ML20137N305
| ML20137N305 | |
| Person / Time | |
|---|---|
| Site: | Point Beach  |
| Issue date: | 04/03/1997 |
| From: | Brady A WISCONSIN ELECTRIC POWER CO. |
| To: | NRC OFFICE OF INFORMATION RESOURCES MANAGEMENT (IRM) |
| References | |
| NUDOCS 9704080321 | |
| Download: ML20137N305 (50) | |
Text
t 4
t.
Wisconsin 1.Electnc POWER COMPANY 231 w M.chen Po. sca 2046.w.ouue wi 53201-2046 (4141221 2345 April 3,1997 U.S. Nuclear Regulatory Commission Document Control Desk Washington, DC 20555 Ladies and Gentlemen:
In accordance with 10 C.F.R. Section 50.71, enclosed is the 1996 annual report to stockholders of Wisconsin Electric Power Company, which includes certified financial statements. Such annual report accompanies Wisconsin Electric's definitive information statement, which is being mailed to stockholders today.
Wisconsin Electric Power Company is the holder of Facility Operating License Nos. DPR-24 and DPR-27 issued by your Commission under Dockets 50-266 and 50-301, respectively.
Ve trul yo
/
\\
9 f
n ai y
4 Co te Secretary &
e President-External Affairs KHE/s Enclosure I
cc: U.S. Nuclear Regulatory Commission Mr. Gerald Charnoff Region III Shaw, Pittman, Potts & Trowbridge 801 Warrenville Road 2300 N Street, N.W.
pff
. Lisle, IL 60532-4351 Washington, DC 20037 Tony McMurtray, NRC Resident Inspector K. H. Ecke A. W. Finke R. R. Grigg 9704080321 970404 ADOCK0500g6 PDR appspppsppt
-er==c A subsimtiH&msEr / kip Ov7watha
Wisconsin Electnc POWER COMPANY 231 W Michgon. PO Bon 2046. Maacukee. WI S3201-2046 (414)221 2345 April 3,1997
Dear Wisconsin Electric Stockholder:
Wisconsin Electric Power Company will hold its arinual meeting of stockholders at 9:00 a.m. on Tuesday, April 29,1997 in Conference Room P437 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 only.
On behalf of the directors and officers of Wisconsin Energy, I invite you to attend Wisconsin Energy's annual meeting to be held Wednesday, April 30,1997 at 9:30 a.m. The Wisconsin l
Energy meeting will be held at the Grand Milwaukee Ilotel,4747 South Ilowell Avenue, near l
Milwaukee's airport. By attending this meeting, you will have the opportunity to meet many of l
the Wisconsin Electric officers and directors. Although you cannot vote your shares of Wisconsin Electric preferred stock at the Wisconsin Energy meeting, you sheuld find the l
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 l
summary annual report, please call our toll-free Stockholder Ilotline at 1-800-558-9663.
Sincerely, l
Richard A. Abdoo Chairman of the Board and Chief Executive Officer
NOTICE OF ANNUAL MEETING OF STOCKIIOLDERS April 3,1997 To the Stockholders of Wisconsin Electric Power Company:
The Annual Meeting of Stockhalders of Wisconsin Electric Power Company will be held at 9:00 a.m. on Tuesday, April 29,1997 in Conference Room P437 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 1998 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 February 26,1997 will be entitled to vote at the meeting.
I By Order of the Board of Directors l
l
/
Ann Marie Brady Corporate Secretary and Vice President - External Affairs l
~~~
l 1
WisconsinElecinc A WISCONSINENERGYCOMPANY 231 West Michigan Street P.O. Box 2046 Milwaukee, Wisconsin $3201 INFORMATION STATEMENT and ANNUAL REPORT TO STOCKIIOLDERS INFORMATION STATEMENT This information statement is being furnished to stockholders beginning on or about April 3,1997 in connection with the annual meeting of stockholders of Wisconsin Electric Power Company (" Wisconsin Electric" or "WE") to be held on April 29,1997, at WE's Public Service Building,231 West Michigan Street, Milwaukee, Wisconsin, and all adjournments 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, llowever, you may vote your shares of preferred stock at the meeting.
VOTING SECURITIES As of February 26,1997, 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 February 26,1997 will be entitled to vote at the meeting. A majority of the votes entitled to be cast by the shares entitled to vote shall constitute a quorum.
All of WE's outstanding common stock, representing over 99% ofits voting securities, is owned beneficially by its parent company, Wisconsin Energy Corporation (" Wisconsin Energy" or "WEC"). 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.
RELATIONSillP WITII INDEPENDENT PUllLIC ACCOUNTANT Price Waterhouse LLP has acted as independent public accountant for WE or its predecessor continuously since 1932, and was appointed by Wisconsin Energy's board of directors to serve as independent public accountant of WEC and its subsidiaries, including WE, during the current year. Representatives of the firm will not attend the annual meeting, but will be present at Wisconsin Energy's annual meeting on April 30,1997 to make any statement they may consider appropriate and to respond to questions w hich may be directed to them.
1
M TIIE BOARD OF DIRECTORS AND ITS COMMITTEES The Board of Directors is responsible for overseeing the performance of WE. In 1996 the Board held eight meetings. The average attendance of all directors for Board and committee meetings was 98%.
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 1996, 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, Ahearne, Cornog, Grigg, Johnson and Stratton are regular members of the Executive Committee; all other directors are alternate members. The Compensation Committee, which met twice in 1996, identifies through succession planning potential executive officers of WE and provides a competitive, performance-based executive and director compensation program that enables WE to attract and retain key individuals and to motivate them to achieve WE's short and long-term goals. Directors Ahearne, Bergstrom and Cornog are members of the Compensation Committee. The Finance Committee, which met once in 1996, 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 the WE's ability to act quickly with respect to certain financing matters when market conditions warrant. Directors Bergstrom, Grigg and Porter are members of the Finance Committee.
ELECTION OF DIRECTORS At the 1997 annual meeting, there will be an election of eight directors to hold ofilce for a term of one year and 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 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 efTect 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 t.navailable 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 December 31,1996.
Information Concerning Nominees (For Terms Expiring in 1998)
RICII ARD A. ABDOO. Age 52. Chairman of the Board, President and Chief Executive Officer of WEC since 1991. Chairman of the Board and Chief Executive Officer of Wisconsin Electric, WEC's principal subsidiary, since 1990. Director of WEC since 1988. Director of Wisconsin Electric since 1989. Chairman of the Baard and Chief Executive Officer of Wisconsin Natural Gas Company (" Wisconsin Natural" or "WN") from 1990 to 1995.
Wisconsin Natural, which was WEC's gas utility subsidiary, merged into Wisconsin Electric effective January 1, 1996. Director of Wisconsin Natural from 1989 to 1995. Director of Marshall & ilsley Corporation, Sundstrand Corporation and United Wisconsin Services, Inc.
JOllN F. AllEARNE. Age 62. Director of the Sigma Xi Center for Sigma Xi, The Scientific Research Society, an organization that provides grants to graduate students and conducts national meetings on major scientific issues, since 1989. Adjunct Scholar of Resources for the Future, an economic research, non-profit institute, since 1993. Lecturer, Duke University, sSce 1995. Vice President and Senior Fellow of Resources for the Future from 1984 to 1993. 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.
2 k
JOIIN F. IIERGSTROM. Age 50. Chairman and Chief Executive Omcer of Bergstrom Corporation since January 1997; President and Chief Executive Omcer of Bergstrom Corporation from 1974 to 1996. Bergstrom Corporation owns and operates numerous automobile dealerships, three hotels and an automotive leasing company. Director of WEC since 1987. Director of Wisconsin Electric since 1985. Director of Bergstrom Corporation, First National Bank-Fox Valley, Kimberly-Clark Corporation, Midwest Express lloidings, Inc.,
Universal Foods Corporation, Driver's Mart Worldwide, Inc. and The Green Bay Packers, Inc.
ROBERT A. CORNOG. Age 56. Chairman of the Board, President and Chief Executive Officer of Snap-on incorporated since 1991. 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 since 1994. Director of Snap-on incorporated and Johnson Controls, Inc.
RICII ARD R. GRIGG. Age 48. Vice President of WEC md President and Chief Operating Omcer of Wisconsin Electric since January 1995; Chief Nuclear Omcer of Wisconsin Electric since December 1996.
President and Chief Operating Officer of Wisconsin Natural during 1995. Group Executive and Vice President of Wisconsin Electric from June to December 1994. Vice President of Wisconsin Electric from 1990 to 1994.
Director of WEC since 1995. Director of Wisconsin Electric since 1994. Director of Wisconsin Natural during 1995.
GENEVA 11. JOlINSON. Age 67. Corporate Director. Former President and Chief Executive Omcer of Family Service America, an organization representing private agencies in the United States and Canada that provide human service programs, from 1983 to 1994. Director of WEC and Wisconsin Electric since 1988.
Director of Firstar Bank Milwaukee, N.A.
DAVID K. PORTER. Age 53. Senior Vice President of WE since 1989. Vice President of Wisconsin Natural from 1989 to 1995. Director of WE since 1989. Director of Wisconsin Natural from 1988 to 1995.
FREDERICK P. STRATTON, JR. Age 57. Chairman and Chief Executive Omcer of Briggs & Stratton Corporation, a manufacturer of small gasoline engines, since 1986. Director of WEC since 1987. Director of Wisconsin Electric since 1986. Director of Briggs & Stratton Corporation, Banc One Corporation, Midwest Express lloidings, Inc. and Weyco Group, Inc.
OTilER MATTERS ne 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 I
received by WE.
COMPENSATION Directors' Compensation i
l l
In order to more closely link directors' pay to performance and to align the Board's interests with stockholders, efTective January 1,1996, the Board determined that a portion of directors' fees will be paid in WEC common l
I stock. Directors can elect to receive the fee in common stock or defer the fee in the WEC phantom common stock account under the Directors' Deferred Compensation Plan.
i I
3 1
J e
During 1996, each nonemployee director received an annual retainer fee of $18,000 (one-half in WEC common stock and the other halfin cash) plus an attendance fee of $1,250 for each Board or commince meetrng attended. In addition, a per diem fee of $1,000 for travel on company business is paid for ear h 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. Non-employee chairs of the committees of the Board received a quarterly committee chair retainer of $1,250. Employee directors receive no directors' fees. Although certain WE directors also serve on WEC's board and compensation committee, only single fees are paid for meetings held by both boards or committees on the same day. In these cases, fees are allocated between WE and WEC based on services rendered.
Nonernployee directors may defer fees so long as they serve on the Board of WE and'or its af61iates pursuant to the Directors' Defened 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 stock, as well as through the accumulation of any reinvested dividends. Deferral amounts are credited to accounts in the name of each panicipating director on the books of WE, are unsecured and are payable only in cash following tennination 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.
Executh e Officers' Compensation The following table summarizes certain information concerning compensation awarded to, earned by or paid to WE's Chief Executive Officer and each of WE's or WEC's other five most highly compensated executive officers for services in all capacities to WEC and its subsidiaries, including WE, for the last three fiscal years. The amounts shown in this and all subsequent tables in this information statement are WEC consolidated compensation data. The portion of time devoted by each officer to WE in 1996, as determined by the percent of time each officer worked for WE versus the other affiliated companies, is as follows: Mr. Abdoo (81%), Mr. Grigg (95%), Mr. Brzezinski (40%), Ms. Krause (100%), Mr. Porter (100%) and Mr. Baker (86%).
4
Summary Compensation Table Long-l crm Compensation
[
Awards Annual Compensation Secunties Other Annual Underlying All Other Name and Principal Position at WE Year Salary Bonus Compensation Options /SARs Compensation
($)
($)
($)
(#)(1)
($)(2)
Richard A. Abdoo Chairman of the Board and 1996 560,000 306,472 8,953 38,000 113.297 Chief Executive Officer 1995 496,000 232,000 8,321 38.000 83,858 1994 450,000 222,396 0
25,000 15,970 Richard R.Grigg President, Chief Operating OfTicer 1996 295,000 62,835 5,206 19,000 43,412 and Chief Nuclear Officer 1995 237,500 63,788 3,084 19,000 42,125 1994 168,333 46,667 0
6,500 11,000 Francis firzerinski Vice President-Business Development 1996 225,000 108,513 (3) 5,933 9,500 19,247 1995 225,000 25,515 80,532 (4) 7,600 17,051 1994 212,000 26,037 0
6,500 7,478 Kristine bl. Krause Vice President Fossil Operations 1996 190,000 68,750 0
9.500 23,239 1995 160,000 48,904 0
9,500 16.532 1994 112,500 24,013 0
6,500 3,368 David K. Porter l
Senior Vice President 1996 190,000 63,449 0
7,600 23,994 1995 190,000 46,170 0
7,600 21,766 1994 190,000 58,333 0
3,000 6,695 Calvin 11. Baker Vice President Finance and 1996 170,000 70.298 1,420 9,500 21,996 Chief Financial OfTicer 1995 145,000 35,235 1,286 7,600 16,249 I994 132,000 34,737 0
3,000 4,331 (1) Grants of options were in combination with contingent dividend awards, as described in the table entitled "Long-Term Incentive Plans--Awards in Last Fiscal Year." No stock appreciation rights ("SARs")
were awarded during any of the fiscal years indicated.
. (2) All Other Compensation for 1996 for Messrs. Abdoo, Grigg, Brzezinski, Ms. Krause, Messrs. Porter I
and Baker, respectively, includes: (i) employer matching of contributions by each named executive into the Employee Savings Plan (ESP) in the amount of $4,750 for each named executive officer, (ii)"make w hole" payments under the Executive Deferred Compensation Plan with respect to matching in the ESP on l
deferred salary or salary received but not otherwise eligible for matching in the amounts of S13,450, 54,512, $2,529, $3,325, $ 1,425 and $775, respectively, and (iii) the full dollar value oflife insurance premiums paid by the company in the amounts of $95,097, $34,150, $11,968, $15,164, $17,819 and
$16.471, respectively, under a split-dollar life insurance program.
(3) Mr. Brzezinski's 1996 award is higher than in previous years because of accomplishments by WEC's l
non-utility subsidiaries; the award includes $17,238 relating to performance in connection with development of land known as the Westridge project.
(4) includes $41,893 for club memberships; the balance is for related tax gross-up payments.
5
Option /SAR Grants in Last Fiscal Year Grant Date Value Individual Grants (1)
Percent of Number of Total Securities Options /SARs Exercise Underlying Granted to or Base Grant Date Options /SARs Employees in Price Expiration Present Name Granted (#)
Fiscal Year
($/Sh)
Date Value (S)(2)
Richard A. Abdoo 38,000 18.0 %
26.81 11/26/2006 119,407 Richard R. Grigg 19,000 9.0%
26.81 11/26/2006 59,704 Francis Brzezinski 9,500 4.5%
26.81 11/26/2006 29,852 Kristine M. Krause 9,500 4.5%
26.81 11/26/2006 29,852 David K. Porter 7,600 3.6%
26.81 1I/26/2006 23,881 Calvin 11. Baker 9,500 4.5%
26.81 11/26/2006 29,852 (1) Consists of incentive and non-qualified stock options to purchase shares of WEC common stock granted pursuant to WEC's 1993 Omnibus Stock Incentive Plan ("OSIP") on November 27,1996.
These options were granted with an equal number of contingent dividend awards (as described in the table entitled "Long-Term Incentive Plans-Awards in Last Fiscal Year"), have exercise prices equal to the fair market value of the WEC shares on the date of grant and first become exercisable on November 27,2000, at which time they become fully exercisable. Upon a " change in control" of WEC, as defined in the OSIP, or upon retirement, permanent total disability or death of the option holder, these options shall become immediately exercisable. The proposed merger with Northern States Power Company ("NSP") wil! not be considered a change in control of WEC for purposes of the OSIP. 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 WEC compensation committee, the exercise price may be paid by delivery of already-owned shares and 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 OSIP, the WEC 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)'Ihe Black-Scholes option pricing model was used to determine the options' present value as of the date of the grant. The assumptions used in the Black Scholes equation are: market price of stock:
$26.81; exercise price of option: $26.81; stock volatility: 14.41%; annualized risk-free interest rate:
6.28%; exercise at the end of 10-year option term; and dividend yield: 5.28%. WE's use of this model should not be construed as an endorsement ofits accuracy. Whether the model's assumptions will prove to be accurate cannot be known at the date of grant. The ultimate value of the options, if any, will depend upon the future value of the WEC common stock, which cannot be forecast with reasonable accuracy, and the optionee's investment decisions.
No stock options other than those granted pursuant to the OSIP were outstandira in the last fiscal year. The earliest date outstanding options previously granted under the OSIP become exercisable is December 15,1997.
Consequently, no options were exercisable in 1996. The following table sets forth the number of options which were not exercisable and the value of such options based upon the difference between the exercise price and the market price of the underlying shares as of December 31,1996.
6
Aggregated Option /SAR Exercises in Last Fiscal Year and Fiscal Year-End Option SAR Values Number of Securities Undeilying Value of Unexercised in-the-Money Unexercised Options /SARs Options /SARs at Fiscal Year-End at Fiscal Year-End
(#)
($)
Name Exercisable Unexercisable Exercisable Unexercisable Richard A. Abdoo 0
123,500 0
3,906 Richard R. Grigg 0
51,000 0
1,581 Francis Brzezinski 0
30,100 0
992 Kristine M. Krause 0
26,750 0
992 David K. Porter 0
24,700 0
657 Calvin 11. Baker 0
23,100 0
775 The following table further describes the long-term incentive awards made during 1996:
Long-Term Incentive Plans-Awards in Last Fiscal Year Estimated Future Performance Payouts Under Number of or Other Non-Stock Shares, Units Period Until Price-Based Plans or Other Maturation Target Name Rights (#)(1) or Payout
($ or #)(2)
Richard A. Abdoo 38,000 11/26/2000
$245,277 Richard R. Grigg 19,000 11/26/2000
$122,638 Francis Brzezinski 9,500 11/26/2000
$61,319 Kristine M. Krause 9,500 11/26/2000
$61,319 David K. Porter 7,600 11/26/2000
$49,055 l
Calvin H. Baker 9,500 11/26/2000
$61,319 l
l (1) Consists of performance units awarded under the OSIP in combination with stock options (as described in the table entitled " Option /SAR Grants in Last Fiscal Year" above). These performance units, entirely in the form of contingent dividends, will be paid if total shareholder return (appreciation in the value of WEC common stock plus reinvested dividends) over a four-year period ending November 26,2000 equals or exceeds the median return earned by the companies included in the Peer Group Index in the " Performance Graph" section of WEC's proxy statement for the 1997 Annual s
Meeting, except that there will be no payout if WEC's total shareholder return is negative over the course of such period. If payable, each participant shall receive an amount equal to the actual dividends paid on WEC common stock for the period of November 27,1996 through November 26, 2000 multiplied by the number of performance units awarded to such participant. Upon a " change in control" of WEC, as defined in the OSIP, this benefit shall immediately vest with all performance l
goals deemed fully achieved. As described in footnote I to the table entitled " Option /SAR Grants in Last Fiscal Year," WEC's proposed merger with NSP does not constitute a change in control under the OSIP with respect to any outstanding contingent dividends granted to the above executive officers.
(2) Assumes, for parposes of illustration only,4% per year compound annual dividend increase based on the current quarterly dividend rate.
Severance Policy, in connection with the Agreement and Plan of Merger between WEC and Northern States Power Company (approved by WEC's stockholders on September 13,1995) the WEC board adopted a Senior Executive Severance Policy (" Severance Policy"). The Severance Policy was adopted to encourage certain executise officers and other key employees, w hose expertise has been critical to WE's success, to remain with WE 7
e during the WEC/NSP merger transition process. The Severance Policy provides for payment of severance to panicipants whose employment is terminated under certain circumstances (e.g., terminations by WE'that are bther than for cause, disability or retirement; temiinations resulting from certain sales of a business by WE; and terminations resulting from reductions in participants' salaries, responsibilities or benents) at any time before (i) the second anniversary of the effective time of the merger with NSP if the transaction is consummated or (ii)
April 28,2000 if the transaction with NSP is not consummated.
The severance bene 0ts under the Severance Policy consist of: (i) three years' salary and annual incentive compensation;(ii) payment of the actuarial equivalent of the additional retirement bene 0ts the participant would have earned if he or she had remained employed for three more years:(iii) continued medical, dental and life insurance coverage for three years;(iv) outplacement services or the use of office space and support; and (v)
Enancial planning counseling.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION Compensation Philosophy and Objectives. The Compensation Committee, which is comprised entirely of independent non-employee directors of WEC and WE, is responsible for making decisions regarding succession planning and executive compensation. The committee, which functions as a combined Compensation Committee for WE and WEC, seeks to provide a competitive, performance-based executive compensation program that enables WE to attract and retain key individuals and motivate them to achieve WE's short and long term goals. The committee regularly re-examines its compensation philosophy to detennine if the executive compensation package is effective in helping WE achieve its corporate objectives.
