ML20205N717

Wisconsin Electric Power Co 1985 Annual Rept & Certified Financial Statements

ML20205N717
Person / Time
Site:	Point Beach
Issue date:	12/31/1985
From:	Britt R, Goetsch J, Mcneer C WISCONSIN ELECTRIC POWER CO.
To:	Office of Nuclear Reactor Regulation
References
NUDOCS 8605020264
Download: ML20205N717 (50)

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w 1985 1984 ',, '(rxue=) -

EarningsperShare ofComunonSeock i $4.75 L $4.35 9.2 -

Dividends perShare ofComunonstock

, $2.43 '

$2.23%

8.7 TotaloperadngRevenues

$1,440,850,000 - $1,434,689,000 '

O.4 Earnings Available forConunon Stockhoklers

$158,389,000

$149,734,000 5.8 -

Average NummberofComunonShares

'34,422,000 (3.1) L outstanding

'33,345,000 Electric Sales to Retail, Municipal and i Cooperative Caseosners (thousand KWH) 18,452,397 18,194,981 1.4l GasSales(thousand therms):

.629,164 619,123 1.6 Retail,MunicipalandCo+A :

Custonners(year-end).'

. 838,843 830,640 11.0 Electric' Gas 229,766 226,009

- 1.7 EARNINGS PER SHARE DIVIDENDS PER 9 TARE OF COnet00NSIOCK OF COh0WOM 51DCK on dottars)

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isconsin Electnc's 90th rar was marked by

. lli n years ago, we exp:ctid to add sewn pmer 3

another strong financial perkwW &c, further,

' plant units in the 1980s. imtead, we buik only.

reductions in electric rates and major decisions

- two and purclused partial ownership in another.

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which will haw an important efect on how we ?

- Our load control strategy began paying off by

- the early 1980s. At a time when many utilities do businessin the future.'.

were facing serious financial problems bringing Earnings imprmed Rr the fifth consecuene ) ras,.

amounting to $4.75 per share ofcommon stock

~new plants on line, our constnrtion program was

' in 1985, compared to $4.35 in 1984.1he year's winding (kmn. Construction spending peaked in

. performance continued a growth pattern that t

- 1980 and has sinceicwled off.'

has seen w niep per share ircense at an awrage

= 1hc headline on the cmtr of our 1975 Annual rate of 15 percent a 3rarsince 1980.

Report obsened that "the energy decisions wt Common stock dhidend pa>tnents were in.

make now will determine h<w we lhe 10 ) ears creased for the 25th year in a rtw, rising to 52.43 from mm"1 hat w as a prophetic statement, for a share in 1985 from 52.23% the previous >rar. -

the tough decisions made in the past decade built The market price of our common stock, which a sound financial base kr Wisconsin Electric rose 28 percent during 1985, has more than in 1985..

. As we begin a new era and k>ok to the next ik)ubled in the past fin years.

10 3rars, we (k) so from a p>sition of strength.

It is particularly gratifying to report these results in a 3rar when we were abic to reduce

, We haw ampic gerrrating capability and a electricity and gas prices. While we were pleased manageable construction program. Our gas and with the past year's operations, sewral far.

. electric rates are wril bekw the national reaching events occurred in 1985 which will set average - and we (k) not expect major increases.

the company's course R)r the >rars ahead.

. Finally, our strong financial position giws us the First of all, we completed a major period of flexibility to begin nwning toward dhrrsified pmtr plant construction, adding twu generating operations at the same time we go forward with units with a capacity of 675,000 kikmatts lhese a major upgrading of our utility plant.

are the last new plants we expect to bring on Our plans to dhersify began in 1981 wirn line until about the turn of the century '

the ikiard of Directors apprmrd a plan to Second, legislation was passed in Wisconsin establish a inkling company, with Wisconsin that will alkw us to nxnr Exwurd with our plans Electric and Wisconsin Natural Gas Co. as sub-to establish a new holding company sidiaries. EfR)rts to form the new parent company Third, we announced plans in December to were bk)cked by a series of regulatory and legis-begin.a 5600 million renmution program to lative delays; it became apparent that legislation extemi the operational lhes of twu coal-fired was treded to clarify the status ofimiding power plants and significantly reduce emissions.

companiesinWisconsin.

In manyways,1985 was a >rar of transition Passage of the hokling company bill in Octotxt i

for Wisconsin Electric. For the past 10 years 1985 cleared the way kr our planned corporate we haw worked aggressiwly to control grtmth -

restructuring. We Aled an applicatkm with the in peak demand for electricity and impnwe '

Public Service Commisskm of Wisconsin in the return to stockholders. We developed in.

December to establish Wiscomin Energy Corp.

nmutive rates, implemented a k)ad management as the parent company of Wisconsin Electric, program and actively promoted efficient energy Wisconsin Natural and various mm utility sub-use. These programs were highly successful and sidiaries the company plans to develop in the L

alkmrd us to cut our planned pmtr plant coming 3rars.

constructionin half.

1hc Wisconsin commisskm is required by 2-

the new holding company law to act on the Utishington and Oak Creek powrr plants is a application by May 28,1986. A hearing has been continuation of our tradition ofinmnation.1he scheduled by the commission on April 23,1986 5600 million modernization will extend the lists in Madison, Wis. Stockholders may participate of botn plants, increase their output and signifi-in the hearing or submit written comments.

cantly reduce sulfur dioxide emissions.

We also will seek necessary appnnuls for Rntr of the boilers at the Oak Creek plant, built the holding company from the Securities and in the 1950s, will be replaced by a trw clean Exchange Commission and other gmernmental coal technok>gy system known as atmospheric units. Et>lk) wing tlose apprtnuls, the restructuring fluidized-bed comixistion ( AFBC).1his will plan will be submitted to a u>te of stockholders reduce sulfur dioxide emissions by 90 percent.

at a special meeting planned for later this )rar.

The AFlK' system mixes limestone ami o>al in We expect to hase Wisconsin Energy Corp.

the combustion pn> cess to capture sulfur gases in operation byJan.1,1987.

nornully pnxiuced when coal is burned.

Management beliers the holding company When completed, the AFBC installation at Oak will panide the opportunity to make your Creek will be the largest in the wurid.

imrstment stronger ami help it grow. We plan Eight other generating units at Oak Cnxk ami to imrst in non-utility subsidiaries to complement Port whshington also will be completely refur-our present operations, but utilities will continue bished beginning in 1986. 'lhe remnution plans to be our principal business and primary source for the two plants were devek) ped after more ofincome.

than twu yrars of analysis to determine the nx>st Some stockholders have a.sked why wr plan to effectist ways to ext::nd plant lists, impnne change the structure of our company, ghrn the triiability, restore capability and achior signdicant success of our utility operations We're not really emissions reductions. The pn>iects at both plants changing the phik> sophy that guided Wisconsin will be completed by 1992.

Electric management. In fact,41sconsir. Electric's As announced in last 3rar's Annual ik x>rt, wr 1

long-term performance has been built on change plan to go forward with the installation and and innmution. In our early history, the company's denmnstration of another clean coal technology -

primarv interest was the street railway business pressurized fluidized-bed combustion - at Unit 5 with electricitT sales incidental.

ist the company changed as times changed.

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As electric operations became nx)rc important, we deveh> ped better ways to prtxiuce cIcctricity y'

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The process of burning puhrrized ctul, for ge$.

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example. was de th> ped at a Wisconsin Electric 7

power plant. Further impnnrments led to the

.l construction of an advanced design plant that 79 held the record as the wurid's most efficient f

e power producer for nx>re than a decade.

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expanding natural gas service a about the same

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time wt phased out the transportation business and related actisities.

.g The IN> int Beach Nuclear Plant, built in the Jy

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1(XWis and early 1970s, continued the company's leadership in adsunced technokigy Point Beach

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4 has fren one of the nation's most reliable msclear Hf plants, and has saved Wisconsin Electric cus-

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tomers more than a billion dollars in the cost of

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3 The major restoration program planned for Ibrt i

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=r of the R>rt Washington plant. 'lhis is a joint impact on electric rates.

pmject imuhing Wisconsin Electric, R> ster R believe wry strongly that air quality Wheeler Dewlopnwnt Corp., Brown Iknrri stamlards shouki he national in scope ami that Corp., Gilbert /Commonwraith Associatesand new clean coal technok)gies, such as those being

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Research Cottrell.

planned kr our plants, offer the best opportunity R are seeking support from the federal gmtrn-for neaningful emissions reductk>ns.

ment, the Electric Rnwr Research Institute and Just as there was a major change in the utility other utilities for this advanced technology business following the oil embary> in the 1970s, demonstration. Congress has appropriated $400 new dewkymerus are occurring rxw which will million to establish a fumi to be used kw demon-haw a dramatic impact on gas and electric utilities strating new clean coal technokyics, and we plan

. in the next 10 years.

to file an application with the Departnrnt of Wisconsin Electric is well positiorxd to antici-Energy for partial funding of the R)rt pate amt respond to these changes. R rant Washington Propect.

forward on a strong finanaal Rxxing which

'lhe imprmements being made at the Rwt prmides the flexibility to take advantage of Mshington ami Oak Creek plants will rxx only opportunities.

enhance arrall system reliability, but will address Our consernthe financial managenent, careful increasing public concern about acid rain. R planning and willingness to inrun ate go hand in ltnt worked ckwely with regulatory and legislathe hand. 'lhat appmach has produced a pxxl return leaders at lx>th the state and national lew! to for our stockholders and reasonably pricul errrgy dewky reasonable acid rain contml strategies.

for our custoners. R will continue our efforts We are confident that significant emissions to imprme on that record in the future.

reductions can be achicwd witix>ut a major 4

CharlesS McNect Chairman of the ik>ard and Chief Executhe Officer MAN Vf Russell W. Britt Presklent and Chief Operating Officer n

SolIkirstein Vice Chairman of the ik>ard March 17,1986 4

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f Jsocial, geographic acd cos.-.dal lami-of nearly 40 million g'copic within 400 miles of -

scape that 05ers something kr everyone.1his.

Milwaukee. Places like Chicago, Minneapolis,'

is Disconsin Electric's senice territory - a region lktroit, Cincinnati anti St. louis are all within -

kiunded by Oki Dbrk! craAsmen and built a dafs drhe or an hour's Right. Excellent air, :

upon a traditkm of quality and hard wurk.

rail and shipping gwrts prmide comenient x1hese 12,600 square miles are more than access to the rest of the nation and the worki w

dairyland or vacatkm playgnuund, nx>re than a Businesses here hm something else y>ing Er ~

backdrop kr timhermen and farmers. Wisconsin them to help them gain an advantage in the ~

and the Upper Peninsula of Michigan are a colorful.

marketplace: k)w energy costs. Wisconsin quilt oflandscapes osering a blemi of cosmo.

Ekctric's rates are anxmg the kmtst in the l politan excitement ' vith unspoiled rural beauty natkm, and our electric rates are not sub ect to It is a land whert tha spicador of a werkt class the sharp increav:s facing other areas of the-spnphony orchestra and the majesty of a hard-country Busines taxes here are another plus Rr -

Ewood R) rest are as close to each other as a 40-Wisconsin.1hc state Imasts the fourth kment minute dme. Between and he}ond are an amazing business tax liability in the U.S. And there are no -

,r dnersityof scenes and lifestyles.

taxes on machinery and equipment, product _

alhis land brings out the best in people, and imentories or the energy used for manufactur.

i thebestinourcompany ing. In Wisconsin there are no highway tolls or lhe re sidents of Wisconsin and_ Michigaris uwr fees, either.

