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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14C
Information Statement Pursuant to Section 14(c)
of the Securities Exchange Act of 1934 (Amendment No. )
Check the appropriate box:
[_] Preliminary Information Statement
[_] Confidential, for Use of the Commission Only
(as permitted by Rule 14c-5(d)(2))
[x] Definitive Information Statement
Wisconsin Electric Power Company
- --------------------------------------------------------------------------------
(Name of Registrant As Specified In Its Charter)
Payment of Filing Fee (Check the appropriate box):
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pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
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(5) Total fee paid:
None
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
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[LOGO] Richard A. Abdoo
W E Chairman of the Board &
WISCONSIN ELECTRIC Chief Executive Officer
A Wisconsin Energy company
231 W. Michigan St.
P.O. Box 2046
Milwaukee, WI 53201-2046
March 20, 2002
Dear Wisconsin Electric Stockholder:
Wisconsin Electric Power Company will hold its annual meeting of
stockholders at 9:00 a.m. on Friday, April 26, 2002, in Conference Room
P140A at the Public Service Building, 231 West Michigan Street,
Milwaukee, Wisconsin. We are not soliciting proxies for this meeting, as
over 99% of the voting stock is owned, and will be voted, by Wisconsin
Electric's parent company, Wisconsin Energy Corporation. If you wish, you
may attend the meeting and vote your shares of preferred stock; however,
it will be a very short business meeting.
On behalf of the directors and officers of Wisconsin Energy, I invite you
to attend Wisconsin Energy's annual meeting to be held Thursday, May 2,
2002, at 10:00 a.m. The Wisconsin Energy meeting will be held at the U.S.
Cellular Arena, 500 West Kilbourn Avenue, Milwaukee, Wisconsin. By
attending this meeting, you will have the opportunity to meet many of the
Wisconsin Electric officers and directors. Although you cannot vote your
shares of Wisconsin Electric preferred stock at the Wisconsin Energy
meeting, you may find the activities to be worthwhile. You will be asked
to register before entering the meeting.
The annual report to stockholders accompanies this information statement.
If you have any questions about the material presented or would like a
copy of the Wisconsin Energy Corporation summary annual report, please
call our toll-free Stockholder Hotline at 1-800-558-9663.
Sincerely,
/s/ Richard A. Abdoo
NOTICE
OF
ANNUAL MEETING OF STOCKHOLDERS
March 20, 2002
To the Stockholders of Wisconsin Electric Power Company:
The Annual Meeting of Stockholders of Wisconsin Electric Power Company will be
held at 9:00 a.m. on Friday, April 26, 2002, in Conference Room P140A at the
Public Service Building, 231 West Michigan Street, Milwaukee, Wisconsin, for
the following purposes:
1. To elect a Board of Directors to hold office until the 2003 Annual
Meeting of Stockholders; and
2. To consider any other matters which may properly come before the meeting.
Stockholders of record at the close of business on March 6, 2002, are entitled
to vote.
By Order of the Board of Directors
/s/ Kristine Rappe
Kristine Rappe
Corporate Secretary
[LOGO]
W E
Wisconsin Electric
A Wisconsin Energy Company
231 West Michigan Street
P.O. Box 2046
Milwaukee, Wisconsin 53201
INFORMATION STATEMENT
and
ANNUAL REPORT TO STOCKHOLDERS
-----------------
INFORMATION STATEMENT
This information statement is being furnished to stockholders beginning on or
about March 20, 2002, in connection with the annual meeting of stockholders of
Wisconsin Electric Power Company ("WE") to be held on April 26, 2002, at WE's
Public Service Building, 231 West Michigan Street, Milwaukee, Wisconsin, and
all adjournments or postponements of the meeting, for the purposes listed in
the Notice of Annual Meeting of Stockholders. The WE annual report to
stockholders accompanies this information statement.
We are not asking you for a proxy and you are requested not to send us a proxy.
However, you may vote your shares of preferred stock at the meeting.
VOTING SECURITIES
As of March 6, 2002, WE had outstanding 44,498 shares of Six Per Cent.
Preferred Stock; 260,000 shares of $100 par value 3.60% Serial Preferred Stock;
and 33,289,327 shares of common stock. Each outstanding share of each class is
entitled to one vote. Stockholders of record at the close of business on March
6, 2002, will be entitled to vote at the meeting. A majority of the shares
outstanding entitled to be voted at the meeting shall constitute a quorum.
All of WE's outstanding common stock, representing over 99% of its voting
securities, is owned by its parent company, Wisconsin Energy Corporation
("WEC"), whose principal business address is 231 West Michigan Street,
Milwaukee, Wisconsin. A list of stockholders of record entitled to vote at the
meeting will be available for inspection by stockholders at WE's principal
business office at 231 West Michigan Street, Milwaukee, Wisconsin, prior to and
at the meeting.
RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANT
Arthur Andersen LLP served as independent public accountant for Wisconsin
Electric for the fiscal year ended December 31, 2001. The WE Board, pursuant to
a recommendation of the WEC Audit and Oversight Committee, has also selected
the firm of Arthur Andersen LLP as the independent public accountant for
Wisconsin Electric for the fiscal year ended December 31, 2002.
Representatives of the firm will not attend the annual meeting, but will be
present at Wisconsin Energy's annual meeting on May 2, 2002, to make a
statement, if they so desire, and to respond to appropriate questions that may
be directed to them.
On March 8, 2001, based on a recommendation of its Audit and Oversight
Committee, WEC notified PricewaterhouseCoopers LLP that its appointment as
principal accountant for WEC and its subsidiaries, including Wisconsin
Electric, would be terminated effective upon completion of the audit of the
results for the fiscal year ended December 31, 2000. On March 8, 2001, based on
a recommendation of the WEC Audit and Oversight Committee, WE engaged the firm
of Arthur Andersen LLP as independent public accountant for the fiscal year
ended December 31, 2001.
The reports of PricewaterhouseCoopers LLP on the financial statements for the
two fiscal years immediately prior to PricewaterhouseCoopers LLP's replacement
contained no adverse opinion or disclaimer of opinion and were not qualified or
1
modified as to uncertainty, audit scope or accounting principle. Between
January 1, 1999, and the termination of PricewaterhouseCoopers LLP's
appointment as principal accountant, there were no disagreements with
PricewaterhouseCoopers LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of PricewaterhouseCoopers
LLP, would have caused that firm to make reference to the subject matter of the
disagreement in connection with its report on Wisconsin Electric's financial
statements. Between January 1, 1999 and the engagement of Arthur Andersen LLP
on March 8, 2001, neither WE nor anyone acting on behalf of WE consulted with
Arthur Andersen LLP regarding the application of accounting principles to a
specified transaction, the type of audit opinion that might be rendered on the
Company's financial statements or any matter that was the subject of a
disagreement with PricewaterhouseCoopers LLP or other event with respect to
PricewaterhouseCoopers LLP that would be required to be disclosed under SEC
regulations.
On behalf of the WE Board, the WEC Audit and Oversight Committee reviewed and
discussed the Company's quarterly and annual financial statements with
management and the independent public accountants. The Audit and Oversight
Committee believes that management maintains an effective system of internal
controls that results in fairly presented financial statements. The Committee
reviewed with Arthur Andersen a list of non-audit services billed during fiscal
year 2001 and determined that such services would not affect the independence
of Arthur Andersen in performing their audit services.
The following table shows the fees billed or expected to be billed for audit
and other services provided by Arthur Andersen LLP for fiscal year 2001
Audit Fees.................................................. $205,000
Financial Information Systems Design and Implementation Fees $ 0
All Other Fees:
Audit Related (1)........................................ $32,250
All Other (2)............................................ 41,900
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Total All Other Fees........................................ $ 74,150
- --------
(1) Audit-related fees include only benefit plan audits.
(2) All other fees consist primarily of tax assistance and training.
THE BOARD OF DIRECTORS AND ITS COMMITTEES
The Board of Directors is responsible for overseeing the performance of WE. In
2001, the Board held five meetings. The average attendance of all directors for
Board and committee meetings was 97%. No director attended fewer than 89% of
the total number of meetings of the Board and Board committees on which he or
she served.
WE has an Executive Committee, Compensation Committee and a Finance Committee;
it does not have audit or nominating committees. The Executive Committee, which
did not meet in 2001, may exercise all of the powers vested in the Board during
periods between Board meetings except action regarding dividends or other
distributions to stockholders, the filling of vacancies on the Board and other
powers which by law may not be delegated to a committee. Directors Abdoo,
Bergstrom, Bowles, Cornog and Stratton are members of the Executive Committee.
The Compensation Committee, which met four times in 2001, considers succession
planning issues and provides a competitive, performance-based executive
compensation program that enables WE to attract and retain key individuals and
to motivate them to achieve WE's short- and long-term goals. The Committee also
provides a competitive director compensation program based on many of the same
criteria. Directors Ahearne, Bergstrom, and Davis are members of the
Compensation Committee. The Finance Committee, which met four times in 2001,
among other things, may take or authorize all necessary actions to effect
financings, refinancings and refundings pursuant to financing plans approved by
the Board of Directors, thus enhancing WE's ability to act quickly with respect
to certain financing matters when market conditions warrant. Directors
Bergstrom, Bowles, Cornog, and Stratton are members of the Finance Committee.
ELECTION OF DIRECTORS
Director Nominees. At the 2002 annual meeting, there will be an election of
nine directors. The individuals named below have been nominated by the Board to
serve one-year terms or until they are reelected or until their respective
successors are duly elected and qualified.
Directors are elected by a plurality of the votes cast by the shares entitled
to vote in the election at a meeting at which a quorum is present. "Plurality"
means that the individuals who receive the largest number of votes are elected
as directors up to the maximum
2
number of directors to be chosen in the election. Therefore, any shares not
voted, whether by withheld authority, broker non-vote or otherwise, have no
effect in the election of directors.
The nominees named below have consented to being nominated and to serve if
elected. The Board of Directors does not expect that any of the nominees will
become unavailable for any reason. If that should occur before the meeting,
another nominee or nominees may be selected by the WE Board of Directors.
Biographical information regarding each nominee is shown below. Ages are shown
as of March 20, 2002.
Information Concerning Nominees For Terms Expiring in 2002
Richard A. Abdoo. Age 58. Chairman of the Board, President and Chief Executive
Officer of WEC since 1991. Chairman of the Board and Chief Executive Officer of
Wisconsin Electric since 1990. Chairman of the Board and Director of Wisconsin
Gas, a subsidiary of WEC, since April 2000. Director of WEC since 1988.
Director of Wisconsin Electric since 1989. Director of AK Steel Holding
Corporation, Cobalt Corporation (formerly known as United Wisconsin Services,
Inc.), Marshall & Ilsley Corporation and Sensient Technologies, Inc.
John F. Ahearne. Age 67. Director of the Ethics Program for the Sigma Xi Center
for Sigma Xi, The Scientific Research Society, an organization that publishes
American Scientist, provides grants to graduate students and conducts national
meetings on major scientific issues, since 1999. Executive Director of Sigma Xi
from 1989 to 1997, and Director of Sigma Xi Center from 1997 to 1999. Adjunct
Scholar of Resources for the Future, an economic research, non-profit
institute, since 1993. Lecturer and Adjunct Professor, Duke University, since
1995. Commissioner of the United States Nuclear Regulatory Commission from 1978
to 1983, serving as its Chairman from 1979 to 1981. Member, National Academy of
Engineering. Director of WEC and Wisconsin Electric since 1994. Director of
Wisconsin Gas since April 2000.
John F. Bergstrom. Age 55. Chairman and Chief Executive Officer of Bergstrom
Corporation since January 1997, and President and Chief Executive Officer of
Bergstrom Corporation from 1974 through 1996. Bergstrom Corporation owns and
operates numerous automobile sales and leasing businesses. Director of WEC
since 1987. Director of Wisconsin Electric since 1985. Director of Wisconsin
Gas since April 2000. Director of Bergstrom Corporation, Banta Corporation,
Kimberly-Clark Corporation, Midwest Express Holdings, Inc., Sensient
Technologies, Inc. and The Green Bay Packers.
Barbara L. Bowles. Age 54. Chairman and Chief Executive Officer of The Kenwood
Group, Inc. since July 2000, and President and Chief Executive Officer from
1989 to July 2000. The Kenwood Group is a Chicago-based investment advisory
firm that manages pension funds for corporations, public institutions and
endowments. Director of WEC and Wisconsin Electric since 1998. Director of
Wisconsin Gas since April 2000. Director of The Black & Decker Corporation,
Dollar General Corporation and Georgia-Pacific Corporation.
Robert A. Cornog. Age 61. Chairman of the Board of Snap-on Incorporated since
1991. Served as President and Chief Executive Officer of Snap-on Incorporated
from 1991 to his retirement in April 2001. Snap-on Incorporated is a developer,
manufacturer and distributor of professional hand and power tools, diagnostic
and shop equipment, and tool storage products. Director of WEC since 1993.
Director of Wisconsin Electric and Wisconsin Gas since 1994 and April 2000,
respectively. Director of Snap-on Incorporated and Johnson Controls, Inc.
Willie D. Davis. Age 67. President and Chief Executive Officer of All Pro
Broadcasting, Inc. since 1977. All Pro Broadcasting owns and operates radio
stations in Los Angeles and Milwaukee. Director of WEC and Wisconsin Electric
since April 2000. Director of Wisconsin Gas since 1990. Director of WICOR from
1990 to April 2000. Director of Alliance Bank, Bassett Furniture Industries
Inc., Checkers Drive-In Restaurants, Inc., The Dow Chemical Co., Johnson
Controls, Inc., Kmart Corp., MGM Grand Inc., Metro-Goldwyn-Mayer, Inc., Sara
Lee Corporation and Strong Capital Management, Inc.
Richard R. Grigg. Age 53. Senior Vice President of WEC since July 2000.
President and Chief Operating Officer of Wisconsin Electric and Wisconsin Gas
since 1995 and July 2001, respectively. Vice President of WEC from 1995 to June
2000. Chief Nuclear Officer of Wisconsin Electric from December 1996 to March
1998. Director of WEC since 1995. Director of Wisconsin Electric since 1994 and
Director of Wisconsin Gas since April 2000.
Frederick P. Stratton, Jr. Age 62. Chairman of the Board of Briggs & Stratton
Corporation. Served as Chairman and Chief Executive Officer of Briggs &
Stratton Corporation until June 2001. Briggs & Stratton Corporation is a
manufacturer of small gasoline engines. Director of WEC since 1987. Director of
Wisconsin Electric since 1986, and Director of Wisconsin Gas since April 2000.
Director of Briggs & Stratton Corporation, Bank One Corporation, Midwest
Express Holdings, Inc. and Weyco Group, Inc.
3
George E. Wardeberg. Age 66. Vice Chairman of the Board of WEC, Wisconsin
Electric and Wisconsin Gas and Director of WEC and Wisconsin Electric since
April 2000. Director of WICOR and Wisconsin Gas since 1992. Mr. Wardeberg also
held numerous positions with WICOR and its subsidiaries, including CEO of WICOR
from 1994 to April 2000. Mr. Wardeberg served as President of WICOR from 1994
to 1997 and Chairman of the Board from 1997 to April 2000. Director of Marshall
& Ilsley Corporation and Twin Disc, Inc. Mr. Wardeberg has indicated that he
will be retiring as Vice Chairman of the Board in April 2002, but has indicated
his willingness to continue to serve as a director.
SHAREHOLDER DERIVATIVE LAWSUIT
On August 21, 2000, and September 29, 2000, two shareholders who had made prior
demands upon Wisconsin Energy and Wisconsin Electric to initiate a shareholder
derivative suit against certain officers, directors, employees and agents as a
result of the City of West Allis/Giddings & Lewis litigation, filed suits on
behalf of WEC shareholders in Milwaukee County Circuit Court. A special
committee of independent directors of Wisconsin Energy Corporation determined
after investigation that a derivative proceeding was not in WEC's best
interests. WEC agreed to mediation of the matter which resulted in an
acceptable proposal to settle the cases. The settlement agreement calls for the
adoption of certain corporate governance measures as well as payment of
plaintiffs' attorneys' fees arising out of the lawsuits. In November 2001, WEC
mailed notice of the proposed settlement agreement to its shareholders. A final
hearing on approval of the settlement agreement was held on January 25, 2002,
at which time the Court gave final approval to the settlement and dismissed the
cases. No WEC shareholders opposed the settlement at the final hearing.
OTHER MATTERS
The Board of Directors is not aware of any other matters which may properly
come before the meeting. The WE Bylaws set forth the requirements that must be
followed should a stockholder wish to propose any floor nominations for
director or floor proposals at annual or special meetings of stockholders. In
the case of annual meetings, the Bylaws state, among other things, that notice
and certain other documentation must be provided to WE at least 70 days and not
more than 100 days before the scheduled date of the annual meeting. No such
notices have been received by WE.
COMPENSATION OF THE BOARD OF DIRECTORS
In order to more closely link directors' pay to performance and to further
align the Board's interests with stockholders, a portion of directors' fees is
paid in WEC common stock. Directors can elect to receive the fee in common
stock or defer the fee in a WEC phantom common stock account under the WEC
Directors' Deferred Compensation Plan.
During 2001, each nonemployee director received one annual retainer fee of
$18,000 paid half in WEC common stock and half in cash. Effective January 1,
2002, following a review of competitive practices, the annual retainer fee was
increased, with identical payment terms, to $24,000 annually. Nonemployee
chairs of the committees of the Board received a quarterly committee chair
retainer of $1,250. Nonemployee directors also receive a fee of $1,500 for each
Board or committee meeting attended. In addition, a per diem fee of $1,250 for
travel on Company business is paid for each day on which a Board or committee
meeting is not also held. Nonemployee directors are also paid $300 for each
signed, written unanimous consent in lieu of a meeting. Employee directors
receive no directors' fees.
Although WE directors also serve on the Wisconsin Energy and Wisconsin Gas
boards, only single fees are paid for meetings held on the same day. In these
cases, fees are allocated between WEC, Wisconsin Electric and Wisconsin Gas
based on services rendered.
Nonemployee directors may defer fees pursuant to the WEC Directors' Deferred
Compensation Plan. Under the plan, fees may be deferred into an account which
accrues interest semiannually at the prime rate or into a WEC phantom common
stock account, the value of which will appreciate or depreciate based on the
market performance of WEC common stock, as well as through the accumulation of
any reinvested dividends. Deferral amounts are credited to accounts in the name
of each participating director on the books of WE, are unsecured and are
payable only in cash following termination of the director's service to WE. The
deferred amounts will be paid out of the general corporate assets or the trust
described under "Retirement Plans" in this information statement.
Each nonemployee director annually receives an option to purchase 5,000 shares
of WEC common stock under WEC's long-term incentive plan for serving as a
director of WE and WEC. Each option has an exercise price equal to the fair
market value of the shares on the date the option is granted and is exercisable
for 10 years after the date of grant. Options vest over a three-year period
4
on the anniversary of the grant date. Upon a change in control of WEC,
disability or death, or if the director leaves the Board after completing a
full term, these options become immediately exercisable. The exercise price of
an option may, at the nonemployee director's election, be paid in cash or with
previously-owned shares of common stock or a combination thereof.
A Directors' Charitable Awards Program has been established to help further
WEC's policy of charitable giving. Under the program, WEC intends to contribute
up to $100,000 per year for 10 years to a charitable organization(s) chosen by
each director, upon the director's death. Directors are provided with one
charitable award benefit for serving on the boards of WEC and its subsidiaries,
including Wisconsin Electric. There is a vesting period of three years of
service on the Board required for participation in this program. Beneficiary
organizations under the program must be approved by the WEC Nominating and
Board Affairs Committee. The program is funded by life insurance on the lives
of the Board members. Directors derive no financial benefit from the program
since all insurance proceeds and charitable deductions accrue solely to WEC.
Because of the tax deductibility of these charitable donations and the use of
insurance as a funding vehicle, the long-term cost to WEC is expected to be
modest.
5
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
Compensation Philosophy and Objectives. The Compensation Committee, which
functions as a combined Compensation Committee for WE and WEC, is responsible
for making decisions regarding compensation for the executives of Wisconsin
Energy Corporation and its principal subsidiaries. All Committee members are
independent, nonemployee directors. We seek to provide a competitive,
performance-based executive compensation program that enables the corporation
to attract and retain key individuals and to motivate them to achieve short-
and long-term goals.
We believe that a substantial portion of executive compensation should be at
risk. As a result, the compensation plans have been structured so that the
level of total compensation is strongly dependent upon achievement of business
results that are aligned with the interests of stockholders and customers.
The primary elements of WE's executive compensation program are base salary,
annual incentive compensation, and long-term incentive compensation. In
general, for WE executives who also hold WEC positions, elements of
compensation are targeted at the 50th percentile of general industry
practices--that is, we target compensation at the median levels paid for
similar positions at similarly sized companies. For WE executives whose
positions principally relate to utility operations, we place a greater emphasis
upon compensation practices in the energy industry. In order to determine
competitive compensation practices, we rely upon compensation surveys provided
to us by Towers Perrin, an independent compensation consultant.
Specific values of 2001 compensation for the Chief Executive Officer and the
four other most highly compensated executive officers are shown in the Summary
Compensation Table. Our basis for determining each element of compensation is
described below.
Base Salary. For 2001, we adjusted base salaries to reflect updated survey
results of executive compensation practices for similar positions at comparable
companies. In making these adjustments, we also considered factors such as the
relative levels of individual experience, performance, responsibility, and
contribution to the results of operations.
Annual Incentive Compensation. The annual incentive plan provides for annual
awards to executives based on achievement of pre-established stockholder-,
customer-, and employee-focused objectives. All payments under the plan are at
risk; payments are only made if performance goals are achieved, and awards may
be less or greater than targeted amounts based on actual performance. Based
upon a review of competitive practices for comparable positions at similarly
sized companies, for 2001, awards were targeted at 35% to 100% of base salary
and actual awards may range from 0% to 200% based on performance. The plan also
provides the Committee with the discretion to recognize individual performance.
At the Committee's direction, the annual performance incentive program for 2001
principally focused on the attainment of key financial measures.
. The financial goals for Messrs. Abdoo, Wardeberg, Donovan, and Salustro
were based upon earnings per share, return on equity and cash flow for
Wisconsin Energy. The earnings per share goal was weighted at 50%; the
other two measures were weighted at 25% each.
. For Mr. Grigg, 75% of his goals were tied to utility financial
performance, including net income, return on net assets, and cash flow;
the remaining 25% of his goals were tied to customer and employee
components.
In February 2002, the Committee met to review the extent to which 2001
performance goals were met. The results are summarized as follows.
Wisconsin Energy's 2001 financial goals were principally met. In 2001, results
for earnings per share before non-recurring costs represented an increase of
$0.53 per share compared to 2000. The increase was due principally to strong
performance of the electric and gas businesses, improved earnings for
non-utility energy businesses and the favorable impact of the share repurchase
program. Messrs. Abdoo, Wardeberg, Donovan, and Salustro earned 79.71% of their
target awards.