The committee believes that a substantial portion of overall executive compensation should be at risk, dependent on achievement ofindividual and corporate goals that are al:gned with the interests of WE's and WEC's stockholders and customers. As a result, compensation for executives will vary from year to year, based upon the level of achievement of operating, Gnancial, safety, environmental stewardship, customer satisfaction and other performance goals. Superior performance will be rewarded with above-average compensation; performance below expectations i
will yield below-average compensation.
l l
The committee employs a nationally recognized compensation consultant, Towers Perrin, to advise it on matters relating to the administration and design of WE's executive compensation program. The consultant provides the committee with information regarding competitive compensation levels, practices and trends within the industry. In addition, information on general corporate compensation practices is provided.
In determming competitive compensation for WE's officer positions, the committee relies primarily on an analysis of compensation practices for the companies included in the industry peer group used to compare investment performance in WEC's proxy statement for the 1997 Annual Meeting (" Peer Group"). The committee relies i
secondarily on a broader analysis of compensation data from a survey of approximately 100 utilities conducted by the Edison Electric Institute (" eel"), a consortium of utilities, and on a survey of compensation practices in general l
industry. The committee reviews both peer group specific and broader industry and general industry pay practices to be fully informed of compensation levels. The committee does not mathematically average the data from these analyses but, rather, considers them as three separate views of the external market.
l Elements of Compensation. The 1996 compensation of WE's executives primarily consisted of three elements:
base salary, annual incentive compensation and long-term incentive compensation. He committee's basis for determining appropriate le els of executive compensation for 1996 for each of these elements is described below.
Specific values of 1996 compe:tsation for the Chief Executive Of0cer and ac Ove other most highly-compensated of0cers in the WE organization are included in the Summary Compensation Table provided in this information statement.
Base Salary. In determining appropriate execu'ive base salaries, the committee considered factors such as individual experience, performance and pot.ential, changes in duties and responsibilities, economic conditions in the 8
utility service areas, the reputation of WE's utility operations, competitiveness of utility service rates and impact of cost-control acliievements. In addition, the committee reviewed executive compensation practices for comparable positions at companies within the Peer Group, as well as the broader group of utilities in the eel database and practices in general industry. As noted above, the committee does not mathematically average the data from these analyses but, rather, considers them as three separate views of the external market. In general, base salaries are targeted at or near the 50th percentile of the average of these three groups.
AnnualIncentive Compensation. The committee administers WEC's Short-Term Performance Plan ("STPP")
which provides annual cash incentive opportunities to executive omcers and other key employees. The STPP is designed to promote the achievement of shareholder and customer-focused objectives of WEC and its subsidiaries, including WE, while recognizing individual and team performance of participants.
Annual incentive compensation awards are targeted at approximately the 75th percentile ofindust y pay practices.
In 1996, target incentive awards were set for participants that ranged from 15% to 55% of base salary. Each -
participant is eligible to receive an award if pre-established corporate performance goals are met. Awards may be increased by up to 100% of targeted amounts or reduced to zero based on individual and team performance.
Except for WE Chief Executive Officer Abdoo and Mr. Grigg, who serves as WE President, Chief Operating Omccr and Chief Nuclear Omcer, performance goals for 1996 were 50% financial and 40% operational. He remaining 10% related to improving WE's relationship with its customers as measured by its Customer Value Added (CVA) score. Financial goals focused on achievement of target earnings per sharc. Operational goals were specific to WE's business processes and, among other things, related to energy marketing effons, development of new energy services, customer satisfaction, employee training nnd development, environmental stewardship, safety of operations, and corporate strategic planning. Mr. Abdoo's goals were 80% financial,10% operational and 10%
CVA; Mr. Grigg's goals were 60% financial,30% operational and 10% CVA.
For 1996, Wisconsin Electric did very well in achieving a number of performance goals. Along with these accomplishments, however, Wisconsin Electric received penalties from regulatory agencies. A civil penalty was levied by the Nuclear Regulatory Commission related to operations at WE's Point Beach Nuclear Plant. A notice of violation of air emissions requirements at WE's Port Washington Power Plant was referred to the Wisconsin Department of Justice. His matter was resolved through payment of a forfeiture. In order that stockholders not assume responsibility for these penalties, the committee agreed that incentive awards for 1996 be reduced to cover the costs of these penalties. As a result, all STPP awards, including the award for Mr. Abdoo, were reduced by 12.2%. In addition, awards for participants who are employed in WE's Nuclear Business Unit were funher reduced by 50% to more appropriately reflect nuclear performance results. Mr. Grigg, who began serving as WE's Chief Nuclear Omcer in December 1996, also had his award reduced. Based on these adjustments, awards to WE and WEC executive omcers under the STPP for 1996 ranged from 0% to 54.7% of base salary.
Long Term incentive Compensation. The committee administers WEC's 1993 Omnibus Stock Incentive Plan
("OSIP"), a long-term incentive plan designed to link the interests of executives and other key employees to long-term shareholder value. De OSIP allows the company to grant stock options, stock appreciation rights, stock awards and performance units to participants. Equity interests in WEC common stock enable participants to share in the appreciation of the value of WEC common stock and provide an incentive for managing the continued performance and value of the company. Long-term incentive awards are targeted at the 90th percentila of the industry grant practices.
]
For 1996, awards in the form of stock options and performance dividend units were granted to each of several groups of OSIP participants. Stock option and performance dividend unit grants to executive omcers who received grants ranged from 3,800 to 38,000 shares and related performance dividend units. The grant level was dependent on each participant's role in influencing the achievement oflong-term performance goals.
The 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 OSIP, the committee has implemented stock ownership guidelines for participants. Guidelines for executive omcers range from 100% to 300% of base salary.
9
Chief Executive Officer Compensation. Performance and compensation of the Chief Executive Officer are of particular importance to the committee. Mr. Abdoo's performance was evaluated by the committee and compensation was determined in accordance with the executive compensation policies described above.
As part of a procedure instituted in 1995, the Compensation Committee chair requested that non-employee directors provide a written evaluation of the CEO's performance. The directors' written feedback was discussed by committee members as part ofits compensation determinations and has been shared with the CEO.
With respect to base salary, in recognition of the leadership provided by the Chief Executive Officer in shaping and guiding a financially strong organization that is able to provide quality services to its customers at competitive prices, as well as his role in guiding the reengineering of several business processes and related cost-control achievements of the company, the outstanding repu'ation of Wisconsin Electric's utility operations in the utility industry and in consideration of competitive salary data, the committee set Mr. Abdoo's base salary at $560,000 for 1996. Mr. Abdoo's base salary approximates the 50th percentile of the data reviewed by the committee.
With respect to annual incentive compensation for fiscal year 1996, the Compensation Committee awarded Mr.
Abdoo the annual incentive award set forth in the " Bonus" column of the Summary Compensation Table. In this regard, the committee established his 1996 STPP target award level at $5% of base salary. The committee's evaluation of Mr. Abdoo's 1996 performance resulted in an award under the STPP of $306,472 or 54.7% of base salary. The award was based upon Mr. Abdoo's actual performance versus specific company-wide financial and operational performance goals. As noted above, Mr. Abdoo's goals were weighted 80% financial,10% operational and 10% CVA. Mr. Abdoo's financial goals focused on achievement of target earnings per share. Operational goals were specific to achieving a high level of nuclear safety, generating new revenue from energy and non-energy related sources, staying within a prescribed budget and safety of operations. Ilis CVA goals related to improving i
WE's relationship with its customers, In determining Mr. Abdoo's 1996 STPP award, the committee specifically noted several accomplishments by the CEO during 1996, including (i) his leadership toward promoting continued close control of operating expenditures which has resulted in significant reductions in costs since 1993,(ii) exceeding earnings targets, in part through earnings growth from WE's gas operations,(iii) continued growth of the organization's customer base, (iv) i completion of the purchase of the Milwaukee County Power Plant,(v) successful start-up of a state-of-the art l
Customer Call Center, (vi) implementation of a new, integrated financial system, (vii) his consistent support of equal opportunity, diversity, cross-cultural sensitivity and strong labor-management relationships within WE,(viii) his leadership role and continued visionary efforts to restructure the electric utility industry and (ix) his effectiveness in guiding employees to implement productivity improvements that will enable WE to become the low-cost energy provider in the upper midwest region and in ensuring that the organization and its employees are prepared for the merger of WEC and Northern States Power Company. As noted above, the committee reduced Mr.
Abdoo's award by 12.2% in recognition of the penalties levied by the Nuclear Regulatory Commission and the Wisconsin Department of Justice against Wisconsin Electric.
With respect to the OSIP, in keeping with the Compensation Committee's philosophy as stated above, Mr. Abdoo was awarded stock options and related dividend performance units in 1996 as set forth in the "Long-Term Compensation Awards" column of the Summary Compensation Table to specifically link a portion of his compensation to the achievement of WE's longer term goals. The award of dividend performance units will be paid if total shareholder return (appreciation in the value af WEC common stock plus reirmsted dividends) over a four-year period ending November 26,2000 equals or exceeds the median return earned by the Peer Group, except that there w;ll be no payout if WEC's total shareholder return is negative over the course of such period.
(
The committee also applied subjective judgment in evaluating the relative importance of the factors which were the basis for determining each element of Mr. Abdoo's compensation to precisely determine his salary and aw ards.
Compliance With Tax Regulations Regarding Esecutive Compensation. Section 162(m)of the Internal l
Revenue Code generally disallows a tax deduction to public companies for compensation over $1 million paid to the i
corporation's chief executive officer and the other executive officers named in the Summary Compensation Table.
10
?
l' i
i L
Qualifying performance-based compensation will not be subject to the deduction limit if certain requirements are met. The com'mittee will continue to review these tax regulations as they apply to WE's executive compensation -
program. It is the committee's intent to preserve the deductibility of executive compensation to the exteni reasonably practicable and to the extent consistent with its other compensation objectives..
l Respectfully submitted to WE's stockholders by the Compensation Committee of the Board of Directors.
Robert A. Cornog, Committee Chair s
John F. Ahearne
' John F Bergstrom l
STOCK OWNERSHIP OF DIRECTORS, NOMINEES AND EXECUTIVE OFFICERS j
WE directors, nominees and executive ofTicers as a group (15 persons) do not own any of WE's stock, but do own 85,216 shares of common stock ofits parent company, Wisconsin Energy (less than 1% of total WEC common stock outstanding). The following table lists the beneficial ownership of WEC common stock (including phantom
)
i
, common stock) of each director, nominee and executive officer named in the Summary Compensation Table below, as of February 11,1997. 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 investment Plan and Wisconsin Electric's Employee Savings Plan (" ESP").
i Number of Number of l
Name Shares (1)
Name Shares (1)
Richard A. Abdoo 22,078 Richard R. Grigg 3,605 John F Ahearne 766 Geneva B. Johnson 3,040 l
Calvin H. Ibier 4,309 Kristine M. Krause 4,805 i
W F.ilergstrom 5,522 David K. Porter 10,175 j
Francis Brzezinski 3,260 Frederick P. Stratton, Jr.
6,949 j
Robert A.Cornog 3.514 j
(1) Share units held in the WEC phantom common stock account under WEC's Directors' Deferred Compensation Plan or Executive Deferred Compensation Plan are: Mr. Abdoo (5,334), Mr. Baker (1,157), Mr. Bergstrom (2,522), Mr. Brzezinski (1,053), Mr. Cornog (858), Mr. Grigg (263), Mrs.
Johnson (633), Ms. Krause (173), Mr. Porter (229), and Mr. Stratton (1,249). Share units are intended
-l to reDect the performance of WEC common stock and are payable in cash.
Each person has sole voting and investment power as to all shares listed for such person (other than phantom
" shares) except that the following persons have shared voting and/or investment power as to the indicated number of shares so listed: Mr; Baker (400), Mr. Brzezinski (108), Mr. Stratton (3,300), Ms. Krause (1,333) and all above-(
named directors and ofncers and other executive of0cers as a group (5,589).
Information ott 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 l
purpusca.
RETIREMENT PLANS In 1996, WE maintained 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 11
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 forrhula 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, without any deduction for Social Security or other offset, with a Social Security integrated benefit fonnula based on percentages of final average compensation for up to 30 years of credited service and additional (lower) percentages of compensation in excess of 30 years, up to a maximum of 10 years. 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 j
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 were 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 l
4%.
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 are in no event to receive any less than what would have been provided under the prior formula, had it continued, if they terminate on or before j
January 1,2011, and do not elect to commence benefits before the earlier of age 55 and completion of 10 years' service, or age 65.
All of the individuals listed in the Summary Compensation Table are " grandfathered" under the prior plan benefit formula. Since their estimated benefits under that formula are higher than under the cash balance plan formula, utilizing current assumptions, 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 1996, based on the grandfathered 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
$ 50,000
$ 10,960
$ 14,614
$ 18,267
$ 21,920
$ 24,028
$ 26,136 100,000 23,897 31,862 39,828 47,794 52,339 56,885 l
150,000 36,835 49,114 61,392 73,670 80,653 87,636 200,000 49,772 66,362 82,953 99,544 108,964 118,385
~
250,000 62,708 83,611 104,514 125,417 137,275 149,132 300,000 75,647 100,862 126,078 151,294 165,589 179,385 400,000 101,522 135,362 169,203 203,044 222,214 241,385 500,000 127,397 169,862 212,328 254,794 278,839 302,885 600,000 153,272 204,362 255,453 306,544 335,464 364,385 700,000 179,147 238,862 298,578 358,294 392,089 425,885 800,000 205,022 273,362 341,703 410,044 448,714 487,385 900,000 230,897 307,862 384,828 461,794 505,339 548,885 1,000,000 256,772 342,362 427,953 513,544 561,964 610,385 1,100,000 282,647 376,862 471,078 565,294 618.589 671,885 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, Grigg, Brzezinski, Ms. Krause, Messrs. Porter and Baker currently have 21,26,7,18,27 and 5 credited years of service, respectively.
12
Other Retirement Benefits. Designated elected officers of WEC and WE participate in the Supplemental Executive Retirement Plan (" SERP"). De 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: (a) 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;(b) 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; and (c) an amount for certain participants equal to the
~
difference between the actual pension benefit payable under the pension retirement plan and what the pension benefit would be if calculated under the prior benefit formula in effect on December 31,1988. 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 WE have entered into agreements with Mr. Abdoo and Mr. Baker, respectively, 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. 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. According to Mr. Baker's agreement, Mr. Baker 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.
ne WEC Amended Non-Qualified Trust, a grantor trust, has been established to fund the SERP, the Executive Deferred Compensation Plan and Mr. Abdoo's and Mr. Baker's agreements. The plans and agreements provide for optional lump sum payments and, in the instance of a change in control, mandatory lump sum payouts without regard to whether the executive's employment has terminated. In each case, the interest rate benchmark fort !a 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.
The SERP, the Executive Deferred Compensation Plan, the Directors' Deferred Compensation Plan, the Amended Non-Qualified Trust and Mr. Abdoo's and Mr. Baker's agreements have each been amended to provide that WEC's proposed merger with NSP will not constitute a change in control under such plans, trust and agreements.
AVAILABILITY OF FORM 10-K A copy (without exhibits) of the Annual Report on Form 10-K for the fiscal year ended December 31,1996 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 Secreury, Ann Marie Brady, 231 West Michigan Street, P. O. Box 2046, Milwaukee, Wisconsin 53201.
13
i WISCONSIN ELECTRIC POWER COMPANY 1996 ANNUAL REPORT TO STOCKIIOLDERS
. ACCOMPANYING INFORMATION STATEMENT TABLE OF CONTENTS ITEM PAGE Business A-2 Market for Common Equity and Related Stockholder Matters A-2 Selected Financial Data A-3 Management's Discussion and Analysis of Financial Condition and Results of Operations A-4 Income Statement A-27 Balance Sheet A-28 Statement of Cash Flows A-30 Capitalization Statement A-31 Common Stock Equity Statement A-32 Notes to Financial Statements A-33 Directors A-46 Executive Officers A-46 i
i A-1
,~._ _
l BUSINESS Wisconsin Electric Power Company (*WE" or " Wisconsin Electric") is an electric, gas and steam utility incorporated in the State of Wisconsin in 1896. Effective January 1,1996, Wisconsin Energy Corporation WE's parent company, merged its wholly owned natural gas utility subsidiary, Wisconsin Natural Gas Company
("WN"), into WE to form a single combined utility subsidiary. Where applicable, references to WE include WN prior to the merger. WE's operations are conducted in the following three business segments.
Electric Operations: The WE electric operations generates, transmits, distributes and sells electric energy in a territory of approximately 12,000 square miles with a population estimated at 2,300,000 in southeastern (includi metropolitan Milwaukee area), east cent al and northern Wisconsin and in the Upper Peninsula of Michigan.
i Gas Operations: The WE gas operations purchases, distributes and sells natural gas to retail customers and transports customer-owned gas in three distinct service areas of about 2,800 square miles in Wisconsin: west and south of the City of Milwaukee, the Appleton area and the Prairie du Chien area. The gas service territory, which has an estimated population of over 1.100,000, is largely within WE's electric service area.
Steam Operations: The WE steam operations distributes and sells steam supplied by its Val'ey and Milwaukee County Power Plants to space heating and processing customers in the metropolitan Milwaukee area.
For additional financial information about business segments, see " Note L - Information by Segments of Business" in the NOTES TO FINANCIAL STATEMENTS.
3 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS i
Cash dividends declared on Wisconsin Electric Power Company's Common Stock during the two most recent fiscal
[
years are set forth below. Dividends were paid to WE's sole common stockholder, WEC.
Total Dividend
- Ouarter L99f2 1925 First
$40,455,444
$30.'08,667 Second 42,478,000 40,455,444 l
Third 42,478,000 40,455,444 Fourth 42,478,000 40,455,444
- Includes dividends paid by Wisconsin Natural Gas Company in 1995.
1
[
L 6
A-2 i
I i
WISCONSIN ELECTRIC POWER COMPANY **
SELECTED FINANCIAL DATA (Thousands of Dollars)
Financial 1996 1995 1994 1993 1992 l
Year Ended December 31 l
Earnings available for
[
common stockholder
$210,112
$239,465
$180,403 *
$187,703
$170,034 Operating revenues Electric
$1,393,270
$1,437,480
$1,403,562
$1,347,844
$1,298,723 Gas 364,875 318,262 324,349 331,301 283,699 Steam 15,675 14,742 14.281 14.090 13.093 Total operating revenues 51,773,820 51,770,484 51,742,192 51,693,235 51,595,515 At December 31 Total assets
$4,507,160
$4,318,924
$4,202,193
$4,078,973
$3,623,838 Long-term debt and preferred stock - redemption required
$1,371,446
$1,325,169
$1,257,776
$1,274,476
$1,280,012 Sales and Customers 1996' 1995 1994 1993 1992 Electr c Megawatt-hours sold 27,560,428 27,283,869 26,911,363 25,685,436 24,747,581 Customers (End ofyear) 968,735 955,616 944,855 932,285 919,466 Gas Therms delivered (Thousands) 936,894 886,729 811,219 809,348 772,036 Customers (End of year) 367,275 357,030 347,080 336,571 327,247 Steam I
Pounds sold (Millions) 2,705 2,532 2,395 2,376 2,284 Customers (End of year) 465 473 471 459 472 QUARTERLY FINANCIAL DATA (Thousands of Dollars)
March June Three Months Ended 1996 1995 1996 1995 Total operating revenues
$495,457
$471,122
$401,686
$405,093 Operating income 85,145 84,572 68,382 72,848 l
Earnings available for common stockholder 61,703 62,121 44,906 51,249 September December Three Months Ended 1996 1995 1996 1935 Total operating revenues
$398,801
$426,413
$477.876
$467,856 Operating income 76,693 80,704 75,624 90,897 Earnings available for common stockholder 52,392 58,679 51,111 67,4!5
. arable because of seasonal and other factors. See MANAGEMENTS Quarterly results ofoperations are not directly e DISCUSSION AND ANALYSIS OF FINANCl EONDITION AND RESULTS OF OPERATIONS.
Earnings and dividends per share are not provided as all of Wisconsin Electric Power Company's ("WE*) common stock is held be Wisconsin Energy Corporation.
{
Includes nonrecurring $73.9 million charge in 1994 ($45 million net of ta4 related to WE's Revitalization program.