' Upper IYninsula are as solid as the glacially 1 hen there are the workers themsches.1hc j'

carmi hills that dot the countryside.1 hey are traditkm of excellence upon which the area highly educated, highly skilled and highly moti.

was n>unded has rot been kmt on today's workers.

' vated. They pursue advanced Winnat study Renxntd from the hasdes and distractions of

in numbers signdicantly greater than the national nwgalopolitan thing, the Wisonsin worker's average. And, the regiotis college-Ix)und studonts cr.ergies and attention can be A>cused on the job outpcrform the natkm, achieving the highest at hand. And the facts back this up. Milwaukee,

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. awrage scores on ACT and SAT tests anong all n>r example, is rated in the top fhe anmng all of the natioris students.

U.S. urban areas for wurker producthity hkers lhese excellent students dorit haw far to go here are skilled and wrli educated.1hc state's to find colleges that match their talents with highly regarded sucat kmal/ technical educatkm higiulualityoserings Sewral of the natioris Snest system wurks ckwely with business and induary public and private co!leges are within Wisconsin to talk >r training programs to the needs of the Electric's territory For example, the Unhersity of community All of tirse ath antages add up to a i Wisconsin campus at Milwackee is a world-class competithe edge R)r Wisconsin companies.

doctoral inmitutkm that is part of the natkwis lhe people of ahe region are tw>t only hard.

Riurth largem public unhersity systent 1hc UW working, they are also innest and demeed citizens.

. ranks flth among unhersities wkh graduates

%comin Electric's senice territory enjoys one of

_ heading Fortune 500 companics.

America's kmtst crirne rates. Its residents put a y : And speaking o(business:1he company's ser-strung emphasis on family and aunmunity And they lice area is an ideal k)catkm nr U.S. Induury enthusiastically exerche their right of chizenship 1he central location prmides ready access to Nearly two-thirds went to the polis in 1980 and America's industrial heartiami ami a marketplace 1984, compared to a 53 percent national average, y

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y inconsin Electric's tradition of excellence condnued in 1985 ami expanded to include ewn

' continued in 1985 as the company made further.

more senices. %c SAVER pmgram pnsmotes

= gains in containing costs, kmenng prices, man; conwnwion ti mugh leurnthes to purchar high aging energy demand, expanding its services and c#iciency energy systems such as natural gas laying the groundwork nr future progress._.

De company continued to expand its electric furnaces md water heaters.'

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3cse achievements couki not haw heen '.

realized but for the hard work and dedaczthm of and gas energy management senices ir com-the 6,000 employees who are Wisconsin Electric -

sucreial and imkastrial customers as well. On-site and its sulmidi ry Wisconsin Natural. Faced with energy use evaluations, consultations, seminars,-

tighter budgets and with the yw4 demands of and luyw-to crergy management publications are a society that has come to expnt more and more some of the senices that were ofered to local --

from those who serve it, employees were called businesses to help them become nx>re efBcient '

upon to dig deep into their mental and physical and nu>re canpetitiw in the marketplace.

resources to meet the ct dk..e And meet it Programs such as these not only help the cusJ theydid.?

tomer; they help Wisconsin Electric by controlling Ewn in the midst ofincreased productkm, a.

the energy demand and deferring the tred kr l growing custoner bene and capanded senices

. new and costly power plants. In fact, the last to the customer; rum-fuel operating and main-two power plant units the company planned to ;

tenance costs were heki to an annual increase add until near the turn of the century were can-ofless than half the rase ofinflatkm - just 16 ;

pieted in 1985. Unit 2 of the Pleasant Prairie -

percent. %is small increase la a testimony to the -

plant went into sernce mid-year.nis was pre.

^ commitment and talents of the workirce. But it ceded by Unit 5 of the Edgewater plant, of which is only one example in a king list of ad.' A.Ams !

LWisconsin Electric owns a one-quarter share.

that hast helped earn Winconsin Electric a reputa.

As effecthe as the company and its customers tion as a company that pertrms kr cuntaners have twen in controlling energy demand, there is

' and stockholders alike. <.

a practical limit to the anx)unt of energy that can From the customer's point of view, the numt be sawd. Other steps will he arcennary to meet '

significant achiestments of 1985 were the two the demand such as rehabilitating okker plants reductions in the price of electricity and one L

' to keep them operating ami upgradiag the per -

reductkin in gas prices put into c5ect during the formance of plants through the application of year. Dis was the secaul year in a row the price new technology %c company's plans to exten-of electricity had been reduced. Customers bene.

siwly refurbish units at its Ibrt Mdiington and fited in other ways, too. As 'part of the company's Oak Creek plants and to comtrt other units at continuing efRrt to help customers climinate -

Oak Creek to a new a>al hurning system will help enetyy waste, several new conservatkm programs ensure Ihe emnpany and its customers of an 1 were twgun in 1985, such as the (kxxl Cents adequate pnxtuction capacity thmugh the late ik>me program ' lt 05ers customers building new 1990s. %csc projects will smt only imprme lx>mes free consultation and computer analyses performance, reduce costs and extemi the of tirir plans along with rec xnmemlations on useful life of the plants, tiry will reduce sul-imprming energy efHelency through building ~

fur dioxide emisskms ami amtribute to a design nwxhfications. Other custoner progs ams cleaner emironment.

like Wisconsin Natural's SAVER program were installation of the new coal imrning sptem iI

6 at Oak Creek will make Wisconsin Electric one of only a handful of utilities in the country using L.:

this new tectuw>k>gy The conpany's commitnwnt

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to inpnning plant perfornunce, howrwn; doesn't

.,.3 stop there. The company also plans to put its g

irsourtes to work on the dorlopment of another 5-m adwinced coal-burning s>Mem called pressurized

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technokigy holds great pn> mise for orn higher

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in the future.

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steam senice sntem in downtown Stilwaukee.

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of the high-pressure steam nuins is schedule l to begin early in 1986 to further strengttwn the s>Mem's reliability Conpanv rwarch and dorkpment continual on other fronts including studies on alternative energy sources and the application of energy-efficient technok v to the residential, u>mnwrrial

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1. f4. d g.4 and industrial sectors.11w conpany is als funding an extensive study by the t.'niwrsity of Wisconsin to evaluate the emironmental impact of placing concrete reefs made from power plant fly ash in lake Alichigaa. ~Ihis idea has the potential for helping sohr the problem of fly ash disposal

~~

while pnniding an impnned habitat for fish in the Great lakes and elsewhere.

No discussion of Wisconsin Electric's techno-higical'achiewments would be complete without mentioning the co npany's ibint Ileach Nuclear Plant. In 19M, 'bint Ileach was again ratal by the

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industry as the most etlicient nuclear plant in the x

1 I nation mrr its entire operating life. 'Ihe plant has beern the anchor of Wisconsin Electric's [xmtr g

plant sptem In)m its very twginning in 1970. Its emiable record rar after year is a tribute to the y.ge t

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j dalication and high caliber of the plant stalIwho hast denx>nstrated that nuclear [xmtr can be a safe, reliable resource in America's quest fi>r I

energy independence. Ilefore its annual refueling and nuinterunce outage in October 1985. Unit 2 at Point lleach had tren in operaiion for 29-'

o>nwcutive dap. its wa nxi longest operating run.

During its nine decades of sening the public, Wisconsin Electric lus nestr Iren hesitant to change with the times or to take the initiative to clunge the tinws. Nineteen eighty-list nurked the beginning of another period of change in the

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4a4 company's histort a clunge signaled by tir pas.

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sage of the utility holding company law by the M

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state legislature. Wisa>nsin Electric inteixis to take j

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the new law by funning a imiding o>mpany called

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4 Wisconsin Energy Corp.1his new a rporate 3,' - {Q

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structure will enahic tir comp.my to fi>rm subsid-

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g, iaries fi>r the purpose of stimulating economic "9ith h

.g.U destlopment and new job opportunities in the

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compam's senice territory In much the same way d

tlut electricity and autural gas fucial the progress

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of the last 90 3rars, the clunges set in motion in

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'Ihc achiesenrnts of 1985 were nuny and signi-ficant, but it is the plans for tbc future that y-q

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command the attention. Even in the midst of great success. Wisconsin Electric o>ntinues to press on toward the next challenge, the next

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&f n;\\ _ ; c lt ) ? ? ? ] &.l f f f And Analpis of Financial Canulition and Results ofOperatisms J.

ReSultS OfOpenations i.4 penrat in 1985 a>mpared to a 3.2 percent increase in 1984 Moderating commwnic acthity 1 arnings per share of awnmon stock incremed resulted in electric idkwatt-lumer sales to large to $4.75 in 1985 fitwn 54.35 in 1984,covenuing mornents and industnal cust<wners increaming a trend of steady grimth. Earnings per share mee less than I pen:ent in 19H5 compared to a 5.5 because of continued ckwe ctxurol of operasang pestent gain the prkr year.

expenses, fewer preferred and comnum shares 1btal gas therm sales of the ownpany's suheid

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lary Winixmain Natural Gas Co., increaned I f) outstauxiing, and higher sales of natural gas re-percent in 1985 owr 1984, resulting frun colder sulting from unustrlly coki weather in Dec.1985.

'Ihis earnings performann was achiewd de9see weatherin Decemher 19H5."Ihisnuwethan kmer Wisanwin retail electric rates in 1985 otet a 3.3 percent decHne in sales to large brought atxunt by a general rase decrease.

commescial and industrial cussomers.

Depreciation expenne fiar the 3 car 1985 reaccts Rr the three ) ears e.ided Dec. 31,1985, the addition of two newp.euwieg units, Edge-kalowatt-hinar neles of cicaricity increased at a w ater Unit 5 and Pleasant Praine Unit 2, which compound annual rase of 2.7 percent. Electric went into senice on March I andJuly 1,1985, revenues lir the same perkxl increased at a respectnely Op: rating expennes were also a-+ H annual race of 3.7 percent. 'Ihe amt induenced by a temporary reductkm in certain of fuel and purchmard pmer remained level mer taxes in 1985 due to a change in Winconsin pubbc tu period. General rase reductions in 1984 and utility taxathm from an ad vakwem to a grues 1985, aleing with a fasel ama credit fir Winowinin

- retail clearic customers in 1985, k..,,.AJ the receipts basis.

Electric kikmatt. hour sales to retail, municipal increase in electric sevemses. Other electric and cooperative wtx>lesale customers intvessed operating mpenses, czcluding inawne taxes and BOOK VALUE AND htARKET PRICE

'IUTAL OPERATING REVENUEN OF rrimana0N TIOCK fin hillionutdollars)

(in dollars as } ear <ml)

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depreciation, increami at a awnpomxt rate of of appn>ximately 2 percent mrr the the 3rars 3.1 percent a ) car mer this perkxl.

c:xling Ike. 31,1990. 'this rate of gn mth antici-Prior Wisctmsin legislation climinatal the pates continueti costsenution by customers. 'lhe electric fuel anxi purchamt power adjustnwnt company forecasts that thenn sales of natural gas clause for Wisconsin retail custonwrs twginning will gnw at a compound annual rate ofless than in 1985. I'nder a pnmlure establisheti ty the I percent mrr the same perimi.