The utility group financial performance exceeded target performance in all
three measures: net income, return on net assets and cash flow. Record revenues
were achieved by the utility segment in 2001 while successfully combining the
utility operations of Wisconsin Electric and Wisconsin Gas, improving customer
service and reducing operating costs. While the utility group made
6
some notable improvements in its customer interactions, the selected customer
measure was not met. This was largely due to unusually high natural gas prices
early in the year that negatively impacted customer perception of the
utilities. Although substantial progress was made in integrating Wisconsin
Electric and Wisconsin Gas operations and processes, cultures and employee
talent during 2001, the selected employee measure did not contribute to the
incentive result for Mr. Grigg. In aggregate, Mr. Grigg earned 86.64% of his
target award.
Based upon these results and any discretion to recognize individual
performance, awards for 2001 were granted to the named executive officers as
shown in the Summary Compensation Table.
For 2002, the Committee set goals for key officers similar to those set for
2001. For Messrs. Abdoo, Wardeberg, Donovan, and Salustro, the annual incentive
is dependent upon attainment of earnings per share, return on equity and cash
flow for WEC. We believe that this incentive structure will help focus
management and help ensure attainment of WEC's financial objectives. For
Mr. Grigg, 75% of his 2002 goals are tied to utility financial performance; the
remainder is tied to utility operational performance.
Long-Term Incentive Compensation. The Committee administers WEC's 1993 Omnibus
Stock Incentive Plan, as amended. This is a WEC stockholder-approved, long-term
incentive plan designed to link the interests of executives and other key
employees to long-term stockholder value. It allows for various types of awards
keyed to the performance of WEC's common stock, including stock options.
In 2001, we reviewed the long-term incentive program to ensure its
effectiveness in focusing executives to achieve the corporation's long-term
objectives. Awards to named executive officers were granted as indicated in the
Summary Compensation Table.
Our Committee believes that an important adjunct to the long-term incentive
program is significant stock ownership by participants. Accordingly, as a
condition of participating in the long-term incentive plan, we have implemented
stock ownership guidelines for officers of the Company. Guidelines for
executive officers range from 100% to 300% of base salary.
Chief Executive Officer Compensation. The assessment of the Chief Executive
Officer's performance and determination of the CEO's compensation are among our
principal responsibilities.
In reviewing the performance of the Chief Executive Officer who also serves as
WEC's CEO, we requested that all nonemployee directors evaluate the CEO's
performance. The Compensation Committee chair reviewed the evaluations, met
with Mr. Abdoo to discuss them, and the Committee factored the results into our
compensation determinations.
We set Mr. Abdoo's WEC consolidated base salary at $707,500 for 2001. This base
salary is somewhat below the median of comparably sized companies in the survey
of general industry compensation practices.
Mr. Abdoo's annual incentive compensation for 2001 was based upon achievement
of the financial initiatives described above.
In view of the discretionary component of the annual incentive plan, the
Committee also noted the significant accomplishments of Mr. Abdoo on a
consolidated WEC basis during 2001; however, no adjustments to his annual
incentive award were made. Significant accomplishments for Mr. Abdoo included:
. receipt of a favorable declaratory ruling from the Public Service
Commission of Wisconsin, enabling the corporation to proceed with
necessary planning, studies and purchases for 2,800 megawatts of new,
in-state generation,
. formation of a new subsidiary, W.E. Power, LLC, for the sole purpose of
financing, constructing and owning the new power plants proposed under our
Power the Future plan,
. approval for a 35-mile Wisconsin Gas lateral to Guardian Pipeline, which
will bring needed natural gas from Chicago and introduce meaningful gas
pipeline competition to southeastern Wisconsin,
. completion of the 2001 Point Beach Nuclear Plant refueling safely, ahead
of schedule and within budget,
. implementation of combined billing and customer service operations,
allowing customers to have one account, receive one bill and make one call
for electric and gas services, and
. progress made in the common stock buy-back program resulting in
repurchasing over $234 million of Wisconsin Energy stock by year end.
7
To specifically link a portion of his compensation to the enhancement of
long-term stockholder value, Mr. Abdoo was awarded long-term incentive
compensation in 2001 in the form of stock options and restricted stock, as set
forth in the ''Long-Term Compensation Awards'' column of the Summary
Compensation Table.
Compliance With Tax Regulations Regarding Executive Compensation. Section
162(m) of the Internal Revenue Code limits tax deductions for executive
compensation to $1 million, unless certain requirements are met. It is the
Company's policy to take reasonable steps to obtain the corporate tax deduction
by qualifying for the exemptions from limitation on such deductibility under
Section 162(m) to the extent practicable.
Respectfully submitted to WE's stockholders by the Compensation Committee of
the Board of Directors.
John F. Bergstrom, Committee Chair
John F. Ahearne
Willie D. Davis
8
EXECUTIVE OFFICERS' COMPENSATION
This table shows, for the last three fiscal years, compensation awarded to,
earned by or paid to WE's Chief Executive Officer and each of WE's other four
most highly-compensated executive officers for services in all capacities to
WEC and its subsidiaries, including WE. The amounts shown in this and all
subsequent tables in this information statement are WEC consolidated
compensation data.
Summary Compensation Table
Long-Term
Annual Compensation Compensation Awards
----------------------------------------------------
Restricted Securities
Other Annual Stock Underlying All Other
Salary Bonus Compensation Awards/(1)/ Options Compensation/(2)/
Name and Principal Position Year ($) ($) ($) ($) (#) ($)
- -----------------------------------------------------------------------------------------------------------
Richard A. Abdoo
Chairman of the Board, President 2001 707,500 563,948 11,811 163,120 300,000 66,875
and Chief Executive Officer of 2000 657,500 723,168 16,954 148,500 100,000 30,632
WEC; Chairman of the Board and 1999 615,000 295,343 8,767 218,504 40,000 33,873
Chief Executive Officer of WE
- -----------------------------------------------------------------------------------------------------------
George E. Wardeberg
Vice Chairman of the Board of 2001 636,750 456,798 2,416 146,808 270,000 89,918
WEC and WE (as of April 2000) 2000 394,667 434,084 0 0 100,000 0
- -----------------------------------------------------------------------------------------------------------
Richard R. Grigg
Senior Vice President of WEC; 2001 440,000 350,719 4,128 122,340 131,535 98,545
President and Chief Operating 2000 400,000 367,446 3,723 111,375 75,000 23,932
Officer of Wisconsin Electric-- 1999 340,000 261,180 4,413 109,252 20,000 18,083
Wisconsin Gas
- -----------------------------------------------------------------------------------------------------------
Paul Donovan
Senior Vice President and Chief 2001 440,000 282,333 28,760 122,340 131,535 65,463
Financial Officer of WEC and WE 2000 407,500 358,559 8,210 232,500 75,000 14,849
(as of August 1999) 1999 142,301 87,465 315 0 30,000 4,046
- -----------------------------------------------------------------------------------------------------------
Larry Salustro
Senior Vice President and 2001 311,668 165,797 2,339 122,340 75,000 33,956
General Counsel of WEC and WE 2000 262,500 229,140 1,891 74,250 50,000 21,114
1999 225,000 117,181 0 54,626 10,000 18,445
/(1) On February 7, 2001, restricted stock awards were granted to Messrs.
Abdoo, Wardeberg, Grigg, Donovan and Salustro in the amounts of 8,000
shares, 7,200 shares, 6,000 shares, 6,000 shares and 6,000 shares,
respectively, which are subject to forfeiture until vested. The dollar
values shown for these shares are based on the closing price of $20.39 per
share on the grant date. The shares awarded to these individuals are
subject to a vesting schedule dependent upon the attainment of cumulative
earnings targets based on WEC performance, with ultimate vesting occurring
at the end of ten years. However, earlier vesting may occur due to
termination of employment by death, disability, or normal retirement, a
change in control of WEC, or action by the Compensation Committee.
Dividends are paid on shares of restricted stock at the same rate as on
unrestricted shares and are used to acquire additional restricted shares.
As of December 31, 2001, the named executive officers held the following
number of shares of restricted stock, including restricted dividends, with
the following values (based on a closing price of $22.56 on December 31,
2001): Mr. Abdoo--35,532 shares ($801,602), Mr. Wardeberg--11,606 shares
($261,831), Mr. Grigg--21,469 shares ($484,341), Mr. Donovan--19,136
shares ($431,708), and Mr. Salustro--22,587 shares ($509,563). /
/(2) All Other Compensation for 2001 for Messrs. Abdoo, Wardeberg, Grigg,
Donovan and Salustro, respectively, includes: /
. employer matching of contributions by each named executive into the
401(k) plan in the amount of $5,100, $5,100, $4,550, $5,100 and $5,100,
respectively,
. ''make whole'' payments under the Executive Deferred Compensation Plan
with respect to matching in the 401(k) plan on deferred salary or salary
received but not otherwise eligible for matching in the amounts of
$50,457, $27,025, $51,431, $18,857, and $15,226, respectively; amounts
include prior period adjustments of $12,637, $35,608, and $4,102 for
Messrs. Abdoo, Grigg, and Salustro, respectively, and
9
. the present value (treated as an interest free loan) of the current
year's non-term portion of the insurance premium paid by WEC under a
split-dollar life insurance program in the amounts of $11,318, $57,793,
$42,564, $41,506, and $13,630 respectively; the executive pays the term
insurance portion of the premium.
Option Grants in Last Fiscal Year
This table shows additional data regarding the options summarized above.
Grant
Date
Individual Grants/(1)/ Value
-------------------------------------------------------------------------
Percent of
Total
Number of Options
Securities Granted to Grant
Underlying Employees Exercise Date
Options in Fiscal or Base Present
Granted Year Price Expiration Value/(2)/
Name (#) (%) ($/Share) Date ($)
-------------------------------------------------------------------------
Richard A. Abdoo 100,000 4.61 20.39 02/07/2011 474,000
200,000 9.22 21.73 05/01/2011 1,092,000
George E. Wardeberg 90,000 4.15 20.39 02/07/2011 426,600
180,000 8.30 21.73 05/01/2011 982,800
Richard R. Grigg 75,000 3.46 20.39 02/07/2011 355,500
56,535 2.61 21.73 05/01/2011 308,681
Paul Donovan 75,000 3.46 20.39 02/07/2011 355,500
56,535 2.61 21.73 05/01/2011 308,681
Larry Salustro 75,000 3.46 20.39 02/07/2011 355,500
/(1)/ Consists of incentive and non-qualified stock options to purchase shares
of WEC common stock granted on February 7, 2001, and May 1, 2001,
pursuant to the 1993 Omnibus Stock Incentive Plan, as amended. These
options have exercise prices equal to the fair market value of the WEC
shares on the date of grant and vest pro rata over a four year period
beginning on the first anniversary of the grant date with full vesting on
the fourth anniversary date. Upon a ''change in control'' of WEC, as
defined in the plan, or upon retirement, permanent total disability or
death of the option holder, these options shall become immediately
exercisable. These options were granted for a term of ten years, subject
to earlier termination in certain events related to termination of
employment. In the discretion of the Compensation Committee, the exercise
price may be paid by delivery or attestation of already-owned shares. Tax
withholding obligations related to exercise may be satisfied by
withholding shares otherwise deliverable upon exercise, subject to
certain conditions. Subject to the limitations of the 1993 Omnibus Stock
Incentive Plan, as amended, the Compensation Committee has the power with
the participant's consent to modify or waive the restrictions on vesting
of these options, to amend these options and to grant extensions or to
accelerate these options.
/(2) An option pricing model (developed by Black-Scholes) was used to determine
the options' present value as of the date of the grant. The assumptions
used in the Black-Scholes equation for options expiring February 7, 2011,
are: market price of stock: $20.39; exercise price of option: $20.39;
stock volatility: 23.43%; annualized risk-free interest rate: 5.43%;
exercise at the end of the 10-year option term; and dividend yield: 3.92%.
The assumptions for options expiring May 1, 2011 are: market price of
stock: $21.73; exercise price of option: $21.73; stock volatility: 23.59%;
annualized risk-free interest rate: 5.65%; exercise at the end of the
10-year option term; and dividend yield: 3.68%. WE's use of this model
should not be construed as an endorsement of its accuracy. The ultimate
value of the options, if any, will depend upon the future value of the WEC
common stock, which cannot be forecast with reasonable accuracy, and on
the optionee's investment decisions. /
10
Aggregated Fiscal Year-End Option Values
No stock options were exercised by the named executive officers in 2001. This
table shows the number and value of exercisable and unexercisable options at
fiscal year-end. Value is calculated using the difference between the exercise
price and the year-end market price multiplied by the number of shares
underlying the option.
------------------------------------------------------------------------------------------------
Number of Securities Underlying Value of Unexercised In the
Unexercised Options at Fiscal Year-End Money Options at Fiscal Year-End
(#) ($)
----------------------------------------------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
------------------------------------------------------------------------------------------------
Richard A. Abdoo 198,498 405,002 64,772 577,328
George E. Wardeberg 549,930 336,666 4,682,536 344,700
Richard R. Grigg 94,748 202,787 48,579 355,420
Paul Donovan 33,750 202,785 48,581 355,418
Larry Salustro 64,999 120,001 32,385 259,915
------------------------------------------------------------------------------------------------
EMPLOYMENT AND SEVERANCE ARRANGEMENTS
Pursuant to the merger agreement relating to WEC's acquisition of WICOR, on
June 27, 1999, WEC adopted severance policies that became effective on April
26, 2000, when the merger occurred, replacing WEC's previous severance policy.
The policies provide for severance benefits to designated executives and other
key employees if within two years after the merger they are discharged without
cause or resign with good reason. WEC has approved changes to the severance
policies to allow for a deferral opportunity for participants who may become
entitled to benefits and to continue the policies after the end of a two-year
period following the WICOR merger to provide for severance benefits in the
event of employment termination either in anticipation of or within a two-year
period following a change in control by reason of discharge without cause or
resign with good reason.
Under the current severance policies, participants have been designated into
one of four benefit levels. Of the individuals named in the Summary
Compensation Table, Mr. Salustro is a Tier 2 participant. Messrs. Abdoo,
Wardeberg, Grigg and Donovan do not participate in the severance policy, but
each has a separate change in control and severance agreement as described
below.
Tier 2 benefits provide generally for lump sum severance payments equal to
three times the sum of the current base salary and the highest bonus in the
last three years (or the then current target bonus, if higher), a pension lump
sum for the equivalent of three years' worth of additional service and three
years' continuation of health and life insurance coverages. An overall limit is
placed on benefits to avoid federal excise taxes under the ''parachute
payment'' provisions of the tax law. However, in return for a non-compete
agreement from Mr. Salustro, WE entered into an agreement with him removing
this overall limit and providing for a "gross-up" payment should any of the
Tier 2 benefits payable to Mr. Salustro trigger such excise taxes.
WEC has entered into agreements with each of Messrs. Abdoo, Grigg and Donovan
providing for certain severance benefits if their employment is terminated (i)
by WEC other than for cause, death or disability in anticipation of or
following a change in control of WEC, (ii) by the executive for good reason
following such a change, (iii) by the executive within six months after
completing one year of service following a change in control, or (iv) in the
absence of a change in control, by WEC for any reason other than cause, death
or disability or by the executives for good reason. The agreements provide for
a lump sum severance payment equal to three times the sum of their highest
annual base salary in effect in the last three years and highest bonus amount.
The highest bonus amount would be calculated as the largest of the current
target bonus for the fiscal year in which employment termination occurs, the
highest bonus paid in either the last three fiscal years of the Company prior
to termination or the change in control, or an amount calculated by multiplying
the highest bonus percentage earned during either of such three fiscal year
periods times the highest yearly base salary rate in effect during the
three-year period ending prior to termination. The agreements also provide for
three years' continuation of health and certain other welfare benefit
coverages, eligibility for retiree health coverage thereafter, continuation of
the split-dollar life insurance program until the applicable policy becomes
paid up, a payment equal to the value of three additional years' of
participation in the applicable qualified and non-qualified retirement plans,
full vesting in all outstanding stock option and restricted stock awards,
certain financial planning services and other benefits and a ''gross-up''
payment should any payments or benefits under the agreements trigger federal
excise taxes under the ''parachute payment'' provisions of the tax law. The
agreements also contain one-year non-compete provisions applicable on
termination of employment.
In connection with Mr. Donovan joining the Company, he was encouraged to
purchase a house in Wisconsin. In this regard, the Company has agreed to
repurchase, at Mr. Donovan's request within seven years of his leaving the
Company, his Wisconsin house at a price that would assure the after-tax
recovery of his investment in that house or its then fair market value,
whichever is greater.
11
As provided in the merger agreement with WICOR, WEC entered into an employment
agreement with Mr. Wardeberg pursuant to which Mr. Wardeberg serves as Vice
Chairman of the WEC Board of Directors for a two-year term. The agreement
provides for a base salary of not less than the greater of $580,000, or 90% of
the base salary then payable to the Chairman of the Board. The agreement also
provides for a bonus of not less than 90% of that payable to the Chairman, with
the total of base salary and bonus in no event to be less than $993,116.
Mr. Wardeberg's employment agreement also includes a special pension benefit
provision under WEC's Supplemental Executive Retirement Plan, calculated as if
Mr. Wardeberg had been employed by WEC since age 25, offset by any WICOR
pension benefits. Severance benefits are provided if his employment is
terminated by WEC other than for cause or by Mr. Wardeberg for good reason. The
agreement provides for a ''gross-up'' payment should any payments to Mr.
Wardeberg trigger federal excise taxes under the ''parachute payment''
provisions of the tax law. Mr. Wardeberg has indicated that he will be retiring
as Vice Chairman of the Board in April 2002, but has indicated his willingness
to continue to serve as a director.
Under the terms of the employment offer letter with Mr. Salustro, he is a
participant in the Supplemental Executive Retirement Plan ("SERP") and is
entitled on his retirement at or after age 60 to certain additional pension
benefits as described below in the "Other Retirement Benefits" section. The
lump sum present value of such benefits would become payable to him on the
occurrence of a change in control.
RETIREMENT PLANS
Wisconsin Electric maintains a defined benefit pension plan of the cash balance
type for most employees, including WE executive officers. The plan bases a
participant's defined benefit pension on the value of a hypothetical account
balance. For individuals participating in the plan as of December 31, 1995, a
starting account balance was created equal to the present value of the benefit
accrued as of December 31, 1994, under the plan benefit formula prior to the
change to a cash balance approach. That formula provided a retirement income
based on years of credited service and final average compensation for the 36
highest consecutive months, with an adjustment to reflect the Social Security
integrated benefit. In addition, individuals participating in the plan as of
December 31, 1995, received a special one-time transition credit amount equal
to a specified percentage varying with age multiplied by credited service and
1994 base pay.
The present value of the accrued benefit as of December 31, 1994, plus the
transition credit, was also credited with interest at a stated rate. For 1996
and thereafter, a participant receives annual credits to the account equal to
5% of base pay (including certain incentive payments, pre-tax deferrals and
other items), plus an interest credit on all prior accruals equal to 4% plus
75% of the annual time-weighted trust investment return for the year in excess
of 4%. Additionally, the cash balance plan provides that up to an additional 2%
of base pay may be earned based upon achievement of earnings targets.
The life annuity payable under the plan is determined by converting the
hypothetical account balance credits into annuity form.
Individuals who were participants in the plan on December 31, 1995, were
''grandfathered'' such that they will not receive any lower retirement benefit
than would have been provided under the prior formula, had it continued, if
their employment terminates on or before January 1, 2011.
For the individuals listed in the Summary Compensation Table, estimated
benefits under the prior plan formula are higher than under the cash balance
plan formula. As a result, their benefits would currently be determined by the
prior plan benefit formula. The following table shows estimated annual benefits
payable in life annuity form on normal retirement for persons in various
compensation and years of service classifications during 2001, based on the
continuation of the prior plan formula (including supplemental amounts
providing additional benefits described below in the ''Other Retirement
Benefits'' section):
Pension Plan Table
Years of Service
--------------------------------------------------
Remuneration 15 20 25 30 35 40
--------------------------------------------------------------
$ 300,000 74,963 99,950 124,938 149,925 164,106 178,288
500,000 126,713 168,950 211,188 253,425 277,356 301,288
700,000 178,463 237,950 297,438 356,925 390,606 424,288
900,000 230,213 306,950 383,688 460,425 503,856 547,288
--------------------------------------------------------------
1,100,000 281,963 375,950 469,938 563,925 617,106 670,288
1,300,000 333,713 444,950 556,188 667,425 730,356 793,288
1,500,000 385,463 513,950 642,438 770,925 843,606 916,288
1,700,000 437,213 582,950 728,688 874,425 956,856 1,039,288
12
The compensation for the individuals listed in the Summary Compensation Table
in the columns labeled ''Salary'' and ''Bonus'' is virtually equivalent to the
compensation considered for purposes of the retirement plans and the various
supplemental plans. Messrs. Abdoo, Wardeberg, Grigg, Donovan, and Salustro
currently have or are considered to have 32, 41, 31, 29, and 29 credited years
of service, respectively.
Other Retirement Benefits. Designated officers of WEC and Wisconsin Electric,
including all the individuals named in the Summary Compensation Table,
participate in the Supplemental Executive Retirement Plan (''SERP''). The SERP
provides monthly supplemental pension benefits to participants, which will be
paid out of unsecured corporate assets, or the grantor trust described below,
as follows: (i) an amount equal to the difference between the actual pension
benefit payable under the pension plan and what such pension benefit would be
if calculated without regard to any limitation imposed by the Internal Revenue
Code on pension benefits or covered compensation; and (ii) an amount calculated
so as to provide participants with a supplemental lifetime annuity, estimated
to amount to between 8% and 10% of final average compensation depending on
which pension payment option is selected. Except for a ''change in control'' of
WEC, as defined in the SERP, no payments are made until after the participant's
retirement or death.
WEC and/or WE have entered into agreements with Messrs. Abdoo, Wardeberg,
Donovan, and Salustro who cannot accumulate by normal retirement age the
maximum number of years of credited service under the pension plan formula in
effect immediately before the change to the cash balance formula, as described
below:
. According to Mr. Abdoo's agreement, Mr. Abdoo at retirement will receive
supplemental retirement payments which will make his total retirement
benefits at age 58 or older substantially the same as those payable to
employees who are age 60 or older, who are in the same compensation
bracket and who became plan participants at the age of 25, offset by the
value of any qualified or non-qualified defined benefit pension plans of
prior employers.
. According to Mr. Wardeberg's agreement, Mr. Wardeberg at retirement will
receive supplemental retirement payments which will make his total
retirement benefits at age 65 or older substantially the same as those
payable to employees who are in the same compensation bracket and who
became plan participants at age 25, offset by the value of any qualified
or non-qualified defined benefit pension plans of WICOR.
. According to Mr. Donovan's agreement, Mr. Donovan at retirement will
receive supplemental retirement payments which will make his total
retirement benefits at age 55 or older substantially the same as those
payable to employees who are in the same compensation bracket and who
became plan participants at the age of 25, offset by the value of social
security benefits and modified by early retirement reduction factors
applicable to Mr. Donovan between age 55 and 58.