" Where applicable, prior year financial and statistical information has been restated to include Wisconsin Natural Gas Company at historical values, A-3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS j
Wisconsin Energy Corporation ("WEC" or the " Company") is a holding company whose principal subsidiary is Wisconsin Electric Power Company ("WE"), an electric, gas and steam utihty. As of December 31,1996, approximately 94% of WEC's consolidated total assets were attributable to WE. The following discussion and
~
analysis of financial condition and results of operations includes both WEC and WE unless otherwise stated.
Winctemdn Electric Revitalization To better position the Company in a changing energy marketplace, WE implemented a revitalization program
(" Revitalization") in 1994 to increase efficiencies and improve customer service by reengineering and restructuring the organization. He new structure consolidated many business functions and simplified work processes. See " Note K Benents Other Than Pensions" in the NOTES TO FINANCIAL' STATEMENTS for additional information.
Mergers,
lWsconsin Natural Gas Companyr On January 1,1996, WEC merged its natural gas utility subsidiary, Wisconsin Natural Gas Company ("WN"), into its electric and steam utility subsidiary, WE, to form a single combined utility subsidiary. The merger, which was part of Revitalization, is expected to improve customer service and reduce operating costs. He accounting treatment for this merger was similar to that which would result from a pooling of e
interests. Where applicable, references to WE include WN's gas operations prior to the merger.
Nm1hern States Power Companyr As previously reported, WEC has entered into an agreement with Northern States Power Company, a Minnesota corporation ("NSP"), which provides for a strategic business combination involving the two companies in a " merger.of-equals" transaction. The future operations and financial position of the Company I
will be significantly affected by the proposed merger. Consummation of the proposed merger is subject to a number of conditions, including obtaining all required regulatory approvals. Additional information concerning such agreement and proposed transaction may be found below under " FACTORS AFFECTING RESULTS OF OPERATIONS - Merger Agreement with Northern States Power Company", and in " Note B - Mergers" -
" DIVIDEND POLICY OF PRIMERGY" in the NOTES TO FINANCIAL STATEMENTS (including unaudited pro forma financial information).
Cmdionary Factors When used in this document, " anticipate", "believe", " estimate", " expect", " objective", " 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 items described below under " FACTORS AFFECTING RESULTS OF OPERATIONS" and below under " CAUTIONARY FACTORS".
RESULTS OF OPERATIONS i
r The following discussion and analysis of the RESULTS OF OPERATIONS does not consider the impact of the proposed rnerger with NSP See " FACTORS AFFECTING RESULTS OF OPERATIONS - Merger Agreement with Northern States Power Company" for information concerning the proposed merger. See " Note L - Information By Segments of Business" in the NOTES TO FINANCIAL STATEMENTS for additional information related to i
WEC's and WE's RESULTS OF OPERATIONS.
l A-4
Earnings 1996 Compared to 1995: During 1996, WEC's consolidated net income and earnings per share of common stock were $218.1 million and $1.97 per share compared to $234.0 million and $2.13 per share during 1995. WE's Net income decreased to $210.1 million in 1996 from approximately $239.5 million in 1995. As described below, WEC's and WE's earnings decreased primarily because 1996 retail electric and gas rate decreases more than offset the favorable impact of increases in electric sales and gas deliveries and decreases in certain Operating Expenses.
2995 Compared to 199f Earnmgs per share of WEC's common stock in 1995 were $2.13 compared with $1.67 per share in 1994, an increase of 27.5%. WEC's Net income increased by approximately $53.2 million and WE's Net Income increased $58.9 million in 1995 compared to 1994. WEC's and WE's earnings during 19% reflect a nonrecurring charge of approximately $73.9 million ($45 million net of tax, or 42 cents per share) associated with WE's Revitalization program.
The 1994 nonrecurring charge primarily included the costs of early retirement and severance packages which were elements of Revitalization. The Company has recovered the 1994 nonrecurring charge in avoided labor costs that would have been charged to Other Operations and Maintenance expense during 19% and 1995.
Excluding the Revitalization charge, WEC's 1995 earnings and earnings per share of common stock were 3.6% and 1.9% greater than 1994 earnings and earnings per share, respectively. WE's 1995 earnings were 6.2% greater than 1994 carnings excluding the Revitalization charge. The increase in WEC's and WE's 1995 earnings primarily reflects higher electric sales and gas deliveries and a decrease in Other Operation and Maintenance expenses.
Electric Revenues, Gross Margins and Sales The table below summarizes Electric Operating Revenues, gross margins, megawatt-hour sales and average electric customers for each of the three years ended December 31,1996.
% Change
% Change 1995 1994 Electric Onerations 1926 1921 to 1996 12.94 to 1995 Electric Gross Margin ($000's)
Operating Revenues Residential
$ 494,142
$ 507,416 (2.6%)
$ 484,627 4.7%
Small Commercial / industrial 421,511 423,039 (0.4%)
406,043 4.2%
Large Commercial / Industrial 383,047 401,794 (4.7%)
398,179 0.9%
Other-Retail / Municipal 56,318 69,318 (18.8%)
69,258 0.1%
Resale-Utilities 26,372 24,811 6.3%
31,295 (20.7%)
Other Operating Revenues 11.880 11.102 7.0%
14.160 (21.6%)
Total Operating Revenues 1,393,270 1,437,480 (3.1%)
1,403,562 2.4%
Fuel & Purchased Power 331.867 345.387 (3.9%)
328.485 5.2%
Gross Margin
$1.061.403 11.092.093 (2.8%)
$ 1.075.077 1.6%
i Sales (Mwh)
Residential 6,998,769 7,042,691 (0.6%)
6,670,081 5.6%
Small Commercial /Industria' 7,204,694 7,047,277 2.2%
6,699,073 5.2%
Large Commercial /Industria; 10,785,505 10,639,782 1.4%
10,471,869 1.6%
Other-Retail / Municipal 1,476,999 1,550,937 (4.8%)
1,603,741 (3.3%)
Resale-Utilities 1.094.461 1.003.182 9.1%
1.466.599 (31.6%)
Total Electric Sales 27.560.428 27.283.869 1.0%
26.911.363 1.4%
A-$
% Change
% Change 1995 1994 Electric Ooerations (cont'd) 1296 1921 to 1996 j.294 to 1995 Average Customers Residential 867,917 857,924 1.2%
846,745 1.3%
Small Commercial / Industrial 91,565 90,386 1.3%
88,765 1.8% ~
Large Commercial / Industrial 706 6 /9 4.0%
674 0.7%
Other-Retail / Municipal 1,812 1,809 0.2%
1,802 0.4%
Resale-Utilities 20 12 66.7 %
9 33.3 %
Total Average Customers 2b2.020 21(L810 1.2%
937,995 1.4%
1996 Compared to 1995: Primarily as a result of annualized electric retail rate decreases effective January 1,1996 of approximately $33.4 million or 2.8% in Wisconsin and $1.1 million or 3.3% in Michigan, total Electric Operating Revenues decreased by 3.1% or $44.2 million during 1996 compared to 1995. Also contributing to the 1996 decrease in Electric Operating Revenues were the effects of renegotiated contracts with various wholesale customers and with the Empire and Tilden iron ore mines (the " Mines"), WE's two largest retail customers, as well as continued reductions in sales to Wisconsin Public Power Inc. SYSTEM ("WPPl") and Upper Peninsula Power Company (*UPPCo"), WE's largest municipal and utility customer, respectively. He renegotiated wholesale and mine contracts contain discounts from previous rates charged to these customers in exchange for contract extensions.
- A 1.0% 1996 increase in total electric kilowatt-hour sales was not sufficient to offset the impact on Electric Operating Revenues of the rate decreases, the renegotiated contracts and the reduced sales to WPPI and UPPCo.
Between the comparative periods, the gross margin on Electric Operating Revenues (Electric Operating Revenues less Fuel and Purchased Power expenses) decreased 2.8% or by approximately $30.7 million. He lower 1996 Electric Operating Revenues more than offset the lower net 1996 Fuel and Purchased Power expenses. Fuel expenses declined 2.6% in 1996 primarily due to lower average coal costs per ton consumed. Between the comparative periods, Purchased Power expense lecreased 13.4% as WE substituted lower cost generation for power purchases.
Residential sales declined 0.6%, but Small Commercial / Industrial sales increased 2.2% during 1996 compared to 1995. A decrease in the average electric usage per Residential customer as a result of cooler weather during the summer of 1996 compared to the summer of 1995 was partially offset by the effect of a 1.2% increase in the average number of Residential customers during 1996. Average usage per Small Commercial / Industrial customer in 1996 was flat compared to 1995. However, a 1996 increase in the average number of Small Commercial / Industrial customers caused the increase in electric sales to this customer class.
Electric energy sales to the Mines increased by 3.2% to approximately 2,369.000 megawatt-hours in 1996 compared to 2,2%,000 megawatt-hours in 1995. Excluding the Mines, sales to Large Commercial / Industrial customers increased 0.9% between the comparative periods, ne 4.8% decrease in 1996 sales to the Other-Retail / Municipal customer class compared to 1995 is largely due to the reduction in sales to WPPI noted above. WPPI has been reducing its purchases from WE subsequent to acquiring generating capacity and expanding use of its existing generating facilities.
Sales of electric energy to other utilities (the Resale-Utilities customer class), representing 4.0% of total 1996 electric energy sales, increased 9.1 % from 1995 to 1996. This increase is attributed in part to increased availability during 1996 of WE's lowett cost generating units compared to 1995 and to greater native load demand as a result of the hot weather during the summer of 1995, allowing for higher opportunity sales by WE to other utilities in 1996. During -
~
1996, a continued reduction in purchases of electricity by UPPCo somewhat offset the increase in resale sales to other utili*ies during 1996. WE expects UPPCo to significantly reduce its purchases of electric energy from WE when a 65 megawatt ("MW") agreement with WE expires at the end of 1997.
A-6
4 1995 Compared to 199ft Despite an annualized $16.2 million or 1.3% Wisconsin retail electric fuel adjustment rate decrea'se that became effective on Augast 4,1994, total Electric Operating Revenues increased by 2.4% or by $33.9 million from 1994 to 1995 due to increased 1995 electric sales.
He gross margin on Electric Operating Revenues increased by 1.6% or $17.0 million in 1995 compared to 1994.
ne gross margin grew because the increased electric sales were primarily to Residential and Small Commercial / Industrial customers who contribute higher margins to earnings than other customer classes. During 1995, Fuel expense increased 6.2% or by approximately $17.7 million in 1995 compared to 1994 as a result of higher electric sales. Purchased Power expense declined 1.9% or by approximately $0.8 million in 1995 compared to 1994 as a result of decreased marginal generating costs in 1995 at three of WE's fossil plants and the newly installed '
peaking capacity at Paris Generating Station (" Paris"). lower generating costs at the fossil plants were due to ~
decreased per unit fuel costs and the benefits of Revitalization, allowing WE to substitute lower cost generation for power purchases. The addition of Paris, a natural gas fired peaking unit, in 1995 allowed WE to eliminate firm power purchase contracts that included fixed demand charges. Unscheduled or longer than expected outages in 1995 at two of WE's most efficient power plants, however, offset most of the decrease in Purchased Power expense as WE purchased nonfirm replacement power on the spot market.
Total electric sales increased by 1.4% in 1995 compared to 1994. Electric sales were positively impacted by substantially warmer summer weather conditions during 1995, resulting in increased use of electricity for air conditioning and other cooling purposes. As measured by cooling degree days, the 1995 cooling season (June through August) was 27.7% warmer than the same period in 1994. During the summer of 1995, WE experienced eight days of electric peak demands greater than the previous record which had been set in June 1994. The increase in electric sales also reflects colder winter weather during the fourth quarter of 1995 and a moderate increase in economic activity in WE's service area.
The warmer 1995 summer weather increased sales primarily to Residential and Small Commercial / Industrial customers. These customers are more sensitive to weather variations than other customer classes. The average number of customers in the Residential and Small Commercial / Industrial customer classes increased by 1.3% and' l.8%, respectively, from 1994 to 1995.
Electric energy sales to the Mines decreased by 0.5% to 2,2%,000 megawatt-hours in 1995 compared to 2,308,000 megawatt-hours in 1994. Excluding the Mines, sales to Large Commercial / Industrial customers increased 2.2%.
De 3.3% reduction in sales to the Other-Retail / Municipal customer class in 1995 compared to 1994 is largely the result of reductions in sales to WPPI discussed above. WPPI's sales reductions during 1995 did not have a sigrdficant effect on earnings.
Sale of electric energy to the Resale-Utilities customer class declined 31.6% in 1995 compared to 1994. This decline can in part be attributed to unplanned or longer than expected outages at two of WE's least cost generating facilities during 1995 and to increased retail customer load as a result of the warmer summer of 1995 weather, both of which reduced the opportunity to sell electric energy to other utilities. Also, as noted above, UPPCo reduced the amount of energy that it purchased from WE in 1995. The 1995 sales reductions by UPPCo did not have a significant effect on 1995 carnings.
Gas Revenues, Gross Margins and Therm ikliveries he table below summarizes Gas Operating Revenues, gross margins, therm deliveries and average gas customers for each of the three years ended December 31,1996.
- A-7
i t
k
% Change Gas Onerations
% Change 1995 j
1226 1925 to 1996 i
1994 Gas Gross Margin ($000's) 1991 to 1995 i
Operating Revenues
. Residential Commercial / Industrial
$218,811
$194,226 12.7 %
$200,824 (3.3 %)
Intenuptible 108,100 94,482 14.4 %
102,4 %
(7.8%)
Transported Customer Owned Gas 11,531 7,712 49.5 %
12,605 (38.8%)
Other. Interdepartmental 11,006 12,161 (9.5 %)
11,453 6.2 %.
Other Operating Revenues 3,775 5,834 (35.3%)
2,907 100.7 %
Total Operating Revenues
_ 11.652 3.M7 202.9 %
_ (5.936) (164.8%)
Cost of Gas Sold 364,875 318,262 14.6 %
324,349 (1.9%)
Gross Margin 214.254 188.76_4 24.1 %
J99.511 (5.4 %)
$130.621
$129.498 0.9%
$124.R't8 3.7%
Therms Delivered (000's)
Residential Commercial / Industrial 371,990 345,140 7.8%
E,913 6.6%
laterruptible 225,169 207,358 8.6%
A,206 4.1 %
Transported Customer Owned Gas.
35,869 29,397 22.0 %
36,916 (20.4 %)
Other -Interdepartmental 268,163 261,361 2.6%.
235,850 10.8 %
Total Gas Delivered 35.703 43.473 (17.9%)
. 15.334 183.5 %
2)QJai
$34J22 5.7%
Average Customers H11JJ2 9.3 %
Residential Commercial / Industrial 330,153 321,643 2.7%
311,288 3.3%
Interruptible 29,930 29,228 2.4%
28,439 2.8 %
Transportation 1%
203 (3.5 %)
198 2.5%
Other -Interdepartmental 230 209 10.1 %
Total Average Customers 8
202 3.5%
R 0.0%
3,60 3,
?,JL221 2.6%
7 14.3 %
19% Comparedto 1995:
3:1QJJ;1 3.3%
January 1,1996, total Gas Operating Revenues increased 14 6% o Operating Revenues (Gas Operating Revenues less Cost of Gas Sold) incr ase effective
. million and the gross margin on Gas decrease on Gas Operating Revenues and on gross margincomp an offset the impact of the rate Gross margin was higher in 1996 because the increased therm deliveries of Gas Sold increased 24.1% or by approximately $45.5 m er customer classes. The change in Cost unit cost of purchased gas and to a higher volume of gas purchases in 1996 mpared to 1995 due to a higher 1996 per contracts with terms of various lengths. Changes in the cost of natural gas purch. W customer rates through the purchased gas adjustment mechanism and do not aff tas ec gross margin.
increase in therm deliveries, Residential and Commercial /
9 compared to 1995. Of this n
17,811,000 therms, respectively, in 1996. These increases are attributed ies increase days,1996 was 9.3% colder than 1995 and 6.0% colder than
. s measured by heating degree Residential and Commercial /Industri:.1 customers increased by 2 7% and 2 4 %u
, respectively, compared to 1995.
A8
Other-f aterdepanmental therm deliveries decreased 17.9% or by 7,770,000 therms during 1996 compared to 1995.
These therm deliveries to WE electric generating facilities, primarily the natural gas fired peaking units at the Paris and Concord Generating Stations (" Concord"), are at rates approved by the Public Service Corranission of Wisconsin
("PSCW"). Therm deliveries to these customers decreased in 1996 as a result of the cooler 1996 summer weather discussed above in " Electric Revenues, Gross Margins and Sales".
1995 Compared to 1994: Despite an increase in 1995 total gas deliveries, total Gas Operating Revenues decreased 1.9% or by approximately $6.1 million in 1995 compared to 1994 as a result of a reduction in the cost of gas, which is recovered in Gas Operating Revenues through the purchased gas adjustment clause. The gross margin on Gas Operating Revenues (Gas Operating Revenues less Cost of Gas Sold) increased 3.7% or by approxiraately $4.7 million in 1995 compared to 1994. 'Ihe gross margin was higher because ofincreased therm sales to Residential and Commercial customers who contribute higher margins to earnigs than other customer classes. A decrease in the average per unit cost of purchased gas during 1995 more than offset the effect of the increase in thenn deliveries such that Cost of Gas Sold decreased 5.4% or by $10.7 million compared to 1994.
Total natural gas therms delivered increased 9.3% or by 75.510,000 therms between the comparative periods.
Colder weather during the fourth quarter of 1995 compared to the fourth quarter of 1994 contributed to net increased deliveries for 1995. As measured by heating degree days, the fourth quarter of 1995 was 43.1% colder than the same period in 1994. The colder weather in the founh quarter of 1995 especially increased sales to Residential and Commercial customers. These customers are more t.ensitive to weather variations as a result of heating requirements than other customer classes. Also, the average number of Residential and Commercial /Imbstrial customers increased by 3.3% and 2.8%, respectively, in 1995 compared to 1994.
During 1995, Other-Interdepanmental therm deliveries increased 183.5% or by 28,139,000 thenns compared to 1994. WE attributes this increase to increased electric generation peaking requirements of Concord and Paris, especially given the warmer weather conditions during the summer of 1995 noted above. All of the gas fired generating units at Concord and Paris were in operation by the end of the second quarter of 1995 while only the generating units at Concord were in operation by the end of the second quarter of 1994.
Operating Expenses 1996 Compared to 1995: Other Operation Expenses decreased 0.9% or by $3.7 millica during 1996 compared to
)
1995, primarily due to lower capitalized conservation, propeny insurance and pension and benefit expenses, partially offset by increased uncollectible expenses. Maintenanz expet.a decreased 8.3% or by approximately $9.4 million in 1996 compared to 1995, primarily as a result of a decrease in costs associated with maintenance of WE's fossil power i
plants. WE attributes the decrease in maintenance to an extended outage at WE's Pleasant Prairie Power Plant in 1995 as well as to continued effons to reduce operating and maintenance costs. Depreciation expense increased 10.3 % or by $18.9 million between the same comparative periods primarily due to increased nuclear decommissioning expenses and to a lesser extent to higher &preciable plant balances in 1996.
During 1996, Operating Taxes Other Than income Taxes increased 4.1 % or by $3.1 million compared to 1995 due to tax adjustments related to prior periods. Total operating income taxes decreased 10.2% or by $14.4 million in 1996 compared to 1995 as a result of lower taxable income.
1995 Comparrd to 1994r Excluding Depreciation expense, operating income taxes and the nonrecurring 1994 Revitalization charge, total Operating Expenses decreased 0.9% in 1995 compared to 1994, reflecting a reduction of 3.1% or approximately $16 million in Other Operation and Maintenance expenses primarily attributable to payroll-related savings and efficiencies gained through WE's Revitalization program. Such reductions were panially offset by higher costs related to increased generation, the availability of Paris and unscheduled or longer than expected outages at WE power plants.
In 1995 compared to 1994, total operating income taxes increased 41.4 % or by $41 million due to lower taxable income in 1994 caused by the nonrecurring Revitalization charge. Deferred income Taxes-Net increased $22 million A-9
or 88.7% primarily due to tax matters related to the timing of payments made in connection with WE's Revitalization program.
Other items Excluding the annual $10.9 million impact of a 1996 change in accounting for capitalized conservation expenditures at WE, Miscellaneous Net Other income and Deductions increased $14.9 million in 1996 compared to 1995. The change in accounting more than offset a 1996 inctease in non-utility Miscellaneous-Net Other Income and Deductions of $13.4 million compared to 1995. This $13.4 million increase was primarily due to fair market valuation adjustments of non-utility investments and the gain recorded on sales of non-utility property and investments.
Miscellaneous-Net Other Income and Deductions decreased $9.8 million in 1995 compared to 1994, due in part to fair market valuation adjustments of non-utility investments.