Public Senice Commissim of Wisconsin (INX),

l'ulkming twu rate reductiorts in the last twu rates may be adpastal if the company'.s cwnulati'.c 3rars anxi the 1985 fuel adjustment credit. the fuel costs are ahmr or bekw a prescribed range INX appnntd a rate increase clicctistJan.1, and are expected to continue to be atxnr or 1986 t/a,npruxiantely $33.7 million or 3.3 percent bekw the authorized annual range. Under this on an annual basis, for the company's Wisconsin procetture, a fuel adgustnwnt credit of $ 16 million retail electric customers. 'this increase is lu. sed wrnt into efliect in April 19H5.

on a 1986 test irar with a 11.50 percent rate Ibr the three >vars c xkxl Ike. 31,1985, gas of return on comnon etiuity, as determinct! for therm sales for Wisconsin Natural decreami 0.5 rate-nuking purposes. It also reflects the full rar 3

percent. Gas restnues for the same peri x1 in-impact of the tuu new power plants placed in creami at a compousul annual rate of 2.6 percent, senice during 1985.the prniously mentioned due primarily to rate increases granted in 1983 clunge in Wisconsin public utility taxation, and and 1981. 'Ihe cost ofpurchael gas for resale a clunge in the metix xi of accounting fbr the mrr this period stabiliini after experiencing sharp orntual decommivioning ofIhe company's ibint increases in prior perkxis. Clunges in the cost lleach Nuclear Plant.

of purchased gas are reflected in rates through A settlement with w holesale electric utstonwrs Wisconsin Natural's purchant gas adjustnwnt prmiding fbr a rate increase of 52.3 million, or clause. Other gas operating expenses, excluding 1 percent on an annual basis, became effect nr income taxes and depreciathm, increami during onJan.1,1986. A request ibr a 52.6 million this period at a compourxl annual rate of 8.5 increase in Alichigan retail electric rates, the first percent. 'Ihis increase was causett, in part, by a increase fbr Stichigan customers since 1983, is higher prmision for uncollectible accounts arx!

peixting. Wisconsin Natural held gas retail base by the cost of contwnution progrants required rates ontstant during 1985.

tw the PSCW

'lhe company and Wiscotisin Natural nuy fn >m Assuming fbrecasted grtsth in the ectummy, time to time retiuest rate adjustments to reth ct the company projects that kikmutt hour sales of clunging costs for fuel, purclused gx m cr. pur-ciectricity will gns at a compound annual rate chased gas, nuterials, taxes, wuges, and capital.

1985 UNII'COSIN OF F1!EI.

1985 SOURCES OF ELECI'RIC ENERGY AND Pl'RCIIASED IM)WER (in gwrcent )

(in wnts per KWlO A u, A '"

(51,

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lbr supplementary information ctmccrning the million principal amount of First Mortgage effects ofinflation see Note K to the Financial ikmds,11% percent Series duc 2015 arxlin Statements.-

- Oct.1985 546.35 million principal aggregate amount of First Mortgage Ikxxis,9% percent Ln.quidity andCapitalResources Series due 2015. une 9% percent Series lxmds wrre issued as the revenue source and collateral he company's capital requirements for the for certain tax exempt financing arrangements.

three 3rars ended Dec. 31,1985 totaled $904 Since 1983, all stock required for the operation million, of which 5407 million was for the con.

of the company's stock plans has been purchawd struction af new or imprmed facilities, 5128 from currently outstanding shares. During 1984 million for the retirement of kmg-term debt, and 1985, the company applied $79 million to

$71 million for acquisition of nuclear fuel, 3116 the purchaw of 819,898 shares ofits 51(X) par million for purchase of the ctxnpany capital stock, nlue serial preferred stock and 537 millkm to

$60 million (or 530 millkm after taxes) for pay.

purchases of 1,188,500 shares ofits 5 to par ment to the Department of Energy for disposal of value common stock. Further purchaws of the spent nuclear fuel used in the generatkm of company's equity securities are rmt anticipated electricity prior to April 7,1983, and $152 at thir time, million for increases in working capital and other At Dec. 31,1985, the company's capitalization, items.1he company obtained $597 million ofits including slmtt term debt and kmg-term debt capital requirements during this perimi fmm due currently consisted of 42 percent debt,5 internal sources of fimds, including depreciation percent preferred stock and 53 percent ctwnnum accruals, normalizatkm ofimrstment tax credits, equity 1he company's simrt-term indchiedness at Dec. 31,1985 consisted of $29 millkm of and retained earnings.

The remaining 5307 million of the company's commercial paper and rmtes payable and 551 capital requirenrnts during this three 3rar period million of kmg-term debt due within 12 nwnths.

was supplied through the sale and leaseback of trased nuclear fuel was less than 3 percent r4 589 million of nuclear fuel, the issuance of capitalization.1hc company also had at the end 528 million of additional comnum stock under '

of the irar $103 million in lines r4available the company's stock plans, simrt term bornmings bank credit and $76 million of short term imrst.

of 521 million, the issuance of 5146 million ments, which could be uwd to fharwr a gxxtion aggregate long term debt arx! $20 million from of the company's anticipated capital requirenrnts.

Other sources.

1he company estimates that for alw the 3rars in September 1985 the company issued 5100 1986 thmugh IP)0, its capital regtdrements will CAPITAIJZATION R13IDENTIAI. ELECTIllCITY COSI3 (in hillkwtmhlollars ar }rar-crml)

n. CONSUMER PIllCE INDEX.

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? otal $1308 millkm,ofwhich appruximately76 mately70 percent ofits capital requirenwnh t

percent will be requerd kr ctwntmetkm pniects.

which are pniected at $573 millkm,incitating

. WT it is anticipated that no new pmer 5373 millkm kr awatruction, and st 14 million plants will be required until the late 1990s, the Er payanents to the external nucicar decommis-company has announced plans to comert k>ur skming trust 6 nd.The remaining capital require-units at the company's Oak Creek hmer Plant to

' ments kr this perkni are expnted to be nrt

-/-.t fluidized-hed combustion, a new prinapally thmugh_reductkms of existing tem-

,' clean coal acchnokw in addition, major reima pwary cash imestments, through slwwt term vations are planned nr the other knar units at txwnmings and, depending on market anxiithwm, Oak Creek and at the ctwnpany's hwt 41mhington L the imuance of up ki 8190 millkm of kmg-tenn Rmer Plant.1hese impnntnwnes, together with '

debt. The awnpeny also in reviewing the pmsi-associaeed operating and maintenance amts, hility of uning tax exempt lumdn to finance a which are expected to aggregate 5600 million porthm of the planned remnathms to the omd mer a six-year penod, will extend the units'

_ pany's Oak Creek and Rwt %imhington pmer operating thes, deder the need kr etwatruction plants mentkmed ahtar. Pending tax law roi-of new pmer plants and achieve significant skwm anski adwrwly impact the ctwnpany's al>ility reductions in sulfur dioxide emissk>ns.

to imue tax exempt lxinda Er these pniects.

1he remaining ctwatructkm expemliturcs 1hc cinnpany in camtinuing to ance the per-during this perkni are primarily kr addithms

~ contage o(cinnnum equity to total capitallia-

to and.wh..wr.; of pxthum of the distri-tkm, as determined under appikahic rase-making bution and tranunisnion systenu, nr new senice

. principles Reductkum in utuity equity are antici-centers and other buildings, and for equipment paard in 1996 in the amtmant of $40 millkwt 1he and impunements at existing pmer plants.

ctwnpany intends to acctunphnh the reductkm

1he balance o(capital requirements during this through capital ctmarihuthum to a wholly 4mirti period is prinapally kr sinking fund require-mm utility inshddiary, which will inme in Anan-ments and maturities of k>ng-term debt, hr twt cial insammemum an inserim hands until the changes of fuel imentorics, ami nr payments to proponed indding ctunpany restructuring can a trust for the ewntual dcawnmisskming of the he accomplished and imentments d the nature

' amnpeny's nuclear plant pursuant to a Ikc. 5, amaemplaatxt in the new leginiathm isnple.

1985 PSCW order.1he company expects to '

mented.1he la dding ctwnpany restructuring is estahlish this external trust fund during 19H6.

planned tr compirthm im or aimnat Ike. 31, During 1986and 19H7,thectwnpanyexpects 19H6, aber receipt of the necewery stochkier

,g inactnal stMarces of fumis to prinide approxi-and regpalatoryp1als. ;

PEAK DEntAND vs. cal % Bit.ITY CONmttEDON EXPENDITURI5 (in mrparitts)

(in minkmmf diellars) 44 m m e H"'

Pt % h I thkillf)

%8 Il nl r......,,,,

3,,

ee n s,

j f

ah

%_[llllW, l

16 %N

%, \\n

}

I 17

Wixumin i Iconc h mer Cinnpam mtem INCOME S'lXfEMENT.vearemimunar.u (11miusaruh of Dollars) 1985 1981 1983 Operating Revenues Electrie

$1,0H6,192

$ 1,091,473

$ 1,070,605 Gas 342,5 %

331,279 336,506 Steam 12,062 11,937 10A53 Total Operating Newnues 1,440,H50 I,13 if69 1,i17,566 Operating Expenses Fuel (Note A) 276,055 28th51 2H5,077 Purcinwd pimrr 23,45)4 3H,55 6 55,08i Gas purcinwd for resale 2 %,225 255,%H 263,195 Other operation exlwnws (Note 11) 234,519 225,135 209,703 Slaintenance 121,0MH 121,608 110,561 Taxes other tiun ina>me taxes 38,002 57,655 50,329 Ikpreciation (Note C)

Straight line 127,007 I I 5,079 109,5 iH Deferred income taxes (Note D) 13,648 9,H 13

( I,1H3 )

Federalincome tax (Note D) 144,539 9 (Jio7 9 i,9 I I imestment tax credit adjustments - net (Note D) 6,458 H,451 12,44i Nate incume tax (Note D) 22,075 19,761 22,133 Total Operating Expenses 1,223,110 1,23i,385 1,212,0(6 Operating Income 217,740 200,306 205,518 OtherIncome and Deductk>ns Interest income 6,762 I i,716 7,206 Allowance for other furxis uwd during construction (Note E) 5,046 11,695 9,112 Sliscellaneous - net (4,605)

(2,iHO)

(.6,72 I)

Federalinwmc tax (Note D)

(609)

(6,758)

(H10)

Mate income tax (Note D)

(187)

(9 66)

(219)

Total Other income and Deductlons 6,365 1H,027 10,59H Income Hefore Interest Charges 224,105 218,331 216,116 Interest Charges Inng term debt 56,164 59,455 59,750 Other interest 2,501 1.022 10,693 Alkmance for fx>rnmed furx!s used during construction (Note E )

(2,037)

( lf6 4)

( i,0H l)

Total Interest Charges 56,628 55,783 66,159 Net 'ncome 167,477 162,568 1 69,9'57 Preferred Stock Dividend Requirement 9,088 12,H1 i 15,0H7 Earnings Anilable for Comnw>n Stockholders

$ I5H,389

$ l19,731

$ 131.H70 Average NumberofSharesof Comer on Stock Outstanding (Thousands) 33,315 31,622 33,939 Earniny PerShare of Comnw>n Stock

$ l.75

$ 6 35

$3.97 1he tw>tes a n pages 2 6 thnmgh 2H are an integral part of the firun :ial statements lH

%iwonsm llectne l\\mcr ( ompim wm STATEMENT OF CIIANGES IN FINANCIAI. l'OSITION, ware,xinionenawr3i (1housarxis of Dollars) 19H5 198 i 1983 Financial Resources Provided Operations Net income

$167,477

$ 162,5 48

$ 149,957 Depreciation - straight line 127,007 I I5,079 109,5 iH

- deferred inmme taxes 13,668 9,H I3 (I,IH3)

Accumulated deferral imestment tax credits 5,109 6,987 I I,298 Nuclear fuel expertse 409 6,210 10,504 Amortization of precertification expenditures 779 1,100 Alkm ance for funds used during etnistruction (7,041)

(16,189)

(l3,226)

Total from operations 306,609 2H5,257 270,968 Common stock 28,169 long term debt 144,432 Short term bommings 19,973 1,260 Vle of nuclear fuel 24,53H 36,i19 27,80i Contributions and ads ances in aid of cortstruction 3,463 3,067 4,755 Deferred clurges/ credits and other 12,516 2,279 (5,152)