. According to the terms of his employment offer letter, Mr. Salustro at
retirement will receive supplemental retirement payments which will make
his total retirement benefits at age 60 or older substantially the same as
those payable to employees who are in the same compensation bracket and
who became plan participants at the age of 25, offset by the value of any
qualified or non-qualified defined benefit pension plans of prior
employers.
Messrs. Wardeberg and Donovan have been granted life insurance benefits in lieu
of certain post-retirement benefits under the SERP. An independent review has
verified that based on certain assumptions, both exchanges are cost neutral to
WEC.
The WEC Amended Non-Qualified Trust, a grantor trust, has been established to
fund certain non-qualified benefits, including the SERP, the Executive Deferred
Compensation Plan and the agreements with the named executive officers. The
plans and agreements provide for optional lump sum payments and, in the
instance of a change in control, and absent a deferral election, mandatory lump
sum payments without regard to whether the executive's employment has
terminated. In each case, the interest rate benchmark formula for calculating
the lump sum amount is the five-year U.S. Treasury Note yield as of the last
business day of the month prior to date of payment.
STOCK OWNERSHIP OF DIRECTORS, NOMINEES AND EXECUTIVE OFFICERS
WE directors, nominees and executive officers as a group do not own any of WE's
stock, but do beneficially own shares of stock of its parent company, Wisconsin
Energy. The following table lists the beneficial ownership of WEC common stock
of each director, nominee, named executive officer, and all of the directors
and executive officers as a group as of February 22, 2002. In general,
"beneficial ownership" includes those shares a director or executive officer
has the power to vote or transfer, and stock options that are exercisable
currently or within 60 days. Included are shares owned by each individual's
spouse, minor children or any other relative sharing the same residence, as
well as shares held in a fiduciary capacity or held in WEC's Stock Plus and
401(k) plans. None of these persons beneficially own more than 1% of the
outstanding WEC common stock.
13
Shares Beneficially Owned/(1)/
------------------------------------------------------
Option Shares
Exercisable Within
Name Shares Owned/(2) (3)/ 60 Days Total
- --------------------------------------------------------------------------------------
Richard A. Abdoo 67,565/(4)/ 248,498 316,063
John F. Ahearne 3,463 8,333 11,796
John F. Bergstrom 3,000 8,333 11,333
Barbara L. Bowles 2,468 8,333 10,801
- --------------------------------------------------------------------------------------
Robert A. Cornog 5,534 8,333 13,867
Willie D. Davis 9,141 18,234/(5)/ 27,375
Paul Donovan 56,174/(4)/ 71,250 127,424
Richard R. Grigg 27,542/(4)/ 132,248 159,790
- --------------------------------------------------------------------------------------
Larry Salustro 26,672/(4)/ 96,249 122,921
Frederick P. Stratton, Jr. 8,600 8,333 16,933
George E. Wardeberg 25,034/(4)/ 572,430/(5)/ 597,464
- --------------------------------------------------------------------------------------
All above-named individuals
and other executive officers
as a group (13 persons) 248,977/(4)/ 1,214,903/(5)/ 1,463,880/(6)/
/(1) Information on beneficially-owned shares is based on data furnished by the
specified persons and is determined in accordance with Rule 13d-3 under
the Securities Exchange Act of 1934, as required for purposes of this
information statement. It is not necessarily to be construed as an
admission of beneficial ownership for other purposes. /
/(2)/ Certain WE directors and executive officers also hold share units in the
WEC phantom common stock account under WEC's deferred compensation plans
as indicated: Mr. Abdoo (18,843), Mr. Bergstrom (6,092), Mr. Cornog
(9,886), Mr. Davis (7,792), Mr. Donovan (8,064), Mr. Grigg (3,177), Mr.
Salustro (2,373), Mr. Stratton (7,726), Mr. Wardeberg (1,250), and all
directors and executive officers as a group (65,368). Share units are
intended to reflect the performance of Wisconsin Energy common stock and
are payable in cash. While these units do not represent a right to
acquire WEC common stock, have no voting rights and are not included in
the number of shares reflected in the "Shares Owned" column in the table
above, we have listed them in this footnote because they represent an
additional economic interest of the directors and executive officers tied
to the performance of WEC common stock.
/(3) Except as described below, each individual has sole voting and investment
power as to all shares listed for such individual, except the following
individuals have shared voting and/or investment power as indicated: Mr.
Abdoo (10,107), Mr. Cornog (150), Mr. Donovan (25,000), Mr. Stratton
(4,600), Mr. Wardeberg (3,608) and all directors and executive officers as
a group (43,465). /
/(4) Includes shares of restricted stock over which the holders have sole
voting but no investment power: Mr. Abdoo (35,532), Mr. Donovan (19,136),
Mr. Grigg (21,469), Mr. Salustro (22,587), Mr. Wardeberg (11,606), all
nonemployee directors (0), and all directors and executive officers as a
group (118,645). Shares listed for Mr. Wardeberg include restricted stock
granted by WICOR which were converted to outstanding WEC restricted stock
on the effective date of the acquisition of WICOR. /
/(5) Option shares listed include options granted by WICOR which were converted
to WEC stock options on the effective date of the acquisition of WICOR. /
/(6) Represents 1.26% of total WEC common stock outstanding on February 22,
2002. /
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the corporation's
officers, directors, and persons owning more than ten percent of a registered
class of the corporation's equity securities to file reports of ownership and
changes in ownership of equity and derivative securities of WE. To the
Company's knowledge, based on information provided by the reporting persons,
all applicable reporting requirements for fiscal year 2001 were complied with
in a timely manner.
AVAILABILITY OF FORM 10-K
A copy (without exhibits) of the Annual Report on Form 10-K for the fiscal year
ended December 31, 2001, as filed with the Securities and Exchange Commission,
is available without charge to any stockholder of record or beneficial owner of
WE common stock by writing to the Corporate Secretary, Kristine Rappe, at the
Company's principal executive offices, 231 West Michigan Street, P. O. Box
2046, Milwaukee, Wisconsin 53201. Financial statements and certain other
information found in the Form 10-K are included in the accompanying WE 2001
Annual Report to Stockholders.
14
WISCONSIN ELECTRIC POWER COMPANY
2001 ANNUAL REPORT TO STOCKHOLDERS
-----------------
2001 ANNUAL FINANCIAL STATEMENTS
and
REVIEW of OPERATIONS
A-1
SELECTED FINANCIAL DATA
WISCONSIN ELECTRIC POWER COMPANY
SELECTED FINANCIAL AND STATISTICAL DATA
Financial 2001 2000 1999 1998 1997
--------- ---------- ---------- ---------- --------- ---------
Year Ended December 31
Earnings available for common stockholder (Millions).. $ 245.3 $ 163.5(a) $ 211.9(b) $ 183.0 $ 69.4
Operating revenues (Millions)
Electric........................................... $ 1,839.8 $ 1,763.4 $ 1,688.3 $ 1,641.4 $ 1,412.1
Gas................................................ 457.1 399.7 306.8 295.9 355.2
Steam.............................................. 21.8 21.9 21.3 20.5 22.3
---------- ---------- ---------- --------- ---------
Total operating revenues........................ $ 2,318.7 $ 2,185.0 $ 2,016.4 $ 1,957.8 $ 1,789.6
========== ========== ========== ========= =========
At December 31 (Millions)
Total assets.......................................... $ 5,067.5 $ 5,025.1 $ 4,901.9 $ 4,608.9 $ 4,520.9
Long-term debt........................................ $ 1,420.5 $ 1,679.6 $ 1,677.6 $ 1,512.5 $ 1,448.6
Utility Energy Statistics
-------------------------
Electric
Megawatt-hours sold (Thousands)....................... 30,539.7 31,398.8 30,619.9 29,475.2 27,671.8
Customers (End of year)............................... 1,044,129 1,026,691 1,006,013 988,929 978,835
Gas
Therms delivered (Millions)........................... 852.4 944.9 944.1 922.8 980.7
Customers (End of year)............................... 412,674 407,761 398,508 388,478 376,732
Steam
Pounds sold (Millions)................................ 2,929.2 3,085.2 2,913.9 2,773.1 3,160.6
Customers (End of year)............................... 449 451 450 454 474
================================================================================
SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
(Millions of Dollars) (d)
-----------------------------
March June
- ------------- ---------------
Three Months Ended 2001 2000 2001 2000
------------------ ------ ------ ------ --------
Total operating revenues................. $706.6 $540.8 $517.5 $496.9
Operating income......................... 123.3 121.4 79.0 91.4
Earnings available for common stockholder 62.4 58.5 34.7 39.9
September December
------------- ---------------
Three Months Ended 2001 2000 2001 2000 (a)
------------------ ------ ------ ------ --------
Total operating revenues................. $552.2 $532.7 $542.4 $614.6
Operating income......................... 135.0 122.6 138.7 58.5
Earnings available for common stockholder 72.9 56.6 75.3 8.5
================================================================================
(a) During the fourth quarter of 2000, the Company recorded severance benefits
and other items of $43.9 million, after tax.
(b) In the fourth quarter of 1999, the Company recorded a litigation settlement
of $10.8 million, after tax.
(c) During 1997, the Company recorded expenses of $13.1 million, after tax,
related to the terminated merger agreement with Northern States Power
Company and $18.0 million, after tax, related to the write-down of
equipment.
(d) Quarterly results of operations are not directly comparable because of
seasonal and other factors. See Management's Discussion and Analysis of
Financial Condition and Results of Operations.
A-2
WISCONSIN ELECTRIC COMPANY
SELECTED OPERATING DATA
2001 2000 1999 1998 1997
Year Ended December 31 ---------- ---------- --------- --------- ---------
Electric Utility
----------------
Operating Revenues (Millions)
Residential..................... $ 644.8 $ 597.2 $ 574.8 $ 571.4 $ 487.2
Small Commercial/Industrial..... 577.3 534.7 510.1 487.6 430.2
Large Commercial/Industrial..... 472.0 464.9 451.2 450.1 402.7
Other--Retail/Municipal......... 63.2 58.3 51.2 51.2 55.3
Resale--Utilities............... 69.6 84.0 79.1 60.9 24.5
Other Operating Revenues........ 12.9 24.3 21.9 20.2 12.2
---------- ---------- --------- --------- ---------
Total Operating Revenues..... $ 1,839.8 $ 1,763.4 $ 1,688.3 $ 1,641.4 $ 1,412.1
========== ========== ========= ========= =========
Megawatt-hour Sales (Thousands)
Residential..................... 7,615.7 7,477.6 7,346.8 7,327.0 6,863.6
Small Commercial/Industrial..... 8,354.2 8,287.5 8,028.2 7,612.4 7,433.1
Large Commercial/Industrial..... 10,983.0 11,626.2 11,333.6 11,392.0 11,021.5
Other--Retail/Municipal......... 1,599.4 1,527.3 1,314.0 1,287.2 1,412.6
Resale--Utilities............... 1,987.4 2,480.2 2,597.3 1,856.6 941.0
---------- ---------- --------- --------- ---------
Total Sales.................. 30,539.7 31,398.8 30,619.9 29,475.2 27,671.8
========== ========== ========= ========= =========
Number of Customers (Average)
Residential..................... 931,714 916,028 897,333 886,635 876,776
Small Commercial/Industrial..... 100,456 98,277 95,964 94,675 93,259
Large Commercial/Industrial..... 706 712 716 720 714
Other........................... 2,319 2,283 1,938 1,855 1,844
---------- ---------- --------- --------- ---------
Total Customers.............. 1,035,195 1,017,300 995,951 983,885 972,593
========== ========== ========= ========= =========
Gas Utility
-----------
Operating Revenues (Millions)
Residential..................... $ 275.8 $ 244.3 $ 193.8 $ 176.5 $ 222.0
Commercial/Industrial........... 150.0 132.0 95.1 87.9 113.6
Interruptible................... 5.1 5.3 5.3 7.1 9.0
---------- ---------- --------- --------- ---------
Total Retail Gas Sales....... 430.9 381.6 294.2 271.5 344.6
Transported Customer-Owned Gas.. 14.2 17.4 14.6 12.0 13.4
Transported--Interdepartmental.. 1.2 1.5 1.8 2.5 3.1
Other Operating Revenues........ 10.8 (0.8) (3.8) 9.9 (5.9)
---------- ---------- --------- --------- ---------
Total Operating Revenues..... $ 457.1 $ 399.7 $ 306.8 $ 295.9 $ 355.2
========== ========== ========= ========= =========
Therms Delivered (Millions)
Residential..................... 318.4 335.7 329.0 289.5 347.9
Commercial/Industrial........... 194.5 206.2 195.3 182.0 211.5
Interruptible................... 8.9 12.0 16.3 23.3 24.5
---------- ---------- --------- --------- ---------
Total Retail Gas Sales....... 521.8 553.9 540.6 494.8 583.9
Transported Customer-Owned Gas.. 305.6 349.9 347.9 349.4 387.2
Transported--Interdepartmental.. 25.0 41.1 55.6 78.6 9.6
---------- ---------- --------- --------- ---------
Total Therms Delivered....... 852.4 944.9 944.1 922.8 980.7
========== ========== ========= ========= =========
Number of Customers (Average)
Residential..................... 376,510 369,210 360,084 347,747 339,002
Commercial/Industrial........... 33,839 33,275 32,594 31,586 30,594
Interruptible................... 30 33 89 146 170
Transported Customer-Owned Gas.. 422 383 328 271 254
Transported--Interdepartmental.. 5 6 6 6 7
---------- ---------- --------- --------- ---------
Total Customers.............. 410,806 402,907 393,101 379,756 370,027
========== ========== ========= ========= =========
Degree Days (a)
---------------
Heating (6,821 Normal)............. 6,338 6,716 6,318 5,848 7,101
Cooling (685 Normal)............... 711 566 753 800 407
- --------
(a) As measured at Mitchell International Airport in Milwaukee, Wisconsin.
Normal degree days are based upon a twenty-year moving average.
A-3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CORPORATE DEVELOPMENTS
INTRODUCTION
Wisconsin Electric Power Company ("Wisconsin Electric" or the "Company"), a
wholly-owned subsidiary of Wisconsin Energy Corporation ("Wisconsin Energy"),
is engaged primarily in the business of generating electricity and distributing
electricity and natural gas with operations in the states of Wisconsin and
Michigan.
Acquisition of WICOR, Inc.: On April 26, 2000, Wisconsin Energy Corporation,
the parent company of Wisconsin Electric, acquired WICOR, Inc. ("WICOR"), the
parent of Wisconsin Gas Company ("Wisconsin Gas"). Wisconsin Energy has
integrated the gas operations of Wisconsin Electric and Wisconsin Gas as well
as many corporate support areas. On November 1, 2000, Wisconsin Electric and
Wisconsin Gas filed an application with the Public Service Commission of
Wisconsin ("PSCW") for authority to transfer Wisconsin Electric's gas utility
assets together with certain identified liabilities associated with such
assets. On December 4, 2001, Wisconsin Electric and Wisconsin Gas entered into
a stipulation with the PSCW in which a Consent Order was issued by the PSCW
providing for the withdrawal of the joint application. Wisconsin Energy
continues to operate the gas business of Wisconsin Electric and Wisconsin Gas
as one operation to achieve operating efficiencies and improved reliability.
For additional information, see "Factors Affecting Results, Liquidity and
Capital Resources" below.
Cautionary Factors: A number of forward-looking statements are included in this
document. When used, the terms "anticipate," "believe," "estimate," "expect,"
"forecast," "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 mentioned throughout this document
and below in "Factors Affecting Results, Liquidity and Capital Resources."
CORPORATE STRATEGY
Business Opportunities
Wisconsin Energy's key corporate strategy is Power the Future which was
announced in September 2000. The Power the Future strategy, which is discussed
further below, is expected to have a significant impact on the Company. This
strategy is designed to increase the electric generating capacity in the state
of Wisconsin while maintaining a fuel diverse, reasonably priced electric
supply. It also is designed to improve the delivery of energy within Wisconsin
Energy's distribution systems to meet increasing customer demands.
Wisconsin Electric is realizing operating efficiencies through the combination
of Wisconsin Electric and Wisconsin Gas. These operating efficiencies should
increase customer satisfaction and reduce operating costs.
Power the Future Strategy: In late February 2001, Wisconsin Energy announced
enhancements to a 10-year, $7 billion strategy, originally proposed in
September 2000, to improve the supply and reliability of electricity in
Wisconsin. As noted above, this Power the Future strategy is intended to meet
the growing demand for electricity and ensure a diverse fuel mix while keeping
electricity prices reasonable. According to a report issued by the Wisconsin
Governor's Office, demand for electricity in the state of Wisconsin is
currently expected to outstrip supply by 7,220 megawatts by the year 2016.
Power the Future would add new coal and natural gas capacity to the state's
power portfolio and would allow Wisconsin Electric to roughly maintain its
current fuel mix.
As part of its Power the Future strategy, Wisconsin Energy, through a
combination of Wisconsin Electric and W.E. Power, LLC., a non-utility affiliate
of Wisconsin Electric, plans to make the following investments over the next
decade:
. Approximately $3 billion in 2,800 megawatts of new natural gas-based and
coal-based generating capacity;
. Approximately $1.3 billion in upgrades to existing electric generating
assets; and
. Approximately $2.7 billion in new and existing energy distribution system
assets.
In November 2001, Wisconsin Energy created a new non-utility energy subsidiary,
W.E. Power, LLC, that would construct and own the new generating capacity.
Under the enhanced Power the Future strategy, Wisconsin Electric, subject to
PSCW approval,
A-4
would lease each new facility, and would operate and maintain the new plants as
part of these 20 to 25-year lease agreements. At the end of the leases,
Wisconsin Electric would have the right to acquire the plants outright at
market value or, depending on tax considerations at that time, Wisconsin
Electric could choose to extend the lease. Smaller investor-owned or municipal
utilities, cooperatives and power marketing associations would have the
opportunity to participate in the project, including expanding or extending
wholesale power purchases from Wisconsin Electric as a result of the additional
electric generating capacity included in the proposal.
Implementation of the Power the Future strategy is subject to a number of
regulatory approvals. In late February 2001, Wisconsin Energy made preliminary
filings for its enhanced Power the Future proposal with the PSCW. Subsequently,
the state legislature amended several laws, making changes which are critical
to the implementation of Power the Future. On October 16, 2001, the PSCW issued
a declaratory ruling finding, among other things, that it was prudent to
proceed with Power the Future and for Wisconsin Energy to incur the associated
pre-certification expenses. However, individual expenses are subject to review
and must be approved by the PSCW in order to be recovered. The PSCW also ruled
that such expenses fall within the reliability "carve-out" provisions contained
in the PSCW's order approving the merger of WICOR and Wisconsin Energy,
allowing Wisconsin Electric to seek recovery of such expenses.
For further information concerning the Power the Future strategy, see "Factors
Affecting Results, Liquidity and Capital Resources" below.
Divestiture of Assets
During 2000, Wisconsin Electric agreed to join American Transmission Company
LLC ("ATC") by transferring its electric utility transmission assets to ATC in
exchange for an equity interest in the new company. Transfer of these electric
transmission assets, with a net book value of approximately $224.4 million,
became effective on January 1, 2001. During 2001, ATC issued debt and
distributed $105.2 million of cash back to Wisconsin Electric as a partial
return of the original equity contribution. Joining ATC is consistent with the
Federal Energy Regulatory Commission's Order No. 2000, designed to foster
competition, efficiency and reliability in the electric industry.
The Company anticipates that the transfer of its electric transmission assets
to ATC will be earnings neutral subject to approval of transmission cost rate
recovery requests made with the PSCW and the Michigan Public Service Commission
("MPSC") during 2001. However, the asset transfer has changed where
transmission-related activities are reflected on the income statement. Prior to
the asset transfer, transmission-related costs were reflected in Other
Operation and Maintenance expense, Depreciation expense and Financing Costs
(for interest expense). Following transfer of the transmission assets, the
Company reports fees paid to ATC for electric transmission service in Other
Operation and Maintenance expense and recognizes an equity interest in ATC's
reported earnings in Other Income and (Deductions), Equity in Earnings of
Unconsolidated Affiliates. See "Utility Rates and Regulatory Matters" below for
information related to recovery of the Company's transmission costs.
A-5
RESULTS OF OPERATIONS
EARNINGS
Earnings during 2001 increased by $81.8 million to $245.3 million compared to
2000 earnings. The primary causes for this increase were the successful
operations of company owned generation assets, price increases to recover fuel
costs and reliability expenditures and interest income related to a litigation
matter. In addition, in 2000, the Company recorded $43.9 million of
non-recurring charges as described below.
Earnings declined by $48.4 million during 2000 when compared with 1999 due in
large part to non-recurring charges primarily associated with the WICOR merger.
In December 2000, Wisconsin Electric recorded non-recurring charges totaling
$43.9 million, after tax, including $34.3 million related to severance benefits
and other items and a one-time contribution of $9.6 million, after tax, to the
Wisconsin Energy Foundation to assist it in becoming self-funded. During 2000,
Wisconsin Electric's earnings before non-recurring items declined by $15.3
million due in large part to higher fuel and purchased power expenses and cool
summer weather during 2000.
The following table summarizes the Company's earnings during 2001, 2000 and
1999.
Wisconsin Electric Power Company 2001 2000 1999
-------------------------------- -------- -------- --------
(Millions of Dollars)
Gross Margin
Electric (See below)........................... $1,336.3 $1,271.9 $1,249.4
Gas (See below)................................ 138.1 141.0 132.8
Steam.......................................... 15.6 15.7 15.2
-------- -------- --------
Gross Margin............................... 1,490.0 1,428.6 1,397.4
Other Operating Expenses..........................
Other Operation and Maintenance................ 681.9 696.1 649.5
Depreciation, Decommissioning and Amortization. 264.3 272.7 234.2
Property and Revenue Taxes..................... 67.8 65.9 66.6
-------- -------- --------
Operating Income........................... 476.0 393.9 447.1
Other Income (Deductions)......................... 36.0 (9.8) (4.9)
Financing Costs................................... 108.9 116.2 112.9
-------- -------- --------
Income Before Income Taxes................. 403.1 267.9 329.3
Income Taxes...................................... 156.6 103.2 116.2
Preferred Stock Dividend Requirement.............. 1.2 1.2 1.2
-------- -------- --------
Earnings Available for Common Stockholder......... $ 245.3 $ 163.5 $ 211.9
Electric Utility Revenues, Gross Margins and Sales
During 2001, Wisconsin Electric's total electric utility operating revenues
increased by $76.4 million or 4.3% compared with 2000. Wisconsin Electric
attributes this growth mostly to incremental rate increases in effect during
2001 related to higher fuel, purchased power and other operating costs. For
additional information concerning these rate increases, see "Factors Affecting
Results, Liquidity and Capital Resources" below. Higher electric cooling load
during the summer of 2001 caused by a return to normal summer weather also
contributed to the growth in electric operating revenues. These revenue
increases were partially offset by a reduction in total electric sales during
2001 due in large part to a softening economy in the region. Purchased power
expenses increased by $28.5 million or 17.1% during 2001 primarily as a result
of higher natural gas prices and, to a lesser extent, as a result of higher
demand costs during 2001 associated with purchased power contracts. However, a
$16.5 million or 5.1% decline in fuel costs during 2001, primarily driven by a
change in the Company's electric supply mix to lower cost nuclear generation
and by an overall reduction in demand for electric energy during 2001, resulted
in a net increase in fuel and purchased power expenses of $12.0 million or 2.4%
when compared with 2000. Due to the increase in operating revenues partially
offset by the slightly higher fuel and purchased power costs, electric gross
margin (total electric utility operating revenues less fuel and purchased power
expenses) grew by $64.4 million or 5.1% during 2001 when compared with 2000.