Other Interest Charges decreased by approximately $5.0 million in 1996 compared to 1995 due to decreased average outstanding short-term debt balances during 1996, primarily at WE. Other Interest Charges increased by $4.8 million in 1995 compared to 1994 as a result of ir. creased average short-term debt balances, primarily at WE, in 1995 compared to 1994.
FACTORS AITECTING RESULTS OF OPERATIONS Merger Agreement with Northern States Power Company On April 28,1995, Wisconsin Energy Corporation ("WEC") and Northern States Power Company, a Minnesota corporation ("NSP"), entered into an Agreement and Plan of Merger, which was amended and restated as of July 26, l
1995 (" Merger Agreement"). The Merger Agreement provides for a strategic business combination mvolving WEC and NSP in a
- merger-of-equals" transaction (" Transaction"). As a result, WEC will become a registered public utility holding company under the Public Utility IIolding Company Act of 1935, as amencied ("PUllCA"), and will change its name to Primergy Corporation ("Primergy"). Primergy will be the parent company of WEC's utility subsidiary, Wisconsin Electric Power Company ("WE", which will be renamed Wisconsin Energy Company), of l
NSP (which, for regulatory reasons, will reincorporate in Wisconsin ("New NSP")), and of the other subsidiaries of l
l The Transaction is intended to be tax-free for income tax purposes and to be accounted for as a " pooling of interests" On September 13,1995, the stockholders of WEC and NSP voted to approve the proposed Transaction. Under the provisions of the Merger Agreement, each outstanding share of NSP common stock will be converted into 1.626 shares of Primergy common stock and each outstanding share of WEC common stock will remain outstanding as a share of Primergy common stock.
'Ihe Merger Agreement is subject to various conditions, including approval of various regulatory agencies. The goal of WEC and NSP was to complete the Transaction by January 1,1997. Ilowever, as dig ed below, all necessary regulatory approvals were not obtained by the end of 1996 and, as a result, the Transaction was not completed in 1996. WEC and NSP continue to pursue regulatory approvals, without unacceptable conditions, to facilitate completion of the Transaction as soon as possible in 1997.
Upon consummation of the Transaction, cost savings are estimated to be approximately $2 billion over a 10-year period, net of transaction costs (including fees for financial advisors, attorneys, accountants, consultants, filings and l
l printing) and net of costs to achieve the savings of approximately $30 million and $122 million, respectively. The allocation between WEC and NSP and their customers of the estimated cost savmgs resulting from the Transaction, net of costs incurred to achieve such estimated cost savings, is subject to regulatory review and approval.
WEC and NSP have proposed that, upon consummation of the Transaction, retail electric rates be reduced by approximately 1.5 % and frozen at that level for four years in the jurisdictions in which they operate. WEC and NSP have also proposed a four year freeze in their wholesale electric rates. In December 1995, WEC and NSP entered into a settlement agreement with certain Wisconsin municipal intervenors that ended the latters' participation :n the A-10
l l
Federal Energy Regulatory Commission (*FERC") and state merger proceedings. De settlement agreement, which provides for certain rate reductions on power sales and transmission services, was approved by the FERC in June 1996. For retail gas customers, WE and NSP WI have proposed that Wisconsin Energy Company implement a $4.2 million reduction in retail gas rates on an annualized basis and a four year rate freeze for customers in Wisconsin and Michigan. NSP has proposed a two year gas retail rate freeze in :ts Minnesota jurisdiction and a modest gas retail rate reduction and four year gas retail rate freeze in its North Dakota jurisdiction.
Regulatory authorities may also require the restructuring of electric transmission system operations or administration.
As noted below, WEC and NSP have proposed an Independent System Operator ("lSO") of their electric transmission systems in testimony filed with the FERC and the Public Service Commission of Wis :onsin ("PSCW")
during merger application hearings. WEC and NSP currently cannot predict what, if any, restructuring of the transmission system will be required. In addition, Wisconsin State law limits the total assets of non-utility affiliates of Primergy, which could affect the amount of non-regulated operations.
Securitics and Exchange Commission: In April 1996, WEC and NSP submitted the initial filing with the Securities and Exchange Commission ("SEC") to facilitate registration of Primergy under the PUllCA. Ahhough WEC and NSP are working to avoid divestitures, the SEC could require, as a condition of its approval of the Transaction, that Primergy divest of certain of its gas utility and/or non-regulated operations within a reasonable time after the Transaction is consummated. In a few cases, the SEC has allowed the retention of such properties or deferred the -
question of divestiture for a substantial period of time. In those cases in which divestiture has taken place, the SEC has usually allowed enough time to complete the divestiture so as to allow the applicant to avoid a " fire sale" of the divested assets. ' WEC and NSP believe that strong policy reasons and prior SEC decisions exist which support their retaining their existing gas utility properties and non-utility ventures, or, alternatively, which support deferring the questica of divestiture for a substantial period of time. Accordingly, WEC and NSP requested in their April 1996 merger application with the SEC that WEC and NSP be allowed to retain WEC's and NSP's existing gas utility properties and non-utility ventures.
Federal Energy Regulatory Commission: The FERC held hearings on the merger application in June 1996. Subject to WEC and NSP meeting eight conditions, the administrative law judge ("AU") in the merger proceeding issued an initial decision in August 1996 recommending approval of the Transaction. The AU's initial decision included recommendations for a working ISO and specifically rejected the need for divestiture of any generation or transmission facilities as a requirement for ensuring open and equal access to the transmission system. In October 1996, WEC and NSP Cled with the FERC a Unilateral Settlement Offer of the Primergy Merger Applicants
(" Settlement Offer") setting forth a proposed ISO for Primergy. The Settlement Offer contains all of the elements approptiate to an ISO and addresses all issues and concerns related to transmission " market power".
In mid-December 1996, the FERC revised and streamlined its 30-year-old policy for evaluating public utility mergers, with the changes designed to expedite the processing of merger applications. De new policy primarily focuses on three factors in reviewing mergers: the effect on competition, rates, and state and federal regulation. For
- pending mergers, such as that between WEC and NSP, the policy will be applied on a case-by-case basis. WEC and NSP believe the proposed Transaction is consistent with the FERC's revised merger policy and are hopeful that the FERC will simultaneously rule on the Settlement Offer and the pending merger application in the first quarter of 1997.
Public Service Commission of Wisconsin: In October 1996, the PSCW commenced hearngs on the merger application, which were completed in November 1996.
In late December 1996, two Wisconsin legislators asked the PSCW to delay decisions on all pending utility mergers until the Wisconsin Legislature had an opportunity to consider a bill revising the state's utility merger law, which the two legislators indicated they would introduce. In early January 1997, the PSCW voted unanimously not to delay its decision. Ilowever, later in January 1997, a Dane County Circuit Court judge ordered the PSCW to delay its decision on the application, pending the results of an investigation regarding alleged pmhibited conversations between one of the conunissioners and WEC officials. He judge further ordered the PSCW to investigate the allegations.
A-11
d While WEC cannot predict specifically when the PSCW will resolve the allegations and proceed with deliberations concerning the merger application, the Company is hopeful that such investigation might be completed by early'in the second quarter of 1997.
Minnesota Public Utilities Commissiont in June 1996, the Minnesota Public Utilities Commission (*.MPUC") issued an order which established the procedural framework for the MPUC's consideration of the merger. The issues of merger-related savings, electric rate freeze characteristics,' NSP's pre-merger revenue requirements, Primergy's ability to control the transmission interface between the Mid-Continent Area Power Pool and the Wisconsin and upper Michigan area, and the impact of control of this interface on Minnesota utilities were set for contested case hearings.
The MPUC completed evidentiary hearings on the merger application in December 1996. In January and February
{
1997, Aus in the merger application proceedings issued their findings and recommendations about the Minnesota merger application. Among other items, they found that the projected merger-related cost savings were reasonable, recommended a four-year rate freeze, with very limited exceptions for rate changes and concluded that the merger would not provide Primergy with the ability or incentive to negatively impact competition. The MPUC will consider the Aus' recommendations along with other information when they deliberate and decide the case. In late March 1997, the MPUC indicated that in April 1997 it would decide whether to adopt procedures in connection with its decision on the Transaction that include additional public hearings as well as additional written comments. If additional hearings or written comments are necessary, final deliberations in this matter would be scheduled for late June or early July 1997.
Michigan Public Senice Commission: In April 1996, the Michigan Public Service Commission ("MPSC")
approved the merger application through a settlement agreement containing terms consistent with the merger application.
Noah IAskota Public Smict Commission: In June 1996, the North Dakota Public Service Commission approved the merger application.
Other Federal Agencies: In the fall of 1995, WEC and NSP filed applications with the United States Nuclear Regulatory Commission ("NRC") for license amendments related to the Merger Agreement. The matter is pending.
In 1995, WEC and NSP received a ruling from the United States Internal Revenue Service indicating that the proposed successive merger transactions included in the Merger Agreement would not prevent treatment of the Transaction as a tax-free reorganization under applicable tax law if each transaction independently so qualified. In December 1996, WEC and NSP filed required notifications with the Federal Trade Commission and the United States Department of Justice ("DOJ") under the llart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. In January 1997, the DOJ served a second request for information and documents. WEC and NSP anticipate responding to the second request in March 1997.
Merger Conditions: Under the Merger Agreement, completion of the Transaction is subject to several conditions, including but not limited to the prior receipt of all necessary regulatory approvals without the imposition of materially adverse terms. In addition, both WEC and NSP have the right to terminate the Merger Agreement if the Transaction has not been completed by April 30,1997, except where on such date all necessary statutory approvals and third party consents have not been obtained but all other conditions to closing have been fulfilled or are capable of being fulfilled. - Then the termination date shall be extended to October 31,1997. WEC continues to work with NSP to complete the Transaction and believes that fulfillment of the various conditions to the Transaction within the time frame of the Merger Agreement is achievable.
Additional information with respect to the Merger Agreement and the proposed Transaction, including pro forma combined condensed financial information, may be found in " Note B - Mergers" in the NOTES TO FINANCIAL STATEMENTS.
A-12
l l
l I
Nuclear Matters Point Beach Nuclear Plant WE operates two 500 megawatt electric generating units at Point Beach Nuclear Plant
(* Point Beach"). During 1996 Point Beach accounted for 25.4% of WE's net electric generation. He current operating licenses for le two units at Point Beach expire in 2010 and 2013 for Units 1 and 2, respectively.
As a resuh of degradation of tubes within the Unit 2 steam generators at Point Beach, WE completed replacement of the steam generators in January 1997. He unit had been operating at 90% of its capacity during the operating cycle prior to the Unit 2 fall refueling and steam generator replacement outage, which began in October 1996. Subject to approval by the NRC, WE expects to restart Unit 2 during the second quarter of 1997. Unit I was taken out of service in February 1997 due to equipment problems. Rese problems and other emergent issues associated with this Unit i outage were resolved and Unit I was scheduled to return to service in March 1997. Unit I had been scheduled to be taken out of service again in early May 1997 to begin an extended refueling outage. In March 1997, WE reevaluated its generating unit outage schedule scenarios to optimize the availability of supply resources and has decided to return Unit I to service in early summer 1997, with the refueling outage currently scheduled to occur from September through October 1997. This decision allows Point Beach staff to focus their attention on the work necessary to bring Unit 2 back into service and, secondarily, to allow Unit I to be in service during the 1997 summer peak demand months. See " FACTORS AFFECTING RESULTS OF OPERATIONS - Rates and Regulatory Information" below for information about a related emergency fuel rate increase request filed with the PSCW in the first quarter of 1997.
WE anticipates additional power purchases during 1997, in part due to the extended outages of Point Beach Units 1 and 2. The cost of these additional power purchases are included in the emergency fuel rate increase request filed with the PSCW as noted above.
WE completed construction of an Independent Spent Fuct Storage Installation ("lSFSI") in 1995 for dry storage of spent fuel from Point Beach. He ISFSI was necessary because the spent fuel pool inside the plant is nearly full.
Two storage casks have been loaded with spent fuel and transferred to the ISFSI. As a result of a hydrogen gas ignition during loading of a third cask in May 1996, cask loading has been halted until actions are implemented to prevent recurrence of such an event and until the NRC has reviewed and accepted these actions. WE hopes to resume loading of the casks in the summer of 1997.
In December 1996, WE paid the NRC $325,000 in civil penalties for performance deficiencies and violations of NRC requirements in various plant activities. In January 1997, the NRC informed WE of additional potential violations observed during a special inspection that could result in further civil penalties. Also, the NRC sent a letter on January 27,1997 notifying WE of a declining trend in performance at Point Beach based upon these inspections and other ongoing regulatory interactions. He NRC issues trend letters to provide early notification of declining performance and to allow a utility, under the watchfulness of the NRC, to take early corrective actions. The NRC acknowledged in the letter that WE has made improvements in the identification and resolution of specific problems.
See " Note F - Nuclear Operations" in the NOTES TO FINANCIAL STATEMENTS for further information related to Point Beach, the Unit 2 steam generator replacement, the ISFSI and NRC matters. See " LIQUIDITY AND CAPITAL RESOURCES - Investing Activities" below for additional information about the Unit 2 steam generator replacement project.
Spent Furt Storuge and Disposal: As noted in the preceding section, WE constructed the ISFSI because its spent fuel pool within Point Beach is nearly full. Without NRC agreement that WE may resume loading of storage casks, the pool for spent fuel will be full by 1998. With NRC agreement to resume loading spent fuel, WE will load up to a total of 12 casks, providing sufficient storage capacity for spent fuel until the year 2000. WE plans to file an
[
application with the PSCW later in 1997 for approval to load by the year 2000 further storage casks in addition to the 12 that were previously appmved.
f A-13 b
\\
The temporary dry storage facilities at Point Beach are being used until the United States Department of Energy
(" DOE") takes ownership of and permanently removes the spent fuel under a contract mandated by the Nuclear.
Waste Policy Act of 1982, as amended in 1987 (" Waste Act"). In July 1996, the United States Coun of Appeals for the District of Columbia circuit ruled that the DOE has an unconditional obligation under the Waste Act to begin accepting spent fuel by January 31,1998. Ilowever, in December 1996, the DOE notified owners of commercial nuclear plants that it will not be able to meet its statutory obligation. The DOE has indicated that it does not expect a permanent spent fuel repository to be available until at least 2010. On January 31,1997, numerous electric utilities filed a petition in the Court of Appeals for review of the DOE's failure to meet its statutory obligation and requested, among other things, authority to withhold payments to the DOE for the permanent disposal program until it begins accepting their spent fuel. While WE was not a party to the petition, the PSCW has joined other public utility commissions and states in a similar petition filed on the same day. At this time, WE is unable to predict when the DOE will actually begin accepting spent fuel. Until such time, WE expects to continue to rely on temporary dry storage of its spent nuclear fuel. As another potential temporary storage option, WE is participating with a consortium of electric utilities to establish a private facility for interim storage of spent nuclear fuel. However, the availability of this private facility is uncenain at this time.
Industry Restructuring and Competition The electric industry continues a trend towards restructuring and increased competition, driven by a combination of market forces, regulatory and legislative initiatives and technological changes. To date, competitive pressures have been most prominent in the wholesale power market, but are expected to continue to develop in the electric retail markets. Currently proposed federal legislation targets electric retail customer choice by the years 2000 through 2003. Present regulatory restructuring initiatives in various midwestern states target electric retail customer choice by the years 2000 through 2005 While the Company cannot predict the ultimate timing or impact of a restructured electric industry, WE has been advocating restructuring of the electric utility industry and believes that as a low-cost j
energy provider, it is well positioned to benefit from such changes. Among others, the following electric and gas industry restructuring initiatives are underway in regulatory jurisdictions where WE currently does business.
PSCW Electric Utility Industry Inrestigationr The PSCW has conducted an investigation into the electric utility industry in Wisconsin, particularly its institutional structure and regulatory regime, in order to evaluate what changes would be beneficial for Wisconsin. In December 1995, the PSCW decided the general direction of utility regulation in Wisconsin. This proposed restructuring of the industry would permit all consumers to choose their electricity provider by the year 2001 and it would establish a competitive generation business. The transmission and distribution functions would remain regulated. In a February 1996 report to the Wisconsin legislature, the PSCW identified a 32 step workplan that it would follow for electric utility restructuring m Wisconsin. During 1996, the PSCW opened dockets on six of these steps including:
Required utilitics to file plans to functionally segment the business into generation, transmission, distribution and customer service operations. Comments were filed on the plans and a technical conference will be held in early 1997.
Requested utilities and other interested parties to file comments on the adoption of affiliated interest standards to prevent unfair competition and cross-subsidization between affiliated businesses. The PSCW staff will prepare an initial proposal for comment in the spring of 1997 to be followed by hearings and miemaking proceedings in the fourth quarter of 1997 j
i Evaluated w hether a public benefits policy advisory board should be created to carry out pclicies to continue l
l programs, such as conservation and low-income energy assistance which are best handled by a government agency as competition is introduced into the industry. Meetings were held throughout 1996 to discuss recommendations for action. These recommendations formed a report that wdl serve as the basis for public meetings in early 1997. The PSCW is expected to make decisions in April 1997 which will most likely require significant legislation.
A-14
I Evaluated what quality of service standards and mechanisms for measuring and monitoring service quality e
.should be established. Utilities and other interested parties were requested to comment on ways to generally improve service rules before moving to a restructured industry. A rulemaking hearing is planned for early 1997. The PSCW is expected to issue an order on service quality for legislative review after the hearings.
Examined the introduction of an ISO in the state of Wisconsin that effectively separates control and operation of the transmission system from the ownership of generation. At the request of the PSCW, WE, along with four other utilities (including NSP) submitted a joint proposal in May 1996 for an ISO that would have the responsibility for ensuring transmission service in the state will be conducted fairly and equitably for all parties.
Bree other proposals were also filed. In September 1996, the PSCW issued an order setting forth principles for an acceptable ISO ("lSO Order"). Among the principles are that the ISO would operate the transmission system, be governed by a Board of Directors not subject to control by transmission owners and be the principal transmission planner. He PSCW indicated that the preferred method of transfer of authority to the ISO is a contract with a minimum length of five years. The PSCW has indicated that it will consider the principles contained in its ISO Order as deliberations are held on the Prizr :rgy merger application. As part of the ?SCW merger proceeding, WEC and NSP proposed an ISO consistent with the ISO proposal filed with the FERC in -
the Settlement Offer discussed above., See " FACTORS AFFECTING RESULTS OF OPERATIONS - Merger Agreement with Northern States Power Company" above for further information about the proposed merger.
MPSC Electric Utility industry Investigation: In December 1996, the staff of the MPSC issued a proposal to restructure that state's electric utility industry. If adopted, the plan would allow all consumers to be able to choose their electric supplier by the year 2004. The proposal supports development of a lower Michigan ISO using FERC principles to ensure non-discriminatory access arxl continued reliability. The Michigan ISO could later be involved with a regional ISO if determined to provide substantive benefit to Michigan customers. Based upon comments received in January 1997, the MPSC has reque sted further input on several implementation issues and will hold additional public hearings in March and April 1997.
Midwest ISO: WE is one of twenty-five utilities who are participating in the formation of a Midwest ISO which would be responsible for ensuring nondiscriminatory open transmission service access and the planning and security of the combined bulk transmission systems of the utilities. These utilities are all transmission facility owners within the East Central Area Reliability Council ("ECAR") or the Mid-America Interconnected Network (" MAIN"). In its Wisconsin statewide ISO Order, the PSCW did not specifically address how the Wisconsin ISO might be merged into the regional Midwest ISO once it was formed. Plans for the Midwest ISO are expected to be filed with the FERC in the summer of 1997 and would be implemented in stages after acceptance by the FERC.
FERC Open Access Transmission Rating: As a result of the Energy Policy Act of 1992, the FERC issued in April 1996 two orders relating to open access transmission service, stranded costs, standards of conduct and open access same-time information systems. The ruling is intended to create a more competitive wholesale electric power i
market.
The first order, Order No. 888, requires public utilities owning, controlling or operating transmission lines to file non-discriminatory open access tariffs that offer others the same transmission service provided to themselves and requires the use of the tariffs for their own wholesale energy sales and purchases. Order No. 888 also provides for the full recovery of " stranded costs" that were prudently incurred to serve power customers and that could go unrecovered if wholesale customers use open access to move to another electric energy supplier. In July 1996, WE submitted to the FERC r, transmission tariff in connection with Order No. 888. WE's filing includes terms and conditions of network transmission service and point-to-point transmission senice, including ancillary services. The rate related aspects of the tariff were accepted by the FERC in a June 1996 settlement agreement regarding WE's preexisting transmission service tariffs. All other aspects of the tariff followed the FERC pro-forma tariff and were accepted by the FERC.