$511.531

$331,262

$326,516 Financial Resources Used Ontgruction expenditures

$138,7M

$ 128,705

$ 139,16 6 Nuclear fuel 22,998 21,133 21,027 Dnidends 90,466 90,056 H 6,H 68 Retirement of long term debt 77,535 68,845 1,70H Purcluse of company capital stock 69,5H2 66,886 Spent nuclear fuel disposal 30,185 0)nstruction funds held by trustees 9,069 Increase (decreaw) in wurking capital (other than short term lx>rnmings and long term debt due currently) 72,912 (7//>3) 76,797

$511.531

$331,262

$326,5 6 6 Increase (Decrease) In Components of Woviing Capital Cash and temporary cash imestments

$ 12,087

$(l1,eiI)

$ N0,67 6 Accounts receivable and accrued utility rntnues 9.302 215 60,658 li>ssil fuel (2,438)

(15,107)

(19,019)

Prep 23ments 36,606 (125) 22i Accounts payable and acen cd liabilitics 11,290 20,587 (30/4:1)

Other 6,067 (I,792) 6,926

$ 72,912

$ (7/(>3)

$ 76,797 The tw>tes on pages 24 through 2H are an integral part

<d the firurxial statenwnts 19 i

i

mvnsn nunc nmer convan3 sm,n BAIANCE SIIEET.iurnax,y

('11miusaixh of Dollars) 1985 19M 4

%3 sets Utility Plant E!cctric

$2,756,151 $2,271,05H Gas 260,115 216,169 Steam 22,G40 20,507 3,03H 306 2,537,73i Accumulated pnnision for depreciation (1,316,773) (I,187,919) 1,721,533 1,369,815 Construction wurk in pn>gress 37,409

.i15,376 Nuclear fuel (Note A) 28,997 30,537 Net l'tility Plant 1,787,939 1,795,72H Other Property and Investments 25,240 16,268 Current Assets Ca4 20,7H8 5,733 Ti mporary cash imestments 75,912 7H,H80 Aco>unts receivable, not of alknv.ince for th>ubtful aco>unts - 56,670 and $3,116 77,320 H2,746 Accrued utility rewnues 116,233 119,517 linssil fuci (at awrage cost) 6H,50H 70,966 Materials and supplies (at awrage o>st )

49,'!41 65,127 Prepayments 40,637 4,033 Other assets 3,402 1,769 Total Current Assets 470',.%1 l(W,739 Deferred Charges and Other Assets H 131 7/dM

$2.291,671 $ 2,226,323

'Ihc rw>tes on pagn 2 6 hniugh 2H are an integral part of tir firuncial a.tatenwnts

(1houvrxis of Ibtlars) 1985 1986 Ilabilities Capitalization (See C pitalization Statement)

Common stock cyuity

$ 9H6,431 $ 919,012 IYeferred stock 100,461 160,15I long tenn debt 702,526 633,670 Total Capitalization 1,789,41M 1,713,133 Current Liabilities long term debt due currently (Note G) 50,908 52,990 Notes payable to banks (Note iI) 4,999 1,999 Commercial paper (Note 11) 24,233 4,260 Accounts papble 105,820 101,073 l'ayroll and ncation accrued 20,019 IH,661 Taxes accrued-income and other 42,713 60,133 Interest accrual 36,126 32,H08 Other 9,667 9,940 Total Current Liabilities 294,465 2H7,H64 Deferred Credits and Other llabilities Accumulated deferred imestment tax credits 145,675 140,566 Nuclear fuel costs accrued 2,536 29,589 L'namortlied accrun! utility rnenues 4,222 Hall Other 10,959 4.H72 Total Deferred Credits and Other Liabilities 163,392 183,47i Contributions in Aid of Construction 44,396 41,H55 Commitments and Contingencies (Note 1)

$2.291,671 52,226,323

'Ihe rxxes on pages 2 4 through 2M are an intty,ral part of the finandal statements I

21

,4+

+

'G hx>n4n Elearic IWrr Conpam Setem CAPITALIZATION STATEMENT,ixxrmber 3i (lhouunds of Dotlars) 1985 1981

[ Common Stock Equity (See Conv:en Stock Equity Statement)

Comnen stock- $10 par nlue; authorized 65,000,tXX) Mures, outstanding-33,289,327 and 33,826,027 slures

$ 332,893 $ 338,260 Other paid-in capital 99,M7 93,670 Retained earnings 553,891 487,082 Total Common Stock Equity 986,431 919,012 Preferred Stock-Wisconsin Eiertric limer Company, Cumulative Six per cent. preferred stock - S lott par value; authorized 45,000 shares; outstanding-44,508 shares 4,451 4,451 Serial preferred stock - $25 par ulue; authori:cd 5,000,mX) stures; unissued Serial preferred stock - 3100 par value; authorized 2.360,000 slures; outstanding-3.60% series - 260,(XX) and 260,mX) stures 26,000 26,000 8.995 series - 333,325 and 400/xX) stures -

33,332 40,mx) 7.75% series-225,810~and 300,tXX) shares 22,581 30,mx) 8.80% series-140,967 and 60t),000 shares 14,097 60.000 y

100,461 160,151 v

Total Preferred Stock (Note F)

Iong Term Debt (Note G)

First mortgage botwis Series Due 1985 1984 Series Due 1985 1984 Wisconsin Electric limer Company

/.

./

3% % - 1986 $20,611 $20,611 6.10%- 1999 2008 $ 25,000 $ 25,000 13% % - 1986 26,666 53,333 6.25% - 1991-2008 1,000 1,000 i

11.40% --1987 23,334 65,990 7 % % - 1999

' 38,936 38,973 4%% - 198FL 21,279 21,592 8 % % - 1993 39,285 39,361 5% - 1900-26,660 26,696 8):% - 1999 11,678 11,702 4%% - 19')1/

3,570 3.620 6.45% - 2001 12,000 12,000 4 % % - 1993, 4,991 4,991 8 % % - 2006 59,955 59,955 5% % - 1996-36,987 37,051 6.45% - 2006 4,000 4,0m) 6% %.1997 11,433, i1,433 6.50% - 2007-2(WT 10,000 10,000 6% % - 1997 37,6M 37,696 8% % - 2008 79,958 79,983 6%L 1998 9,797 9,812 9 % % - 2015 46,350 6 7 - 1998 33,424 33,434 11% % - 2015 100,000

,b 6a k,578 608,733 Wso>nsin Natural Gas Corr;uny M%% - 1986 3,631 3,631 6 % % - 1992 9,174 9,227 4 % % - 1987 4,.UO -

4,3'3 8gs _1994 9,5(g 9,554 4% % - 1990

~ 6,377, 6,448 gg% _ 1996 9,695 9,715 42,731 42,908 727,309 651,141 j Debentures (uncured)

/ Wisconsin Electric limrr Compaa} -7% Series due 1993 28,800 29,447 y

y

.1

' Note (unsecttred)

. " "i 7 / Wisconsin Electric limtr Company-7%% duc 1985 7,0m) s

Unamortired discount - net (2,675)

(928) inng term debt due currently (50,908)

(52,990)

TotalIong Term Debt 707,526 633,670 Total Capitalization

$1,789,618 $ 1,713,133 The notes on pages 24 through 28 are an integral part of the financial statements.

22

Wiem4n Ilettne limer Ccmpany SWem COMMON STOCK EQUrlY STATEMENT (11xxnands of Dollan)

Common Stock Comnum hi Other Paid Retained Shares

$10 Par blue in Capital Earnings Ltal Balance-December 31,1982 33,216,lM

$332,162

$79,914 $363,097 $775,173 Net income 149,957 149,95'i Cash dhiderxis Common stock- $2.06 per diare (69,761)

(69,76I)

Preferred stock (15,087)

(15,087)

Sale of common stock I,261,663 12,616 15,553 (45) 28,124 Balance-December 31,1983 34,477,827 344,778 95,467 428,161 868,406 Net income 162,548 162,548 Cash dhidends Common stock- $2.235 per share (77,016)

(77,016)

Preferred stock (l3,010)

(l3,n10)

Purchase of common stock (651,800)

(6,518)

(1,797)

(l2,001)

(20,316)

Purchase of nJuiul stock (Note F)

(1,570)

(l570) i Balance-DeG Eicr31,1984 33,826,027 338,260 93.670 487,082 919,012 Net income 167,477 167,477 Cash dhidends Common stock- $2.43 per diare (80,94 ()

(80,944)

Preferred stock (9,522)

(9,522)

Purchase of common stock (536,700)

(5,367)

(1,481)

(10.202)

(17,050)

Purchase of preferred stock (Note F) 7,458 7,158 Balance-Dwe;44r 31,1985 33,289,327

$332,893

$99,647 $553,891

$986,431 The notes on pages 24 through 28 are an integral part of the financial statements 23

Esconsin Electric 1%rr Comguny sprem NOTES TO FINANCIALSTATEMENTS SummaryofSignificant Accounting Policies General Iswomelhxes lhe accounting records of the company and its Deferral federal income tax accounting is utility subsuhary are kept as prescribed by the practiced in respect to significant timing liederal Energy Regulatory Commission, modi-differences.

ficd for requirements of the Public Senice Pursuant to a PSCW order cifectimJanuary Comnussion of Wisconsin (PSCW).1hc con.

1985, deferred state income tax resulting from the solidated financial statements include the use of accrierated depreciation is rust strorded accounts of the company and its subsidiaries, (see Note D).

Wisconsin Natural Gas Company and Badger The federal imrstment tax credit is accounted Senice Compan) for on the deferred basis and is retketed in income ratably mer the life of the related property Revenues Meters are read and accounts are billed Debt Premium, Discount and Expense monthly SinceJanuary 1,1977 utility rewnues long term debt premium or discount and ham been recognized on the accrual basis and expense ofissuance are anortized by the straight include estimated amounts for senice rendered line metixxl mer the liws of the debt issues and but not billed. Accrued utility rewnue of $52 included as interest expense. Unanmnized million at December 31,1976 is being recorded anxxmts pertaining to debt reacquired for sinking as rewnue in equal amounts mer a ten > car penod fund purposes are written off currently asprescribed by the PSCW.

A. Rental Expense Fuel 1btal rental expense was $39,601,000 in 1985, lhe cost of fuel is expensed in the period

$43,528,000 in 1984 and $37,846,000 in 1983 consumed. Nuclear fuel expense includes the This includes charges of $36,349,000 in 1985, estimated cost for disposal of spent fuel based

$40,569,000 in 1984 and $35,196,000 in 1983 on a contract with the U.S. Department of Energy relating to the company's nuclear fuel leasing arrangement with Wisconsin Electric Fuellhtst Gas Purchased forResale (Trust).1hc nuclear fuel is leased for a perial lhe cost ofpurchased gas sold is expensed of 60 months or until the renxml of the fuel in the period the gas is recciwd from the from the reactos; if earlier. Irase payments include pipeline supplier.

charges for the cost of fuel burned, financing costs and a management fee. In the ewnt the Property company or the Trust terminates the lease, the Electric arwi gas utility property is recorded at Trust would recmtr its unanortized cost of original cost, and steam utility and nonutility nuc! car fuel from the company Under the lease propertyis recorded at cost. Additions to utility terms, the company is in effect the ultimate pmperty and significant replacements are charged guarantor of the Thist's commercial paper ami to utility plant at cost. Cost includes material, line of credit Imrnmings financing the imrst-labor and allowance for funds used during ment in nuckar fuel.

construction (see Note E). Replacements of 1he nuckw fuel lease lus twen treated as an minor items of property are charged to mainte-operating lease in the financial statenrnts and by nance expense. The cost of depreciable prop-the PSCW in determining revenue requirements.

erty, together with remmal cost less salvage, is The value of the leased fuel is not inchaled in charged to accumulated prmision for depreci-the company's rate base. Ilad the lease been ation when propertyis retired.

accounted for as a capital lease, an assct and corresponding liability equal to the unanmrtized cost of the leased nuclear fuel would have tx en recorded at December 31 in tne anxxmts of

$51,445,000 in 1985 and $57,233,000 in 1984.