During 2000, Wisconsin Electric's total electric utility operating revenues
increased by $75.1 million or 4.4% compared with 1999. Wisconsin Electric
attributes this growth mostly to higher electric energy sales and rate
increases during 2000. Interim and final electric rate increases, that became
effective in early April 2000 and on August 30, 2000, respectively, contributed
approximately
A-6
$22.1 million to the increase in electric operating revenues. For additional
information concerning these rate increases, see "Factors Affecting Results,
Liquidity and Capital Resources" below. Fuel and purchased power expenses
increased by $52.6 million or 12.0% during 2000, reflecting increased
generation and significantly higher natural gas prices. Purchased power
expenses also grew due to higher demand costs during 2000 associated with
purchased power contracts. To a limited extent, Wisconsin Electric was able to
limit the increase in fuel and purchased power costs during 2000 by changing
its electric supply mix away from higher cost natural gas-fired generation and
power purchases to lower cost nuclear and coal-fired generation.
The following table compares Wisconsin Electric's electric utility operating
revenues and its gross margin during 2001 with similar information for 2000 and
1999.
Electric Revenues and Margin Megawatt-Hour Sales
---------------------------- --------------------------
Electric Utility Operations 2001 2000 1999 2001 2000 1999
--------------------------- -------- -------- -------- -------- -------- --------
(Millions of Dollars) (Thousands)
Operating Revenues.............
Residential................. $ 644.8 $ 597.2 $ 574.8 7,615.7 7,477.6 7,346.8
Small Commercial/Industrial. 577.3 534.7 510.1 8,354.2 8,287.5 8,028.2
Large Commercial/Industrial. 472.0 464.9 451.2 10,983.0 11,626.2 11,333.6
Other-Retail/Municipal...... 63.2 58.3 51.2 1,599.4 1,527.3 1,314.0
Resale-Utilities............ 69.6 84.0 79.1 1,987.4 2,480.2 2,597.3
Other Operating Revenues.... 12.9 24.3 21.9 -- -- --
-------- -------- -------- -------- -------- --------
Total Operating Revenues....... 1,839.8 1,763.4 1,688.3 30,539.7 31,398.8 30,619.9
Fuel and Purchased Power.......
Fuel........................ 308.8 325.3 299.1
Purchased Power............. 194.7 166.2 139.8
-------- -------- --------
Total Fuel and Purchased Power. 503.5 491.5 438.9
-------- -------- --------
Gross Margin................... $1,336.3 $1,271.9 $1,249.4
Weather--Degree Days (a).......
Heating (6,821 Normal)...... 6,338 6,716 6,318
Cooling (685 Normal)........ 711 566 753
- --------
(a) As measured at Mitchell International Airport in Milwaukee, Wisconsin.
Normal degree days are based upon a twenty-year moving average.
During 2001, total electric megawatt-hour sales fell by 2.7% compared with
2000, reflecting a softening economy that has especially affected large
commercial and industrial customers such as Wisconsin Electric's largest retail
customers, two iron ore mines. Sales to these mines decreased by 17.7% during
2001, with one of the mines currently idle pending a production decision by its
owners. Excluding the two mines, total electric sales decreased 1.5% during
2001 and sales to the remaining large commercial/industrial customers decreased
by 2.3% when compared with 2000. Due to warmer weather during the summer of
2001, a 1.8% increase in sales to residential customers, who are more weather
sensitive and contribute higher margins than other customer classes, partially
offset the effects of the soft economy on electric sales during 2001. As
measured by cooling degree days, 2001 was 25.6% warmer than 2000 and 3.8%
warmer than normal. Sales for resale to other utilities, the Resale-Utilities
customer class, declined 19.8% during 2001 primarily as a result of a reduced
demand for wholesale power.
During 2000, total electric energy sales increased by 2.5% compared with 1999,
mostly reflecting growth in the average number of residential, small
commercial/industrial and other retail/municipal customers and a 13.1% increase
in sales to the iron ore mines noted above. Excluding these mines, total
electric sales increased by 1.7% and sales to the remaining large
commercial/industrial customers were unchanged between the comparative periods.
Growth in the average number of customers partially offset the effects of
cooler weather during the 2000 cooling season on total electric energy sales
and on operating revenues. As measured by cooling degree days, 2000 was 24.8%
cooler than 1999 and 17.4% cooler than normal.
A-7
Gas Utility Revenues, Gross Margins and Therm Deliveries
The following table compares Wisconsin Electric's gas utility operating
revenues and its gross margin (total gas utility operating revenues less cost
of gas sold) during 2001, 2000 and 1999.
Gas Utility Operations 2001 2000 1999
---------------------- --------------- --------------- ---------------
Gas Operating Revenues $457.1 $399.7 $306.8
Cost of Gas Sold...... 319.0 258.7 174.0
--------------- --------------- ---------------
Gross Margin.......... $138.1 $141.0 $132.8
During 2001, Wisconsin Electric's gas operating revenues increased by $57.4
million or 14.4% when compared with 2000 revenues. This increase reflected a
$60.3 million increase due to increases in the cost of gas sold offset in part
by warmer weather which reduced volumes sold. Because changes in the cost of
natural gas purchased at market prices were included in customer rates through
the gas cost recovery mechanism, gas operating revenues changed by
approximately the same amount as the cost of gas sold and gross margin was
unaffected by such changes.
During 2000, Wisconsin Electric's total gas utility operating revenues
increased by $92.9 million or 30.3% while gross margin increased by $8.2
million or 6.2% when compared with 1999. Interim and final retail gas rate
increases, that became effective in early April 2000 and on August 30, 2000,
respectively, along with a weather-related increase in higher margin
residential and commercial/industrial retail gas sales during the fourth
quarter of 2000, contributed to the increase in operating revenues and gross
margin during 2000. For additional information concerning the rate increases,
see "Factors Affecting Results, Liquidity and Capital Resources" below. A
decrease in revenues from interdepartmental therm deliveries to Wisconsin
Electric's natural gas-fired electric generating facilities during 2000
partially offset the increases in gas utility operating revenues and gross
margin noted above.
The following table compares gas utility gross margin and therm deliveries
during 2001, 2000 and 1999. Gross margin is a better performance indicator than
revenues because changes in the cost of gas sold flow through to revenue under
gas cost recovery mechanisms that do not impact gross margin.
Gross Margin Therm Deliveries
--------------------- -----------------
Gas Utility Operations 2001 2000 1999 2001 2000 1999
---------------------- ------ ------ ------ ----- ----- -----
(Millions of Dollars) Millions
Customer Class
Residential........................... $ 87.4 $ 88.4 $ 85.7 318.4 335.7 329.0
Commercial/Industrial................. 31.2 31.6 29.3 194.5 206.2 195.3
Interruptible......................... 0.7 0.9 1.8 8.9 12.0 16.3
------ ------ ------ ----- ----- -----
Total Retail Gas Gross Margin..... 119.3 120.9 116.8 521.8 553.9 540.6
Transported Gas....................... 15.7 18.7 14.6 330.6 391.0 403.5
Other Operating....................... 3.1 1.4 1.4 -- -- --
------ ------ ------ ----- ----- -----
Total Operating Gross Margin...... $138.1 $141.0 $132.8 852.4 944.9 944.1
Weather--Degree Days (a)
Heating (6,821 Normal)................ 6,338 6,716 6,318
- --------
(a) As measured at Mitchell International Airport in Milwaukee, Wisconsin.
Normal degree days are based upon a twenty-year moving average.
Gas margins totaled $138.1 million in 2001, or a $2.9 million decline from
2000. This decline was directly related to warmer winter weather which reduced
the heating load. Total therm deliveries of natural gas decreased by 9.8%
during 2001, but varied within customer classes. Volume deliveries for the
residential and commercial/industrial customer classes decreased by 5.2% and
5.7%, respectively, reflecting warmer weather. Residential and commercial
customers are more weather sensitive and contribute higher margins per therm
than other customers. Transportation volumes were 15.4% lower than the prior
year reflecting fuel switching to lower-cost fuel options and a softening
economy.
Other Items
Other Operation and Maintenance Expenses: Other operation and maintenance
expenses decreased by $14.2 million during 2001 when compared with 2000. The
most significant change in other operation and maintenance expenses between the
comparative
A-8
periods resulted from $44.9 million of higher electric transmission expenses
caused by a change in how electric transmission costs are recorded as a result
of the transfer of Wisconsin Electric's electric transmission assets to ATC on
January 1, 2001. Also, as described below in 2000, the Company recorded $52.7
million of costs which did not recur in 2001. Partially offsetting this was a
reduction in costs as a result of the WICOR merger, which led to the
consolidation of common operating and support areas.
Other operation and maintenance expenses increased by $46.6 million during 2000
when compared with 1999. The most significant change in other operation and
maintenance expenses between the comparative periods resulted from $52.7
million of pre-tax non-recurring charges associated with the WICOR merger
including severance, benefits and other items. Increased other operation and
maintenance expenses during 2000 were also attributable to $14.8 million of
higher non-fuel fossil generation expenses and $9.0 million of higher electric
distribution expenses offset in part by an $8.8 million decline in nuclear
non-fuel expenses and a $9.9 million decline in customer service expenses.
Depreciation, Decommissioning and Amortization Expenses: Depreciation,
decommissioning and amortization expenses were $8.4 million lower during 2001
compared with 2000. The transfer of electric transmission assets to the ATC
resulted in a reduction in depreciation expense, which was partially offset by
increased capital asset additions for electric generation and for electric and
gas distribution systems.
Depreciation, decommissioning and amortization expenses were $38.5 million
higher during 2000 compared with 1999. Pursuant to a 1998 rate order for the
1998/1999 test year, Wisconsin Electric was amortizing pre-1991 contributions
in aid of construction. This amortization, which was completed as of December
31, 1999, had the effect of reducing depreciation expense by $22.8 million in
2000 compared to 1999. Higher average depreciable property during 2000 also
contributed to an increase in depreciation expense.
Other Income and Deductions: Other Income and Deductions increased by $45.8
million during 2001 due to recognition of equity in the earnings of the ATC of
$20.6 million, reduced contributions to the Wisconsin Energy Foundation, and
$10.5 million of interest income Wisconsin Electric has accrued on the deposit
tendered in the Giddings & Lewis, Inc./City of West Allis lawsuit partially
offset by lower interest income on investments. For more information concerning
this lawsuit see "Note L--Commitments and Contingencies" in the Notes to
Financial Statements.
Financing Costs: Financing costs decreased by $7.3 million during 2001
primarily due to lower interest rates on variable rate debt. Financing costs
were $3.3 million higher in 2000 compared with 1999.
Income Taxes: Wisconsin Electric's effective income tax rate was 38.8%, 38.5%,
and 35.2% in each of the three years ended December 31, 2001, respectively. The
effective income tax rate increased during 2000 due in large part to the end of
amortization of pre-1991 contributions in aid of construction.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
The following table summarizes Wisconsin Electric's cash flows during 2001,
2000 and 1999:
Wisconsin Electric Power Company 2001 2000 1999
-------------------------------- ------- ------- -------
(Millions of Dollars)
Cash Provided by (Used in)
Operating Activities...... $ 526.2 $ 572.7 $ 335.3
Investing Activities...... $(290.9) $(419.3) $(393.1)
Financing Activities...... $(224.6) $(192.7) $ 93.5
Operating Activities
During 2001, cash flow from operations decreased to $526.2 million, or a $46.5
million decline from 2000. This decrease was primarily attributable to changes
in working capital requirements, non-cash changes in how the Company accounts
for electric transmission operations offset by increased operating income.
During 2000, cash flows from operations increased by $237.4 million over 1999
due primarily to increased non-cash charges and a $110 million payment made in
1999 related to litigation. This payment was returned to the Company with
interest in early 2002.
A-9
Investing Activities
During 2001, the Company spent $377.0 million in capital expenditures, a $25.5
million increase over 2000 capital expenditures, and a $30.6 million increase
over 1999 capital expenditures. During 2001, the Company transferred its
transmission assets with a net book value of approximately $224.4 million to
ATC, in exchange for a 43% equity interest. During 2001, ATC remitted $105.2
million of cash back to the Company as a partial return of its investment.
For the year ended December 31, 2000, Wisconsin Electric spent $419.3 million
in investing activities including $352.5 million for the acquisition or
construction of new or improved facilities, $41.6 million for the acquisition
of nuclear fuel and $17.6 million of payments to the nuclear decommissioning
trust fund for the eventual decommissioning of Point Beach Nuclear Plant.
Financing Activities
During 2001, Wisconsin Electric used $224.6 million of net cash in its
financing activities consisting primarily of the payment of $130.0 million of
dividends to Wisconsin Energy. In January 2002, the Company redeemed $100
million of 8 3/8% long-term debt and $3.4 million of 9 1/8% long-term debt.
These redemptions were financed with short-term commercial paper bearing rates
of approximately 2%. The 2002 redemptions are expected to have an initial cost
of $5.2 million associated with the redemption premium; however, it is expected
that the current short-term rates will result in reduced interest costs during
2002.
CAPITAL RESOURCES AND REQUIREMENTS
Capital Resources
Wisconsin Electric anticipates meeting its capital requirements during 2002
primarily through internally generated funds. Beyond 2002, Wisconsin Electric
expects to meet its capital requirements through internally generated funds
supplemented, when required, through the issuance of debt securities.
The Company has access to the 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 December 31, 2001, Wisconsin Electric had $138 million of total available
unused short-term borrowing capacity under existing commercial paper programs
and other short-term borrowing arrangements. On that date, Wisconsin Electric
had $250 million of available unused lines of bank credit to support its
outstanding commercial paper program and other short-term borrowing
arrangements.
The following table shows Wisconsin Electric's capitalization structure at
December 31:
Capitalization Structure 2001 2000
------------------------ -------------- --------------
(Millions of Dollars)
Common Equity................................ $1,980.1 51.0% $1,864.8 48.3%
Preferred Stock.............................. 30.4 0.8% 30.4 0.8%
Long-Term Debt (including current maturities) 1,703.2 43.8% 1,707.7 44.2%
Short-Term Debt.............................. 172.4 4.4% 257.0 6.7%
-------- ----- -------- -----
Total..................................... $3,886.1 100.0% $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.
Wisconsin Electric Power Company S&P Moody's Fitch
-------------------------------- ---- ------- -----
Commercial Paper.......... A-1 P-1 F1+
Secured Senior Debt....... A Aa2 AA
Unsecured Debt............ A- Aa3 AA-
Preferred Stock........... BBB+ A2 AA-
S&P's, Moody's and Fitch's current outlook for Wisconsin Electric is stable.
A-10
Wisconsin Electric believes these security ratings should provide a significant
degree of flexibility in obtaining funds on competitive terms. However, these
security ratings 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
Total capital expenditures, excluding the purchase of nuclear fuel, are
currently estimated to be $370 million during 2002. Due to changing
environmental and other regulations such as air quality standards or electric
reliability initiatives that impact the Company, future long-term capital
requirements may vary from recent capital requirements. Wisconsin Electric
currently expects capital expenditures, excluding the purchase of nuclear fuel,
to be between $325 million and $400 million per year during the next five years.
Capital requirements over the next decade for Power the Future include
approximately $1.3 billion to upgrade existing electric generating assets and
approximately $2.7 billion for energy distribution system upgrades much of
which will be expended by Wisconsin Electric. In addition, subject to PSCW
approval, new generating plants will be constructed by W.E. Power, a
non-utility subsidiary of Wisconsin Energy, and leased to Wisconsin Electric
under 20-25 year lease agreements. It is expected that Wisconsin Electric will
recover the lease payments in its utility rates. It is anticipated that
Wisconsin Electric will need external financing as the plants are constructed.
Wisconsin Electric is a party to various financial instruments with off-balance
sheet risk as a part of its normal course of business, including financial
guarantees and letters of credit which support construction projects, commodity
contracts and other payment obligations. Wisconsin Electric's estimated maximum
exposure under such agreements is approximately $6 million as of December 31,
2001. However, the Company believes the likelihood is remote that material
payments will be required under these agreements.
Wisconsin Electric has the following contractual obligations and other
commercial commitments as of December 31, 2001:
Payments Due by Period
---------------------------------------
2-5 After 5
Contractual Obligations (a) Less than 1 yr years years Total
--------------------------- -------------- ------ -------- --------
(Millions of Dollars)
Long-Term Debt (b).................... $255.3 $348.6 $ 908.4 $1,512.3
Capital Lease Obligations (c)......... 56.7 149.6 469.9 676.2
Operating Lease Obligations (d)....... 7.4 14.7 13.9 36.0
Unconditional Purchase Obligations (e) 9.6 38.4 -- 48.0
Other Long-Term Obligations (f)....... 143.2 436.1 269.4 848.7
------ ------ -------- --------
Total Contractual Cash Obligations.... $472.2 $987.4 $1,661.6 $3,121.2
- --------
(a) The amounts included in the table are calculated using current market
prices, forward curves and other estimates. Contracts with multiple unknown
variables have been omitted from the analysis.
(b) Principal payments on Long-Term Debt of Wisconsin Electric (excluding
capital lease obligations).
(c) Capital Lease Obligations of Wisconsin Electric for nuclear fuel lease and
purchase power commitment.
(d) Operating Leases Obligations for equipment, vehicles and property for
Wisconsin Electric.
(e) Unconditional Purchase Obligations for information technology and other
services for utility operations.
(f) Other Long Term Obligations under various contracts of Wisconsin Electric
for the procurement of fuel, power, gas supply and associated
transportation, primarily related to utility operations.
Obligations for utility operations by Wisconsin Electric have historically been
included as part of the rate making process and therefore generally recoverable
from customers.
A-11
FACTORS AFFECTING RESULTS, LIQUIDITY AND CAPITAL RESOURCES
MARKET RISKS AND OTHER SIGNIFICANT RISKS
The Company is potentially exposed to market and other significant risks as a
result of the nature of its businesses and the environment in which those
businesses operate. Such risks, described in further detail below, include but
are not limited to: (1) Commodity price risks related to electric generation
fuel costs, the market price of electricity and the price of natural gas;
(2) Regulatory risk associated with the recovery of fuel and purchased power
costs; (3) Weather fluctuations; (4) Interest rate risks associated with the
Company's portfolio of short and long-term debt; (5) Marketable securities
return risk related to debt and equity investments held in various trust funds;
(6) Economic risks; and (7) Inflationary risks to future results of operations,
especially as they relate to expenses associated with employee medical benefit
plans and post retirement benefits.
Commodity Price Risk: In the normal course of business, Wisconsin Electric
utilizes contracts of various duration for the forward sale and purchase of
electricity. This is done to effectively manage utilization of its available
generating capacity and energy during periods when available power resources
are expected to exceed the requirements of its obligations. This practice may
also include forward contracts for the purchase of power during periods when
the anticipated market price of electric energy is below expected incremental
power production costs. Wisconsin Electric manages its fuel and gas supply
costs through a portfolio of short and long-term procurement contracts with
various suppliers for the purchase of coal, uranium, natural gas and fuel oil.
Wisconsin's retail electric fuel cost adjustment procedure mitigates some of
Wisconsin Electric's risk of electric fuel cost fluctuation. On a prospective
basis, if cumulative fuel and purchased power costs for electric utility
operations deviate from a prescribed range when compared to the costs projected
in the most recent retail rate proceeding, retail electric rates may be
adjusted, subject to risks associated with the regulatory approval process
noted below.
The PSCW has authorized a dollar for dollar recovery of natural gas costs for
the gas utility operations of Wisconsin Electric through gas cost recovery
mechanisms, which mitigates most of the risk of gas cost variations. For
additional information concerning the electric utility fuel cost adjustment
procedure and the natural gas utility gas cost recovery mechanism, see "Rates
and Regulatory Matters" below.
Regulatory Recovery Risk: The electric operations of Wisconsin Electric burn
natural gas in several of its peaker power plants or as a supplemental fuel at
several coal-fired plants, and the cost of purchased power is tied to the cost
of natural gas in many instances. Wisconsin Electric bears significant
regulatory risk for the recovery of such fuel and purchased power costs when
they are higher than the base rate established in its rate structure.
As noted above, the electric operations of Wisconsin Electric operate under a
fuel cost adjustment clause in the Wisconsin retail jurisdiction for fuel and
purchased power costs associated with the generation and delivery of
electricity. This clause establishes a base rate for fuel and purchased power,
and Wisconsin Electric assumes the risks and benefits of fuel cost variances
that are within 3% of the base rate. For 2001 and 2000, actual fuel and
purchased power costs at Wisconsin Electric exceeded base fuel rates by $0.1
million and $25.9 million, respectively. In 2001, the base fuel rates included
a fuel surcharge. For 1999, actual Wisconsin Electric fuel and purchased power
costs were $1.5 million less than base fuel rates.
Weather: The rates of Wisconsin Electric are set by the PSCW based upon
estimated temperatures which approximate 20-year averages. Wisconsin Electric's
electric revenues are sensitive to the summer cooling season, and to some
extent, to the winter heating season. The gas revenues of Wisconsin Electric
are sensitive to the winter heating season. A summary of actual weather
information in the utility segment's service territory during 2001, 2000 and
1999, as measured by degree-days, may be found above in "Results of Operations".
Interest Rate Risk: Wisconsin Electric, has various short-term borrowing
arrangements to provide working capital and general corporate funds. Wisconsin
Electric also has variable rate long-term debt outstanding at December 31,
2001. Borrowing levels under such arrangements vary from period to period
depending upon capital investments and other factors. Future short-term
interest expense and payments will reflect both future short-term interest
rates and borrowing levels.
The Company performed an interest rate sensitivity analysis at December 31,
2001 of its outstanding portfolio of $172.4 million short-term debt with a
weighted average interest rate of 1.86% and $165.4 million of variable-rate
long-term debt with a weighted average interest rate of 1.99%. A one-percentage
point change in interest rates would cause the Company's annual interest
expense to increase or decrease by approximately $1.7 million before taxes from
short-term borrowings and $1.7 million before taxes from variable rate
long-term debt outstanding.
A-12
Marketable Securities Return Risk: Wisconsin Electric funds its pension, other
postretirement benefit and nuclear decommissioning obligations through various
trust funds, which in turn invest in debt and equity securities. Changes in the
market price of the assets in these trust funds can affect future pension,
other postretirement benefit and nuclear decommissioning expenses. Future
annuity payments to these trust funds can also be affected by changes in the
market price of trust fund assets. Wisconsin Electric expects that the risk of
expense and annuity payment variations as a result of changes in the market
price of trust fund assets would be mitigated in part through future rate
actions by the Company's various utility regulators. The Company is currently
operating under a PSCW ordered, qualified five year rate freeze. For further
information, see "Rates and Regulatory Matters" below.