He second order, Order No. 889, works to ensure that transmission owners and their affiliates do not have an unfair competitive advantage in using transmission to sell power. Order No. 889 establishes standards of conduct and A 15 P
l
?
i I
requires that a public utility's merchant function rely on the same electronic information network that its transmission customers rely on to obtain information about its transmission system v hen buying or selling power. -
i On March 3,1997, the FERC reafGrmed and clarined these orders with the issuance of Order No. 888a.
WE has advocated open access to transmission facilities as a necessary step in the competitive restructurmg of the electric utility industry and does not believe that the ruling by the FERC will have a detrimental effect on its financial position or results of operations. The open access transtnission orders became effective in mid-1996.
In its open access transmission ruling, the FERC encouraged utilities to consider ISOs such as the Wisconsin statewide and Midwest ISOs noted above as a tool to meet the demands of a competitive market for electric energy, I
Wholesale Cornpetition: Wholesale sales of electric energy accounted for 5.0%,5.6% and 6.2% of WE's total Electric Operating Revenues in 1996,1995 and 1994, respectively. WE attributes the decrease over this three year j
period in part to the increasingly competitive market for electric wholesale customers. In response to competition, WE renegotiated long-term power sales contracts with its municipal and rural electric cooperative wholesale
)
customers duri.ng 1995 and 1996. De renegotiated contracts contain discounts from previous rates charged to these
]
customers in exchange for contract extensions. Two wholesale customers, representing 24 MW, chose to obtain their power supplies from other suppliers, with their contracts phasing out between 1997 and 1998. As a result of the renegotiated and bst contracts, WE anticipates that electric wholesale revenues will continue to decrease slightly in 1997 and 1998.- WE expects to continue to provide transmission service to the customers who did not renew their Contracts.
PSCWNatural Gas Utility Industry I,rvestigation: De PSCW continued a generic investigation of the natural gas industry in Wisconsin and addressed the extent to which traditional regulation should be replaced with a different approach. In response to a November 1996 PSCW order, WE will file a revised gas cost recovery mechanism
("GCRM") by July 1,1997. In accordance with that order, GCRMs must either be an incentive type or modified dollar-for-dol:ar type, both of which will include after-the-fact prudence reviews by the PSCW. After WE files and receives PSCW approval for the new GCRM, WE will be able to assess the level of risk. The Company does not expect that a major portion of gas costs that are currently passed through to customers will be subject to risk under any GCRM that will be filed later this year.
The PSCW has also issued Standards of Conduct applicable to opportunity sales. Opponunity sales are described as time sales of underutilized capacity and supply entitlements that become periodically available because of the variable daily and seasonal needs of customers. Dese Standards of Conduct are intended to ensure that all interested market participants have an opponunity to purchase released capacity and supply and that the releasing tr.ility receives the highest price for the sale, given the specific circumstances. Additional restrictions become applicable if a gas utility has a marketing affiliate.
Electric Sales and Gas Deliveries Outlook Assuming moderate growth in the economy of its service territory and nonnal weather, WE presently anticipates total electric kilowatt-hour sales to grow at a compound annual rate of approximately 2.1% over the five year period ending December 31,2001. WE forecasts total therm deliveries of natural gas to grow at a compound annual rate of approximately 1.9% over the same five-year period. These forecasts are subject to a number of variables, including among others the economy, weather and the restmcruting of the electric and gas utility industries, which may affect the actual growth in sales. Dese estimates do not reflect the operations of NSP, which will become a part of
{
Primergy after consununation of the Transaction. See " FACTORS AFFECTING RESULTS OF OPERATIONS -'
Merger Agreement with Nonhern States Power Company" above.
I New Gas Service Proposal: On February 14,1997, WE filed revised plans with the PSCW to expand natural gas service to more than 4,800 potential customers in northeastern Wisconsin. De project will involve the installation of more than 350 miles of new gas main and is one of the largest proposed new franchise territory expansion efforts in A 16
e recent Wisconsin history. Wisconsin Public Service Corporation ("WPS"), an unaffiliated investor-owned utility in Grecri Bay, Wisconsin, filed a competing application to serve a portion of the area for which WE originally filed.
WE and WPS have reached an agreement that resolves which company will serve in areas that both companies initially filed to serve. A number of approvals must be granted before the project can continue, including receivin approval from the PSCW. The Wisconsin Propane Gas Association has intervened in the case and has requeste the PSCW hold a hearing. He hearing is scheduled for April 1997. Once all approvals are received, WE expects to begin contacting potential customers in the second half of 1997.
Pmposed Arquisition of ESELCO, Inc.r ESElIO, Inc., parent company of Edison Sault Electric Company
(" Edison Sault), and WEC announced on March 25,1997, that they had entered into a letter of intent setting forth the preliminary terms of the potential acquisition of ESELCO, Inc. by WEC. All outstanding shares of ESELCO, Inc. common stock would be converted into shares of WEC common stock based on a value of $44 of ESElf0, Inc. common stock in a transaction proposed to be structured as a tax-free reorganization and accounted for as a pooling of interests. He total purchase price would be approximately 571 million. The exact number of shares of WEC common stock to be issued in the transaction would be determined by dividing $44.50 by the average closing prices of WEC common stock during a specified period prior to closing.
Cor. summation of the proposed transaction is contingent upon several conditions including the negotiation and execution of a definitive agreement, approval by the Boards of Directors of both companies and the shareholders of ESELCO, Inc., receipt of all appropriate regulatory approvals, the effectiveness of a registration statement to be filed with the Securities and Exchange Commission covering the WEC shares to be issued in the trar'saction and other customary conditions. There can be no assurance as to the final terms of the proposed transaction, or that tne conditions will be satisfied, or that the proposed transaction will be consummated.
Edison Sault is an electric utility which serves approximately 22,000 residential, commercial and industrial customers located in Michigan's eastern Upper Peninsula. ESELCO, Inc. is traded under the symbol EDSE on the NASDAQ National Maiket.
Effects of Weather By the nature of its utility business segmen*s, WEC's and WE's earnings are sensitive to weather variations from period to period. Variations in winter weather affect heating load for both the gas and electric utility. Variations in summer weather affect cooling load for the electric utility as well as therm deliveries to gas fired electric generating customers. The table below summarizes weather in WE's service territory as measured by degree days for each of the three years ended December 31,1996.
I
% Change
% Change 1995 1994 Ikgree Days 1926 1925 to 1996 1994 to 1995 Ileating (7,049 Normal) 7,469 6,833 9.3%
6,431 6.3 %
Cooling (668 Normal) 608 952 (36.1%)
877 8.6%
l Effects of Inflation With expectations of low-to-moderate inflation, the Company does not believe the impact of inflation will have a j
material cffect on its future results of operations.
A-17
7-Rates and Regulatory Matters The table below summarizes the projected annual revenue impact of recent rate changes authorized by regulatory commissions for the electric, natural gas and steam utilities of the Company based on the sales projections utilized by those commissions in setting rates. The PSCW regulates Wisconsin retail electric, steam and natural gas rates, while the FERC regulates wholesale power and electric transmission and gas transportation service rates. The MPSC regulates retail electric rates in Michigan.
The PSCW has discontinued the practice of conducting annual rate case proceedings, replacing it with a new schedule which calls for future rate cases to be conducted once every two years. In support of its goal to become the lowest-cost energy provider in the region and in light of the operating cost reductions expected from Revitalization discussed above, WE did not seek an increase in rates for 1994 or 1995. Discussion of rate changes for the 1997 and 1996 test years follow the table.
Revenue Percent Increase Change Service (Decrease) m Rates Effective Date (Millions)
(%)
Retail electric, WI
$ (7.4)
(0.6) 02/18/97 Retail gas (6.4)
(2.0) 02/18/97 Steam heating 0.1
.5 02/18/97 Retail electric, WI (33.4)
(2.8) 01/01/ %
Retail electric, MI (1.1)
(3.3) 01/01/ %
Retail gas (8.3)
(2.6) 01/01/ %
Steam heating (0.8)
(5.1) 01/01/ %
Fuel electric, WI (16.2)*
(1.3) 08/04/94
- 'Ihe 8/4/94 fuel credit was climinated 1/1/% by PSCW Order.
Under the Wisconsin retail electric fuel cost adjustment procedure, retail electric rates may be adjusted, on a 1
prospective basis, if cumulative fuel and purchasea power costs, when compared to the costs projected in the retail l
electric rate proceeding, deviate from a prescribed range and are expected to continue to be above or below that range.
Due to extended outages at Point Beach and the Oak Creek Power Plant, WE has incurred and will continue to incur increased fuel costs beyond those reflected in its electric rates. In February 1997, WE filed with the PSCW a request for an increase in its electric rates to cover the increased fuel costs. The filing was made under the PSCW special rules governing fuel cost increases. Under tnese rules, a utility may, if allowed by the PSCW, recover a portion of the fuel cost increase. The projected fuel cost increase for WE is estimated at about $67 million of which $53 million j
i is allocated to the Wisconsin jurisdiction. The portion of the $53 million which WE may be allowed to recover could depend upon the timing and nature of the PSCW order. It is expected that WE's rate increase request will be contested.
In December 1995, the MPSC approved the suspemion of the Power Supply Cost Recovery Clause (fuel adjustment procedure) for a five-year period for Michigan retail electric customers. In the case of natural gas costs, differences between the test year estimate and the actual cost of purchased gas are accounted for through a purchased gas adjustment clause, 1997 Test Year: In an order dated February 13,1997, the PSCW directed WE to implement rate decreases for Wisconsin retail electric and gas customers of $7.4 million or 0.6% and $6.4 million or 2.0%, respectively, on an annualized basis, and a steam rate increase of $0.1 million or 0.5% on an annualized basis. The order is effective February 18,1997 and is based on a regulatory return on common equity of 11.8%, up from 11.3 % authorized since A-18
\\
January 1,1996. The PSCW had determined that it required a special full review of WE's rates for the 1997 test year in connection with consideration of the application for approval of the proposed merger of WEC and NSP.
1996 Test Yearr in a letter order dated September 11,1995, the PSCW directed WE to implement rate decreases for Wisconsin retail electric, gas and steam customers of $33.4 million or 2.8%, $8.3 million or 2.6% and $0.8 million or 5.1 %, respectively, on an annualized basis effective January 1,1996. The order is based on a regulatory return on common equity of 11.3 %, down from 12.3 % authorized since 1993, Also effective January 1,1996, the MPSC authorized WE to implement a rate decrease for Michigan non-mine retail electric customers of SL1 million or 3.3%
on an annualized basis.
Neither the 1997 nor 1996 Test Year changes reflect the proposed retail electric and gas rate reductions and freezes nor the wholesale rate reductions and freezes related to the proposed merger with NSP. See " FACTORS AFFECTING RESULTS OF OPERATIONS - Merger Agreement with Northern States Power Company" above for a separate discussion of rate actions related to the proposed Transaction.
Regulatory Accountingr WEC's principal subsidiary, WE, operates under electric utility rates which are subject to the approval of the PSCW, MPSC and FERC, and natural gas and steam utility rates that are subject to the approval of the PSCW (see " Rates and Regulatory Matters" above). Such rates 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 rates 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 may no longer be appropriate as allowed under Statement of Financial Accounting Standards No. 71, Accounting for the Effects of Certain Types of Regulation. At this time, WEC is unable to predict whether any adjustments to regulatory assets and liabilities will occur in the future. See " Note A - Summary of Significant Accounting Policies" in the NOTES TO FINANCIAL STATEMENTS for additional information.
New Accounting Pronounecments in 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No.121, Accounting for the Impairment of long-Lived Assets ("FAS 121") and Statement of Financial Accounting Standards No.123, Accounting for Stock-Based Compensation ("FAS 123"). FAS 121 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. FAS 123 establishes reporting standards and an optional accounting method for stock-based employee compensation plans. The Company adopted both standards prospectively in 1996. Adoption did not have a material effect on the Company's net income or financial position.
In February 1996, FASB released for comment an exposure draft of a Proposed Statement of Financial Accounting Standards, Accounting for Certain Liabilities Related to Closure or Removtl of long-Lived Assets (" Proposed FAS"). The Proposed FAS, ifissued, would require WE to recognize as a liability the present value of the estimated future total costs associated with closure or removal of certain long-lived assets and to correspondingly capitalize those costs. The capitalized costs would be depreciated to expense over the useful life of the asset. The proposed statement would become effective in 1998. This Proposed FAS would apply to decommissioning costs for Point Beach and would result in WE recording a decommissioning liability and corresponding asset as required by the pronouncement. Currently, nuclear decommissioning costs are accmed as depreciation expense over the expected service lives of the two units at Point Beach based on an external sinking fund method. Any changes in depreciation expense due to differing assumptions between the Proposed FAS and those currently required by the PSCW are not expected to be material and would most likely be deferrable and recoverable in rates. For additional information on the costs of decommissioning Point Beach, see " Note F - Nuclear Operations" in the NOTES TO FINANCIAL STATEMENTS, A-19 i
e Environmental Matters l
The 1990 Amendments to the Clean Air Act mandate significant nation-wide reductions in SO and 2
Clean Air Act:
NO, emissions to address acid rain and ground level ozone control requirements.
WE has cornpleted the installation of cortinuous emission monitors at all of its facilities and installed low NO, burners on all boilers at its Oak Creek and Valley Power Plants. These actions, along with the burning of low sulfur coal meet the requirements that became effective January 1,1995. To date, approximately $47.6 million has been spent on compliance with the 1990 amendments to the Clean Air Act.
WE elected to voluntarily bring the Valley and Pon Washington Power Plants under jurisdiction of the NO, requirements of the Clean Air Act amendments of 1990, five years earlier than mandated. This was possible because these units already meet the current NO, emissions standards.
WE projects a surplus of SO emission allowances during Phase 1 and a small shortfall during Phase II, which begins 2
in the year 2000. WE is secking additional allowances available as a result of energy conservation programs. As an integral component of its least-cost plan, WE is active in S0 allowance trading. Revenue from the sale of 2
allowances is being used to offset future potential rate increases.
Additional fuel switching and the installation of NO, controls at various power plants will be required to meet the second phase of reduction requirements that become effective January 1,2000. These costs, along with additional operating expenses, are not expected to exceed $38.0 million based on today's costs.
Afanufactured Gas Plant Sites WE is reviewing and addressing environmental conditions at a number of former manufactured gas plant sites. See " Note M - Commitments and Contingencies" in the NOTES TO FINANCIAL STATEMENTS for additional information.
WE aggressively seeks environmentally acceptable, beneficial uses for its combustion Ash LandfillSites:
byproducts, liowever, ash materials 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 remediation. Where WE 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. These costs are included in the environmental operating and maintenance costs of WE.
LS Power Generation Facility in 1993, a competitive bidding process conducted by the PSCW resulted in the selection of a proposal submitted by an unaffiliated independent power producer, LSP-Whitewater L.P. ("LS Power"), to construct a generation facility to meet a portion of WE's anticipated increase in system supply needs. WE subsequently signed a long-term agreement to purchase electricity from the proposed facility. The agreement is contingent upon the facility being completed and placed into operation. Plant construction is currently on schedule to meet the planned start-up date of June 1,1997.
See " Note M - Commitments and Contingencies" in the NOTES TO FINANCIAL STATEMENTS for additional information about WE's long-term power purchase agreement with LS Power.
LIQUIDITY AND CAPITAL RESOURCES Except where specifically noted, the following discussion and analysis of LIQUIDITY AND CAPITAL RESOURCES does not consider the impact of the proposed merger with NSP. See " FACTORS AFFECTING RESULTS OF OPERATIONS - Merger Agreement with Northern States Power Company" above for information about the proposed merger.
A-20
I Investing Activities WEC invested a net total of $1.1% billion in its businesses during the three years ended December 31,1996.
Investmets during this three-year period included approximately $957 million for construction of new or improved facilities of which $840 million was for utility projects and approximately $117 million was for non-utility projects.
Additional investments during the three years ended December 31,1996 included approximately $76 million for acquisition of nuclear fuel, $47 million for the eventual decommissioning of Point Beach and net capitalized conservation expenditures of $18 million. WEC's non-utility subsidiaries received net proceeds of $31 million during this three-year period on the disposition of various investments as part of Other Investing Activities.
Point Beach Unit 2 Steam Genemfors: In October 1992, WE filed an application with the PSCW for replacement of the Point Beach Unit 2 steam generators, which will allow for the unit's operation until the expiration of its operating license in 2013. In an Interim Order in February 1995, the iSCW deferred the decision on steam generator replacement until after the refueling outage in September 1995. Ilowever, the PSCW directed WE to make suitable arrangements with the fabricator of the new steam generators to allow the fabrication, delivery and replacement to proceed promptly if authorized by the PSCW. The reasonable costs of such arrangements to maintain a place in line with the fabricator would be afforded rate recovery. In May 1996, WE received a written order from the PSCW approving replacement of the steam generators at an estimated cost of $% million. Replacement of the Unit 2 steam generators was completed in.lanuary 1997. Capital expenditures of $41.5 million and $24.6 million were made in 1996 and 1995, respctively, for replacement of the Unit 2 steam generators.
Milwaukee County Power Plant: The 11 MW Milwaukee County Power Plant supplies electricity, steam and chilled water to the hospitals and other member institutions of the Milwaukee Regional Medical Center, as well as to other large customers located on land known as the Milwaukee County Grounds. In December 1995, WE acquired the electric generation and distribution facilities in the first phase of the acquisition. De capital cost for the electric l
facilities was $7 million. These facilities and the new customers associated with them were integrated into WE's l
current electric utility operations. !n December 1996, WEC acquired the steam and chilled water production and distribution facilities to complete the second phase of the purchase. Two outstanding contingencies were met prior to I
closing the purchase. ne PSCW approved the purchase of the steam facilities, and the five largest customers signed steam and chilled water service agreements which obligate them to purchase their present and future heating and cooling requirements from WEC for a period of ten years. The capital cost for the steam facilities was approximately
$21 million. WE has integrated these facilities and the associated customers into its current steam utility operations.
The capital cost for the chilled water facilities was approximately $19 million. A separate subsidiary of WEC will operate the chilled water facilities as a non-regulated business.
Paris Generating Stati<m: During 1995, WE placed in service four units, or approximately 300 megawatts of capacity, at its Paris Generating Station. This natural gas-fired combustion turbine facility, located near Union Grove, Wisconsin, is designed to meet peak demand requirements. Capital expenditures of $6 million, $10 million and $54 million were made during 1996,1995 and 1994, respectively. The capital costs of the Paris facility totalled approximately $102 million.
Concont Generating Station: During 1994, WE placed in service the last two units, or approximately 150 megawatts of capacity, at its Concord Generating Station. This four unit 300 megawatt natural gas-fired combustion turbine facility, located near Watertown, Wisconsin, is designed to meet peak demand requirements. The first two units were completed in 1993. Capital expenditures of $3 million and $6 million were made during 1995 and 1994, respectively, for constmetion of this facility. The capital costs of the Concord facility totalled approximately $100 million.
Porf Washington Power Plant Renoration: Additionally during 1994, WE completed the $107 tnillion renovation project at its Port Washington Power Plant. The renovation work, which began in September 1991, included the installation of additional emission control equipment. Capital expenditures totaling $12 million were made during 1994 for this project.
A-21
Kimberly Cogeneration Facility: Prior to the 1993 selection of the LS Power generation facility by the PSCW discussed above in " FACTORS AFFECTING RESULTS OF OPERATIONS - LS Power Generation Facility" WE had proposed to construct its own 220 megawatt cogeneration facility in Kimberly, Wisconsin, which was intended to provide process steam to Repap Wisconsin, Inc. ("Repap") starting in mid 19M. In its order, the PSCW selected the WE project as the second place conditional project if the LS Power project did not proceed. At December 31,1996, a net investment of approximately $65.6 million remains in Other Deferred Charges and Other Assets for the Kimberly Cogeneration Facility equipment (the Equipment"). This balance represents costs associated with the procurement of three combustion turbines, one steam turbine and three heat recovery boilers that were acquired in order to achieve the in-service dates as agreed to in a steam service contract with Repap. See " Note M -
Commitments and Contingencies" in the NOTES TO FINANCIAL STATEMENTS for further information concerning disposition of the Equipment.
Non-Utility Investments: WEC's non-utility assets amounted to approximately $304 million at December 31,1996.
WEC currently anticipates making additional non-utility investments from time to time. For additional information, see " Capital Requirements 1997-2001" below.