24

B. Pension Plans Additional depreciation is accmed, in accor-Several noncontributory pension plans etnrr dance with the PSCW requirements, which is all eligible emplo)tes. Normal employre pension equal to the tax efTects of timing difTerences cost is accrued and funded currently Unfunded related to pmperty and nuclear fuel including prior ser ice liability is amortized mer periods principally the use of accelerated apreciation

)

from ten to thirty >rars. lYnsion expense was methods for federal tax purposes in 1985 and

$8,170,000 in 1985, $12,338,000 in 198 ( and for federal and state tax purposes in 1984 and

$14,591,000 in 1983. In 1985 pension expense 1983 (see Note D).

decreased appmximately $4.2 million as a result Straight line &preciation as a percent of aver-of a change in the actuarial asset niuation method age apreciable utility plant was 4.8% in 1985 fmm the spread gain method which recognizes and 1983 and 4.9% in 1984.

gains and losses over a five }rar perhxi, to a current market value meth(x1, which ghts D. Income Tax Expense immediate recognition to the >rar etxi asset nlue, llehnv is a summary ofincome tax expense and De change in the actuarial weighted astrage a reconciliation of total income tax expense with rate of return assumption fmm i.0% in 1983 to the tax expected at the federal statutory rate.

7.5% in 1984 reduced pension expense by approximately $1.8 million in 1984.

( ""al* "I D"ll"')

I985 1984 1983 A comparison of accumulated plan benefits Current tax expeme

$127,4 to $120,072 $118.073 Immenon cmtit i

and plan net assets anilable for benefits is

ggg_gg, adjustments - net 6,458 8,651 12,441 Defermi tnes di.uped Decem$er 31 to depreciation

( nxxisnis otDollan) 1985 19&i C*PC*C 33'M8 9'NI3 (I'IN3) al tu expeme

$147,516 $I38336 $129331 Actuarial present ulue of accumulated plan benefits:

Income before income Vested benefits

$200,990 $174,553 taxes

$3I4.993 $300.88 6 $279.288 Nomested benefits 6,150 7,989 Expected tax at federal

$207,110 $182,542 statutory rate

$14 4.897 $138,407 $128,472 Net plan assets

$308,00I $250,758 All<mance for funds used during De weighted astrage rate of return used in deter-3ltN" x net of mining the actuarial present mlue of accumu-federal tu redudion I1,095 11,993 12,118 lated plan benefits was 7.5%.

Imtstment tax cmiit restored (7,905) (6,753) (5,780)

C. Depreciation Other(no item mer Depreciation expense is accrued at straight 5% ofexpected tu) 2/68 2,I36 605 line rates, certified by the PSCW, which include

' Intal tax expeme

$147,516 $138336 $129331 estimates of sahnge and plant removal costs. For the 3rars 1983-1985, the nuclear plant & pre.

We aggregate amount of deferred income ciation rates certified by the PSCW pnnide for taxes inclu&d in the accumulated provision for decommissioning costs stated in estimated depreciation at December 31 was $257,151,(XX) futuredollarsof theprojected rarofdecommis-in 1985 and $242,365,(XX)in 1984. Ileginningin 3

sioning. In December 1985 the PSCW issued an 1985, accumulated deferred state income tax order changing the accounting and funding of $19,099,(XX) at December 31,1984 is being methods for nuclear power plant decommission-recorded as a reduction to deferred income tax ing for future 3rars. In 1986 the company will expense in equal amounts over an 18 rar peritxt 3

change from a straight line negathe salvage as prescribed by the PSCW. At December 31, method with internal funding to an external sink.

1985 the cumulathr amount of timing differ-ing fund metixxi. ne company will transfer ences for which deferred income taxes have approximately $85 million, which is equal to the not been pnnided was approximately $80 mil-December 31,1985 accumulated pnnision for lion for federal tax purposes and $130 million nuclear power plant decommissioning, to an for state tax purposes. Any tax effect of these external trust ftmd in 1986.

amounts is expected to be recovered through future utility rates.

25

hun in Electric l\\mcr Onmpany SWem NOTES TO FINANCIAL STATF31EN'IS (ccmtirmal)

E. Allowance for Funds Used During G. Long Term Debt Construction (AFDC)

%c nuturities and sinking fund requirements AFDC is included in utility plant accounts and tinuugh 1990 for tlw aggregate anx>unt oflong represents the cost of borrowed funds used term debt outstanding at December 31,1985 are during plant construction and a rate of return on sixmn below. Of the annual sinking fund require.

stockholders' capital used for construction ments, $3.990,000 nuy be satisfied by certifying purposes. On the income statement the cost of additional mortgaged property borrowed funds (before income taxes) is a

19W,

$79,901,000 reduction ofinterest expense and the return on stockholders' capital is an item of noncash

'U"3 h3l$$$$

i3 other income.

1989 5,270,000

'the company lus been limited by the PSCW in 1990 38,307,000 1985 to capitalizing AFDC on 30% of construc-tion work in progress. In 1984 and 1983 the Future sinking fund requirements lust been PSCW limited the company to capitalizing anticipated by adance purchases of bonds to AFDC only on construction work in progress the extent of $25,044,00() and certification of exceeding 10% ofits net imrstment rate baw.

pmper: yin the amount of $3.990,000.

Revenues granted by the PSCW in rate orders Substantially all utility plant and nonutility include the equivalent of a return on imrst.

property is subject to the lien of the appli.

ment in construction work in progress tlut is cable mortgage.

outside the limits noted alxnr. AFDC was cap-italized at a rate of 11.15% in 1985 and 7% in II. Notes Pa)able and Commercial Paper 1984 and 1983, as approved by the PSCW.

Unused lines ofcredit for short term borrow-ing amounted to $ 102,600,000 at December F. Preferred Stock 31,1985. In support of urious infornut lines of In 1985 the companypurchased and retired credit from banks, the companies have agreed a total of 459,033 shares of 8.80% Series,66,675 to nuintain unrestricted compensating balances.

slures of 8.90% Series and 74,190 shares of 7.75%

With the exception of funds required for daily Series, $100 par nlue Serial Preferred Stock at an operations, the cash balance slum n on the bal-aggregate cost of $52,532,000.

ance sheet at December 31,1985 represents In 1984 the company purchased and retired compensating balances.

250,000 shares ofits $100 par value Serial Pre-ferred Stock,10.875% Series, constituting all the I. Commitments and Contingencies j

shares of such issue, at a price of $106.00 per Plans for the construction and financing of share plus accrued dividends.

future additions to utility plant can Iw found else-De Serial Preferred Stock is redeemable in where in this report in " Management's Discussion whole or in part at the option of the company and Anal >3is of Financial Condition and Results at the following redemption prices plus any ofOperations."

accrued dhidends.

Series Redemption Price Per$ hare 3.60% $101 8.90% $101 7.75% $104 to Nmember 1,1986 and $101 thereafter 8.80% $105.87 tojanuary 1,1989;$102.94 to January 1,1994 and $101 thereafter 26

j. Information by Segments of Business pliousamh ortmum) warended December 31 1985 1981 1983 Electric Operations Operating rewnues

$1,086,192

$ 1,09I473

$1,070d05 Operating income Irfore income taxes 328,003 303,049 305,621 Depreciation-straight line 116,289 10 i,H53 100,030 Construction expenditures 118,171 112,996 I 18,93I Gas Operations Rewnue from unaffiliated customers 342,5 %

331,279

16,506 Intersegment sales 4,C Operating rewnues 342,5 %

331,279 311J31 Operating income before income taxes 34,411 27,365 26,220 Depreciation -straight line 10,056 9,572

. H,863 Construction expenditures 16,764 13,512 16,8I8 Steam Operations Operating rewnues 12,062 I I,937 10,653 Operating income Irfore inconr taxes 2,M6 2,522 1,979 Depreciation-straight line 662 65-4 625 Construction expenditures 1,6M 345 97i Consolidated Operating rewnues (excluding interwgment sales climinated in consolidation) 1,440,850 1d31,689 1J 17,561 Operating income before income taxes 366,460 332,936 333,H2O Depreciation -straight line 127,007 115,079 1(F),5IM Construction expenditures (including nonutility) 138,7M 128,705 139,161 At Decemtwr 31 Net Identifiable Assets Bectric

$2,019,134

$ 1,981.061

$2,010,181 Gas 245,2M 220,868 229,173 Steam and nonutility 27,333 2 f,391 23,175 Total Consolidated Aswts

$2,291,671

$2,226.323

$2.262,532 Intersegment sales consist principally ofgas sold by Wisconsin Natural to the company at rates appn nul by the INX 27

Wiwonsin i krtnc hmrr company sptem NOTES TO FINANCIAL STMF31EN'IS (wntinmvi)

K. Supplementary Information Concerning Statement ofIncome Adjusted for the Effects of Changing Prices (Unaudited)

Changing Prices "Ihe following supplementary information pro-War Ended Ikumber 31,1985 sides certain data about the effects of changing Current prices in accordance with Financial Accounting As Reported Q>st Standards Board (FASB) requirements. This In financial (Awrage information should be viewrd as estimates of the (Millionsof Dollars) statements 1985 Dollars) possible effects ofinflation rather than as pre-Operating Rewnues

$1,44 I 51,44I cise measures.

Operating Expenses Current cost amounts represent an estimated Depreciation -straight line 127 260 cost of replacing existing plant and wrre deter.

U'h**PC"'

949 949 mined by indexing the original cost ofplant I47 347 by the llandy-Whitman Index of Public Utility Constmction Costss Under rate making procrihet!

Total Operating Expenses 1,223 1,356 by the regulatory commissions to which the Operatingincome 218 85 OtherIncome and company is subject, only historical cost of plant twuctions 6

6 is recoverable in rates 'Ihe impact of this rate making is mitigated to the extent that plant is I"',' y M L*"d financed with debt which can be repaid with Diddends (66)

(66) dollars of reduced purchasing power.

gs Adable for

'Ihe prosision for depreciation stated m, current common stocktmiders cost was determined by applying the company's (Note)

$ 158 5 25 certified depreciation rates to the average in-Earnings Per Share dexed plant amounts. Income tax expense has

'#7$

not been adjusted because the effects ofinflation he cunent awt of net utility plant at December 31, are not recognized for tax purposes. Other items 1985 w2s s4.3 billion 'the increase in the current cost of ofexpense have not been restated in accordance P"'"**

" "" '" ' 9" with FASB Statement No. 33 Selected Supplementary Financial Data Adjusted fcr Effects of Changing Prices War Ended December 31 ( All amounts are stated in awrage IWS ddlars)

(milions ofd>llars excmt for per sture anents) 1985 1981 1983 1982 1981 Current CostInformation Earnings (loss) antilable for common stocktmlders ( Note) 25 21 3

(20)

(35)

Earnings (loss) per share of common stock (Note)

$0.75 so60 50.10 5(0.62) ${ I.15)

GeneralInformation (Jnrealized gain from decline in purchasing powrr of debt and preferred stock 41 47 48 52 127 Common stock equityat year.cnd 971 939 922 854 790 Operating rewnues

$1,441

• 31,486

$ 1,531 51,452 S I,363 Cash diddends per share of common stock

$ 2.43 - 5 2.31 5 2.22 52.I2 3 2.08 Market price per share of common stock at ) car-end

$39.12

$31.79

$29.19 325.07 520.80 Consumer Price Index - awrage for 3rar 322.2 311.I 298.4 289.I 272.4

' Actual 1985 dollars.