At December 31, 2001, Wisconsin Electric held the following total trust fund
assets at fair value, primarily consisting of publicly traded debt and equity
security investments.
Millions
Wisconsin Electric Company of Dollars
-------------------------- ----------
Pension trust funds...................... $756.4
Nuclear decommissioning trust fund....... $589.6
Other postretirement benefits trust funds $ 81.0
Wisconsin Electric manages its fiduciary oversight of the pension and other
postretirement plan trust fund investments through a Board-appointed Investment
Trust Policy Committee. Qualified external investment managers are engaged to
manage the investments. The Company conducts asset/liability studies
periodically through an outside investment advisor. The current study projects
long-term, annualized returns of approximately 9%.
Fiduciary oversight for the nuclear decommissioning trust fund investments is
also the responsibility of the Board-appointed Investment Trust Policy
Committee. Qualified external investment managers are also engaged to manage
these investments. An asset/liability study is periodically conducted by an
outside investment advisor, subject to additional constraints established by
the PSCW. The current study projects long-term, annualized returns of
approximately 9%. Current PSCW constraints allow a maximum allocation of 65%
equities. The allocation to equities is expected to be reduced as the date for
decommissioning Point Beach Nuclear Plant approaches in order to increase the
probability of sufficient liquidity at the time the funds will be needed.
Wisconsin Electric insures various property and outage risks through Nuclear
Electric Insurance Limited ("NEIL"). Annually, NEIL reviews its underwriting
and investment results and determines the feasibility of granting a
distribution to policyholders. Wisconsin Electric has received at least $9.0
million before taxes as its share of distributions in recent years. Adverse
loss experience, rising reinsurance costs, or impaired investment results at
NEIL could result in increased insurance costs to Wisconsin Electric.
Economic Risk: Wisconsin Electric operates in Wisconsin and the Upper Peninsula
of Michigan and its results are dependant upon economic conditions within its
service territory.
Inflationary Risk: Wisconsin Electric continues to monitor the impact of
inflation, especially with respect to the rising costs of medical plans, in
order to minimize its effects in future years through pricing strategies,
productivity improvements and cost reductions. Except for continuance of an
increasing trend in the inflation of medical costs and the impacts on the
Company's medical and post retirement benefit plans, Wisconsin Electric has
expectations of low-to-moderate inflation. Wisconsin Electric does not believe
the impact of general inflation will have a material effect on its future
results of operations.
For additional information concerning risk factors, including market risks, see
"Cautionary Factors" below.
RATES AND REGULATORY MATTERS
The Public Service Commission of Wisconsin regulates retail electric, natural
gas, and steam rates in the state of Wisconsin, while the Federal Energy
Regulatory Commission regulates wholesale power, electric transmission and
interstate gas transportation service rates. The Michigan Public Service
Commission regulates retail electric rates in the state of Michigan.
Wisconsin Jurisdiction
WICOR Merger Order: As a condition of its March 15, 2000 approval of the WICOR
acquisition, the PSCW ordered a qualified "five-year rate restriction period"
in effect freezing electric and natural gas rates for Wisconsin Electric
effective January 1, 2001.
A-13
The Company may seek biennial rate reviews during the five-year rate
restriction period limited to "carve out" changes in revenue requirements as a
result of:
. Governmental mandates;
. Abnormal levels of capital additions required to maintain or improve
reliable electric service; and
. Major gas lateral projects associated with approved natural gas pipeline
construction projects.
To the extent that natural gas rates and rules need to be modified during the
integration of the gas operations of Wisconsin Electric and Wisconsin Gas, the
Company's total gas revenue requirements are to remain revenue neutral under
the merger order. In its order, the PSCW found that electric fuel cost
adjustment procedures as well as gas cost recovery mechanisms would not be
subject to the five-year rate restriction period and that it was reasonable to
allow Wisconsin Energy to retain efficiency gains associated with the merger. A
full rate review will be required by the PSCW at the end of the five-year rate
restriction period.
The table below summarizes the anticipated annualized revenue impact of recent
rate changes, primarily in the Wisconsin jurisdiction, authorized by regulatory
commissions for Wisconsin Electric's electric, natural gas and steam utilities.
Incremental
Annualized Authorized
Revenue Percent Return on
Increase Change Common Effective
Service--Wisconsin Electric (Decrease) in Rates Equity Date
--------------------------- ----------- -------- ---------- ---------
(Millions) (%) (%)
Retail gas (a)........... $ 3.6 0.9% 12.2% 12/20/01
Fuel electric, WI (b).... $20.9 1.4% -- 5/03/01
Fuel electric, WI (b).... $37.8 2.5% -- 2/09/01
Fuel electric, MI........ $ 1.0 2.4% -- 1/01/01
Retail electric, WI...... $27.5 1.8% 12.2% 1/01/01
Retail electric, WI (c).. $11.3 0.8% 12.2% 8/30/00
Retail gas (c)........... $(3.6) (0.9%) 12.2% 8/30/00
Retail electric, WI (c).. $25.2 1.7% 12.2% 4/11/00
Retail gas (c)........... $11.6 3.3% 12.2% 4/11/00
Fuel electric, WI........ $(7.8) (0.5%) -- 5/01/99
- --------
(a) On 11/1/01 the Milwaukee County Circuit Court overturned the PSCW's 8/30/00
final order for natural gas rates and the PSCW reinstated the higher
4/11/00 interim gas rate order, effective 12/20/01.
(b) The 2/9/01 order was an interim order that was effective until the 5/3/01
final order was issued by the PSCW. The final 5/3/01 order superceded the
2/9/01 interim order.
(c) The 4/11/00 order was an interim order that was effective until the 8/30/00
final order was issued by the PSCW. The retail gas 8/5/00 final order was
amended in the 12/20/01 order.
On March 23, 2000, the PSCW approved Wisconsin Electric's request for interim
price increases related to the 2000/2001 biennial period, authorizing a $25.2
million (1.7%) increase for electric operations and an $11.6 million (3.3%)
increase for gas operations. The interim increase, which was subject to
potential refund, became effective April 11, 2000. Rates in the interim order
were based upon a 12.2% return on common equity.
On August 30, 2000, the PSCW issued its final order in the 2000/2001 pricing
proposal. The final order authorized a $36.5 million (2.5%) increase for
electric operations (or $11.3 million higher than authorized in the interim
order) as well as an $8 million (2.1%) increase for gas operations (or $3.6
million lower than authorized in the interim order). Wisconsin Electric
refunded to gas customers revenues that resulted from the difference in gas
rates between the interim and final orders. In its August 30, 2000 final order,
the PSCW authorized a second $27.5 million (1.8%) increase for electric
operations effective January 1, 2001. Rates in the final order were based upon
a 12.2% return on common equity.
On November 14, 2000, Wisconsin Electric filed a petition for judicial review
with the Milwaukee County Circuit Court challenging the PSCW's decision to
limit the final gas rate increase to $8.0 million rather than the $11.6 million
found reasonable for the interim increase. On November 1, 2001 the Milwaukee
County Circuit Court ruled in Wisconsin Electric's favor and remanded it back
to the PSCW for action. The PSCW did not challenge the courts decision and
authorized the Company to increase natural gas rates by $3.6 million effective
December 20, 2001.
A-14
In its final order related to the 2000/2001 biennial period, the PSCW
authorized recovery of revenue requirements for, among other things, electric
reliability and safety construction expenditures as well as for nitrogen oxide
("NO\\x") remediation expenditures. Revenue requirements for electric
reliability and safety construction expenditures are subject to refund at the
end of 2001 to the extent that actual expenditures are less than forecasted
expenditures included in the final order. In March 2000, the PSCW had
previously authorized all Wisconsin utilities to depreciate NOx emission
reduction costs over an accelerated 10-year recovery period. Due to the
uncertainty regarding the level and timing of these expenditures, the PSCW, in
its final order, required Wisconsin Electric to establish escrow accounting for
revenue requirement components associated with NOx expenditures. Wisconsin
Electric's actual NOx remediation expenditures during the 2000/2001 biennial
period resulted in an under-spent balance of approximately $8.0 million at
the end of 2001 in the NOx escrow account which will need to be addressed in
future rate making activities. \\
Electric Transmission Cost Recovery: In September 2001, Wisconsin Electric
requested that the PSCW approve $58.8 million of annual rate relief to recover
costs associated with the formation and operation of ATC, which was designed to
enhance access and increase electric system reliability and market efficiency.
Wisconsin Electric also is seeking to recover associated incremental
transmission costs of the Midwest Independent System Operator, the multi-state
organization that will monitor and control electric transmission throughout the
Midwest. These increased costs are due to the implementation of capital
improvement projects that are expected to increase transmission capacity and
reliability. The Company anticipates that cost recovery of the transmission
related costs under this request and similar requests in the Michigan
Jurisdiction will be earnings neutral subject to approval of these requests by
the PSCW and MPSC.
Fuel Cost Adjustment Procedure: As previously reported, Wisconsin Electric
operates under a fuel cost adjustment clause for fuel and purchased power costs
associated with the generation and delivery of electricity and purchase power
contracts. 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 purchased power in 2001. Wisconsin
Electric revised its projected power supply 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 power supply 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 (or an additional $20.9
million over the interim order). Under the fuel rules, Wisconsin Electric would
have to refund to customers any over recoveries of fuel costs. During 2001, the
Company did not over recover fuel costs.
On June 4, 2001, two consumer advocacy groups petitioned the Dane County
Circuit Court for review of these decisions of the PSCW authorizing Wisconsin
Electric to add a surcharge to its electric rates to recover its expected 2001
power supply costs. The petitioners allege that the PSCW made various material
errors of law and procedure as a result of which the Court should set aside
both the interim and final orders and remand the case to the PSCW. The matter
is pending. Wisconsin Electric intends to vigorously defend the PSCW's orders
and believes the Court will affirm the PSCW's actions.
Gas Cost Recovery Mechanism: As a result of the acquisition of WICOR by
Wisconsin Energy, the PSCW required similar gas cost recovery mechanisms
("GCRM") for the gas operations of Wisconsin Electric and for Wisconsin Gas. In
recent years, Wisconsin Electric has operated under a modified
dollar-for-dollar GCRM, which included after the fact prudence reviews by the
PSCW. The majority of gas costs are passed through to customers under its
existing gas cost recovery mechanism.
In February 2001, the PSCW issued an order to Wisconsin Electric authorizing a
new GCRM. This new GCRM, which was effective April 1, 2001, is similar to the
existing GCRM at Wisconsin Gas. Under the new GCRM, gas costs will be passed
directly to customers through a purchased gas adjustment clause. However,
Wisconsin Electric will have the opportunity to increase or decrease earnings
by up to approximately 2.5% of its total annual gas costs based upon how
closely actual gas commodity and capacity costs compare to benchmarks
established by the PSCW.
Commodity Price Risk: The gas operations of Wisconsin Electric have a commodity
risk management program that has been approved by the PSCW. This program hedges
the cost of natural gas and, therefore, changes in the value of the financial
instruments do not impact net income. This program allows the Company's gas
operations to utilize call and put option contracts to reduce market risk
associated with fluctuations in the price of natural gas purchases and gas in
storage. Under this program, Wisconsin Electric has the ability to hedge up to
50% of its planned flowing gas and storage inventory volumes. The cost of
applicable call and put option contracts, as well as gains or losses realized
under the contracts, do not affect net income as they are fully recovered under
the purchase gas adjustment clause of Wisconsin Electric gas cost recovery
mechanism. In addition, under the Gas Cost Incentive Mechanism, Wisconsin
Electric uses derivative financial instruments to manage the cost of gas. The
cost of these financial instruments, as well as any gains or losses on the
contracts, are subject to sharing under the incentive mechanism.
A-15
Michigan Jurisdiction
In mid-November 2000, Wisconsin Electric submitted an application with the
Michigan Public Service Commission requesting an electric retail rate increase
of $3.7 million (9.4%) on an annualized basis. Hearings on this rate relief
request were completed in June of 2001. In December of 2001, the MPSC issued an
order reopening the case on a limited basis to incorporate the rate effects of
the transfer of Wisconsin Electric transmission assets to ATC. Hearings are
scheduled for April 2002 with a Proposal for Decision expected around June 1,
2002.
Electric Transmission Cost Recovery: Consistent with requests in Wisconsin
noted above, Wisconsin Electric requested from the Michigan Public Service
Commission in September 2001 rate recovery of estimated 2002 transmission costs
over 2001 levels in the amount of $0.3 million for its operations in Michigan
through the Michigan Power Supply Cost Recovery mechanism. The request is
pending.
ELECTRIC SYSTEM RELIABILITY
In response to customer demand for higher quality power as a result of modern
digital equipment, Wisconsin Electric is evaluating and updating its electric
distribution system as part of Wisconsin Energy's enhanced Power the Future
strategy. The Company is taking some immediate steps to reduce the likelihood
of outages by upgrading substations and rebuilding lines to upgrade voltages
and reliability. These improvements, along with better technology for analysis
of the Company's existing system, better resource management to speed
restoration and improved customer communication, are near-term efforts to
enhance Wisconsin Electric's current electric distribution infrastructure. In
the long-term, Wisconsin Electric is initiating a new distribution system
design that is expected to consistently provide the level of reliability needed
for a digital economy, using new technology, advanced communications and a
two-way electricity flow. Implementation of the Power the Future strategy is
subject to a number of state and federal regulatory approvals. For additional
information, see "Corporate Developments" above.
Wisconsin Electric had adequate capacity to meet all of its firm electric load
obligations during 2001. Public appeals for conservation were not required, nor
was there the need to interrupt or curtail service to non-firm customers who
participate in load management programs in exchange for discounted rates. All
of Wisconsin Electric's generating plants performed well during the hottest
periods of the summer and all power purchase commitments under firm contract
were received.
Wisconsin Electric expects to have adequate capacity to meet all of its firm
load obligations during 2002. However, extremely hot weather along with
unexpected equipment unavailability could require Wisconsin Electric to call
upon load management procedures during 2002 as it has in past years.
ENVIRONMENTAL MATTERS
Consistent with other companies in the energy industry, Wisconsin Electric
faces potentially significant ongoing environmental compliance and remediation
challenges related to current and past operations. Specific environmental
issues affecting Wisconsin Electric, include, but are not limited to (1) air
emissions, such as carbon dioxide ("CO2"), sulfur dioxide ("SO2"), nitrogen
oxide ("NOx"), small particulates and mercury, (2) disposal of combustion
by-products such as fly ash, (3) remediation of former manufactured gas plant
sites, (4) disposal of used nuclear fuel, and (5) the eventual decommissioning
of nuclear power plants. Wisconsin Electric is currently pursuing a proactive
strategy to manage its environmental issues, including (1) substitution of new
and cleaner generating facilities for older facilities as part of the Power the
Future strategy, (2) development of additional sources of renewable electric
energy supply, (3) participation in regional initiatives to reduce the
emissions of NOx from the Company's fossil fuel-fired generating facilities,
(4) participation in voluntary programs with the Wisconsin Department of
Natural Resources to reduce overall emissions, including mercury, from
Wisconsin Electric's coal-fired power plants, (5) recycling of ash from
coal-fired generating units and (6) the clean-up of former manufactured gas
plant sites. For further information concerning disposal of used nuclear fuel
and nuclear power plant decommissioning, see "Nuclear Operations" below and
"Note E--Nuclear Operations" in the Notes to Financial Statements,
respectively.
National Ambient Air Quality Standards: In July 1997, the United States
Environmental Protection Agency revised the National Ambient Air Quality
Standards for ozone and particulate matter. Although specific emission control
requirements are not yet defined and despite legal challenges to these
standards that will impact compliance requirements and timing, Wisconsin
Electric believes that the revised standards will likely require significant
reductions in SO\\2 and NOx emissions from coal-fired generating facilities. If
these new standards withstand ongoing legal challenges, Wisconsin Electric
expects that reductions needed to achieve compliance with the ozone attainment
standards will be implemented in stages from 2004 through 2012, beginning with
the ozone \\
A-16
transport reductions described below. Reductions associated with the new
particulate matter standards are expected to be implemented in stages after the
year 2010 and extending to the year 2017. Beyond the cost estimates identified
below, Wisconsin Electric is currently unable to estimate the impact of the
revised air quality standards on its future liquidity, financial condition or
results of operations.
Ozone Non-Attainment Rulemaking: In October 1998, the United States
Environmental Protection Agency promulgated ozone transport rules to address
transport of NOx and ozone into ozone non-attainment areas in the eastern
half of the United States. The rules would have required electric utilities in
22 eastern states and the District of Columbia, including the state of
Wisconsin, to significantly reduce NOx emissions by May 1, 2003. A court
decision on these challenges was issued in March 2000, excluding the state of
Wisconsin, but continuing to include southern Michigan as one of 19 states in a
region east of the Mississippi River that would remain subject to the October
1998 rules.
Independent of any court decisions, Wisconsin and some other states in the Lake
Michigan region have concluded rulemaking proceedings that require utilities,
including Wisconsin Electric, to reduce NOx emissions as part of separate,
existing 1-hour ozone attainment demonstration rules required by the United
States Environmental Protection Agency for the Lake Michigan region's severe
non-attainment areas. In the meantime, ambient monitoring data from the past
three years shows that the Lake Michigan region is now in attainment with the
1-hour ozone standard. The state of Wisconsin and other Lake Michigan region
states are in the process of submitting a redesignation (to attainment) plan to
the United States Environmental Protection Agency. This plan will continue to
require the utility NOx reductions previously required when the area was in
nonattainment. The NOx reductions will now be part of the maintenance and
contingency plans required by the redesignation plan.
Michigan's and Wisconsin's rules are both in effect. Wisconsin Electric
currently expects to incur total capital costs of $150 million to $200 million
and annual operation and maintenance costs of $6 million to $9 million during
the period 2001 through 2004 to comply with the Michigan and Wisconsin rules.
Wisconsin Electric believes that compliance with the NOx emission reductions
requirements will substantially mitigate costs to comply with the United States
Environmental Protection Agency's July 1997 revisions to the ozone National
Ambient Air Quality Standards discussed above.
In January 2000, the PSCW approved Wisconsin Electric's comprehensive plan to
meet the Wisconsin regulations, permitting recovery in rates of NO\\x emission
reduction costs over an accelerated 10-year recovery period and requiring that
these costs be separately itemized on customer bills.
Mercury Emission Control Rulemaking: As required by the 1990 amendments to the
Federal Clean Air Act, the United States Environmental Protection Agency issued
a regulatory determination in December 2000 that utility mercury emissions
should be regulated. The United States Environmental Protection Agency will
develop draft rules within the next three years. In June 2001, the Wisconsin
Department of Natural Resources ("WDNR") independently developed draft mercury
emission control rules that would affect electric utilities in Wisconsin. The
draft rules call for 30%, 50% and 90% reductions in mercury air emissions over
5, 10 and 15 years, respectively. The draft rules also require offsets for new
mercury-emitting generating facilities. Wisconsin's draft rules were not
finalized before the end of 2001 and will likely be revised before being
finalized. The Company is currently unable to predict the ultimate rules that
will be developed and adopted by the United States Environmental Protection
Agency or the WDNR, nor is it able to predict the impacts, if any, that the
United States Environmental Protection Agency 's and WDNR's mercury emission
control rulemakings might have on the operations of its existing or potential
coal-fired generating facilities.
Manufactured Gas Plant Sites: Wisconsin Electric is voluntarily reviewing and
addressing environmental conditions at a number of former manufactured gas
plant sites. For further information, see "Note L--Commitments and
Contingencies" in the Notes to Financial Statements.
Ash Landfill Sites: Wisconsin Electric aggressively seeks environmentally
acceptable, beneficial uses for its combustion byproducts. For further
information, see "Note L--Commitments and Contingencies" in the Notes to
Financial Statements.
EPA Information Requests: Wisconsin Electric received a request for information
from the United States Environmental Protection Agency regional office pursuant
to Section 114(a) of the Clean Air Act. For further information, see "Note L--
Commitments and Contingencies" in the Notes to Financial Statements.
A-17
LEGAL MATTERS
Giddings & Lewis Inc./City of West Allis Lawsuit: In July 1999, a jury issued a
verdict against Wisconsin Electric awarding the plaintiffs $4.5 million in
compensatory damages and $100 million in punitive damages in an action alleging
that Wisconsin Electric had deposited contaminated wastes at two sites in West
Allis, Wisconsin owned by the plaintiffs. In September 2001, the Wisconsin
Court of Appeals overturned the $100 million punitive damage award and remanded
the punitive damage claim back to the lower court for retrial. In January 2002,
the Wisconsin State Supreme Court denied the plaintiffs' petition for review.
For further information, see "Note L--Commitments and Contingencies" in the
Notes to Financial Statements.
Wisconsin International Electric Power Litigation: During 1999, Wisconsin
Electric and Wisconsin International Electric Power, Ltd. reached settlement of
litigation brought by Wisconsin International Electric Power against Wisconsin
Electric claiming that Wisconsin Electric had breached contractual duties
allegedly owed to the plaintiff relating to development of an electric
generating plant at Subic Bay in the Philippines. While Wisconsin Electric does
not believe that it breached any contractual duties allegedly owed to the
plaintiff, Wisconsin Electric paid Wisconsin International Electric Power, Ltd.
$18.0 million before taxes in November 1999 to settle the case, and the
plaintiff's claims were dismissed with prejudice.
NUCLEAR OPERATIONS
Point Beach Nuclear Plant: Wisconsin Electric owns two 510-megawatt electric
generating units at Point Beach Nuclear Plant in Two Rivers, Wisconsin which
are operated by Nuclear Management Company, LLC ("NMC"), a joint venture of the
Company and affiliates of other unaffiliated utilities. During 2001, 2000, and
1999, Point Beach provided 25%, 23% and 22% of Wisconsin Electric's net
electric energy supply, respectively. The United States Nuclear Regulatory
Commission operating licenses for Point Beach expire in October 2010 for Unit 1
and in March 2013 for Unit 2.
In July 2000, Wisconsin Electric's senior management authorized the
commencement of initial design work for the power uprate of both units at Point
Beach. Subject to approval by the Wisconsin Energy Board of Directors and the
PSCW, the project may be completed by May 2008 and could add approximately 90
megawatts of electrical output to Point Beach.
Wisconsin Electric has formed an operating license renewal team which is
expected to complete a technical and economic evaluation of license renewal by
late-2002. Based upon the results of this evaluation and subject to approval by
executive management and by the Board of Directors of Wisconsin Energy in early
2003, Wisconsin Electric will determine whether to seek appropriate regulatory
approvals, including submittal of an application to the Nuclear Regulatory
Commission, in mid 2003 for an extension of the operating licenses for Point
Beach Nuclear Plant for a period of up to 20 years.
Used Nuclear Fuel Storage and Disposal: During 1995, Wisconsin Electric
completed construction of a facility at Point Beach for the temporary dry
storage of up to 48 canisters containing used nuclear fuel. During 2000,
Wisconsin Electric finished loading the last of twelve canisters originally
authorized by the PSCW. On March 13, 2001, the PSCW approved a May 2000
application for authority to load additional temporary used fuel dry storage
containers beyond the twelve that were originally authorized. The application
requested authorization for sufficient additional containers, at a cost of up
to approximately $46 million, to operate Point Beach Units 1 and 2 to the end
of their current operating licenses, but not to exceed the original 48-canister
capacity of the facility. NMC is under contract with a new vendor to supply the
next generation of used fuel dry storage containers for Point Beach.