Afinergy Glass Aggregate Plant Minergy Corp. ("Minergy"), a non-utility WEC subsidiary, plans to place into operation a $45 million facility in Neenah, Wisconsin that would recycle paper sludge from area paper mills into two usable products: glass aggregate and steam. The glass aggregate will be sold into existing construction and aggregate markets and the steam will be sold to a local paper mill. The plant will result in substantial environmental and economic benefits to the area by providing an alternative to landfilling paper sludge. Minergy commenced construction in July 1996, with commercial operation scheduled for April 1998. The project is expected to be financed during construction through short-term borrowings. Capital expenditures totaling $14 million were made l
during 1996 for this facility.
I Cash Provided by Operating and Financing Activities During the three years ended December 31,1996, cash provided by operating activities totaled $1.308 billion at WEC and $1.310 billion at WE. During this period, internal sources of funds, after the payment of dividends, provided 75% of WEC's and 82% of WE's capital requirements.
Financing activities during the three-year period ended December 31,1996 included the issuance of approximately
$506 million of long-term debt by WEC of which $480 million was issued by WE. The proceeds of these new debt issues were used to retire or refinance higher coupon debt in the amount of $223 million, to reduce net short-term borrowings in the amount of $138 million and for other general corporate purposes. WEC added $126 million of common equity from the issuance of new shares through the Company's stock plans an<i purchased or redeemed $5 million of preferred stock. No preferred stock was issued during this period. Dividends on WEC's common stock were $167 million, approximately $160 million and approximately $151 million during 1996,1995 and 19%,
respectively. WE paid dividends to WEC of approximately $168 million, $160 million and $151 million during 1996,1995 and 1994, respectively, and received a total of $60 million in capital contributions from WEC during this three-year period.
In December 1996, WE and WISVEST Corporation issued promissory notes in the amount of $12.05 and $10.95 million, respectively, due 2006. The notes were issued as part of the transaction to acquire the steam and chilled water facilities from Milwaukee County. The notes have been discounted to reflect the difference between the effective interest rate of 6.36% and the stated rate of 1.93%.
In November 1996, WE issued $200 million of 6 5/8% unsecured debentures due 2006. In Dc. ember 1995, WE issued $100 million of unsecured One llundred Year 6 7/8% Debentures due 2095. Proceeds of both issues were added to WE's general funds and were applied to the repayment of short-term borrowirgs.
In August 1995, WE called for optional redemption $98.35 million aggregate principal amount of fixed rate tax exempt bonds issued by three politicaljurisdictions on WE's behalf that were :,ecured by issues of WE's First A-22
i Mortgage Bonds with terms corresponding to the tax exc npt bonds called for redemption. During September and October 1995,*the three politicaljurisdictions issued $98.35 million aggregate principal amount of new tax exempt bonds on behalf of WE, collateralized by unsecured variable rate promissory notes issued by WE, maturing between March 1, 2006 and September 1, 2030, with terms corresponding to the respective issues of the refunding tax exempt bonds, he proceeds were used to finance the optional reo motions. The WE First Mongage Bonds, which collateralized the redeemed tax exempt bonds, have been canceled.
The Merger Agreement, entered into by WEC and NSP, provides for restrictions on certain transactions by both the Company and NSP, including the issuance of debt and equity securities. Should circumstances arise to make such transactions necessary, NSP would need to agree to consent to any such change in the Merger Agreement.
Capital Structure WEC's and WE's capitalization at December 31 were:
WEC WE 1926 1225 1926 1925 Common Equity 53.3 %
53.8 %
51.6 %
52.1 %
Preferred Stock 0.8 0.9 0.9 1.0 I_ong-Term Debt (including current maturities) 44.0 40.8 46.1 42.3 Short-Term Debt
_ L2
__.4Ji
__id
._L6 M%
M%
M%
M%
l Compared to the utility industry in general, the Company has maintained a relatively high ratio of conunon equity to total capitalization and low debt and preferred stock ratios. This conservative capital structure, along with strong bond ratings and internal cash generation has provided, and should continue to provide, the Company with access to the capital markets when necessaiy to finance the anticipated growth in the Company's utility business. WE currently has senior secured debt ratings of AA+ by Standard & Poor's Corporation ("S&P"), Duff & Phelps Inc. and Fitch Investors Service Inc. ("Fitch*) and Aa2 by Moody's Investors Service (" Moody's"). WE currently has unsecured debt ratings of AA by S&P and Duff & Phelps, Inc. and Aa3 by Moody's.
Following announcement of the Transaction, in May 1995 S&P reported that it was placing on CreditWatch with negative implications its AA+ senior secured debt and AA+ preferred stock ratings of WE and its AA senior unsecured debt rating of Wisconsin Michigan investment Corporation, a non-utility subsidiary of WEC. S&P stated that if the Transaction is completed, the likely credit rating for the senior secured debt of WE is expected to be AA or AA. As part of its rating process, S&P intends to review the financial and operating plans of the merged utilities.
Also in May 1995, citing WE's corainued operation as a separate utility subsidiary after the Transaction, its strength within its rating category and its strong capital structure, Moody's confirmed its Aa2 first mortgage bond rating of WE. On December 5,1995, Fitch changed WE's credit trend from " stable" to " declining" based upon its analysis of cash flow trends versus its standards for an AA+ rating.
At year-end 1996, WEC had $185 million of unused lines of bank credit and approximately $11 million of cash and cash equivalents, and WE had $99 million of unused lines of bank credit and approximately $2 million of cash and cash equivalents.
Capital Rnguirements 1997-2001 Construction Erpenditurrst The Company's construction expenditures for the period 1997-2001 are estimated to be
$1.2 billion. Of this amount, approximately $992 million represents utility construction expenditures.1997 utility construction expenditures are estimated to be $250 million, and include, in a.!dition to the recurring additions and improvements to WE's distribution and transmission systems, anticipated expenditures associated with the installation of more than 350 miles of new gas main which will expand natural gas service to more than 4,800 potential A-23
l, customers, expenditures for the construction of approximately 250 miles of new distribution system to, improve the reliability of WE's rural electric distribution system, expenditures for upgrades to environmental equipment at several of WE's fossil fueled power plants and expenditures related to upgrading computer systems to improve productivity and customer service.
/tetirement oflong-tenn Debt Securities: The Company's capital requirements for maturing long-term debt and sinking funds total $173 million in 1997 and $179 million for the period 1998-2001. Included in the above amounts are WE's requirements of $167 million and $159 million, respectively. See " Note il - 3 ong-Term Debt" in the NOTES TO FINANCIAL STATEMENTS for additional information.
Decommissioning Tmst Payments: WE's estimated payments to the Nuclear Decommissioning Trust Fund (" Fund")
for 1997 are $33 million. For the period 1998-2001, the combined estimated payments are $154 million. Payments to the Fund represent both the amount of annual contribution to external trust funds and the income earned on the external trust funds. WE expects to contribute $11 million to the Fund annually. See " Note F - Nuclear Operations" in the NOTES TO FINANCIAL STATEMENTS for additional information.
PSCW Admnce Plans: In December 1995, the PSCW approved WE's Advance Plan 7 niing originally filed in January 1994. In addition to specifying the expectations of conservation and load management programs, the plan indicates the need for additional peaking and intermediate load capacity during the 20-year planning period. WE does not anticipale needing additional base load generation until after 2010.
i in the Advance Plan process, the regulated electric utilities in Wisconsin file, for planning purposes, long-term forecasts of future resource requirements along with plans to meet those requirements, including plarmed implementation of energy management and conservation programs (demand-side savings). As a result of the PSCW's j
industry restructuring initiatives described above in " FACTORS AFFECTING RESULTS OF OPERATIONS -
Industry Restructuring and Competition", future Advance Plans will be streamlined to focus primarily on the need and timing for new generation additions and transmission facilities. In a February 1997 ruling, the PSCW spHe the Advance Plan 8 filing into two phases. In May 1997, Wisconsin utilities will be filing twenty year forecasts of electricity demand hng with data on existing generation. The PSCW will rule on this in August 1997. Phase two will be filed in January 1998 and will include generation and transmission plans. An order on Phase two is expected from the PSCW in August 1998.
Capital Resources
'Ihe Company expects internal sources of funds from operatians to provide approximately 73% of the capital requirements for 1997. The remaining cash requirements for 1997 are expected to be met through short-term borrowings and/or the issuance of intermediate or long-term debt. Beyond 1997, capital requirements will be met principally through internally generated funds supplemented, when required, by debt and equity fmancing. The specific form, amount and timing of securities which may be issued have not yet been determined and will depend, to a large extent, on market conditions and other factors.
On September 1,1996, WEC resumed issuing new shares of common stock through the Companyi stock plans.
Between January 1,1996 and August 31,1996, WEC pmdased shares required for the plans on the open market.
From September 1996 through December 1996, WEC issued 859,458 new shares of common stock through the Company's stock plans and received proceeds of approximately $23 million.
CAUTIONARY FACTORS This report and other documents or oral presentations contain or may contain forward-looking statements made by or on behalf of WEC or WE. Such statements are based upon mangement's current expectations and are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the statements, When used in written documents or oral presentations, the words " anticipate", "believe", estimate", " expect",
"objectivf, " project" and similar expressions are intended to identify forward-looking statements. In addition to the A-24
assumptions and other factors referred to specifically in connection with such statements, factors that could cause WEC's or WE's actual results to differ materially from those contemplated in any forward-looking statements L
include, among others, the following:
Operating, Financial and Industry Factors Factors affecting utility operations such as unusual weather conditions; catastrophic weather-related damage; e
unscheduled generation outages, maintenance or repairs; unanticipated changes in fossil fuel, nuclear fuel or gas supply costs or availability due to higher demand, shortages, transponation problems or other developments; nuclear or environmental incidents; resolution of spent nuclear fuel storage and disposal and steam generator replacement issues; electric transmission or gas pipeline system constrMats; unanticipated organizational structare or key personnel changes; collective bargaining agreements with ion employees or work stoppages; inflation rates; or demographic and economic factors affecting utility service territories or operating environment.
'Ihe 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.
Customer business conditions including demand for their projucts or services and supply of labor and materials used in creating their products and services, Regulatory factors such as unanticipated changes in rate setting policies or procedures; unanticipated changes in e
regulatory accounting policies and practices; industry rr structuring initiatives; transmission system operation and/or administration initiatives; recovery of costs of rtevious investments made under traditional regulation; required approvals for new construction; NRC opera'ing regulatory changes related to Point Beach; or the siting approval process for new generating and transraission facilities.
The cost and other effects of legal and administrative proceedings, settlements, and investigations, claims and changes in those matters.
Factors affecting the availability or cost of capital such as changes in interest rates; market perceptions of the utility industry, the Company or any of its subsidiaries; or security ratings.
Federal, state or local legislative factors such as changes in tax laws or rates; changes in trade, monetary and fiscal policies, laws and regulations; electric and gas industry restructuring initiatives; or changes in environmental laws and regulations.
Certain restrictions imposed by various financing arrangements and regulatory requirements on the ability of WE to transfer funds to WEC in the form of cash dividends, loans or advances.
Authoritative generally accepted accounting principle or policy changes from such standard setting bodies as the FASB and the SEC.
Unanticipated technological developments that result in competitive disadvantages and create the potential for impairment of existing assets, i
Changes in social attitudes regarding the utility and power industries.
e Possible risks associated with non-uulity diversification such as competition; operating risks; dependence upon j
certain suppliers and customers; or environmental and energy regulations.
i A-25
1
)
Other business or investment considerations that may be disclosed from time to time in WEC's or WE's SEC filings or in other publicly disseminated written documents.
i Business Combination Factors l
i Consummation of the Transaction with NSP to form Primergy and Wisconsin Energy Company, which will e
have a significant effect on the future operations and financial position of WEC and WE, respectively. Specific factors include:
)
The ability to consummate the Transaction on substantially the basis contemplated.
)
e The ability to obtain the requisite approvals by all applicable regulatory authorities without the imposition I
e of materially adverse terms.
The ability to generate the cost savings to Primergy that WEC and NSP believe wtil be generated by the synergies resulting from the Transaction. This depends upon the degree to which the assumptions upon which the analyses employed to devdop estimates of potential cost savings as a result of the Transaction will approximate actual experience. Such assumptions involve judgements with respect to, among other things, future national and regional economic conditions, national and regional competitive conditions, inflation rates, regulatory treatment, weather conditions, financial market conditions, business decisions and other uncertainties. All of diese factors are difficult to predict and many are beyond the control of WEC and NSP. While it is believed that such assumptions are reasonable, there can be no assurance that they will approximate actual experience or that the estimated cost savings will be realized.
The allocation of the benefits of cost savings between shareholders and customers, which will depend, among other things, upon the results of regulatory proceedings in various jurisdictions.
The rate structure of Primergy's utility subsidiaries.
Additional regulation to which Primergy will be subject as a registered public utility holding company under PUllCA, in contrast to the more limited impact of PUliCA upon WEC and NSP as exempt holding companics, and other different or additional federal and state regulatory requirements or restrictions to which Primergy and its subsidiaries mhy be subject as a result of the Transaction (including conditions which may be imposed in connection with obtaining the regulatory approvals necessary to consummate the Transaction such as the possible requirement to divest ga.s utility properties and possibly certain non-utility ventures).
Factors affecting the dividend policy of Primergy including results of operations and financial condition of Primergy and its subsidiaries and such other business considerations as the Primergy Board of Directors considers relevant.
WEC and WE undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information. future events or otherwise.
i l
A-26 i
m WISCONSIN ELECTRIC POWER COMPANY INCOME STATEMENT Year Ended December 31 1996 1995 1994 (Thousands of Dollars)
Operating Revenues Electric
$1,393,270
$1,437,480
$1,403,562 Gas 364,875 318,262 324,349 Steam 15,675 14,742 14,281 Total Operating Revenues 1,773,820 1,770,484 1,742,192 Operating Expenses Fuel (Note F) 295,651 303,553 285,862 Purchased power 36,216 41,834 42,623 Cost of gas sold 234,254 188,764 199,511 Other operation expenses 391,520 395,242 399,011 Maintenance 103,046 112,400 124,602 73,900 Revitalization (Note K)
Depreciation (Note C) 202,796 183,876 177,614 Taxes other than income taxes 77,866 74,765 76,035 Federal income tax (Note D) 105,656 119,939 104,725 State income tax (Note D) 24,976 28,405 24,756 Deferred income taxes - net (Note D)
(1,575)
(2,833)
(25,095)
Investment tax credit - net (Note D)
(2,430)
(4,482)
(4,625)
Total Operating Expenses 1,467,976 1,441,463 1,478,919 Operating income 305,844 329,021 263,273 Other Income and Deductions Interest income 13,553 12,850 11,715 Allowance for other funds used during construction (Note E) 3,036 3,650 4,985 Miscellaneous - net (3,642) 5,677 10,727 Federal income tax (Note D)
(631)
(535)
(1,504)
State income tax (Note D)
(570)
(370)
(589)
Total Other income and Deductions 11,746 21,272 25,334 Income Before Interest Charges 317,590 350,293 288,607 Interest Charges i.ong-term debt 100,133 99,727 102,059 O'.her interest 7,821 11,960 7,610 1
Ailowance for borrowed funds used during construction (Note E)
(1,679)
(2,062)
(2,816)
Total Interest Charges 106,275 109,625 106,853 Net income 211,315 240,668 181,754 Preferred Stock Dividend Requirement 1,203 1,203 1,351 Earnings Available for Common Stockholder
$210,112
$239,465
$180,403 Note: Earnings and dividends per share of common stock are not applicable because all of Wisconsin Electric Power Company's common stock is owned by Wisconsin Energy Corporation.
The notes are an integral part of the fmancial statements.
A-27
R
" WISCONSIN ELECTRIC POWER COMPANY /
BALANCESHEET December 31 ASSETS i
1996 1995' (Thousands of Dollars).-
Utility Plant Electric ~
$4,725,832
$4,531,404
~
Gas 503,041 489,739
' Steam 60,480 40,078 5,289,353 5,061,221 Accumulated provision for' depreciation (2,441,950)
'(2,288,080).
2,847,403
,2,773,141-Construct on work in progress 135,040 *
"78,153 i
Nuclear fuel-net (Note F) 75,476 59,260
.j
'i Net Utility Plant 3,057,919 2,910,554 Other Property and Investments Nuclear decommissioning trust fund (Note F) 322,085
,275,125 Conservation investments (Note A) 92,705 115,523 i
Other 43,219
.36,979
- Total Other Property and Investments 458,009 427,627 -
Current Assets 19,550.
Cash and cash equivalents 1,871 Accounts receivable, net of allowance for doubtful accounts - $13,264 and $13,400 140,256 144,476 Accrued utility revenues 155,838 140,201 Fossil fuel (at average cost) i13,516 83,366 i
Materials and supplies (at average cost) 70,900 70,347 Prepayments 55,176 55,147 Other.
3,268 4,637 Total Current Assets 540,825 517,724 Deferred Charges and Other Assets Accumulated deferred income taxes (Note D) 150,269 136,581 Deferred regulatory assets (Note A) 193,756 193,757 Other 106,382 132,681 Total Deferred Charges and Other Assets 450,407 463,019 Total Assets
$4,507,160
$4,318,924, ne notes are an integral part of the financial hate:nents.
+
9
/
-r
-t A-28 4
4 u-y
_ _ ~
WISCONSIN ELECTRIC POWER COMPANY BALANCE SHEET December 31 CAPITALIZATION and LI ABILITIES
.1996 1995 (Thousands of Dollars)
Capitalization (See Capitalization Statement)
Comrnon stock equity
$1,738,788
$1,696,565 Preferred stock 30,450 30,451 Long-term debt (Note H) 1,371,446 1,325,169 Total Capitalization 3,140,684 3,052,185 i
Current Liabilities Long-term debt due currently (Note II) 183,635 51,419 Notes payable (Note I) 45,390 150,694 Accounts payable 145 194 107,115 Payroll and vacation accrued 2,07 26,699 Taxes accrued - income and other 33,581 18,378 l
Interest accrued 22,500 21,617
' Other 32,588 48,762-i 1
Total Current Liabilities 487,595 424,684 Deferred Credits and Other Liabilities Accumulated deferred income taxes (Note D) 507,845 479,828 Accumulated deferred investment tax credits 87,798 89,672
?
Deferred regulatory liabilities (Note A) 175,943 167,483 Other 107,295 105,072 Total Deferred Credits and Other Liabilities 878,881 842,055 Commitments and Contingencies (Note M) r Total Capitalization and Liabilities
$4,507,160
$4,318,924 i
The notes are an integral part of the financial statements, j
l I
\\
i A-29
r WISCONSIN ELECTRIC POWER COMPANY STATEMENT OF CASif FLOWS Year Ended December 31 1996 1995 1994 (Thousands of Dollars)
Operating Activities
$211,315
$240,668
$181,754 Net income Reconciliation to cash 202,796 183,876 177,614 21,887 22,324 21,437 Depreciation Nuclear fuel expense - amortization Conservation capense - amonization 22,498 21,870
'10,910 Debt premium, discount &
9,762 12,652 14,368 expense - amortization (942)
(5,404) 43,860 (1,575)
(2,833)
(25,095)
Revitalization - net Deferred income taxes - net (2,430)
(4,482)
(4,625)
Investment tax credit - net Allowance for other funds used (3,036)
(3,650)
(4,985) iluring construction Change in -
Accounts receivable 4,220 (32,639) 7,684 inventories (30,703) 5,233 11,455 Accounts payable 38,779 16,650 (20,683)
Other current assets (14,297)
(4,068)
(9,878)
Other current liabilities (2,780) 17,097 9,980 5,816 (29,204)
(13,123)
Other 461,310 438,090 410,673 Cash Provided by Operating Activities Investing Activities (319,832)
G48,85)
(271,448)
Construction expenditures Allowance for borrowed funds used
(),679)
(2,062)
(2,816) during construction (26,053)
(23,454)
(26,351)
(26,309)
(10,861)
(10,138)
Nuclear fuel Nuclear decommissioning trust 319 2,130 (20,823)
Conservation investments - net (8,211)
(4,511)
(10,205)
Other Cash Used in investing Activities (381,765)
(287,625)
(341,781)
Financing Activities 230,094 217,453 32,474 Sale oflong-term debt Retirement oflong-term debt (52,921)
(134,172)
(35,069)
(105,304)
(91,811) 49.294 Change in short term debt 30,000 30,000 Stockholder capital contribution (1)
(5,250)
Retirement of preferred stock Dividends on common stock (167,889)
(159,576)
(150,951)
(1,203)
(1,203)
(1,381)
Dividends on preferred stock Cash Used in Financing Activities (97.224)
(139,309)
~i80,883)
($17,679)
$11,156
($11,991)
Change in Cash and Cash Equivalents Supplementalinformation Cash Paid For
$94,845
$99,352
$93,383 Interest (net of amount capitalized) 107,68.