Note - Excluding adjustment to net recmtrable cost

REPORT OF INDEPENDENT ACCOUNTANTS

'R) the Board of Directors arul the Stockix>lders ofWisconsin Electric Rmer Company in our opinion, the accompanying consoli-1985, in conformity with generally acc(pted dated balance sheet and statement ofcapital-accounting principics consistently applied. Our.

ization and the related consolidated statements examinations of these statements were made in ofincome, common stock equity, anxi changes accordance with generally acetykd auditing in financial position present fairly the Snancial standards and accordingly incituled such tests of position of Wisconsin Electric Rmtr Company the accounting trcords and such other audit-and its subsuliaries at December 31,19115 and ing pnxrdures as we considered necessary in 1984, and the results of their operations and the thecircumstanc --

/

changes in their financial position for eat h of the

/

f three }rars in the period ended December 31,

, gQL-y-4 A.U.4 mn Milwaukee, Wisconsin January 22,1986 29

m une ucom n mrm,w - m SELECTED FINANCIAL DXfA (lluassands of dollars esetpt for per slurr aminants) 1985 1901 1983 1982 1981 Financial Net incume 167,477 162,548 149,957 131,MS 105,502 Preferrni stock dividend ruluirement (9,088)

( l2,HI4)

(l5,087)

(l5,087)

(l5,087)

Earnings anilable for comnxin stock 158,389 I49,731 131,H70 116,558 90,415 Earnings per sture ofcomnxin stock (5) 4,75 4.35 3.97 3.60 2.93 Disidendsdeclared erhareof I

comnx>n stock ($)

2.43 2.235 2.06 1.902 1,76 Operating rntnues-Electric 1,086,192 1,091,173 1,070,105 971,788 869,977 Gas _

342,5 %

331,279 336,506 317,225 273,065 Steam 12,062

!!,937 10,653 10,897 9,311 Total operating rarnues 1,440,850 1,431/W)

I,417,561 1,302,910 1,152,383 Total assets 2,291,671 2,226,323 2,262,532 2,131,298 2,116,070 Inng term debt and preferred stock-redemption ruluired 702,526 633,670 717,272 762,720 757,631 Sales and Customers Electric Megawatt 4x>urs s>ld 18,744,323 18,612,419 17,776,817 17,279,680 17,792,0H0 Customers (Endof rar) 838,851 830,MH H22,i 19 8iH,850 HI2,81I 3

Gas 7herms(tix>usands) sold 629,1M 619,123 609,013 632,326 652,171 Customers (Endof rar) 229,766 226,009 221,197 217,983 215,520 3

Stearn

. IN)unds (millions) x>Id 2,004 2,023 1,909 2,0 11 1,924 Customers (Endof rar) 517 529 5to 5 13 5 19 3

QUARTERLY FINANCIAL DXfA (llu nas.inds of dollars except fiir per sture anu wants) l

'Ihree Months Eruks!

March June September Decemtwr 1985 1981 1985 1984 1985 1981 1985 1984 Total operating rnenues H29,377 $431,373 $305,717 $313,800 $320,078 $317,530 $385,678 $371,986 Operatingincome 70,287 63,536 36,742 41,332 52,445 49.797 58,266 42,639 Net income 60,937 53.831 26,887 35,608 38,548 40,528 41,105 32,581 Earnings per share ofcomnx>n stock

$1.73

$l.16

$0.75

$0.91

$1.09

$ 1.09

$1,18

$0 86 Because of scax>nal factors which affect the utility lxisiness and differences between summer and winter electric rates, the quarterly results of operations are ru>t diredly comparabic.

I l

i STOCIGOLDER SERVICES INFORMATION Eisconsin Electric is committed to pnnid-wuit about 10 days after the payment date to l

ing its stockholders with information related to allow for any delay in mail delivery After that their imestment in the company Our Stockholder time, call the Stockholder llotline.

Ilotline makes it easy for yuu to call with ques-tions or requests for information. Stockholder Can I have my dMdend check deposited i

senices repmentatives are available to assist directly into my bank account?

}uu from 8K tm. to 4:30 p.m. (central time)

Ti s Complete a direct deposit form and return ewrybusiness day it to us with a bank deposit slip. Call the In Milvuukee, call 277-2100 Stockholder llotline and request that a direct in Wisconsin, call 800-242-9686 degmsit form be mailed to }uu.

OutsideWisconsin, call 800-558 9663 (Continental USA only)

What was the range ofcommon stock prices and dividends during 1984 and 1985?

You can ewn call when our offices are closed andleaw a message on our tutomatic Range of Common stock Prices and Dividends answering equipment.

em. ww ros von i

M

% snel Ihrret hwrth Mrns

% snmi nwrst harth e Ih Power Company's stock listed and what is as2s o

,o' o.5 o ms,o en its stock trading symbol?

.o w 3"

• The company's common stock and $ 100 Par Value Serial Preferred Stock,8.90% Series and 7.75% Series are listed and traded on the New uw 35 5"'

York Stock Exchange.

32 %

3'"

The company's trading symbol is WPC. In the stock exchange listings of many daily newyapers, y,

Wisconsin Electric is abbreviated as WiscEP for the common stock and WisEpf for the pre-ferred stock-How many common stockholders does

'Ihe Six Per Cent. Preferred Stock and $100 Wisconsin Electric have?

Par Value Senal Preferred Stock,3.60% Series I

and 8.80% Series are traded on the over-the.

lktsed on the number of stockholder accounts, i

counter market.

there were 57,731 common stockholders as of December 31,1985.

Howoften are dividends paid on the common and preferred stock?

Where can I obtain additional information about Wisconsin Electric Power Company?

Dhidends on the common stock and $ 100 Par f,,;Juarterly nyx>rtspmtiding ufxiatalfinancial,y,

(

Wlue Preferred Stock,8.90% Senes,7.75% Series, 8.80% Series and 3.60% Series are normally paid lx>lders 77x R>nn 10-Knyx>rtfor 1985 to fix on March 1, June 1, Sept.1, and Dec.1. Dividends Securities aiul Ercluinge Corninission and 1985 on the Six Per Cent. Preferred Stock are paid

,g3,,5fafg,ff(y, pq,,,, y,y y, n,y,y7, y, y,,ffyg onJan. 31, April 30, July 31 and Oct. 31.

fu,j,,gy,,yfyyecy,g ff, g,,,cfz 23f g,,

.\\ficlx*tpn St., IK). Ikre 2(H6,,11iluunkw, W153201.

WhatshouldI do ifI don't receive my

.lf>uur stock is held m. street name, and you dMdend check?

wish to receive information on a timely basis, If>uu do not receive a dividend check on the write to the company's transfer agent at the appropriate payment date, we suggest that >uu address listed. Wur name will be added to our direct mailing list.

31

How do I transfer stock from my current you to complete certain forms and pay the cost

(

registration?

of an indemnity lx>nd. % asuid theft or loss, you should keep >uur stock certificates in a safe

1. Sign the back of the stock certificate exactly place, sud as a bank safe deposit lx>x.

as your rume appears on the front. If there is nx>re tlun one owner, all perums must sign.

Can I terminate my ADRSPP or CSOP account

2. Ilast the signature guaranteed by an authorized at any time?

representatist of a commercial bank or trust While we sell shares once a wrek and issue company or by a stockhmker who is a member of one of the major stock exclunges. There is certificates at any time, no account will be usually no charge fbr this sersice. A notary terminated during the 25 da>3 prior to a dhideix!

publicis not acceptable.

payment date.

3. list the full name on the back of the certificate Ilow do I sell shares or hae certificates m which the stures are to be registered as issued from my ADRSPP or CSOP account?

well as the address and social security number or other taxpayer identification number.

We need >uur specific instructions in writing.

4. Send the certificate by registered or certified Wu can use the top part of a statement and mail to the company's Stock Thutsfer Office.

indicate whether you want us to sell slures or The new certificate will be nuiled directly issue you a certificate.

to the new owner.

Alail yuur instructions to the company's Stock

5. If uu transfer less than the number of shares Transfer Office. ~1here is no clurge for issuing J

represented by the original certificate, indicate certificates; a snull fee is clurged for selling slures.

on the back of the certificate the exact number to be transferred. A new certificate for the Who should I contact ifI have questions transferred shares will be nuiled to the new about my bonds or debentures?

owner and a certificate for the balance will li>r Wisconsin Electric and Wisconsin Natural be mailed to you.

first mortgage bonds, contact First Wisconsin Thist if the transfer of stock imuhrs an unusual Co., 777 E. Wisconsin Asr., Milw2ukee, WI 53201.

situation, such as the death of a spouse or other rur 41sconsin Michigan first mortgage bonds, joint tenant, call the Stockholder llotline for contact First llank, N.A.,201 W. Wisconsin Asr.,

specificinstructicas.

Milwaukee,WI 53203 li>r 7% Debentures, contact M&l Marshall and Will the shares in my Automatic Dividend IIMey llank,770 N. Water St., Milwaukee, WI 53202.

Remvestment and Stock Purchase Plan (ADRSPP) account or Customer Stock Owner-Who are the company's transfer agents?

ship Plan (CSOP) account automatically be transferred in the same way?

lbr all outstanding issues of common and preferred stock-No, the ADRSPP or CSOP shares will remain in Peter Sirko the ADRSPPor CSOP account unless yuu Wisconsin Electric INmtr Qt specifically request that they be transferred.

Stock Thutsfer Office Indicate on the back of the certificate that luu 231 W. Michip St' have shares held in an ADRSPP or CSOP account.

110. Ilox 2416 Those shares will be transferred according to Milwaukee,WI 53201

)uur instructions.

Ihr the comnxin stock and 5100 I ar Wlue Serial HowshouldI report alost orstolen Preferred Stock,8M)% Series. 7.75% Series and certlGcate?

8.80% Series only.

If>uu cannot locate a certificate, call the Stock-Manufacturers llanostr Thist Qt holder llotline for instructions on how to obtain 450 W. 33rd Street - 8th Ibor a replacement certificate. It will be necessary fbr New Wrk, NY 1(XX)1 32

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1 Wisconsin Electnc ma coumr 231 W MICHIGAN,P O BOX 2046. MILWAUKEE.W153201 H14 277 2345 April 28, 1986 Director of Nuclear Reactor Regulation U.S. Nuclear Regulatory Commission Washington, D.C.

20555 Gentlemen:

In accordance with 10 C.F.R. Section 50.71, enclosed is a copy of each of the following:

1.

Annual Report to Stockholders of Wisconsin Electric Power Company which includes certified financial statements of the company and its subsidiaries (consolidated);

2.

Certified financial statements of Wisconsin Electric Power Company (corporate).

Wisconsin Electric Power Ccmpany 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.

Sincerely, J. H. Goetsch Secretary Enclosures J

, i

~.

I

~ WISCONSIN ELECTRIC POWER COMPANY I

1 Financial Statements for the Year 1985

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i REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and the Stockholders of WISCONSIN ELECTRIC POWER COMPANY In our opinion, the accompanying balance sheet and statement of capitalization and the related statements of income, common stock equity, and changes in financial position present fairly the financial position of Wisconsin Electric Power Company (parent company only) at December 31, 1985 and 1984, and the results of its operations and the changes in its financial position for each of the three years in the period ended December 31, 1985, in conformity with generally accepted accounting principles consistently applied. Our examinations of these statements were made in accordance with 1

generally accepted auditing standards and accordingly included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.