Temporary storage alternatives at Point Beach are necessary until the United
States Department of Energy takes ownership of and permanently removes the used
fuel as mandated by the Nuclear Waste Policy Act of 1982, as amended in 1987
(the "Waste Act"). Effective January 31, 1998, the Department of Energy failed
to meet its contractual obligation to begin removing used fuel from Point
Beach, a responsibility for which Wisconsin Electric has paid a total of $177.6
million over the life of the plant. The Department of Energy has indicated that
it does not expect a permanent used fuel repository to be available any earlier
than 2010. It is not possible, at this time, to predict with certainty when the
Department of Energy will actually begin accepting used nuclear fuel.
On August 13, 2000, the United States Court of Appeals for the Federal Circuit
ruled in a lawsuit brought by Maine Yankee and Northern States Power Company
that the Department of Energy's failure to begin performance by January 31,
1998 constituted a breach in the Standard Contract, providing clear grounds for
filing complaints in the Court of Federal Claims. Consequently, Wisconsin
Electric filed a complaint on November 16, 2000 against the Department of
Energy in the Court of Federal Claims. The matter is pending. As of August
2000, Wisconsin Electric has incurred damages in excess of $35 million, which
it seeks to recover from the United States Department of Energy. Damages will
continue to accrue, and, accordingly, Wisconsin Electric expects to seek to
recover all of its damages in this lawsuit.
A-18
During 2000, President Clinton vetoed legislation that would have required the
United States Department of Energy to establish a temporary used fuel
repository in the state of Nevada until a permanent repository is available and
to begin taking ownership from utilities and removing used fuel as required by
the Waste Act. The Senate and the House failed to override the President's
veto. Wisconsin Electric is unable to predict whether similar legislation might
be reintroduced and passed during 2002 or President Bush's administration might
support and sign such legislation.
In January 2002, as required by the Nuclear Waste Policy Act, the Secretary of
Energy Spencer Abraham notified Nevada Governor Kenny Guinn and the Nevada
Legislature that he intended to recommend to President Bush that the Yucca
Mountain site is scientifically sound and suitable for development as the
nation's long-term geological repository for used nuclear fuel. On February 14,
2002, Secretary Abraham provided the formal recommendation to President Bush.
In a February 2002 letter to Congress, President Bush expressed his support for
the development of the Yucca Mountain site. The letter also affirmed the need
for a permanent repository by supporting the need for nuclear power and its
cost competitiveness, as well as acknowledging that successful completion of
the repository program will redeem the clear Federal legal obligation set forth
in the Nuclear Waste Policy Act.
INDUSTRY RESTRUCTURING AND COMPETITION
Electric Utility Industry
Driven by a combination of market forces, regulatory and legislative
initiatives and technological changes, the nation's electric industry has
followed a trend in recent years towards restructuring and increased
competition. In the Midwest region, the state of Illinois passed legislation
that introduced retail electric choice for large customers in 1999 and
introduces choice for all retail customers by May 2002. As described in further
detail below, full retail electric choice was introduced in the state of
Michigan in January 2002. Congress continues to evaluate restructuring
proposals at the federal level. However, severe electric supply constraints and
a resulting rise in the cost of electricity in California has revitalized
public debate in Wisconsin concerning deregulation. Given the current status of
restructuring initiatives in regulatory jurisdictions where the Company
primarily does business, Wisconsin Electric cannot predict the ultimate timing
or impact of a restructured electric industry on its financial position or
results of operations.
Restructuring in Wisconsin: Due to many factors, including relatively
competitive electric rates charged by the state's electric utilities, Wisconsin
is proceeding with restructuring of the electric utility industry at a much
slower pace than many other states in the United States. Instead, the PSCW has
been focused in recent years on electric reliability infrastructure issues for
the state of Wisconsin such as:
. Improvements to existing and addition of new electric transmission lines
in the state;
. Addition of new generating capacity in the state;
. Modifications to the regulatory process to facilitate development of
merchant generating plants;
. Development of a regional independent electric transmission system
operator; and
. The previously described formation of a statewide transmission company,
American Transmission Company LLC, which became operational January 1,
2001.
The PSCW continues to maintain the position that the question of whether to
implement electric retail competition in Wisconsin should ultimately be decided
by the Wisconsin legislature. No such legislation has been introduced in
Wisconsin to date.
Restructuring in Michigan: In June 2000, the Governor of the state of Michigan
signed the "Customer Choice and Electric Reliability Act" into law empowering
the MPSC to implement electric retail access in Michigan. In effect, the new
law provides that all Michigan retail customers of investor-owned utilities
have the ability to choose their electric power producer after January 1, 2002.
The Michigan Retail Access law was characterized by Michigan Governor Engler as
"Choice for those who want it and protection for those who need it."
As of January 1, 2002, Michigan retail customers of Wisconsin Electric were
allowed to remain with their regulated utility at regulated rates or choose an
alternative electric supplier to provide power supply service. Wisconsin
Electric plans to maintain its generation capacity and distribution assets and
provide regulated service as they have in the past. Wisconsin Electric expects
to continue providing distribution and customer service functions regardless of
the customer's power supplier.
A-19
Competition and customer switching to alternative suppliers in the Company's
service territories in Michigan has started very slowly with little alternate
supplier activity, reflecting the small market area, the Company's competitive
regulated power supply prices and a lack of interest in general of the Upper
Peninsula of Michigan as a market for alternative electric suppliers.
Natural Gas Utility Industry
Restructuring in Wisconsin: The PSCW has instituted generic proceedings to
consider how its regulation of gas distribution utilities should change to
reflect the changing competitive environment in the natural gas industry. To
date, the PSCW has made a policy decision to deregulate the sale of natural gas
in customer segments with workably competitive market choices and has adopted
standards for transactions between a utility and its gas marketing affiliates.
However, work on deregulation of the gas distribution industry by the PSCW is
presently on hold. Currently, Wisconsin Electric is unable to predict the
impact of potential future deregulation on the Company's results of operations
or financial position.
ACCOUNTING DEVELOPMENTS
New Pronouncements: In June 2001, the Financial Accounting Standards Board
authorized issuance of SFAS 143, Accounting for Asset Retirement Obligations.
SFAS 143, which is effective for fiscal years beginning after June 15, 2002,
requiring entities to record the fair value of a legal liability for an asset
retirement obligation in the period in which it is incurred. Upon adoption, the
Company may be required to modify its accounting for nuclear decommissioning.
Wisconsin Electric has not yet completed its evaluation of application of the
SFAS 143 rules. The Company expects to adopt SFAS 143 effective January 1, 2003.
In August 2001, the Financial Accounting Standards Board issued SFAS 144,
Accounting for the Impairment of Long-Lived Assets. SFAS 144, which is
effective for financial statements issued for fiscal years beginning after
December 15, 2001, requires entities to test long-lived assets (asset groups)
for recoverability whenever events or changes in circumstances indicate that
its carrying amount may not be recoverable. The Company adopted SFAS 144
effective January 1, 2002. Wisconsin Electric has not yet completed the
evaluation of application of the SFAS 144 rules.
SIGNIFICANT ACCOUNTING POLICIES
Regulatory Accounting: Wisconsin Electric operates under rates established by
state and federal regulatory commissions which are designed to recover the cost
of service and provide a reasonable return to investors. Developing competitive
pressures in the utility industry may result in future utility prices which are
based upon factors other than the traditional original cost of investment. In
such a situation, continued deferral of certain regulatory asset and liability
amounts on the utility's books, as allowed under Statement of Financial
Accounting Standards No. 71, Accounting for the Effects of Certain Types of
Regulation ("SFAS 71"), may no longer be appropriate and the unamortized
regulatory assets net of the regulatory liabilities would be recorded as an
extraordinary after-tax non-cash charge to earnings. Such a charge could be
material. The Company continually reviews the applicability of SFAS 71 and has
determined that it is currently appropriate to continue following SFAS 71. At
this time, the Company is unable to predict whether any adjustments to
regulatory assets and liabilities will occur in the future. See "Note--Summary
of Significant Accounting Policies" in the Notes to Financial Statements for
additional information.
Accounting for Derivative Instruments: SFAS 133, Accounting for Derivative
Instruments and Hedging Activities, is effective for fiscal years beginning
after June 15, 2000. Wisconsin Electric adopted this statement effective
January 1, 2001. For further information, see "Note A--Summary of Significant
Accounting Policies" and "Note H--Derivative Instruments" in the Notes to
Financial Statements.
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," "forecast," "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:
. Factors affecting utility operations such as unusual weather conditions;
catastrophic weather-related or terrorism-related damage; availability of
electric generating facilities; unscheduled generation outages, or
unplanned maintenance or repairs;
A-20
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 changes in
facilities or operations to reduce the risks or impacts of potential
terrorist activities; 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 or the state of Connecticut
related to emissions from fossil-fueled power plants such as carbon
dioxide, sulfur dioxide, nitrogen oxide, small particulates or mercury; 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,
such as issuance during the summer of 2001 of SFAS 141, Business
Combinations; SFAS 142, Goodwill and Other Intangible Assets; SFAS 143,
Accounting for Asset Retirement Obligations; and SFAS 144, Accounting for
the Impairment of Long-Lived Assets 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.
. 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,
local opposition to siting of new generating facilities and obtaining the
investment capital from outside sources necessary to implement the
strategy.
. Unexpected difficulties or unanticipated effects of the qualified
five-year electric and gas rate freeze ordered by the PSCW as a condition
of approval of the WICOR merger.
. 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.
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.
A-21
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WISCONSIN ELECTRIC POWER COMPANY
INCOME STATEMENTS
Year Ended December 31
2001 2000 1999
-------- -------- --------
(Millions of Dollars)
Operating Revenues
Electric.............................................. $1,839.8 $1,763.4 $1,688.3
Gas................................................... 457.1 399.7 306.8
Steam................................................. 21.8 21.9 21.3
-------- -------- --------
Total Operating Revenues.......................... 2,318.7 2,185.0 2,016.4
Operating Expenses
Fuel and purchased power.............................. 509.7 497.7 445.0
Cost of gas sold...................................... 319.0 258.7 174.0
Other operation and maintenance....................... 681.9 696.1 649.5
Depreciation, decommissioning and amortization........ 264.3 272.7 234.2
Property and revenue taxes............................ 67.8 65.9 66.6
-------- -------- --------
Total Operating Expenses.......................... 1,842.7 1,791.1 1,569.3
-------- -------- --------
Operating Income......................................... 476.0 393.9 447.1
Other Income and Deductions
Interest income....................................... 13.2 4.0 7.5
Allowance for other funds used during construction.... 1.7 2.6 3.8
Equity in earnings of unconsolidated affiliates....... 20.6 -- --
Other................................................. 0.5 (16.4) (16.2)
-------- -------- --------
Total Other Income and Deductions................. 36.0 (9.8) (4.9)
Financing Costs
Interest expense...................................... 109.7 117.5 114.7
Allowance for borrowed funds used during construction. (0.8) (1.3) (1.8)
-------- -------- --------
Total Financing Costs............................. 108.9 116.2 112.9
-------- -------- --------
Income Before Income Taxes............................... 403.1 267.9 329.3
Income Taxes............................................. 156.6 103.2 116.2
-------- -------- --------
Net Income............................................... 246.5 164.7 213.1
Preferred Stock Dividend Requirement..................... 1.2 1.2 1.2
-------- -------- --------
Earnings Available for Common Stockholder................ $ 245.3 $ 163.5 $ 211.9
======== ======== ========
The accompanying Notes to Financial Statements are an integral part of these
financial statements.
A-22
WISCONSIN ELECTRIC POWER COMPANY
STATEMENTS OF CASH FLOWS
Year Ended December 31
2001 2000 1999
------- ------- -------
(Millions of Dollars)
Operating Activities
Net income............................................................. $ 246.5 $ 164.7 $ 213.1
Reconciliation to cash
Depreciation, decommissioning and amortization..................... 277.6 287.3 265.6
Nuclear fuel expense amortization.................................. 32.3 27.4 25.8
Equity in earnings of unconsolidated affiliates.................... (20.6) -- --
Deferred income taxes, net......................................... (28.4) (5.9) 33.7
Investment tax credit, net......................................... (4.5) (4.5) (4.3)
Allowance for other funds used during construction................. (1.7) (2.6) (3.8)
Change in--Accounts receivable and accrued revenues................ 17.0 (95.7) (3.9)
Inventories............................................... (29.7) (0.2) 0.8
Other current assets...................................... 27.0 31.1 (46.5)
Accounts payable.......................................... -- 86.4 (42.4)
Other current liabilities................................. (1.7) 42.8 (1.7)
Other.............................................................. 12.4 41.9 (101.1)
------- ------- -------
Cash Provided by Operating Activities..................................... 526.2 572.7 335.3
Investing Activities
Capital expenditures................................................... (377.0) (352.5) (346.4)
Cash distributions received from ATC................................... 105.2 -- --
Allowance for borrowed funds used during construction.................. (1.0) (1.3) (1.8)
Nuclear fuel........................................................... (9.9) (41.6) (18.6)
Nuclear decommissioning funding........................................ (17.6) (17.6) (17.7)
Other.................................................................. 9.4 (6.3) (8.6)
------- ------- -------
Cash Used in Investing Activities......................................... (290.9) (419.3) (393.1)
Financing Activities
Issuance of long-term debt............................................. 22.0 25.0 179.6
Retirement of long-term debt........................................... (30.8) (30.2) (100.7)
Change in short-term debt.............................................. (84.6) (7.7) 45.4
Stockholder capital contribution....................................... -- -- 150.0
Dividends paid on common stock......................................... (130.0) (178.6) (179.6)
Dividends paid on preferred stock...................................... (1.2) (1.2) (1.2)
------- ------- -------
Cash Provided by (Used in) Financing Activities........................... (224.6) (192.7) 93.5
------- ------- -------
Change in Cash and Cash Equivalents....................................... 10.7 (39.3) 35.7
Cash and Cash Equivalents at Beginning of Year............................ 10.6 49.9 14.2
------- ------- -------
Cash and Cash Equivalents at End of Year.................................. $ 21.3 $ 10.6 $ 49.9
======= ======= =======
Supplemental Information--Cash Paid For
Interest (net of amount capitalized)................................... $ 131.7 $ 137.8 $ 131.2
Income taxes (net of refunds).......................................... $ 142.1 $ 59.7 $ 117.9
The accompanying Notes to Financial Statements are an integral part of these
financial statements.
A-23
WISCONSIN ELECTRIC POWER COMPANY
BALANCE SHEETS
December 31
ASSETS
2001 2000
--------- ---------
(Millions of Dollars)
Property, Plant and Equipment
Electric....................................................................... $ 5,064.4 $ 5,300.7
Gas............................................................................ 596.2 578.2
Steam.......................................................................... 66.0 64.4
Common......................................................................... 334.4 372.9
Other.......................................................................... 17.2 7.3
--------- ---------
6,078.2 6,323.5
Accumulated depreciation....................................................... (3,208.5) (3,339.2)
--------- ---------
2,869.7 2,984.3
Construction work in progress.................................................. 163.3 106.8
Leased facilities, net......................................................... 116.0 121.7
Nuclear fuel, net.............................................................. 73.6 93.1
--------- ---------
Net Property, Plant and Equipment.......................................... 3,222.6 3,305.9
Investments
Nuclear decommissioning trust fund............................................. 589.6 613.3
Investment in ATC.............................................................. 128.6 --
Other.......................................................................... 15.1 28.9
--------- ---------
Total Investments.......................................................... 733.3 642.2
Current Assets
Cash and cash equivalents...................................................... 21.3 10.6
Accounts receivable, net of allowance for doubtful accounts of $22.7 and $19.7. 236.1 232.7
Other accounts receivable...................................................... 116.4 --
Accrued revenues............................................................... 132.2 163.0
Materials, supplies and inventories............................................ 227.1 197.4
Prepayments.................................................................... 72.0 71.5
Deferred income taxes.......................................................... -- 32.5
Other.......................................................................... 6.0 1.2
--------- ---------
Total Current Assets....................................................... 811.1 708.9
Deferred Charges and Other Assets
Deferred regulatory assets..................................................... 287.4 232.0
Other.......................................................................... 13.1 136.1
--------- ---------
Total Deferred Charges and Other Assets.................................... 300.5 368.1
--------- ---------
Total Assets...................................................................... $ 5,067.5 $ 5,025.1
========= =========
The accompanying Notes to Financial Statements are an integral part of these
financial statements.
A-24
WISCONSIN ELECTRIC POWER COMPANY
BALANCE SHEETS
December 31
CAPITALIZATION AND LIABILITIES
2001 2000
-------- --------
(Millions of Dollars)
Capitalization (See Capitalization Statements)
Common equity........................................ $1,980.1 $1,864.8
Preferred stock...................................... 30.4 30.4
Long-term debt....................................... 1,420.5 1,679.6
-------- --------
Total Capitalization............................. 3,431.0 3,574.8
Current Liabilities
Long-term debt due currently......................... 282.7 28.1
Short-term debt...................................... 172.4 257.0
Accounts payable..................................... 213.6 213.5
Payroll and vacation accrued......................... 52.3 39.0
Taxes accrued--income and other...................... 72.5 26.6
Interest accrued..................................... 18.3 18.8
Deferred income taxes................................ 6.8 --
Other................................................ 60.9 84.2
-------- --------
Total Current Liabilities........................ 879.5 667.2
Deferred Credits and Other Liabilities
Accumulated deferred income taxes.................... 399.0 466.1
Accumulated deferred investment tax credits.......... 70.2 74.7
Deferred regulatory liabilities...................... 141.4 123.6
Other................................................ 146.4 118.7
-------- --------
Total Deferred Credits and Other Liabilities..... 757.0 783.1
Commitments and Contingencies (Note L).................. -- --
-------- --------
Total Capitalization and Liabilities.................... $5,067.5 $5,025.1
======== ========
The accompanying Notes to Financial Statements are an integral part of these
financial statements.
A-25
WISCONSIN ELECTRIC POWER COMPANY
STATEMENTS OF CAPITALIZATION
December 31
2001 2000
-------- --------
(Millions of Dollars)
Common Equity (See Statements of Common Equity)
Common stock--$10 par value; authorized 65,000,000 shares; outstanding--33,289,327 shares........... $ 332.9 $ 332.9
Other paid in capital............................................................................... 530.7 530.7
Retained earnings................................................................................... 1,116.5 1,001.2
Accumulated other comprehensive income.............................................................. -- --
-------- --------
Total Common Equity...................................................................... 1,980.1 1,864.8
Preferred Stock........................................................................................
Six Per Cent. Preferred Stock--$100 par value; authorized 45,000 shares; outstanding--44,498 shares. 4.4 4.4
Serial preferred stock--
$100 par value; authorized 2,286,500 shares; 3.60% Series redeemable at $101 per share;
outstanding--260,000 shares................................................................... 26.0 26.0
$25 par value; authorized 5,000,000 shares; none outstanding.................................... -- --
-------- --------
Total Preferred Stock.................................................................... 30.4 30.4
Long-Term Debt
First mortgage bonds
7 1/4% due 2004....................................................................... 140.0 140.0
7 1/8% due 2016....................................................................... 100.0 100.0
6.85% due 2021........................................................................ 9.0 9.0
7 3/4% due 2023....................................................................... 100.0 100.0
7.05% due 2024........................................................................ 60.0 60.0
9 1/8% due 2024 (Redeemed 2002)....................................................... 3.4 3.4
8 3/8% due 2026 (Redeemed 2002)....................................................... 100.0 100.0
7.70% due 2027........................................................................ 200.0 200.0
Debentures (unsecured)
6 5/8% due 2002....................................................................... 150.0 150.0
6 5/8% due 2006....................................................................... 200.0 200.0
9.47% due 2006........................................................................ 3.5 4.2
8 1/4% due 2022....................................................................... 25.0 25.0
6 1/2% due 2028....................................................................... 150.0 150.0
6 7/8% due 2095....................................................................... 100.0 100.0
Notes (unsecured)
6.36% effective rate due 2006......................................................... 6.0 7.2
2.15% variable rate due 2006 (a)...................................................... 1.0 1.0
2.15% variable rate due 2015 (a)...................................................... 17.4 17.4
1.75% variable rate due 2016 (a)...................................................... 67.0 67.0
2.15% variable rate due 2030 (a)...................................................... 80.0 80.0
Obligations under capital leases....................................................................... 211.4 215.5
Unamortized discount................................................................................... (20.5) (22.0)
Long-term debt due currently........................................................................... (282.7) (28.1)
-------- --------
Total Long-Term Debt..................................................................... 1,420.5 1,679.6
-------- --------
Total Capitalization................................................................................... $3,431.0 $3,574.8
======== ========
- --------
(a) Variable interest rate as of December 31, 2001.
The accompanying Notes to Financial Statements are an integral part of these
financial statements.
A-26
WISCONSIN ELECTRIC POWER COMPANY
STATEMENTS OF COMMON EQUITY
Accumulated
Other Other
Common Paid In Retained Comprehensive
Stock Capital Earnings Income Total
------ ------- -------- ------------- --------
Balance--December 31, 1998.................................................. $332.9 $380.7 $ 985.0 $ -- $1,698.6
Net income............................................................... 213.1 213.1
Cash dividends...........................................................
Common stock......................................................... (179.6) (179.6)
Preferred stock...................................................... (1.2) (1.2)
Stockholder capital contribution......................................... 150.0 150.0
------ ------ -------- ---------- --------
Balance--December 31, 1999.................................................. 332.9 530.7 1,017.3 -- 1,880.9
Net income............................................................... 164.7 164.7
Property dividend--common stock.......................................... (1.0) (1.0)
Cash dividends...........................................................
Common stock......................................................... (178.6) (178.6)
Preferred stock...................................................... (1.2) (1.2)
------ ------ -------- ---------- --------
Balance--December 31, 2000.................................................. 332.9 530.7 1,001.2 -- 1,864.8
Net income............................................................... 246.5 246.5
Other comprehensive income (loss)
Unrealized gain (loss) on derivatives qualified as hedges:
Unrealized losses due to cumulative effect of a change in
accounting principle, net of tax................................ (5.1) (5.1)
Reclassification adjustment for gain included in net
income, net of tax.............................................. 5.1 5.1
Other unrealized gain (loss) arising during period, net of
tax............................................................. -- --
------ ------ -------- ---------- --------
Comprehensive Income.............................................. -- -- 246.5 -- 246.5
Cash dividends
Common stock......................................................... (130.0) (130.0)
Preferred stock...................................................... (1.2) (1.2)
------ ------ -------- ---------- --------
Balance--December 31, 2001.................................................. $332.9 $530.7 $1,116.5 $ -- $1,980.1
====== ====== ======== ========== ========
The accompanying Notes to Financial Statements are an integral part of these
financial statements.