149,224 148,552 Income taxes The notes are an integral part of the financial staterrc nts.
n-30
WISCONSIN ELECTRIC POWER COMPANY CAPITALIZATION STATEMENT December 31 1996 1995 (Thousands cf Dollars)
Common Stock Equity (See Common Stock Equity Statement)
Cemmon stock - $10 par s alue; authorized 65,000,000 shares;
$3, 2,893
$332.893 1
outstanding - 33,289,327 shares Other paid in capital 280,689 280,689 Retained earnings 1,125.206 1,082,983 Total Common Stock Equity 1,738,788 1,696,565 i
l' referred Stock - Cumulative Six Per Cent. Preferred Stock $100 par value; authorized 45,000 shares; outstanding - 44,498 and 44,508 shares 4,450 4 45i Serial preferred stock - $100 par value; authorized 2,286,500 shares; outstanding 3.60% Series - 260,000 shares 26,000 26,000 Total Preferred Stock (Note G) 30,450 30,451 Long 7crm Debt First mortgage bonds Series Due 1996 1995 Series Due 1996 1995 4-1/2%
i996 $ -
$30,000 7-1/8% 2016 100,000 100,000 5-7/8% 1997 130,000 130,000 6 85 %
2021 9,000 9,000 6-5/8% 1997 10,000 10.000 7-3/4% 2023 100,000 100,000 5-1/8% 1998 60,000 60,000 7.05 %
2024 60,000 60,000 6-l/2% 1999 40,000 40,000 9-l/8% 2024 3,443 3,443 6-5/8% 1999 51,000 51,000 8-3/8% 2026 100,000 100.000 7-1/4% 2004 140,000 140,000 7.70 %
2027 200.002 200.000 1,003.443 1,033,443 Debentures (unsechred) 6-l/8% Series duc 1997 25.000 25,000 6-5/8% Series due 2006 200,000 9.47% Series duc 2006 7,000 7,000 8-1/4% Senes duc 2022 25,000 25,000 6-7/8% Series duc 2095 100,000 100.000 Notes (unsecured)
Variable rate due 2006 1,000 1,000 Variable rate due 2015 17,350 17,350 Variable rate duc 2016 67,(H)0 67.000 Variable rate due 2030 80,000 S0,000 Due 2006 (Note 1I) 12.052 Obligations under capital lease (Note F) 42,962 43,924 Unamortized discount - net (25,726)
(23,129)
Long-term debt due currently (183,635)
(51.419) 1,325.169 Total Long Term Debt (Nate II) 1,371,446__
Total Capitalization
$3,140.684
$3.052.185 The notes are an integral part of the financial statements.
A-31
~..
I WISCONSIN ELECTRIC POWER COMPANY COMMON STOCK EQUITY STATEMENT Common Stock
$10 Par Other Paid Retained Shares '
Value in Capital Earnings Total
[
(Thousands of Dollars) o Balance - December 3i,1993 33,289,327
$332,893
$220,689
. $973,917
$1,527,499 Net income ~
181,754 181,754 Cash dividends Common stock (150,951)
(150,951) l Preferred stock (1,381)
(1,381) l Stockholder capitalcontribution 30,000-30,000-Other (245).
- (245)'
Balance - December 31,1994 33,289,327 332,893 250,689 1,003,094 1,586,676 Net income 240,668 240,668'.
l Cash dividends Common stock.
(159,576),
(159,576)
Preferred stock (1,203)
(1,203) ~
Stockholder capital contribution 30,000 30,000 Balance - December 31,1995 33,289,327 332,893 280,689 1,082,983 1,696,565 Net income 211,315 211,315 Cash dividends l
. Common stock (167,889)
(167,889)
Preferred stock (1,203).
(1,203)'
Balance - December 31,1996 33,289.327
$332,893
$280,689
$ 1,125,206
$1,738,788 The notes are an integral pan of the financial statements.
V k
P t
A-32
WISCONSIN ELECTRIC POWER COMPANY NOTES TO FINANCIAL STATEMENTS A - Sanmary of Significant Accounting Policies General: The accounting records of Wisconsin Electric Power Company ("WE") are kept as prescribed by the
. Federal Energy Regulatory Commission ("FERC"), modified for requirements of the Public Service Commission of Wisconsin ("PSCW").
'Ihe preparation of financial statements in conformity with generally accepted accounting principles requires i
management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and j
disclosure of contmgent 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.
RcFenues: Utility revenues are recogmzed on the accrual basis and include estimated amounts for service rendered but not billed.
Fuel: The cost of fuel is expensed in the period consumed.
Properfy: Property is recorded at cost. Additions to and significant replacements of utility property are charged to utility plant at cost; minor items are charged to maintenance expense. Cost includes material,. labor and allowance for funds used during construction (see Note E).' The cost of depreciable utility property, together with removal cost less salvage, is charged to accumulated provision for depreciation when property is retired Regulatory Assets and flabilitiest Pursuant to Statement of Financial Accounting Standards No. 71, Accountq for the Effects of Certain Types of Regulation, WE capitalizes, as regulatory assets, incurred costs which are expected to be recovered in future utility rates. WE also records, as regulatory liabilities, the current recovery in utility rates of costs which are expected to be paid in the future.
i T'he following deferred regulatory assets and liabilities are reflected in the Balance Sheet.
December 31 1226 1995 (Thousands of Dollars)
Deferred Regulatory Assets Deferred income taxes
$154,532
$155,944 Department of Energy assessments 29,022 31,638.
. Other 10.202 6.175 Total Deferred Regulatory Assets
$193.736
$193.757 Deferred Regulatory Liabilities Deferred income taxes
$155,720
$163,676 Tax and interest refunds 14,080 Other
. 6.143 3.807 Total Deferred Regulatory Liabilities id212Q HQ2g4Q WE directs a variety of demand-side management programs to help fon r energy conservation by its customers. As
' authorized by the PSCW, WE capitalized certain conservation progranwosts prior to 1995. Utility rates approved by
' the PSCW provide for a current return on these conservation investmento As of December 31,1996 and 1995, there were $92.7 million and $115.5 million of conservation investments, res;ectively, on the Balance Sheet in Other Property and Investments. Through 1995, conservation investments wer charged to operating expense over a ten-A-33 e-
year amortization period. Beginning in 1996, the capitalized conservation balance is charged to operating exp a straight line basis over a five-year amortization period.
- Statement of Cash Flows: Cash and cash equivalents include marketable debt securities acquired three months o less from maturity.
B - Afergers Wisconsin Natural Gas Cornpanyr On January 1,1996, Wisconsin Energy Corporation ("WEC"), WE's parent company, merged its natural gas utility subsidiary, Wisconsin Natural Gas Company ("WN*) into WE. The accounting treatment for this merger was similar to that which would result from a pooling of interests. WE's' prior years' financial information has been restated to include WN at historical values. Where applicable, references to WE include WN prior to their merger.
Northern States Power Company: On April 28,1995, WEC and Nonhern States Power Company, a Minnesota corporation (*NSP'), entered into an Agreement and Plan of Merger, which was amended and restated as of July 26, 1995 (* Merger Agreement"). The Merger Agreement provides for a strategic business combination involving WEC and NSP in a ' merger-of-equals" transaction (" Transaction"). As a result, WEC will become a registered public utility holding company under the Public Utility liolding Company Act of 1935, as amended, and will change its name to Primergy Corporation ("Primergy*). Primergy will be the parent company of WE (which will be renamed Wisconsin Energy Company), of NSP (which, for regulatory reasons, will reincorporate in Wisconsin ("New NSP")), and of the other subsidiaries of WEC and NSP.
in connection with the Transaction, Northem States Power Company, a Wisconsin corporation (*NSP.WI"),
currently a subsidiary of NSP, will be merged into Wisconsin Energy Company. At the time of the merger of NSP-W1 into Wisconsin Energy Company, New NSP will acquire from NSP-WI certain gas utility assets in Lacrosse and 3
2 Iludson, Wisconsin with a net historical cost at December 31,1996 of $25.7 million.
The Transaction is intended to be tax-free for income tax purposes and to be accounted for as a pooling of interests.
On September 13,1995, stockholders of WEC and NSP voted to approve the Transaction.
The Merger Agreement is subject to various conditions, including the approval of various regulatory agencies. Two of four state regulatory commissions, the Michigan Public Service Commission and the North Dakota Public Service Commission, approved the Transaction during 1996. Also during 1996, the PSCW, the Minnesota Public Utilities Commission ("MPUC") and the FERC concluded hearings on the Transaction. WEC and NSP are hopeful that the PSCW, the MPUC and the FERC will rule on the Transaction in the second quaner of 1997. The PSCW, which was scheduled to rule on the Transaction in January 1997, has delayed a decision pending the results of an investigation of alleged prohibited conversations between one of the PSCW commissioners and WEC officials. WEC is unable to predict with certainty when the PSCW will rule on the Transaction, but is hopeful that the investigation will be completed by early in the second quarter of 1997. In late March 1997, the MPUC indicated that in April 1997 it would decide whether to adopt procedures in connection with its decision on the Transaction that include additional public hearings as well as additional written comments. If additional hearings or written comments are necessary, fmal deliberations in this matter would be scheduled for late June or early July 1997. Remaining regulatory I
applications and filings have either been submitted or approved.
l
)
The goal of WEC and NSP was to complete the Transaction by January 1,1997. However, because all necessary
{
regulatory approvals were not obtained by the end of 1996, the Transaction was not completed in 1996. WEC and NSP continue to pursue regulatory approvals, without unacceptable conditions, to facilitate completion of the Transaction as soon as possible in 1997.
Filings with regulatory agencies in the states where WEC and NSP provide utility services and in which such filings i
are required include a request for deferred accounting treauent and rate recovery of costs incurred associated with A-34
the Transaction. As of December 31,1996, WE has deferred $15.0 million of costs to achieve the merger as a compdnent of Deferred Charges and Other Assets-Other.
'Ihe following summarized Wisconsin Energy Company unaudited pro forma financial information combines historical balance sheet and income statement information of WE and NSP-WI to give effect to the Transaction, including the transfer of the gas assets from NSP-WI to New NSP, and should be read in conjunction with the historical financial statements and related notes thereto of WE and NSP-WI. The unaudited pro forma income statement information does not reflect adjustments for 1996 revenues of $32.5 million and related expenses associated with the transfer of the gas assets from NSP WI to New NSP. A $150 million pro forma adjustment has been made to conform the presentation of noncurrent deferred income taxes in the summarized unaadited pro forma combined balance sheet information as a net liability. The allocation between WEC and NSP and their customers of the estimated cost savings resulting from the Transaction, net of costs incurred to achieve such savings, will be subject to regulatory review and approval. None of the estimated cost savings, the costs to achieve such savings, nor transaction costs are reflected in the unaudited pro forma financial information. All other financial statement presentation and accounting policy differences are immaterial and have not been adjusted in the unauditeo pro forma financial information.
The unaudited pro forma balance sheet information gives effect to the Transaction as if it had occurred at December 31,19%. The unaudited pro forma income statement information gives effect to the Transaction as if it had occurred at January 1,1996. The following information is not necessarily indicative of the financial position or operating results that would have occurred had the Transaction been consummated on the date or at the beginning of the pericxi for which the Transaction is being given effect nor is it necessarily indicative of future operating results or financial position.
Wisconsin Energy Company:
- Unaudited WE NSP-WI Pro Forma (As Reoorted)
(As Renorted)
Combined **
(Millions of Dollars)
As of December 31,19%
Utility plant-net
$ 3,058
$ 665
$ 3,703 Current assets 541 87 M6 Other assets
. 908
$7
___flL4 Total Assets 1MQ2 1.3Q2 lild Common stockholder's equity
$1,739
$ 331
$ 2,070 Preferred stock and premium 30 30 long-term debt 1.372 717 1.6M Total Capitalization 3,141 563 3,7M Current liabilities 488 89 577
';.her liabilities 878
_ 157 887 Total Equity & Liabilities LM02 L 522 1112 1
1 For the Year Ended December 31,1996 i
Utility Operating Revenues
$ 1,774
$ 466
$ 2,240 Utility Operating income 306 56 362 Net income, after Preferred Dividend Requirements S
210 39 249 In connection with the Merger Agreement, WE will be renamed Wisconsin Energy Company.
Includes a $150 million pro forma adjustment to conform the presentation of noncurrent deferred taxes as a net liability and a net $25.7 million pro forma adjustment for the transfer of selected gas assets from N5P-WI to l
New NSP.
Note:
Earnings per share of common stock are not applicable because all of the Wi::consin Energy Company j
common stock will be owned by Primergy.
A-35
I C - Depreciation j
Depreciation expense is accrued at straight line rates over the estimated useful lives of the assets. These rates are j
certified by the PSCW and include estimates for salvage and removal costs. Depreciation as a percent of average
)
depreciable utility plant was 4.1% in 1996,3.8% in 1995 and 3.9% in 1994. Nuclear plant decommissioning is accrued as depreciation expense (see Note F).
D -Income Taxes Comprehensive interperiod income tax allocation is used for federal and state temporary differences. The federal investment tax credit is accounted for on the deferred basis and is reflected in income ratably over the life of the related property, The following table is a summary of income tax expense and a reconciliation of total income tax expense with the tax expected at the federal statutory rate.
1926 1921 1224 (Thousands of Dollars)
Current tax expense
$131,833
$149,249
$131,574 investment tax credit-net (2,430)
(4,482) -
(4,625)
Deferred tax expense, (1.575)
(2.833)
(25.095)
Total Tax Expense
$127.828
$141.934
$101.854 Income Before income Taxes and Preferred Dividend
$339.143
$382.602
$283.608 Expected tax at federal sta.utory rate
$118,700
$133,911
$ 99,263 State income tax net of federal tax benefit 17,624 18,943 14,087 investment tax credit restored (4,509)
(4,482)
(4,625)
Other (no item over 5% of expected tax)
(3.987)
(6.438)
(6.871)
Total Tax Expense
$127.828
$141.934
$101.854 Statement of Financial Accounting Standards No.109, Accounting for hicome Taxes ("FAS 109"), requires the recording of deferred assets and liabilities to recognize the expected future tax consequences of events that have been reflected in WE's financial statements or tax returns and the adjustment of deferred tax balances to reflect tax rate changes. Following is a summary of deferred income taxes under FAS 109.
Decemler 31 1926 1921 (Thousands of Dollars)
Deferred Income Tax Assets Decommissioning trust
$ 41,066
$ 43,759 Construction advances 45,906 43,052 Other 63 297 49.770 Total Deferred Income Tax Assets
$150.269
$136.581 Deferred Income Tax Liabilities Property related
$480,788
$445,878 Conservation investments 16,827 25,775 Other 10.230 8.175 Total Deferred Income Tax Liabilities
$507.845
$479.828 1
l A-36
i
. As detailed in Note A, WE has also recorded deferred regulatory assets and liabilities representing the future -
expecthd impac't of deferred taxes on utility revenues.
E - Allowance for Funds Used During Construction ("AFUDC")
AFUDC is included in utility plant accounts and represents the cost of borrowed funds used during plant construction and a return on stockholders' capital used for construction purposes. On the income statement, the cost of borrowed funds (before income taxes) is a reduction of interest expense and the return on stockholders' capital is an item of noncash other income.
As approved by the PSCW, AFUDC was capitalized on 50% of construction work in progress ("CWIP") at a rate of 10.17% during 1996. Prior to 1996, utility rates approved by the PSCW provided for a current return on investment for selected long-term projects included in CWIP. AFUDC was capitalized on the remaining CWIP at a rate of 10.83% in 1995 and 1994.
F - Nucicar Operations Point Beach Nuclear Pfant. WE operates two 500 megawatt electric generring units at its Point Beach Nuclear Plant (" Point Beach"). During 1996, Point Beach accounted for 25.4% of WE's net clectric generation. The current operating licenses for the two units at Point Beach expire in 2010 and 2013 for Units I and 2, respectively, in May 1996, WE received a written order from the PSCW ("PSCW Order") approving replacement of the Unit 2 steam generators and reaffirming its prior decision approving WE's construction and operation of an Independent Spent Fuel Storage Installation ("!SFSI") for dry storage of spent fuel at Point Beach, in July 1996, the PSCW denied a petition for rehearing fued by intervenors in the proceeding.
Failure by the PSCW to approve the steam generator replacement and reaffirm authorization for the ISFSI would have jeopardized the continued operation of Point Beach. The Unit 2 replacement steam generators were necessary due to the degradation of tubes within the steam generators and will permit operation of Unit 2 at least until its current operating license expires. The steam generator replacement was completed in January 1997. Subject to approval by the United States Nuclear Regulatory Commission ("NRC*), WE expects to restart Unit 2 in the second quarter of 1997. The ISFSI provides interim dry storage of spent fuel from Point Beach until the United States Department of Energy (* DOE") takes ownership of and removes spent fuel under an existing contract mandated by the Nuclear Waste Policy Act of 1982. The ISFSI is necessary because the spent fuel pool inside the plant is nearly full Construction of the ISFSI was completed in 1995.
In August 1996, a group of intervenors in the PSCW Order proceedings filed in Dane County Circuit Court a petition for judicial review of the PSCW Order. The petition seeks revensal of the PSCW Order and a remand to the PSCW directing it to deny WE's request for authorization to replace the steam generators and to construct the ISFSI, or in fx attemative, to correct the alleged errors in the PSCW Order. WE has intervened in the proceeding to vigorously oppose the petition. Final briefs have been filed in the proceeding, and WE is awaiting a decision by the court on the petition.
Two storage casks have been loaded with spent fuel and transferred to the ISFSI. During loading of a third cask in May 1996, hydrogen gas was ignited within the cask. Cask loading has been halted until actions are implemented by WE to prevent recurrence of such an event and until the NRC has reviewed and accepted such actions. WE hopes to receive agreement from the NRC that WE may resume loading of the casks in the summer of 1997.
In December 1996, WE paid the NRC $325,000 in civil penalties for performance deficiencies and violatior.s of NRC requirements in various plant activities. In January 1997, the NRC informed WE of additional potential violations observed during a special inspection that could result in further civil penalties. Also, the NRC sent a letter on January 27,1997 notifying WE of its assessment that Point Beach has experienced a recent declining trend in performance based upon these inspections and other ongoing regulatory interactions. The NRC issues trend letters to A 37
provide an early notification of declining performance and to allow a utility, under the watchfulness of the NRC, to take early corrective actions. The NRC acknowledged in the letter that WE has made improvements'in the identification and resolution of specific problems.
In early October 1996, the NRC requested all nuclear reactor licensees in the United States to describe the processes used to ensure the adequacy and integrity of the licensees' design bases for their plants and to ensure the plants continue to be o[erated and maintained in accordance with the design bases. WE responded to the NRC in February 1997.
Nuclear Fucle WE has a nuclear fuel leasing arrangement with Wisconsin Electric Fuel Trust (" Trust"), which is treated as a capital lease. The nuclear fuel is leased 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 WE or the Trust terminates the lease, the Trust would recover its unamortized cost of nuclear fuel I
from WE. Under the lease terms, WE is in effect the ultimate guarantor of the Trust's commercial paper and line of credit borrowings financing the investment in nuclear fuel.
Provided below is a summary of nuclear fuel investment at December 31 and interest expense for the respective years on the nuclear fuel lease.
1926 1925 1994 (Thousands of Dollars)
Nuclear Fuel Ur. der capital lease
$100,952
$ 89,840 Accumulated provision for amortization (61,408)
(50,532)
In process / stock
. 35.932 19.952 Total Nucleat Fuel 1]M26
$ 59.260 Interest Expense on Nuclear Fuel lease
$2,332
$2,401
$1,8%
The future minimum lease payments under the capital lease and the present value of the net minimum lease payments as of December 31,1996 are as follows:
(Thousands of Dollars) 1997
$19,141 1998 15,823 1999 7,011 2000 3,356 2001 418 Total Minimum lease Payments 45,749 less: Interest (2.787)
Present Value of Net Minimum lease Payments S 2 3.62 The estimated cost of disposal of spent fuel, based on a contract with the DOE, is included in nuclear fuel expense.
The Energy Policy Act of 1992 establishes a Uranium Enrichment Decontamination and Decommissioning Fund
("D&D Fund") for the DOE's nuclear fuel enrichment facilities. Deposits to the D&D Fund are derived in part from special assessments to utilities. As of December 31,1996, WE has on its books a remaining estimated liability equal to the projected special assessments of $26.8 million. A corresponding deferred regulatory asset is detailed in Note A.