PRICE WATERHOUSE Milwaukee, Wisconsin January 22, 1986 -

l 2

WISCONSIN ELECTRIC POWER COMPANY INCOME STATEMENT Year Ended December 31 1985 1984 1983 (Thousands of Dollars)

Operating Revenues Electric

$1,086,192

$1,091,473

$1,070,405 Steam 12,062 11,937 10,653 Total Operating Revenues 1,098,254 1,103,410 1,081,058 Operating Expenses Fuel (Note A) 276,055 284,654 285,631 Purchased power 23,494 38,554 55,081 Other operation expenses (Note B) 200,775 197,012 179,893 Maintenance 116,406 120.052 106,564 Taxes other than income taxes 34,524 52,060 45,634 Depreciation (Note C)

Straight line 116,951 105,507 100,655 Deferred income taxes (Note D) 11,287 7,242 (3,196)

Federal income tax (Note D) 94,623 88,500 88,341 Investment tax credit adjustments -

net (Note D) 5,692 7,588 11,369 State income tax (Note D) 19,843 18,169 20,401 Total Operating Expenses 899,650 919,338 890,373 Operating Income 198,604 184,072 190,685 Other Income and Deductions Equity in subsidiary earnin9s 15,828 12,503 10,961 Interest income 6,565 14,937 7,684 Allowance for other funds used during construction (Note E) 4,873 11,478 9,142 Miscellaneous - net (4,321)

(2,292)

(4,450 Federal income tax (Note D)

(636)

(4,922)

(1,124 State income tax (Note D)

(190)

(971)

(279 Total Other Income and Deductions 22.119 30,733 21,934 Income Before Interest Charges 220,723 214,805 212,619 Interest Charges Long term debt 53,253 56,533 57,182 Other interest 1,984 412 9,564 Allowance for borrowed funds used during construction (Note E)

(1,991)

(4,688)

(4,084)

Total Interest Charges 53,246 52,257 62,662 Net Incme

$ 167,477 162,548

$ 149,957 The notes on pages 9 through 13 are an integral part of the financial statements. A

__.__.A,

s WISCONSIN ELECTRIC POWER COMPANY STATEMENT OF CHANGES IN FINANCIAL POSITION Year Ended December 31 1985 1984 1983 (Thousands of Dollars)

Financial Resources Provided Operations Net income

$167,477

$162,548

$149,957 Depreciation - straight line 116,951 105,507 100,655

- deferred income taxes 11,287 7,242 (3,196)

Accumulated deferred investment tax credits 4,444 6,232 10,308 Nuclear fuel expense 409 6,240 10,504 Amortization of precertification expenditures 779 4,100 Undistributed subsidiary earnings (7,549)

(6,293)

(5,441)

Allowance for funds used during construction (6,864)

(16,166)

(13,226)

Total from operations 286,155 266,089 253,661 28,169 Concon stock Long term debt 144,432 Short term borrowings 19,973 4,260 Sale of nuclear fuel 24,538 36,419 27,804 Contributions and advances in aid of construction 3.110 2,746 4,489 Deferred charges / credits and other 14,874 4,096 (3,944) 5493,082 5313,610 5310,179 Financial Resources Used Construction expenditures

$122,019

$115,193

$122,349 Nuclear fuel 22,998 24,433 24,027 Dividends 90,466 90,056 84,848 Retirement of long term debt 77,399 48,734 1,566 Purchase of company capital stock 69,582 46,886 Spent nuclear fuel disposal 30,185 Construction funds held by trustees 9,069 Increase (decrease) in working capital (other than short term borrowings and long term debt due currently) 71,364 (11,692) 77,389 5493,082 5313,610 5310,179 Increase (Decrease) in Components of Working Capital Cash and temporary cash investments

$ 6,677

$(12,921) $ 81,746 Accounts receivable and accrued utility revenues (1,498) 11,349 21,087 Fossil fuel (2,592)

(15,457)

(19,063)

Notes receivable from subsidiaries 5,457 (7,395) 10,612 Accounts payable and accrued liabilities 24,096 14,133 (21,843)

Prepayments 33,202 (145) 227 Other 6,022 (1,256) 4,623 5 71,364 5(11,692) 5 77,389 The notes on pages 9 through 13 are an integral part of ther financial statements..-

s L

WISCONSIN ELECTRIC POWER COMPANY BALANCE SHEET DECEMBER 31 ASSETS 1985 1984 (Thousands of Dollars)

Utility Plant Electric

$2,756,151

$2.271,058 Steam 22,040

_ 2,291,565 20,507 2,778,191 Accumulated provision for depreciation (1,219,120)

(1,100,516) 1,559,071 1,191,049 Construction work in progress 35,926 414,762 Nuclear fuel (Note A) 28,997 30,537 Net Utility Plant 1,623,994 1,636,348 Other Property and Investments Investment in subsidiary companies (Note F) 90,187 82,630 Nonutility property - net 8,872 6,944 Other investments 11,944 2,891 Total Other Property and Investments 111,003 92,465 Current Assets Cash 16,906 5,390 Temporary cash investments 72,511 77,350 Accounts receivable, net of allowance for doubtful accounts - $5,084 and $2,472 57,806 66,092 Accrued utility revenues 86,738 79,950 Notes receivable from subsidiary companies (Note F) 23,095 17,638 Fossil fuel (at average cost) 67,582 70,174 Materials and supplies (at average cost) 47,643 43,039 Prepayments 37,142 3,940 Other assets 2,943 1,525 Total Current Assets 412,366 365,098 Deferred Charges and Other Assets 7,951 7,389 32,155,314 52,101,300 The notes on pages 9 through 13 are an integral part of the financial statements.

t -

I-WISCONSIN ELECTRIC POWER COMPANY BALANCE SHEET DECEMBER 31 LIABILITIES 1985 1984

~(Thousands of Dollars)

Capitalization (See Capitalization Statement)

Common stock equity

$ 986,431

$ 919,012 Preferred stock 100,461 160,451 Long term debt 663,447 590,783 Total Capitalization 1,750,339 1,670,246 Current Liabilities Long term debt due currently (Note H) 47,277 52,990 Commercial paper (Note I) 24,233 4,260 Accounts payable 63,190 68,628 Payroll and vacation accrued 17,806 16,708 Taxes accrued - income and other 24,388 47,952 Interest accrued 35,012 31,703 Other 7,204 6,705 Total Current Liabilities 219,110 228,946 Deferred Credits and Other Liabilities Accumulated deferred investment tax credits 135,893 131,449 Nuclear fuel costs accrued 2,536 29,589 Unamortized accrued utility revenues 2,732 5,465 Other 10,591 3,835' Total Deferred Credits and Other Liabilities 151,752 170,338 Contributions in Aid of Construction 34,113 31,770 Commitments and Contingencies (Note J) 52,155,314 52,101,300 The notes on pages 9 through 13 are an integral part of the financial statements.

WISCONSIN ELECTRIC POWER COMPANY f'

CAPITALIZATION STATEMENT DECEMBER 31 1985 1984 Ghousands of Dollars)

COP 9 TON STOCK EQUITY (See Common Stock Equity Statement)

Cosmon stock ($10 par value; authorized 65,000,000 shares; outstanding - 33,289,327 and 33,826,027 shares)

$ 332,893

$338,260 Other paid in capital 99,647 93,670 Retained earnings 505,223 445,963 Undistributed subsidiary earnings 48,668 41,119 Total Common Stock Equity 986,431 919,012 PREFERRED STOCK - Cumulative Six per cent. preferred stock - $100 par value; authorized 45,000 shares; outstanding - 44,508 shares 4,451 4,451 Serial preferred stock - $25 par value; authorized 5,000,000 shares; unissued Serial preferred stock - $100 par value; authorized 2,360,000 shares; outstanding -

3.60% series - 260,000 and 260,000 shares 26,000 26,000 8.90% series - 333,325 and 400,000 shares 33,332 40,000 7.75% series - 225,810 and 300,000 shares 22,581 30,000 8.80% Series - 140,967 and 600,000 shares 14,097 60,000 Total Preferred Stock (Note C) 100,461 160,451 1DNC TERM DEBT (Note H)

First mortgage bonds Se ries Due N

IT56 20,611 20,611 13-3/4%

1986-26,666 53,333 4

11.40%

1987 23,334 65,990 4-1/8%

1988 21,279 21,592 5

1990 26,660 26,696 4-3/4%

1991 3,570 3,620 4-1/2%

1993-4,991 4,991 5-7/8%

1996 36,987 37,051-6-1/2%

1997 11,433 11,433 6-7/8%

1997 37,664 37,696 6-5/8%

1998 9,797 9,812 6-7/8%

1998 33,424 33,434 6.10 %

1999-2008 25,000 25,000 6.25 %

1999-2008 1,000 1,000 7-1/4%

1999 38,936 38,973 8-3/8%

1999 39,285 39,361 8-1/2%

1999 11,678 11,702 6.45 %

2004 12,000 12,000 8-3/4%

2006 59,955 59,955 6.45 %

2006 4,000 4,000 i

6.50 %

2007-2009 10,000 10,000 6-7/8%

2008 79,958 79,983 9-3/4%

2015 46,350 11-1/2%

2015 100,000 684,578 608,233 Debentures (unsecured) 7% Series due 1993 28,800 29,447 Fste (unsecured) 7,000 7-1/4% due 1985 Unamortized discount - net (2,654)

(907)

Long term debt due currently (47,277)

(52,990)

Total long Term Debt 663,447 590,783 Total Capitalization

$1.750,339

$1,670,246 The notes on pages 9 through 13 are an integral part of the financial statements. -

WISCONSIN ELECTRIC POWER COMPANY COPMON STOCK EQUITY STATEMENT (Thousands of dollars)

Undistributed Common Stock Common Stock Other Paid Retained Subsidiary Shares

$10 Par lalue In Capital Earnings Earninas Total Balace - December 31, 1982 33,216,164

$332,162

$ 79,914

$333,712

$29,385

$775,173 Net income 149,957 149,957 Equity in earnings of subsidiaries (10,%1) 10.961 Dividends received from subsidiaries 5,520 (5,520)

Ca:h dividends Common stock - $2.06 per share (69,761)

(69,761)

Preferred stock (15,087)

(15,087)

Sale of common stock 1,261,663 12,616 15,553 (45) 28,124

Balace - December 31, 1983 34,477,827 344,778 95,467 393,335 34,826 868,406 Net income 162,548 162,548 Equity in earnings of subsidiaries (12,503) 12,503 Dividends received from subsidiaries 6,210 (6,210)

Ccsh dividends

' Comunon stock - $2.235 per share (77,016)

(77,016)

Preferred stock (13,040)

(13,040)

Pdrehase of common stock (651,800)

(6,518)

(1,797)

(12,001)

(20,316)

Purchase of preferred stock (Note C)

(1,570)

(1,570)

Esitnce - December 31, 1984 33,826,027 338,260 93,670 445,963 41,119 919,012 Net income 167,477 167,477 Equity in earnings of subsidiaries (15,828) 15,828 Dividends received from subsidiaries 8,279 (8,279)

Crah dividends Common stock - $2.43 per share

'(80,944)

(80,944)

Preferred stock (4,522)

(9,522)

Purchase of common stock (536,700)

(5,367)

(1,481)

(10,202)

(17,050)

Purchase of preferred stock (Note G) 7,458 7.458 Balance - December 31, 1985 33.289,327

$ 332,893

$ 99,647

$505,223

$48,668

$986,431 Tha notes on pages 9 through 13 are an integral part of the financial statements. <

WISCONSIN ELECTRIC POWER COMPANY NOTES TO FINANCIAL STATEMENTS Summary of Significant Accounting Policies General The accounting records of the company and its utility subsidiary are kept as prescribed by the Federal Energy Regulatory Commission, modified for requirements of the Public Service Commission of Wisconsin (PSCW). The company owns all of the common stock of Wisconsin Natural Gas Company (Wisconsin Natural) and Badger Service Company. The company carries its investments in subsidiaries in accordance with the equity method of accounting.