A-27
WISCONSIN ELECTRIC POWER COMPANY
NOTES TO FINANCIAL STATEMENTS
A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General: The accounting records of Wisconsin Electric Power Company ("Wisconsin
Electric" or the "Company"), a wholly-owned subsidiary of Wisconsin Energy
Corporation ("Wisconsin Energy"), are maintained as prescribed by the Federal
Energy Regulatory Commission, modified for requirements of the Public Service
Commission of Wisconsin ("PSCW"). Wisconsin Electric is an electric, gas and
steam utility which services electric customers in Wisconsin and the Upper
Peninsula of Michigan, gas customers in Wisconsin and steam customers in metro
Milwaukee.
On April 26, 2000, Wisconsin Energy acquired WICOR, Inc. 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.
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. On
December 4, 2001, Wisconsin Electric and Wisconsin Gas entered into a
stipulation with the PSCW in which a Consent Order was issued by the PSCW
providing for the withdrawal of the joint application. Wisconsin Energy
continues to operate the gas business of Wisconsin Electric and Wisconsin Gas
as one operation to achieve operating efficiencies and improved reliability.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of certain assets
and liabilities and disclosure of contingent assets and liabilities at the date
of financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Reclassifications: Certain prior year financial statement amounts have been
reclassified to conform to their current year presentation. These
reclassifications had no effect on net income or earnings per share.
Revenues: Revenues are recognized on the accrual basis and include estimated
amounts for service rendered but not billed.
Wisconsin Electric's rates include base amounts for estimated fuel and
purchased power costs. It can request recovery of fuel and purchased power
costs prospectively from retail electric customers in the Wisconsin
jurisdiction through its rate review process with the PSCW and in interim fuel
cost hearings when such annualized costs are more than 3% higher than the
forecasted costs used to establish rates. Wisconsin Electric's retail gas rates
include monthly adjustments which permit the recovery or refund of actual
purchased gas costs.
Property and Depreciation: Utility property, plant and equipment is recorded at
cost. Cost includes material, labor and allowance for funds used during
construction. Additions to and significant replacements of property are charged
to property, plant and equipment at cost; minor items are charged to
maintenance expense. The cost of depreciable utility property, together with
removal cost less salvage value, is charged to accumulated depreciation when
property is retired.
Utility depreciation rates are certified by the state regulatory commissions
and include estimates for salvage value and removal costs. Depreciation as a
percent of average depreciable utility plant was 4.6% in 2001, 4.5% in 2000,
and 4.1% in 1999. Nuclear plant decommissioning costs are accrued and included
in depreciation expense (see Note E). General plant and software are amortized
over periods approved by the state regulatory commissions.
Other property, plant and equipment is recorded at cost. Cost includes
material, labor and capitalized interest. Additions to and significant
replacements of property are charged to property, plant and equipment at cost;
minor items are charged to maintenance expense. Upon retirement or sale of
other property and equipment, the cost and related accumulated depreciation are
removed from the accounts and any gain or loss is included in "Other Income and
Deductions--Other" in the Income Statements.
Depreciation expense is accrued at straight line rates over the estimated
useful lives of the assets.
Allowance For Funds Used During Construction: Allowance for funds used during
construction ("AFUDC") is included in Wisconsin Electric's utility plant
accounts and represents the cost of borrowed funds used during plant
construction and a return on
A-28
stockholders' capital used for construction purposes. In the Income Statements,
the cost of borrowed funds (before income taxes) is shown as an offset to
interest expense and the return on stockholders' capital is an item of non-cash
other income.
As approved by the PSCW, Wisconsin Electric capitalized AFUDC at the following
rates during the periods indicated:
. September 1, 2000--continuing 10.18%
. June 1, 1998--August 31, 2000 10.21%
Prior to August 31, 2000, based on PSCW authorization, Wisconsin Electric
accrued an allowance for funds used during construction on 50% of all
construction work in progress. In a rate order dated August 30, 2000, the PSCW
authorized the Company to accrue AFUDC on all electric utility nitrogen oxide
remediation construction work in progress at a rate of 10.18%, and provided a
full current return on electric safety and reliability construction work in
progress so that no AFUDC accrual is required on such projects. In addition,
the August PSCW order provided a current return on half of other utility
construction work in progress and authorized AFUDC accruals on the remaining
50% of these projects.
Materials, Supplies and Inventories: Inventory at December 31, 2001 and 2000
consists of:
Materials, Supplies and Inventories 2001 2000
----------------------------------- ------ ------
(Millions of Dollars)
Fossil Fuel.................. $101.8 $ 78.2
Natural Gas in Storage....... 81.6 36.6
Materials and Supplies....... 43.7 82.6
------ ------
Total..................... $227.1 $197.4
====== ======
Substantially all fossil fuel, materials and supplies and natural gas in
storage inventories are priced using the weighted average method of accounting.
Long-Lived Assets: Wisconsin Electric reviews the carrying value of long-lived
assets for impairment whenever events or changes in circumstances indicate that
the carrying amount may not be recoverable. An impairment would be determined
based upon a comparison of the undiscounted future operating cash flows
anticipated to be generated during the remaining life of the long-lived assets
to the carrying value. Measurement of any impairment loss would be based upon
discounted operating cash flows.
Regulatory Accounting: Wisconsin Electric accounts for its regulated operations
in accordance with Statement of Financial Accounting Standards No. 71,
Accounting for the Effects of Certain Types of Regulation. This statement sets
forth the application of generally accepted accounting principles to those
companies whose rates are determined by an independent third-party regulator.
The economic effects of regulation can result in regulated companies recording
costs that have been or are expected to be allowed in the rate making process
in a period different from the period in which the costs would be charged to
expense by an unregulated enterprise. When this occurs, costs are deferred as
assets in the balance sheet (regulatory assets) and recorded as expenses in the
periods when those same amounts are reflected in rates. Additionally,
regulators can impose liabilities upon a regulated company for amounts
previously collected from customers and for amounts that are expected to be
refunded to customers (regulatory liabilities).
A-29
Deferred regulatory assets and liabilities at December 31 consist of:
Deferred Regulatory Assets and Liabilities 2001 2000
------------------------------------------ ------ ------
(Millions of Dollars)
Deferred Regulatory Assets..............
Deferred income tax related.......... $142.7 $148.4
Environmental costs.................. 41.2 --
Other plant related.................. 39.0 30.6
Deferred transmission costs.......... 22.3 --
Lightweight aggregate plant.......... 16.8 19.7
Department of Energy assessments..... 15.9 18.5
Deferred nuclear costs............... 4.7 8.3
Other................................ 4.8 6.5
------ ------
Total Deferred Regulatory Assets........ $287.4 $232.0
====== ======
Deferred Regulatory Liabilities.........
Deferred income taxes................ $103.9 $110.2
Tax and interest refunds............. 9.9 10.2
NOx escrow........................... 8.6 --
Other................................ 19.0 3.2
------ ------
Total Deferred Regulatory Liabilities... $141.4 $123.6
====== ======
During 2000, Wisconsin Electric discontinued operation of its lightweight
aggregate plant at Oak Creek Power Plant. As authorized by the PSCW, Wisconsin
Electric transferred the associated remaining undepreciated plant balance of
$19.7 million on December 31, 2000 to a deferred regulatory asset account,
which is being amortized over the five year period ending
December 31, 2005.
Income Taxes: Wisconsin Electric is included in Wisconsin Energy's consolidated
Federal income tax return. As such, Wisconsin Energy allocates Federal current
tax expense or credits to Wisconsin Electric based on its separate tax
computation.
Investment tax credits related to regulated utility assets are recorded as a
deferred credit on the balance sheet and amortized to income over the
applicable service lives of related properties in accordance with regulatory
treatment.
Derivative Financial Instruments: The Company has physical and financial
derivative instruments as defined by Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging Activities
("SFAS 133"), however use of financial instruments is limited and was
immaterial as of December 31, 2001 and 2000. For further information, see Note
H.
Statement of Cash Flows: Cash and cash equivalents include marketable debt
securities acquired three months or less from maturity.
Restrictions: Various financing arrangements and regulatory requirements impose
certain restrictions on the ability of Wisconsin Electric to transfer funds to
Wisconsin Energy in the form of cash dividends, loans or advances. Under
Wisconsin law, Wisconsin Electric is prohibited from loaning funds, either
directly or indirectly, to Wisconsin Energy. The Company does not believe that
such restrictions will materially affect its operations.
Investments: Investments in other affiliated companies in which the Company
does not maintain control are accounted for using the equity method.
Nuclear Fuel Amortization: The Company leases nuclear fuel and amortizes it to
fuel expense for a period of 60 months or until the removal of the fuel from
the reactor, if earlier.
B--AMERICAN TRANSMISSION COMPANY
Effective January 1, 2001 Wisconsin Electric transferred electric utility
transmission system assets with a net book value of $224.4 million to American
Transmission Company LLC ("ATC") in exchange for an equity interest in this new
company. During 2001, ATC issued debt and distributed $105.2 million of cash
back to Wisconsin Electric as a partial return of the original equity
contribution. The Company also received $10.9 million in dividends during 2001.
A-30
The Company anticipates that the transfer of its electric transmission assets
to ATC will be earnings neutral. However, the asset transfer has changed where
transmission-related activities 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 ATC for
electric transmission service in Other Operation and Maintenance and recognizes
an equity interest in ATC's reported earnings in Other Income and
Deductions--Equity in earnings of unconsolidated affiliates.
C--NON-RECURRING CHARGES
During the fourth quarter of 2000, the Company recorded one-time charges
totaling $43.9 million after tax. Of this, $34.3 million was related to
severance and employee benefits and other items. In connection with the WICOR
merger and the divestiture of non-core businesses, approximately 170 employees
received severance benefits under severance agreements and enhanced retirement
initiatives. The Company has paid all of the anticipated expenses except
approximately $4.3 million of severance benefits related to 128 employees as of
December 31, 2001. No other adjustments were made to the reserve liability. In
addition, the Company made a contribution of $9.6 million after tax to the
Wisconsin Energy Foundation to assist it in becoming self-funding.
During 1999, Wisconsin Electric reached agreement in the settlement of
litigation related to the development of an electric generating plant in the
Philippines at an after tax cost of $10.8 million.
D--INCOME TAXES
The Company follows the liability method in accounting for income taxes as
prescribed by Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes ("SFAS 109"). SFAS 109 requires the recording of deferred
assets and liabilities to recognize the expected future tax consequences of
events that have been reflected in the Company's financial statements or tax
returns and the adjustment of deferred tax balances to reflect tax rate
changes. Tax credits associated with regulated operations are deferred and
amortized over the life of the assets.
The following table is a summary of income tax expense for each of the years
ended December 31:
Income Tax Expense 2001 2000 1999
------------------ ------ ------ ------
(Millions of Dollars)
Current tax expense......... $189.5 $113.6 $ 86.8
Deferred income taxes, net.. (28.4) (5.9) 33.7
Investment tax credit, net.. (4.5) (4.5) (4.3)
------ ------ ------
Total Income Tax Expense. $156.6 $103.2 $116.2
====== ====== ======
The provision for income taxes for each of the years ended December 31 differs
from the amount of income tax determined by applying the applicable U.S.
statutory federal income tax rate to income before income taxes and preferred
dividend as a result of the following:
2001 2000 1999
- - --------------- --------------- ---------------
Effective Effective Effective
Income Tax Expense Amount Tax Rate Amount Tax Rate Amount Tax Rate
- ------------------ ------ --------- ------ --------- ------ ---------
(Millions of Dollars)
Expected tax at statutory federal tax rates........... $141.0 35.0% $ 93.8 35.0% $115.2 35.0%
State income taxes net of federal tax benefit......... 20.7 5.1% 14.4 5.4% 16.1 4.9%
Investment tax credit restored........................ (4.5) (1.1%) (4.5) (1.7%) (4.5) (1.4%)
Flowback of prior contributions in aid of construction -- -- -- -- (8.1) (2.5%)
Other, net............................................ (0.6) (0.2%) (0.5) (0.2%) (2.5) (0.8%)
------ ---- ------ ---- ------ ----
Total Income Tax Expense........................... $156.6 38.8% $103.2 38.5% $116.2 35.2%
====== ==== ====== ==== ====== ====
A-31
The components of SFAS 109 deferred income taxes classified as net current
assets and net long-term liabilities at December 31 are as follows:
Current Assets Long-Term
(Liabilities) Liabilities (Assets)
-------------- -------------------
Deferred Income Taxes 2001 2000 2001 2000
--------------------- ------ ----- ------ ------
(Millions of Dollars)
Property-related.................. $ -- $ -- $568.8 $564.5
Construction advances............. -- -- (69.8) (65.5)
Decommissioning trust............. -- -- (55.0) (52.9)
Contested liability payment....... (44.5) -- -- 43.8
Recoverable gas costs............. (0.5) -- -- --
Uncollectible account expense..... 7.9 7.0 -- --
Employee benefits and compensation 10.4 9.5 (30.6) (17.4)
Asset impairment charge........... 10.8 10.8 -- --
Other............................. 9.1 5.2 (14.4) (6.4)
------ ----- ------ ------
Total Deferred Income Taxes.... $ (6.8) $32.5 $399.0 $466.1
====== ===== ====== ======
E--NUCLEAR OPERATIONS
Point Beach Nuclear Plant: Wisconsin Electric owns two 510-megawatt electric
generating units at Point Beach Nuclear Plant ("Point Beach") in Two Rivers,
Wisconsin. Point Beach is operated by Nuclear Management Company, a company
that, as of December 31, 2001, provides services to nine nuclear generating
units in the Midwest. Nuclear Management Company is owned by the Company and
the affiliates of four other unaffiliated investor-owned utilities in the
region. Wisconsin Electric currently expects the two units at Point Beach to
operate to the end of their operating licenses, which expire in October 2010
for Unit 1 and in March 2013 for Unit 2.
Nuclear Insurance: The Price-Anderson Act as amended and extended to August 1,
2002, currently limits the total public liability for damages arising from a
nuclear incident at a nuclear power plant to approximately $9.5 billion, of
which $200 million is covered by liability insurance purchased from private
sources. The remaining $9.3 billion is covered by an industry retrospective
loss sharing plan whereby in the event of a nuclear incident resulting in
damages exceeding the private insurance coverage, each owner of a nuclear plant
would be assessed a deferred premium of up to $88.1 million per reactor
(Wisconsin Electric owns two) with a limit of $10 million per reactor within
one calendar year. As the owner of Point Beach, Wisconsin Electric would be
obligated to pay its proportionate share of any such assessment.
Wisconsin Electric, through its membership in Nuclear Electric Insurance
Limited ("NEIL"), carries decontamination, property damage and decommissioning
shortfall insurance covering losses of up to $1.5 billion at Point Beach. Under
policies issued by NEIL, the insured member is liable for a retrospective
premium adjustment in the event of catastrophic losses exceeding the full
financial resources of NEIL. Wisconsin Electric's maximum retrospective
liability under its policies is $12.4 million.
Wisconsin Electric also maintains insurance with NEIL covering business
interruption and extra expenses during any prolonged accidental outage at Point
Beach, where such outage is caused by accidental property damage from
radioactive contamination or other risks of direct physical loss. Wisconsin
Electric's maximum retrospective liability under this policy is $8.6 million.
It should not be assumed that, in the event of a major nuclear incident, any
insurance or statutory limitation of liability would protect Wisconsin Electric
from material adverse impact.
Nuclear Decommissioning: Nuclear decommissioning costs are included in
depreciation expense under an external sinking fund method as these costs are
recovered through rates over the expected service lives of the generating
units. Decommissioning expenses of $17.6 million during 2001 and 2000, and
$17.7 million during 1999 were accrued under this method.
Decommissioning costs collected through rates are deposited into the nuclear
decommissioning trust fund and also included in accumulated depreciation. As a
result, these funds do not add to the cash flows available for general
corporate purposes. Earnings on the fund balance accumulate in the nuclear
decommissioning trust fund and in accumulated depreciation.
A-32
It is expected that the annual payments to the nuclear decommissioning trust
fund along with related earnings will provide sufficient funds at the time of
decommissioning. Wisconsin Electric believes it is probable that any shortfall
in funding would be recoverable in utility rates.
The estimated cost to decommission the plant in 2001 dollars is $621 million
based upon a site specific decommissioning cost study completed in 1998, and
includes additional costs from prior estimates for work management by an
independent decommissioning general contractor. Assuming plant shutdown at the
expiration of the current operating licenses, prompt dismantlement and annual
escalation of costs at specific inflation factors established by the PSCW, it
is projected that approximately $1.9 billion will be spent over a thirty-three
year period, beginning in 2010, to decommission the plant.
Following is a summary at December 31 of the Nuclear Decommissioning Trust Fund
balance, stated at fair value, which is equal to the accrued decommissioning
liability balance included in accumulated depreciation.
Nuclear Decommissioning Trust Fund 2001 2000
---------------------------------- ------ ------
(Millions of
Dollars)
Total funding and realized net earnings. $434.8 $408.1
Unrealized gains, net................... 154.8 205.2
------ ------
Total................................ $589.6 $613.3
====== ======
As required by Statement of Financial Accounting Standards No. 115, Accounting
for Certain Investments in Debt and Equity Securities, Wisconsin Electric's
debt and equity security investments in the Nuclear Decommissioning Trust Fund
are classified as available for sale. Gains and losses on the fund were
determined on the basis of specific identification; net unrealized holding
gains on the fund were recorded as part of the fund and as part of accumulated
depreciation.
Decontamination and Decommissioning Fund: The Energy Policy Act of 1992
established a Uranium Enrichment Decontamination and Decommissioning Fund ("D&D
Fund") for the United States Department of Energy's nuclear fuel enrichment
facilities. Deposits to the D&D Fund are derived in part from special
assessments on utilities using enrichment services. As of December 31, 2001,
Wisconsin Electric has recorded its remaining estimated liability equal to
projected special assessments of$15.9 million. A deferred regulatory asset is
detailed in Note A. The deferred regulatory asset will be amortized to nuclear
fuel expense and included in utility rates over the next six years ending in
2007.
F--LONG-TERM DEBT
First Mortgage Bonds, Debentures and Notes: At December 31, 2001, the
maturities and sinking fund requirements through 2006 for the aggregate amount
of long-term debt outstanding (excluding obligations under capital leases) were:
(Millions of
Dollars)
2002...... $ 255.3
2003...... 1.9
2004...... 141.9
2005...... 1.9
2006...... 202.9
Thereafter 908.4
--------
Total.. $1,512.3
========
Sinking fund requirements for the years 2002 through 2006, included in the
preceding table, are $9.5 million. Substantially all of Wisconsin Electric's
utility plant is subject to a first mortgage lien.
Long-term debt premium or discount and expense of issuance are amortized by the
straight line method, over the lives of the debt issues and included as
interest expense.
In January 2002, the Company redeemed $100 million of 8-3/8% first mortgage
bonds due 2026 and $3.4 million of 9-1/8% first mortgage bonds due 2024. Early
redemption of this long-term debt was financed through the issuance of
short-term commercial paper.
A-33
Obligations Under Capital Leases: In 1997, Wisconsin Electric entered into a 25
year power purchase contract with an unaffiliated independent power producer.
The contract, for 236 megawatts of firm capacity from a gas-fired cogeneration
facility, includes no minimum energy requirements. When the contract expires in
2022, Wisconsin Electric may, at its option and with proper notice, renew for
another ten years or purchase the generating facility at fair value or allow
the contract to expire. Wisconsin Electric treats this contract as a capital
lease. The leased facility and corresponding obligation under capital lease
were recorded at the estimated fair value of the plant's electric generating
facilities. The leased facility is being amortized on a straight line basis
over the original 25-year term of the contract.
The long-term power purchase contract is treated as an operating lease for
rate-making purposes and the minimum lease payments are recorded as purchased
power expense on the Income Statements. Such payments totaled $21.5 million,
$21.0 million and $20.4 million during 2001, 2000 and 1999, respectively. As a
result, the difference between the minimum lease payments and the sum of the
imputed interest and amortization costs under capital lease accounting are
recorded as a deferred regulatory asset (see Note A). Due to the timing of the
minimum lease payments, Wisconsin Electric expects the regulatory asset to
increase to approximately $78.5 million by the year 2009 and the total
obligation under capital lease to increase to $160.2 million by the year 2005
before each is reduced over the remaining life of the contract.
Wisconsin Electric has a nuclear fuel leasing arrangement with Wisconsin
Electric Fuel Trust ("Trust") which is treated as a capital lease. The nuclear
fuel is leased and amortized to fuel expense for a period of 60 months or until
the removal of the fuel from the reactor, if earlier. Lease payments include
charges for the cost of fuel burned, financing costs and management fees. In
the event Wisconsin Electric or the Trust terminates the lease, the Trust would
recover its unamortized cost of nuclear fuel from Wisconsin Electric. Under the
lease terms, Wisconsin Electric is in effect the ultimate guarantor of the
Trust's commercial paper and line of credit borrowings financing the investment
in nuclear fuel. Interest expense on the nuclear fuel lease, included in fuel
expense, was $3.3 million, $3.9 million and $3.5 million during 2001, 2000 and
1999, respectively.
Following is a summary of Wisconsin Electric's capitalized leased facilities
and nuclear fuel at December 31.
Capital Lease Assets 2001 2000
-------------------- ------ ------
(Millions of Dollars)
Leased Facilities
Long-term purchase power commitment. $140.3 $140.3
Accumulated amortization............ (24.3) (18.6)
------ ------
Total Leased Facilities................ $116.0 $121.7
====== ======
Nuclear Fuel
Under capital lease................. $127.5 $121.4
Accumulated amortization............ (80.0) (63.1)
In process/stock.................... 26.1 34.8
------ ------
Total Nuclear Fuel..................... $ 73.6 $ 93.1
====== ======
A-34
Future minimum lease payments under the capital leases and the present value of
the net minimum lease payments as of December 31, 2001 are as follows:
Nuclear
Purchase Power Fuel
Capital Lease Obligations Commitment Lease Total
------------------------- -------------- ------- -------
(Millions of Dollars)
2002....................................... $ 26.9 $ 29.8 $ 56.7
2003....................................... 28.0 16.1 44.1
2004....................................... 29.0 9.0 38.0
2005....................................... 30.1 5.1 35.2
2006....................................... 31.2 1.1 32.3
Later Years................................ 469.9 -- 469.9
------- ------ -------
Total Minimum Lease Payments............... 615.1 61.1 676.2
Less: Estimated Executory Costs............ (127.7) -- (127.7)
------- ------ -------
Net Minimum Lease Payments................. 487.4 61.1 548.5
Less: Interest............................. (332.4) (4.7) (337.1)
------- ------ -------
Present Value of Net Minimum Lease Payments 155.0 56.4 211.4
Less: Due Currently........................ -- (27.4) (27.4)
------- ------ -------
$ 155.0 $ 29.0 $ 184.0
======= ====== =======
G--SHORT-TERM DEBT
Short-term notes payable balances and their corresponding weighted-average
interest rates at December 31 consist of:
2001 2000
---------------- ----------------
Interest Interest
Short-Term Debt Balance Rate Balance Rate
--------------- ------- -------- ------- --------
(Millions of Dollars)
Banks and other. $ 60.9 1.90% $ 50.0 6.49%
Commercial paper 111.5 1.87% 207.0 6.60%
------ ------
$172.4 1.88% $257.0 6.58%
====== ======
On December 31, 2001, Wisconsin Electric had $138 million of total available
unused short-term borrowing capacity under existing commercial paper programs
and other short-term borrowing arrangements. On that date, Wisconsin Electric
had $250 million of available unused lines of bank credit to support its
outstanding commercial paper program and other short-term borrowing
arrangements.