Effective in 1997, the PSCW has disallowed the recovery of D&D Fund assessments in Wisconsin utility retail rates as a result of a decision by the U.S. Court of Federal Claims in " Yankee Atomic Electric Company v. The United A-38 l
States" ("Yrnkee Atomic") in which the court m!ed that the payments were unlawful. WE has a similar contract with the DOE. Ed PSCW expects that the DOE will eventually refund the D&D Fund assessments paid by the affected utilities but has stated that it would be appropriate that WE be reimbursed if the Yankee Atomic decision is overturned or modified. The amount of the assessments related to the PSCW rate jurisdiction is approximately 85%
of the assessments or $2.6 million in 1997 and will remain as a deferred regulatory asset. He ponion of allowable costs will be amonized to nuclear fuel expense and included in utility rates over the next 11 years.
Nuclear Insurance: ne Price-Anderson Act ("Act") provides an aggregate limitation of $8.9 billion on public.
liability claims arising out of a nuclear incident. WE has $200 million of liability insurance from commercial sources. He Act also establishes an industry-wide retrospective rating plan under which nuclear reactor owners coulo be assessed up to $79.3 million per reactor (WE owns two), but not more than $10 million in any one year for each reactor, in the event of a nuclear incident.
An industry-wide insurance program, with an aggregate limit of $200 million, has been established to cover radiation injury claims of nuclear workers first employed after 1987. If claims in excess of the available funds develop, WE could be assessed a maximum of approximately $3.0 million per reactor.
WE has property damage, decontamination and decommissioning insurance totaling $1.5 billion for loss from damage at Point Beach with Nuclear Mutual Limited ("NML") and Nuclear Electric Insurance Limited ("NEIL"). Under the NML and NEIL policies, WE has a potential maximum retrospective premium liability per loss of $5.4 million and
$7.0 million, respectively.
WE also maintains additional insurance with NEIL covering extra expenses of obtaining replacement power during a prolonged accidental outage (in excess of 21 weeks) at Point Beach. This imurance coverage provides weekly indemnities of $3.5 million per unit for outages during the first year, declining to 80% of the amounts during the second and third years. Under the policy, WE's maximum retrospective premium liability is approximately $7.8 million.
It should not be assumed that, in the event of a major nuclear incident, any insurance or statutory limitation of.
I liability would protect WE from material adverse impact.
Nuclear Decommissioning: Subject to resolution of the Point Beaclk Unit 2 steam generator replacement and ISFSI matters described above, WE expects to operate the two units at Point Beach to the expiration of their current
)
operating licenses. The estimated cost to decommission the plant in 1996 dollars is $379 million based upon a site i
specific decommNioning cost study completed in 1994. 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 $1.7 billion will be spent over a twenty-year period, beginning in 2010, to decommission the plant.
)
Nuclear decommissioning costs are accrued as depreciation expense over the expected service lives of the two units following an external sinking fund method. In 1996, WE increased its funding levels based on a site specific estimate as required by the PSCW. It is expected that the annual payments to the Nuclear Decommissioning Trust Fund
(" Fund") along with the earnings on the Fund will provide sufficient funds at the time of decommissioning. WE believes it is probable that any shortfall in funding would be recoverable in utility rates.
As required by Statement of Financial Accounting Standards No. I15, Accounting for Certain Investments in Debt and Equity Securities, WE's debt and equity security investments in the Fund are classified as available for sale.
Gains and lwses on the Fund were determined on the basis of specific identification; net unrealized holding gains on the Fund were recorded as part of accumulated provision for depreciation.
A-39
Following is a summary of decommissioning costs and earnings charged to depreciation expense and the Fund, balance included in accumu!ated provision for depreciation at December 31. The Fund balance is stated at fair value.
1226 1921 1911 (Thousands of Dollars)
Decommissioning costs
$15,418
$ 3,456
$ 3,456 Earnings 10.891
_ lA01 6.682 Depreciation Expense
$2r,jg2
$1gj51
$1QJJ.$
Total costs accrued to date
$261,729
$235,420 Unrealized gain
. 60.356 39.705
$275.125 Accumulated Provision for Depreciation
$322.085 G - Preferred Stock l
Serial Preferred Stock authorized but unissued is cumulative, $25 par value,5,000,000 shares.
In the event of default in the payment of preferred dividends, no dividends or other distributions may be paid on WE's common stock.
The 3.60% Series Preferred Stock is redeemable in whole or in part at the option of WE at $101 per share plus any accrued dividergis.
In 1994, WE called for redemption all of its 52,500 outstanding shares of 6.75% Series Preferred Stock at a redemption price of par.
- II-long-Term Debt '
'Ihe maturities and sinking fund requirements through 2001 for the aggregate amount of long-term debt outstanding j
(excluding obligations under capital lease, see Note F) at December 31,1996 are shown below.
)
(Thousands of Dollars) 1997
$166,905 1998 61,905 1999 92,905 2000 1,905 2001 1,905 Sinking fund requirements for the years 1997 through 2001, included in the table above, are $9.5 million.
Substantially all utility plant is subject to the applicable mortgage.
leng-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. Unamortized amounts pertaining to reacquired debt are written off currently, when acquired for sinking fund purposes, or amortized in accordance with PSCW orders, when acquired for early retirement.
Tbc fair value of WE's long-term debt was $1.6 billion and $1.5 billion at December 31,1996 and 1995, respectively. The fair value of the first mortgage bonds a:x! debentures is estimated based upon the market value of the same or similar issues. Book value approximates fair value for WE's unsecured notes. The fair value of WE's obligations under capital lease is the market value of the Trust's commercial paper.
J A-40
l In September and October 1995, WE issued $98.35 million of unsecured variable rate promissory notes maturing
- between March'1,2006 and September 1,2030. These notes were issued as a revenue and collateral source for an equal principal amount of tax exempt Refunding Revenue Bonds issued on WE's behalf to refund $98.35 million of previously issued tax exempt bonds called for optional redemption that were secured by WE's First Mortgage Bonds.
In November 1996, WE issued $200 million of 6 5/8% unsecured debentures due 2006. Iri December 1995, WE issued $100 million of unsecured One llundred Year 6 7/8% Debentures due 2095. Proceeds from both issues were added to WE's general funds and were applied to the repayment of short-term borrowings.
1 In December 1996, WE issued a promissory note in the amount of $12.05 million due 2006. The note was issued as part of the transaction to acquire the steam facilities from Milwaukee County. The note has been discounted to redect the difference between the effective interest rate of 6.36% and the stated rate of 1.93%. This discount will be amortized over the life of the notes using the effective interest method.
At December 31,1996, the interest rate for the $67 taillion variable rate note due 2016 was 4.15% and the interest rate for the $98.35 million variable rate notes due 2006-2030 was 4.20%.
I-Notes Payable Short-term notes payable balances and their corresponding weighted average interest rates at December 31 consist of:
1996 1995 k
Interest Interest Balance Ralc Balance Rate (Thousands of Dollars)
Banks
$10,495 5.80 %
$100,885 5.78 %
Commercial paper 34.895 5.59 %
49.809 5.88 %
$ML2Q
$150.694 Unused lines of credit for short-term borrowing amounted to $99.3 millien at December 31,1996. In support of various informal lines of credit from banks, WE has agreed to maintain unrestricted compensating balances or to pay commitment fees; neither the compensating balances nor the commitment fees are significant.
J - Pension Plans Prior to 1996, WE had several defined benefit noncontributory pension plans covering all eligible employees.
Pension benefits were based on years of service and the employee's compensation. Effective January 1,1996, plans covering all employees were converted to a single defined benefit noncontributory cash balance plan. Under the cash balance plan, pension benefits are determined by a combination of annual plan wages, a credit based upon WE's annual financial performance and individual account-based interest credits. Lump sum payout at termination of employment or retirement is available. Each employee's opening account balance was based on accrued pension benefits as of December 31,1994 and convetted to a lump-sum amount determined under the prior plan's provisions.
l The lump-sum amount was credited for an additional transition credit based on age and years of service. The cash balance plan includes a grandfather clause, where employees who retire during the 15 years following January 1, 1996 receive the greater of pension benefits calculated under their original pension plan or under the cash balance plan.
The majority of the plans' assets are equity securities; other assets include corporate and government bonds and real estate. The plans are funded to meet the requirements of the Employee Retirement income Security Act of 1974.
In the opinion of WE, current pension trust assets and amounts which are expected to be paid to the trusts in the future will be adequate to meet future pension payment obligations to current and future retirees.
A-41
^
Pension Cost calenbred ocr FAS 87
- 1996
.1993 199f (Thousands of Dollars)
Components of Net Periodic Pension Cost, Year Ended December 31 Cost of pension benefits earned by employees
$ 9,912
$, 8,985
$10,933 Interest cost on projected benefit obligation.
41,454 41,586 38,736 Actual (return) loss on plan assets (85,141)
(136,243) 7,634 Net amortization and deferral 34.600 88.493 (52.180)
Total pension cost calculated under FAS 87 W
5 2.821 11123
- Actuarial Present Value of Accumulated Benefit Obligation, at December 31 Vested benefits-employees' right to receive benefit no longer contingent upon continued employment
$560,801
$543,371 Nonvested benefits-employees' right to receive benef i contingent upon 14.741 12.651 continued employment
$575.542
$556.022 Total obligation Funded Status of Plans: Pension Assets and Obligations at December 31 Pension assets at fair market value
$687,482
$637,529 Projected benefit obligation at present value (601,213)
(584,785)
Unrecognized transition asset (19,566)
(22,034)
Unrecognized prior service cost 36,027 23,1%
Unrecognized net gain (96.344)
(54.780)
S 6.386
($
876)
Projected status of plans Re.es used for calculations (%)
Discount rate-interest rate used to adjust for the time value of money 7.75 7.25 8.25 Assumed rate of increase in compensation levels 4.75 to 5.0 4.75 5.0 Expected long-term rate of return on pension assets 9.0 9.0 9.0 l
(
- Statement of Financial Accounting Standards No. 87, Employers' Accout. ting for Pensions i
('FAS 87").
K - Benefits Other Than Pensions l'ostretirement Benefitsr Effective in 1993, WE adopted prospectively Statement of Financial Accounting Standards No.106, Employers' Accounting for Postretirement Benefits Other Than Pensions ("FAS 106"), and elected the 20 year option for amortization of the previously unrecognized accumulated postretirement benefit obligation.
i WE sponsors defined benefit postretirement plans that cover both salaried and nonsalaried employees who retire at age 55 or older with at least 10 years of service. The postretirement medical plan provides coverage to retirees and their dependents. Retirees contribute to the medical plan. The group life insurance benefit is reduced upon retirement.
f A-42 L
- Etnployees' Benefit Trusts (" Benefit Trusts") are used to fund a major portion of postretirement benefits. He funding policy for the Benefit Trusts is to maximize tax deductibility. The majority of the Benefit Trusts' assets are mutual funds.
Postretirement Benefit Cost calculated ocr FAS 106 192f2 1995 1994 (Thousands of Dollars)
Components of Net Periodic Postretirement Benefit Cost, Year Ended December 31 Cost of postretirement benefits earned by employees
$ 2,436
$ 2,276
$ 2,653 Interest cost on projected benefit obligation 10,456 10,458 10,148 Actual return on plan assets (5,938)
(12,598)
(3,393)
Net amortization and deferral 6.745 13.951 5.648 Total postretirement benefit cost calculated under FAS 106
}jj,g22
}Jgg2
$3,jjg Funded Status of Plans: Postretirement Obligations and Assets at December 31 Accumulated Postrctirement Benefit Obligation at December 31 Retirees
($92,417)
($92,746)
Fully eligible active plan participants (9,938)
(10,304)
Other active plan participants (40.428)
(4 L732)
Total obligation (142,783)
(144,782)
Postretirement assets at fair market value 49.424 45.086 Accumulated postretirement benefit obligation in excess of plan assets (93,359)
(99,6%)
Unrecognized transition obligation 78,239 83,268 Unrecognized prior service cost (1,038)
(1,279) 1 Unrecognized net gain (14.583)
(6.102)
Accrued Postrctirement Benefit ' Obligation
($30.741)
($23.8091 Rates used for calculations (%)
Discount rate-interest rate used to adjust for the time value of money 7.75 7.25 8.25 Assumed rate of increase in compensation levels 4.75 to 5.0 4.75 5.0 Expected long-term rate of return on postretirement assets 9.0 9.0 9.0 Ileahh care cost trend rate 10.0 declining to 5.0 in year 2002 Changes in health care cost trend rates will affect the amounts reported. For example, a 1 % increase in rates would increase the accumulated postretirement benefit obligation as of December 31,1996 by $8.4 million and the aggregate of the service and interest cost components of net periodic postretirement benefit ccr.t for the year then ended by approximately $1 million.
Revitali:ation: In the first quartet of 1994, WE recorded a $73.9 million charge related to its revitalization program, his charge included $37.5 million for Early Retirement incentive Packages ("ERIP") and $25 million for Severance Packages ("SP"). These plans were used to reduce employee staffing levels. ERIP provided for a monthly income supplement ("ERIP Supplement"), medical benefits and waiver of an early retirement pension reduction. The SP included a severance payment, medical / dental insurance, outplacement services, personal financial planning and tuition support. Availability of these plans to various bargaining units was based upon agreements made between WE and the bargaining units. These plans were available to most management employees but not to elected officers.
A Under ERIP,403 employees elected to retire in 19%. Under SP,651 and 75 employees enrolled in 1994 and 1 15, respectively. ERIP Supplement costs are paid from pension plan trusts and medical / dental benefits from employee benefit trusts. Remaining ERIP and SP costs are paid from general corporate funds. 7he ultimate timing of cash flows for ERIP Supplement costs depends upon the funding limitations of WE's pension plans. With the exception of ERIP Supplement costs, approximately $35.8 million have been paid against the revitalization liability through December 31,1996 and no liability remains outstanding at December 31,1996.
L - Information Hy Segments of Business WE is a public utility incorporated in the State of Wisconsin. WE's principal business segments include electric, gas and steJm uthity operations. 7he electric utility generates, transmits, distributes and sells electric energy in southeastern (including metropolitan Milwaukee), east central and northern Wisconsin and in the Upper Peninsula of Michigan. 7he gas utility purchases, distributes and sells natural gas to retail customers and transports custome;-
owned gas in three service areas in southeastern, east central and western Wisconsin that are largely within the electric service area. The steam utility produces, distributes and sells steam to space heating and processing customers in the Milwaukee area. The following summarizes the business segments of WE.
. Year ended December 31 199fa 1925 1293 (Thousands of Dollars)
Electric Operations Operating revenues
$1,393,270
$1.437,480
$1,403,562 Operating income before income taxes 380,376 419,271 329,216 Depreciation 183,159 164,789 159,414 Construction expenditures 272,838 223,723 244,718 Gas Operations Operating revenues 364,875 318,262 324,349 Operating income before inco' taxes 47,720 47,022 30,993 Depreciation 18,246 17,722 16,856 Construction expenditures 22.851 24,851 25,481 Steam Operations Operating revenues 15,675 14,742 14,281 Operating income before income taxes 4,375 3,757 2,825 Depreciation 1,391 1,365 1,344 Construction expenditures 21,651 206 1,213 Total Operating revenues 1,773,820 1,770,484 1,742,192 Operating income before income taxes 432,471 470,050 363,034 Depreciation 202,796 183,876 177,614 j
Construction expenditures (including non-utility) 319,832 248,867 271,448 At December 31 Net Id.ntifiable Assets
- Electric
$3,646,997
$3,449,822
$3,411,512 Gas 400,582 376,536 357,242 j.
Steam 46,499 25,214 25,315 l
Non-utility 9.199 5.235 2.779 Totalidentifiable Assets 4,103,277 3,856,807 3,796,848 i
Other corporate assets **
403.883 462.117 405.345 Total Assets
$4.507.160
$4.318.924
$M07 ' 2),
Prior years restated to reflect change in presentation.
- Primarily includes other property and investments, materials and supplies and deferred charps and other assets.
A-44
e M - Commitments and Contingencies Purchase Powr Commitment: To meet a portion of WE's anticipated increase in future system energy supply needs, WE has entered into a 25 year power purchase contract with an unaffiliated independent power producer, LSP-Whimwater I P, ("LS Power"). The contract is contingent upon the generating facility achieving commercial operation. Plant construction is currently on schedule to meet the planned start-up date of June 1,1997. The contract includes no minimum take provisions for energy. WE's estimated unconditional obligations under the terms of the contract at December 31,1996 are:
(Thousands of Dollars) 1997 5 17,000 1998 30,000 1999 31,000 2000 32,000 2001 33,000 Later Years 815.000 Total Minimum Obligations 958,000 less: Interest (569.000)
Total at Present Value
$389.000 Kimberly Cogenemtion Facility: In 1993, a competitive bidding process conducted by the PSCW resulted in selection of a proposal submitted by LS Power to construct the generating facility discussed in Purchase Power Commitment above. Prior to the 1993 selection of the LS Power generating facility by the PSCW, WS had proposed to construct its own 220 megawatt cogeneration facility in Kimberly, Wisconsin, which was intendec ; provide process steam to Repap Wisconsin, Inc. ("Repap") starting in mid-1994. In its order, the PSCW seletted the WE project as the second place conditional project if the LS Power project did not proceed. At December 31,1996, a net investment of approximately $65.6 million remains in Other Deferred Charges and Other Assets for the Kimberly Cogeneration Facility equipment (the " Equipment"). This balance represents costs associated with the procurement of three combustion turbines, one steam turbine and three heat recovery boilers that were acquired in order to achieve the in-service dates as agreed to in a steam service contract with Repap.
)
WE is continuing to review other options for use or sale of the Equipment,' which is a technology of natural gas-fired combined cycle generation equipment that is marketed worldwide. WE is investigating opportunities to sell the Equipment or to use it in another power project and is currently negotiating a power project involving the Equipment.
At this time, WE does not believe that disposition of the Equipment will have a material adverse effect on its financial condition. Ilowever, there is a possibility that WE may need to recognize an irnpairment of the Equipment in the future should the project noted above not occur and should no other viable sales opportunities and/or power projects involving the Equipment be identified.
Manufactured Gas Plant Sites: WE continues a voluntary program to investigate the remediation of a number of former manufactured gas plant ("MGP") sites. Approximately $1.7 million has been expended through December 31,1996 for such activities. Future remediation costs to be incurred through the year 2001 have been estimated to be $12 million, but the actual costs are uncertain pending the result of further site specific investigation i
and the selection of site specific remediation, in its February 13,1997 rate order, the PSCW amplified its position on the reco5ery of MGP remediation costs. It reiterated its position that such costs should be deferred and amortized and recovered, without carrying costs, in future rate cases. Since the timing and recovery of MGP remediation costs will be affected by the biennial rate case cycle and WE's proposed merger related rate freeze, the timing and magnitude of remediation expenditures, and their recovery during the period to 2001, may be affected, f
A-45
i N - Transactions with Associated Companies I
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 PSCW. WE received from WEC stockholder capital contributions of $30 million in 1995 and 1994, respecJvely.
Plans for the construction and financing of future additions to r.tility plant can be found elsewhere in this retx)rt in MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS " LIQUIDITY AND CAPITAL RESOURCES - Capital Requirements 1997-2001."
DIRECTORS The information under Election of Directors" in Wisconsin Electric's definitive Information Statement dated April 3,1997, attached hereto, is incorporated herein by reference.
t EXECUTIVE OFFICERS (Figures in parenthesis indicate age and years of service with Wisconsin Electric Power Company as of December 31,1996.)
Richard A. Abdoo(52;21)
Francis Brzezinski(45;7) 2 Chairman of the Board l' ace President -
and ChiefExecutive Officer Business Development Richard R. Grigg (48;26)
Charles T. Govin, Jr. (50;l 8)
President. ChiefOperating Officer l' ice President - Electric and Gas Operations and ChiefNuclear officer Kristine M. Krause (42;l8)
Dayid K. Potter (53;27) l' ice President - Fossd Operations Senior l' ice President Kristine A. Rapp6 (40;14)
Calvm f1. Baker (53;5) l' ice President - Customer Services l' ice President - Finance and ChiefFinancial Officer Anne K. Klisurich (49;24)
Controller Ann Marie lirady (44;8)
Corporate Secretary and l' ice President - External Affairs l
1 A-46 i
g
.. ~
8 100 East Wisconsin Avenue Telephone 414 276 9500 l
Suite 1500 Mdwaukee. WI 53202 i
b5Ce Water $iOUSeLLP l
REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and the Stockholder of Wisconsiii Eiectric Power Company I
In our opinion, the accompanying balance sheet and capitalization statement and the related statements of income, of common stock equity and of cash flows present fairly, in all material respects, the financial position of Wisconsin Electric Power Company at December 31,1996 I
and 1995, and the results ofits operations and its cash flows for each of the three years in the period ended December 31,1996, in conformity with generally accepted accounting principles. 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 generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstateraent. 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 the opinion expressed above.
/
M January 29,1997
,