Revenues Meters are read and accounts are billed monthly. Since January 1, 1977 utility revenues have been recognized on the accrual basis and include estimated amounts for service rendered but not billed. Accrued utility revenue of $32 million at December 31, 1976 is being recorded as revenue in equal amounts over a ten year period as prescribed by the PSCW.

Fuel The cost of fuel is expensed in the period consumed. Nuclear fuel expense includes the estimated cost for disposal of spent fuel based on a contract with the U.S. Department of Energy.

Property Electric utility property is recorded at original cost, and steam utility and nonutility property is recorded at cost. Additions to utility property and significant replacements are charged to utility plant at cost. Cost includes material, labor and allowance for funds used during construction (see Note E). Replacements of minor items of property are charged to maintenance expense.

The cost of depreciable property, together with removal cost less salvage, is charged to accumulated provision for depreciation when property is retired.

Income Taxes Deferred income tax accounting is practiced in respect to signifi-cant timing differences. Pursuant to a PSCW order effective January 1985, deferred state income tax resulting from the use of accelerated depreciation is not recorded (see Note D).

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.

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w

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Debt Premium, Discount and Expense Long term debt premium or discount and exoense 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 debt reacquired for sinking fund purposes are written off currently.

A - Rental Expense Total rental expense was $39,418,000 in 1985, $43,335,000 in 1984 and $37,651,000 in 1983.

This includes charges of $36,349,000 in 1985,

$40,569,000 in 1984 and $35,196,000 in 1983 relating to the company's nuclear fuel leasing arrangement with Wisconsin Electric Fuel Trust (Trust).

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 a management fee.

In the event the company or the Trust terminates the lease, the Trust would recover its unamortized cost

.of nuclear fuel from the company. Under the lease terms, the company is in effect the ultimate guarantor of the Trust's commercial paper and line of credit borrowings financing the investment in nuclear fuel.

The nuclear fuel lease has been treated as an operating lease in the financial statements and by the PSCW in determining revenue requirements.

The value of the leased fuel is not included in the company's rate base.

Had the lease been accounted for as a capital lease, an asset and corres-i conding liability equal to the unamortized cost of the leased nuclear fuel 1

would have been recorded at December 31 in the amounts of $51,445,000 in 1985 and $57,233,000 in 1984.

B - Pension Plans 3

Several noncontributory pension plans cover all eligible employees.

4 Normal employee pension cost is accrued and funded currently. Unfunded prior service liability is amortized over periods from ten to thirty years.

1 Pension expense was $6,567,000 in 1985, $10,944,000 in 1984 and $13,093,000 in 1983.

In 1985 pension expense decreased approximately $4.2 million as a result of a change in the actuarial asset valuation method from the spread gain method which recognizes gains and losses over a five year period, to a I

current market value method which gives innediate recognition to the year end asset value. The change in the actuarial weighted average rate of return assumption from 7.0% in 1983 to 7.5% in 1984 reduced pension expense by approximately $1.6 million in 1984.

A comparison of accumulated plan benefits and plan net assets available for benefits is shown below.

5 December 31 1984 i

1985 (Thousands of Dollars)

Actuarial present value of accumulated plan benefits:

Vested benefits

$182,768

$158,734 Nonvested benefits 5,556 7,372

$188,324

$166,106 Net plan assets

$279,216

$228,209 The weighted average rate of return used in determining the actuarial present value of accumulated plan benefits was 7.5%.

i d

C - Depreciation Depreciation expense is accrued at straight line rates, certified by the PSCW, which include estimates of salvage and plant removal costs.

For the years 1983-1985, the nuclear plant depreciation rates certified by the PSCW provide for deconinissioning costs stated in estimated future dollars of the projected year of decommissioning.

In December 1985 the PSCW issued an order changing the accounting and funding methods for nuclear power plant decommissioning for future years.

In 1986 the company will change from a straight line negative salvage method with internal funding to an external sinking fund method. The company will transfer approximately $85 millio, which is equal to the December 31, 1985 accumulated provision for nuclear power plant decommissioning, to an external trust fund in 1986.

Additional depreciation is accrued, in accordance with the PSCW requirements, which is equal to the tax effects of timing differences related to property and nuclear fuel including principally the use of accelerated depreciation methods for federal tax purposes in 1985 and for federal and state tax purposes in 1984 and 1983 (see Note D).

Straight line depreciation as a percent of average depreciable utility plant was 4.8% in 1985 and 1983 and 4.9% in 1984.

D - Income Tax Expense Below is a summary of income tax expense and a reconciliation of total income tax expense with the tax expected at the federal statutory rate.

1985 1984 1983 (Thousands of Dollars)

Current tax expense

$115,292

$112,562

$110,145 Investment tax credit adjustments -

net 5,692 7,588 11,369 Deferred taxes charged to depreciation expense 11,287 7,242 (3,196)

Total tax expense 5132,271 5127,392 5118,318 Income before income taxes

$299,748

$289,940

$268,275 Expected tax at federal statutory rate

$137,884

$133,373

$123,407 Allowance for funds used during construction (3,157)

(7,437)

(6,084)

Equity in earnings of subsidiaries (7,281)

(5,751)

(5,042)

State income tax net of federal tax reduction 9,763 11,026 11,057 1

Investment tax credit restored (7,455)

(6,357)

(5,404)

Other (no item over 5% of expected tax) 2,517 2,538 384 Total tax expense 5132,271 5127,397 5118,318 J

l i

I The aggregate amount of deferred income taxes included in the accumula-ted provision for depreciation at December 31 was $238,368,000 in 1985 and

$225,943,000 in 1984. Beginning in 1985, accumulated deferred state income tax of $19,099,000 at December 31, 1984 is being recorded as a reduction to deferred tax expense in equal amounts over an 18 year period as prescribed by the PSCW. At December 31, 1985, the cumulative amount of timing differences for which deferred income taxes have not been provided was approximately $75 million for federal tax purposes and $125 million for state tax purposes. Any tax effect of this amount is expected to be recovered through future utility rates.

E - Allowance for Funds Used During Construction (AFDC)

AFDC is included in utility plant accounts and represents the cost of borrowed funds used during plant construction and a rate of 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.

The company has been limited by the PSCW in 1985 to capitalizing AFDC on 30% of construction work in progress.

In 1984 and 1983 the PSCW limited the company to capitalizing AFDC only on construction work in progress exceeding 10% of its net investment rate base. Revenues granted by the PSCW in rate orders include the equivalent of a return on investment in construction work in progress that is outside the limits noted above. AFDC was capital-ized at a rate of 11.15% in 1985 and 7% in 1984 and 1983 as approved by the i

PSCW.

F - Transactions with Subsidiary Companies The company renders managerial, financial, accounting, legal, data processing and other services to Wisconsin Natural, which in turn renders to the company certain accounting and other services. These services are billed at cost by the respective companies. The company also buys gas from Wisconsin Natural for electric generation at rates approved by the PSCW.

To take advantage of the company's access to short term funds at a lower cost than that available to Wisconsin Natural, the company makes loans to the subsidiary at an interest rate approximating the cost to the company.

G - Preferred Stock In 1985 the company purchased and retired a total of 459,033 shares of 8.80% Series, 66,675 shares of 8.90% Series and 74,190 shares of 7.75%

Series, $100 par value Serial Preferred Stock at an aggregate cost of i

$52,532,000.

In 1984 the company purchased and retired 250,000 shares of its $100 par value Serial Preferred Stock,10.875% Series, constituting all the shares of such issue, at a price of $106.00 per share plus accrued divi-dends.

The Serial Preferred Stock is redeemable in whole or in part at the option of the company at the following redemption prices plus any accrued dividends. -

4 j.

G-PreferredStock(continued]

Series Redemption Price Per Share 3.60%

$101 8.90%

$101 l

7.75%

$104 to November 1,1986 and $101 thereafter 8.80%

$105.87 to January 1, 1989; $102.94 to January 1, 1994 l

and $101 thereafter l

l H - Long Term Debt 4

\\

The maturities and sinking fund requirements through 1990 for the aggregate amount of long term debt outstanding at December 31, 1985 are shown below. Of the annual sinking fund requirements, $3,690,000 may be satisfied by certifying additior.al mortgaged property.

1986

$75,800,000 1987 28,524,000 1988 25,888,000 1989 4,890,000 1990 31,550,000 Future sinking fund requirements have been anticipated by advance purchases of bonds to the extent of $24,865,000 and certification of property in the amount of $3,690,000.

Substantially all utility plant and nonutility property is subject to-the lien of the applicable mortgage.

1 - Notes Payable and Connercial Paper i

Unused lines of credit for short term borrowing amounted to $89,600,000 at December 31, 1985.

In support of various informal lines of credit from banks, the company has agreed to maintain unrestricted compensating balances.

With the exception of funds required for daily operations, the cash balance shown on the balance sheet at' December 31, 1985 represents compensatipg balances.

J - Commitments and Contingencies Construction expenditures for 1986 through 1990 are estimated to be

$1,008 million. Although it is anticipated that no new power plants will be required until the late 1990s, the company has announced plans to convert four units at the company's Oak Creek Power Plant to atmospheric fluidized-bed com-bustion, a new clean coal technology.

In addition, major renovations are planned for the other four units at Oak Creek and at the company's Port Washington Power Plant. These improvements, together with associated operating ard maintenance costs, which are expected to aggregate $600 million over a six-year period, will extend the units' operating lives, defer the need for construction of new power plants and achieve significant reductions in sulfur dioxide emissions;.

The remaining construction expenditures during this period are primarily for additions to and replacement of portions of the distribution and trans-miss{on systems, for new service centers and other buildings, and for equipment and improvements at existing power plants.,

WISCONSIN ELECTRIC POWER COMPANY l

DIRECTORS John F. Bergstrom

• Richard L. Johnson

• Russell W. Britt

• Charles S. McNeer Sol Burstein John L. Murray Joseph F. Heil, Jr.

• Morris W. Reid l

• Jon G. Udell

(*) Member of Executive Committee; all other directors are alternate members 0FFICERS l

Charles S. McNeer...... Chairman of the Board and Chief Executive Officer Russell W. Britt................... President and Chief Operating Officer l

Sol Burs tei n.................................. Vice Chai rma n of the Board Thomas J. Cassi dy............................... Executive Vice President Richard A. Abdoo................................... Senior Vice President John W. Boston..................................... Senior Vice Presi dent Robert H. Gorske...................... Vice President and General Counsel Carlyl e W. Fay............................ Vi ce Pres i dent - Nucl ear Power Russell A. Niles.................... Vice President - Division Operations Huberto R. Platz........... Vice President - Engineering and Construction Jerry G. Remmel............................. Vice President and Treasurer Richard E. Skogg..................... Vice President - Operating Services John E. Speaker.......................... Vice Pres ident - Communica tions l

Kenneth E. Wol ters.................... Vice President - System Operations John H. Go e ts c h................................................ Sec re ta ry Ri cha rd R. P i l tz.............................................. Con trol l e r Nancy R. Noeske................................. Assistant Vice President Davi d K. Porter................................. Assi s tant Vice Presiden t John W. Fleissner.................................... Assistant Secretary Gordon A. Wil li s..................................... Assi s tant Trea surer t

i GENERAL 0FFICES 1

231 West Michigan Street, P. O. Box 2046, Milwaukee, Wisconsin 53201 i

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