H--DERIVATIVE INSTRUMENTS
Effective January 1, 2001 the Company adopted SFAS 133, which 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.
As of the date of adoption, SFAS 133 required 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 had a limited number of physical commodity contracts that
are defined as derivatives under SFAS 133 during 2001 and that qualify for cash
flow hedge accounting. These cash flow hedging instruments are comprised of
electric forward contracts which are used to manage the supply of and demand
for electricity. With the adoption of SFAS 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 SFAS 133. The impact of this transition as of
January 1, 2001 was a $5.1 million reduction in Accumulated Other Comprehensive
Income which was reclassified into earnings during 2001.
A-35
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 year ended December 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. As of December 31,
2001, Wisconsin Electric had no material derivative instruments outstanding.
The Financial Accounting Standards Board continues to develop interpretative
guidance for SFAS 133 which may impact Wisconsin Electric's application of the
standard in the future.
I--FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount and estimated fair value of certain of Wisconsin Electric's
recorded financial instruments at December 31 are as follows:
2001 2000
----------------- -----------------
Carrying Fair Carrying Fair
Financial Instruments Amount Value Amount Value
--------------------- -------- -------- -------- --------
(Millions of Dollars)
Nuclear decommissioning trust fund...... $ 589.6 $ 589.6 $ 613.3 $ 613.3
Preferred stock--no redemption required. $ 30.4 $ 16.7 $ 30.4 $ 15.4
Long-term debt including current portion $1,512.3 $1,549.6 $1,514.2 $1,473.9
The carrying value of cash and cash equivalents, net accounts receivable,
accounts payable and short-term borrowings approximates fair value due to the
short maturities of these instruments. The nuclear decommissioning trust fund
is carried at fair value as reported by the trustee (see Note E). The fair
values of Wisconsin Electric's preferred stock are estimated based upon the
quoted market value for the same or similar issues. The fair value of Wisconsin
Electric's long-term debt, including the current portion of long-term debt but
excluding capitalized leases, is estimated based upon quoted market value for
the same or similar issues or upon the quoted market prices of U.S. Treasury
issues having a similar term to maturity, adjusted for the issuing company's
bond rating and the present value of future cash flows.
A-36
J--BENEFITS
Pensions and Other Postretirement Benefits: Wisconsin Electric provides defined
benefit pension and other postretirement benefit plans to employees. The status
of these plans, including a reconciliation of benefit obligations, a
reconciliation of plan assets and the funded status of the plans follows.
Other
Postretirement
Pension Benefits Benefits
--------------- ---------------
Status of Benefit Plans 2001 2000 2001 2000
----------------------- ------ ------- ------- ------
(Millions of Dollars)
Change in Benefit Obligation
Benefit Obligation at January 1........... $773.5 $ 749.8 $ 173.4 $192.3
Service cost.......................... 18.5 14.4 6.2 4.2
Interest cost......................... 57.0 55.3 13.6 14.4
Plan participants' contributions...... -- -- 5.8 5.3
Plan amendments....................... -- 4.6 -- (29.7)
Actuarial loss........................ 14.9 0.2 21.9 2.2
Special termination benefits.......... -- 1.2 -- --
Benefits paid......................... (57.7) (52.0) (15.6) (15.3)
------ ------- ------- ------
Benefit Obligation at December 31......... $806.2 $ 773.5 $ 205.3 $173.4
Change in Plan Assets
Fair Value at January 1................... $873.2 $ 915.2 $ 79.4 $ 82.3
-Actual return on plan assets......... (60.3) 8.4 (0.1) (1.7)
Employer contributions................ 1.2 1.6 11.5 8.8
Plan participants' contributions...... -- -- 5.8 5.3
Benefits paid......................... (57.7) (52.0) (15.6) (15.3)
------ ------- ------- ------
Fair Value at December 31................. $756.4 $ 873.2 $ 81.0 $ 79.4
------ ------- ------- ------
Funded Status of Plans
Funded status at December 31.............. $(49.8) $ 99.7 $(124.3) $(94.0)
Unrecognized
Net actuarial loss (gain)............. 18.4 (123.9) 44.1 8.5
Prior service cost.................... 26.2 29.6 0.3 0.3
Net transition (asset) obligation..... (6.8) (9.0) 16.8 26.6
------ ------- ------- ------
Net Asset (Accrued Benefit Cost).......... $(12.0) $ (3.6) $ (63.1) $(58.6)
====== ======= ======= ======
The components of net periodic pension and other postretirement benefit costs
as well as the weighted-average assumptions used in accounting for the plans
include the following:
Pension Benefits Other Postretirement Benefits
-------------------------------------- --------------------------------------
Benefit Plan Cost Components 2001 2000 1999 2001 2000 1999
---------------------------- ----------- ----------- ------------ ----------- ----------- ------------
(Millions of Dollars)
Net Periodic Benefit Cost
Service cost.......................... $ 18.5 $ 14.4 $ 15.6 $ 6.2 $ 4.2 $ 3.3
Interest cost......................... 57.0 55.3 49.2 13.6 14.4 12.4
Expected return on plan assets........ (71.3) (68.4) (62.4) (6.8) (7.0) (5.8)
Amortization of:
Transition obligation (asset)..... (2.2) (2.2) (2.2) 1.5 4.6 4.6
Prior service cost................ 3.3 3.9 3.1 0.1 0.1 0.2
Actuarial loss (gain)............. 0.9 0.5 0.6 1.5 (0.2) 0.1
Terminations/curtailment.......... -- 1.2 -- -- 8.8 --
----------- ----------- ------------ ----------- ----------- ------------
Net Periodic Benefit Cost................ $ 6.2 $ 4.7 $ 3.9 $ 16.1 $ 24.9 $ 14.8
=========== =========== ============ =========== =========== ============
Weighted-Average Assumptions
at December 31 (%)
Discount rate......................... 7.25 7.5 7.5 7.25 7.5 7.5
Expected return on plan assets........ 9.0 9.0 9.0 9.0 9.0 9.0
Rate of compensation increase......... 4.5 to 5.0 4.5 to 5.0 4.75 to 5.0 4.5 to 5.0 4.5 to 5.0 4.75 to 5.0
A-37
Pension Plans: Pension plan assets, the majority of which are equity
securities, are held by pension trusts. Other pension plan assets include
corporate and government bonds and real estate. In the opinion of the Company,
current pension trust assets and amounts which are expected to be paid to the
trusts in the future will be adequate to meet pension payment obligations to
current and future retirees. This table represents both qualified and
non-qualified pension plan obligations.
Open window benefits were offered in 2000 to certain participants in the
Wisconsin Electric Retirement Account Plan. This benefit enhancement resulted
in a one-time FAS 88 cost of $0.7 million.
Other Postretirement Benefits Plans: Wisconsin Electric uses Employees' Benefit
Trusts to fund a major portion of other postretirement benefits. The majority
of the trusts' assets are mutual funds or commingled indexed funds.
Effective January 1, 1992, postretirement benefit costs have been calculated in
accordance with FAS 106, Employers' Accounting for Postretirement Benefits
Other Than Pensions, and are recoverable from the utility customers of
Wisconsin Electric.
In 2000, the benefit attribution period was modified for the Wisconsin Electric
Postretirement medical plans to equal the 10 years of service following the
later of age at hire or age 45. This change resulted in a "negative" plan
amendment and a "plan curtailment".
The assumed health care cost trend rate for 2002 is at 10% for all plan
participants decreasing gradually to 5% in 2007 and thereafter. Assumed health
care cost trend rates have a significant effect on the amounts reported for
health care plans.
A one-percentage-point change in assumed health care cost trend rates would
have the following effects:
1% Increase 1% Decrease
----------- -----------
(Millions of Dollars)
Effect on
Postretirement benefit obligation.. $15.8 $(14.3)
Total of service and interest cost
components....................... $ 2.0 $ (1.8)
Savings Plans: Wisconsin Electric sponsors savings plans which allow employees
to contribute a portion of their pretax and/or after tax income in accordance
with plan-specified guidelines. Matching contributions under these plans
charged to expense amounted to $8.3 million, $9.0 million and $8.7 million
during 2001, 2000 and 1999, respectively.
K--SEGMENT REPORTING
Wisconsin Electric, a wholly-owned subsidiary of Wisconsin Energy Corporation,
has organized its operating segments according to how it is currently
regulated. Wisconsin Electric's reportable operating segments include electric,
natural gas and steam utility segments. The accounting policies of the
reportable operating segments are the same as those described in Note A.
The electric utility engages 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. The
natural gas utility is responsible for the purchase, distribution and sale of
natural gas to retail customers and the transportation of customer-owned
natural gas in three service areas in southeastern, east central, and northern
Wisconsin. The steam utility produces, distributes and sells steam to space
heating and processing customers in the Milwaukee, Wisconsin area.
Summarized financial information concerning Wisconsin Electric's reportable
operating segments for each of the years ended December 31, 2001, 2000 and 1999
is shown in the following table.
Reportable Operating
Segments
--------------------- Other
Year Ended Electric Gas Steam (a) Total
- ---------- -------- ------ ----- ------ --------
(Millions of Dollars)
December 31, 2001
Operating Revenues (b)................................... $1,839.8 $457.1 $21.8 $ -- $2,318.7
Depreciation, Decommissioning and Amortization........... $ 231.7 $ 29.3 $ 3.3 -- $ 264.3
Operating Income (c)..................................... $ 446.2 $ 28.6 $ 1.2 -- $ 476.0
Equity in Earnings (Losses) of Unconsolidated Affiliates. $ 20.6 -- -- -- $ 20.6
Capital Expenditures..................................... $ 324.4 $ 34.5 $ 3.1 $ 15.0 $ 377.0
Total Assets (d)......................................... $4,265.6 $499.8 $48.6 $253.5 $5,067.5
December 31, 2000
Operating Revenues (b)................................... $1,763.4 $399.7 $21.9 $ -- $2,185.0
Depreciation, Decommissioning and Amortization........... $ 239.5 $ 30.0 $ 3.2 -- $ 272.7
Operating Income (c)..................................... $ 368.9 $ 23.2 $ 1.8 -- $ 393.9
Capital Expenditures..................................... $ 318.9 $ 32.1 $ 1.2 $ 0.3 $ 352.5
Total Assets (d)......................................... $4,163.1 $445.3 $48.0 $368.7 $5,025.1
A-38
Reportable Operating
Segments
--------------------- Other
Year Ended Electric Gas Steam (a) Total
- ---------- -------- ------ ----- ------ --------
(Millions of Dollars)
December 31, 1999
Operating Revenues (b)......................... $1,688.3 $306.8 $21.3 $ -- $2,016.4
Depreciation, Decommissioning and Amortization. $ 207.9 $ 23.7 $ 2.6 -- $ 234.2
Operating Income (c)........................... $ 412.9 $ 31.7 $ 2.5 -- $ 447.1
Capital Expenditures........................... $ 313.7 $ 31.7 $ 1.3 $ (0.3) $ 346.4
Total Assets (d)............................... $4,179.3 $427.2 $47.6 $247.8 $4,901.9
- --------
(a) Primarily other property and investments, materials and supplies and
deferred charges.
(b) Wisconsin Electric accounts for intersegment revenues at a tariff rate
established by the Public Service Commission of Wisconsin. Intersegment
revenues are not material.
(c) Interest income and interest expense are not included in segment operating
income.
(d) Common utility plant is allocated to electric, gas and steam to determine
segment assets (see Note A).
L--COMMITMENTS AND CONTINGENCIES
Capital Expenditures: Certain commitments have been made in connection with
estimated total capital expenditures of approximately $370 million during 2002.
Giddings & Lewis, Inc./City of West Allis Lawsuit: As previously reported, in
July 1999, a Milwaukee County Circuit Court jury issued a verdict against
Wisconsin Electric awarding the plaintiffs, Giddings & Lewis Inc., Kearney &
Trecker Corporation (now a part of Giddings & Lewis), and the City of West
Allis, $4.5 million in compensatory damages and $100 million in punitive
damages in an action alleging that Wisconsin Electric had deposited
contaminated wastes at two sites in West Allis, Wisconsin owned by the
plaintiffs. In April 2000, the Circuit Court Judge imposed sanctions against
Wisconsin Electric related to representations made by Wisconsin Electric during
trial that Wisconsin Electric had no insurance coverage for the punitive damage
award. Wisconsin Electric appealed the judgment entered on the jury's verdict
with respect to the punitive damages, as well as the Judge's ruling on the
sanctions matter. Wisconsin Electric did not reflect any charges to expense for
the punitive damage award or sanctions because management, based in part on the
advice of counsel, believed it would prevail on appeal.
On September 5, 2001, the Wisconsin Court of Appeals, District 1, reversed the
$100 million punitive damage judgment award rendered by the trial court in its
entirety and ordered a new trial on the issue of punitive damages only and
reversed the sanctions order in its entirety. In January 2002, the Wisconsin
State Supreme Court denied the plaintiffs' petition for review and sent the
case back to the trial court for the new trial on the issue of punitive
damages. The punitive damage payment was returned to the Company with interest
in early 2002. The Company expects that a new trial will be held on the issue
of punitive damages in 2003. This matter is still pending final resolution and,
therefore, the final financial impact, if any, is not known at this time.
In December 1999, in order to stop the post-judgment accrual of interest at 12%
during the pendency of the appeal, Wisconsin Electric tendered a contested
liability payment of $110 million to the Milwaukee County Clerk of Circuit
Court, representing the $104.5 million verdict and $5.5 million of accrued
interest. (The payment was recorded in "Deferred Charges and Other Assets--
Other" on the 2000 balance sheet. It has been classified along with interest
due as "Other Accounts Receivable" on the 2001 balance sheet.) Under Wisconsin
law, the Appellate Court decision makes the plaintiffs liable to Wisconsin
Electric for the $100 million of punitive damages plus accrued interest
originally tendered in December 1999 plus accrued interest subsequent to
December 1999. During 2001, the Company recorded interest income of $10.5
million based on the Appellate Court decision.
On August 21, 2000 and September 29, 2000, two shareholders who had made prior
demands upon Wisconsin Energy and Wisconsin Electric to initiate a shareholder
derivative suit against certain officers, directors, employees and agents of
Wisconsin Electric as a result of the City of West Allis/Giddings & Lewis
litigation, filed suits on behalf of Wisconsin Energy shareholders in Milwaukee
County Circuit Court. A special committee of independent directors of Wisconsin
Energy determined after investigation that a derivative proceeding was not in
Wisconsin Energy's best interests. Wisconsin Energy agreed to mediation of the
matter which resulted in an acceptable proposal to settle the cases. The Court
granted preliminary approval of the settlement agreement on October 29, 2001
and authorized the sending of notice of the settlement to the shareholders. A
final hearing on approval of the settlement agreement was held on January 25,
2002 at which time the Court gave final approval to the settlement and
dismissed the cases. The settlement did not have a significant impact on
financial position or results of operations.
A-39
Environmental Matters: Wisconsin Electric periodically reviews its exposure for
remediation costs as evidence becomes available indicating that its remediation
liability has changed. Given current information, including the following,
management believes that future costs in excess of the amounts accrued and/or
disclosed on all presently known and quantifiable environmental contingencies
will not be material to the Company's financial position or results of
operations.
During 2000, Wisconsin Electric expanded a voluntary program of comprehensive
environmental remediation planning for former manufactured gas plant sites and
coal-ash disposal sites. Wisconsin Electric has performed a preliminary
assessment of twenty-one sites, including eleven of the manufactured gas plant
sites discussed below, and expects to discuss these sites with the Wisconsin
Department of Natural Resources as necessary. At this time, the Company cannot
estimate future remediation costs associated with these sites beyond those
described below.
Manufactured Gas Plant Sites: Wisconsin Electric is investigating the
remediation of former manufactured gas plant sites that were previously used by
the Company. Based on this preliminary investigation, the Company estimates
that the future costs for detailed site investigation and future remediation
costs may range from $25-$40 million over the next ten years. This estimate is
dependent upon several variables including, among other things, the extent of
remediation, changes in technology and changes in regulation. As of December
31, 2001, Wisconsin Electric has established reserves of $25 million related to
future remediation costs.
The PSCW has allowed Wisconsin utilities, including Wisconsin Electric, to
defer the costs spent on the remediation of manufactured gas plant sites, and
has allowed for such costs to be recovered in rates over five years. As such,
the Company has recorded a regulatory asset for remediation costs it has spent
to date and accrued.
Ash Landfill Sites: Wisconsin Electric aggressively seeks environmentally
acceptable, beneficial uses for its combustion by-products. However, such
coal-ash by-products have been, and to some degree, continue to be disposed in
company-owned, licensed landfills. Some early designed and constructed
landfills may allow the release of low levels of constituents resulting in the
need for various levels of monitoring or adjusting. Where Wisconsin Electric
has become aware of these conditions, efforts have been expended to define the
nature and extent of any release, and work has been performed to address these
conditions. The costs of these efforts are included in the fuel costs of
Wisconsin Electric. During 2001, the Company incurred $1.2 million in coal-ash
remediation expenses and incurred $2.9 million in 2000.
As a result of the Cooperative Agreement, an innovative regulatory agreement
signed with the Wisconsin Department of Natural Resources in February 2001, the
Company is now able to recover fly ash from it's landfills and mix it with coal
for combustion at Pleasant Prairie Power Plant. In this way, the carbon left in
the ash is recovered as "ash fuel" and the resulting fly ash produced is a high
value product sold as replacement for cement.
Information Requests: Wisconsin Electric, has received a request for
information from the United States Environmental Protection Agency ("U.S. EPA")
regional office pursuant to Section 114(a) of the Clean Air Act. This request
seeks information relating to operations of Wisconsin Electric's power plants.
Wisconsin Electric has submitted information responsive to this request. This
information request is similar to those issued by U.S. EPA to numerous electric
utility companies over the past two years. The Company will continue to
cooperate with the U.S. EPA on this matter. At this time, Wisconsin Electric
cannot predict whether U.S. EPA will allege past violations that might subject
the Company to fines or penalties.
M--TRANSACTIONS WITH ASSOCIATED COMPANIES
Managerial, financial, accounting, legal, data processing and other services
may be rendered between associated companies and are billed in accordance with
service agreements approved by the Public Service Commission of Wisconsin.
Wisconsin Electric received stockholder capital contributions from Wisconsin
Energy of $150 million in 1999. Intercompany sales, accounts receivable and
accounts payable are all immaterial.
A-40
[LOGO] Andersen
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholder of Wisconsin Electric Power Company:
We have audited the accompanying balance sheet and statement of capitalization
of Wisconsin Electric Power Company as of December 31, 2001, and the related
statements of income, common equity and cash flows for the year then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Wisconsin Electric Power
Company as of December 31, 2001, and the results of its operations and its cash
flows for the year then ended in conformity with accounting principles
generally accepted in the United States.
/s/ Arthur Andersen LLP
- -----------------------
Arthur Andersen LLP
Milwaukee, Wisconsin
February 5, 2002
A-41
[LOGO] PRICEWATERHOUSECOOPERS
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and the
Stockholder of Wisconsin Electric Power Company
In our opinion, the balance sheet and statement of capitalization as of
December 31, 2000 and the related statements of income, of common equity and of
cash flows for each of the two years in the period ended December 31, 2000
present fairly, in all material respects, the financial position, results of
operations and cash flows of Wisconsin Electric Power Company at December 31,
2000 and for each of the two years in the period ended December 31, 2000 in
conformity with accounting principles generally accepted in the United States
of America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
February 6, 2001
A-42
MARKET FOR REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
Dividends declared on Wisconsin Electric Power Company's common stock during
the two most recent fiscal years are set forth below. With the exception of the
third quarter of 2000, dividends were paid entirely in cash. Dividends were
paid to Wisconsin Electric's sole common stockholder, Wisconsin Energy
Corporation. There is no established public trading market for the Company's
common stock.
Quarter 2001 2000
------- ------ ------
(Millions of
Dollars)
First.... $ 32.5 $ 44.9
Second... 32.5 44.9
Third (a) 32.5 44.9
Fourth... 32.5 44.9
------ ------
Total.... $130.0 $179.6
====== ======
- --------
(a) During the third quarter of 2000, the Board of Directors approved that $1.0
million of the dividend be paid in a property dividend with the balance
paid in cash.
Subject to any regulatory restriction or other limitations on the payment of
dividends, future dividends will be at the discretion of the board of directors
and will depend upon, among other factors, earnings, financial condition and
other requirements.
Various financing arrangements and regulatory requirements impose certain
restrictions on the ability of Wisconsin Electric to transfer funds to
Wisconsin Energy in the form of cash dividends, loans or advances. Under
Wisconsin law, Wisconsin Electric is prohibited from loaning funds, either
directly or indirectly, to Wisconsin Energy.
BUSINESS OF THE COMPANY
Wisconsin Electric Power Company is an electric, gas and steam utility which
was incorporated in the state of Wisconsin in 1896. Wisconsin Electric's
operations are conducted in the following three segments.
Electric Operations: Wisconsin Electric's electric operations generate,
distribute and sell electric energy to over 1,000,000 customers in Wisconsin
and in the Upper Peninsula of Michigan. On January 1, 2001, Wisconsin Electric,
together with Edison Sault Electric Company, an affiliated electric utility,
and with other unaffiliated Wisconsin utilities, transferred its electric
transmission assets to American Transmission Company LLC in return for a
proportionate ownership interest in this new company.
Gas Operations: Wisconsin Electric's gas operations purchase, distribute and
sell natural gas to retail customers and transports customer-owned gas to
approximately 413,000 customers in three distinct service areas in Wisconsin.
Steam Operations: Wisconsin Electric's steam operations generate, distribute
and sell steam supplied by its Valley and Milwaukee County Power Plants. Steam
is used by approximately 450 customers in the metropolitan Milwaukee area for
space heating and processing, hot water and humidification.
For additional financial information about Wisconsin Electric's operating
segments, see "Note K--Segment Reporting" in the Notes to Financial Statements.
A-43
DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS
The information under "Election of Directors" in Wisconsin Electric's
definitive Information Statement dated March 20, 2002, attached hereto, is
incorporated herein by reference.
EXECUTIVE OFFICERS
The figures in parenthesis indicate age and years of service with Wisconsin
Electric as of December 31, 2001.
Richard A. Abdoo (57; 26) Chairman of the Board and Chief Executive Officer
Charles R. Cole (55; 2) Senior Vice President
Stephen P. Dickson (41; 1) Controller
Paul Donovan (54; 2) Senior Vice President and Chief Financial Officer
Richard R. Grigg (53; 31) President and Chief Operating Officer
Larry Salustro (54; 4) Senior Vice President and General Counsel
George E. Wardeberg (66; 1) Vice Chairman of the Board
A-44
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