ML20206C236
| ML20206C236 | |
| Person / Time | |
|---|---|
| Site: | Point Beach  |
| Issue date: | 04/22/1999 |
| From: | Fehring T WISCONSIN ELECTRIC POWER CO. |
| To: | NRC OFFICE OF INFORMATION RESOURCES MANAGEMENT (IRM) |
| References | |
| NUDOCS 9904300203 | |
| Download: ML20206C236 (62) | |
Text
w Wisconsin Electnc POWER COMPANY 231mV Michegbn, PO Box 2046. Mdwoukee. WI 53201 2046 (414J 2212345 April 22,1999 U.S. Nuclear Regulatory Commission Document Control Desk I
Washington, DC 20555 Document Control Desk:
In accordance with 10 C.F.R. Section 50.71, enclosed is the 1998 annual report to stockholders of Wisconsin Electric Power Company which includes certified financial statements. Such annual report accompanies Wisconsin Electric's definitive information statement, which is being mailed to stockholders today.
Wisconsin Electric Power Company is the holder of Facility Operating License Nos. DPR-24 I
and DPR-27 issued by your Commission under Dockets 50-266 and 50-301, respectively.
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io II.Feh Corporate Sec ta Enclosure cc:
U.S. Nuclear Regulatory Commission Gerald Charnoff Region III Shaw, Pittman, Potts & Trowbridge 801 Warrenville Road 2300 N. Street, N.W.
Lisle, IL 60532-4351 Washington, DC 20037 l
Fred Brown, NRC Resident Inspector Patrick Louden, NRC Resident Inspector f-Pat Simpson, NRC Resident Inspector Keith 11. Ecke A. William Finke Carmel M. Liberman M d Michael B. Sellman
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NOTICE OF ANNUAL MEETING OF STOCKIIOLDERS April 22,1999 To the Stockholders of Wisconsin Electric Power Company:
The Annual Meeting of Stockholders of Wisconsin Electric Power Company will be held at 10:00 a.m. on Wednesday, May 26,1999 in Conference Room P140a at the Public Service Building,231 West Michigan Street, Milwaukee, Wisconsin, for the following purposes:
1.
To elect a Board of Directors to hold office until the 2000 Annual Meeting of Stockholders; and 2.
To consider any other matters which may properly come before the meeting.
Stockholders of record at the close of business on March 25,1999 will be entitled to vote at the meeting.
By rder of the Board of Directors t
Thomas H. Fehring Corporate Secretary I
i
lWasconsin WW 2,?;fe,*,*,
A WISCONSIN ENERGY COMPANY gg cygwy my 231 W. Michigan P.o. Box 2046 Milwaukee, WI 53201 April 22,1999 I
Dear Wisconsin Electric Stockholder:
Wisconsin Electric Power Company will hold its annual meeting of stockholders at 10:00 a.m. on Wednesday, May 26,1999 in Conference Room P140a at the Public Service Building,231 West Michigan Street, Milwaukee, Wisconsin. We are not soliciting proxies for this meeting, as over 99% of the voting stock is owned, and will be voted, by Wisconsin Electric's parent company, Wisconsin Energy Corporation. If you wish, you may attend the meeting and vote your shares of preferred stocI however, it will be a very short business meeting only.
On behalf et
. directors and officers of Wisconsin Energy,Iinvite you to attend Wisconsin Energy's an 1 meeting to be held Wednesday, June 2,1999 at 10:00 a.m. The Wisconsin Energy meeting will be held at the Midwest Express Center,400 West Wisconsin Avenue, Milwaukee, Wisconsin. By attending this meeting, you will have the opportunity to meet many of the Wisconsin Electric officers and directors. Although you cannot vote your shares of Wisconsin Electric preferred stock at the Wisconsin Energy meeting, you should find the activities to be worthwhile. You will be asked to register before entering the meeting.
The annual report to stockholders accompanies this information statement. If you have any questions about the material presented or would like a copy of the Wisconsin Energy Corporation summary annual report, please call our toll-free Stockholder Hotline at 1-800-558-9663.
Sincerely, b
I i
O Wisconsin Electnc A WISCONSIN ENERGY COMPANY 231 West Michigan Street P.O. Box 2046 Milwaukee, Wisconsin 53201 INFORMATION STATEMENT and ANNUAL REPORT TO STOCKIIOLDERS INFORMATION STATEMENT This information statement is being furnished to stockholders beginning on or about April 22,1999 in connection with the anm.al meeting of stockholders of Wisconsin Electric Power Company ("WE") to be held on May 26,1999, at WE's Public Service Building,231 West Michigan Street, Milwaukee, Wisconsin, and all adjournments of the meeting, for the purposes listed in the Notice of Annual Meeting of Stockholders. The WE annual report to stockholders accompanies this information statement.
We are not asking you for a proxy and you are requested not to send us a proxy. However, you may vote your shares of preferred stock at the meeting.
VOTING SECURITIES As of March 25,1999, WE had outstanding 44,498 shares of Six Per Cent. Preferred Stock; 260,000 shares of $100 par value 3.60% Serial Preferred Stock; and 33,289,327 shares of common stock. Each outstanding share of each class is entitled to one vote. Stockholders of record at the close of business on March 25,1999 will be entitled to vote at the meeting. A majority of the votes entitled to be cast by the shares entitled to vote shall constitute a quorum.
All of WE's outstanding common stock, representing over 99% ofits voting securities, is owned by its parent company, Wisconsin Energy Corporation ("WEC"). A list of stockholders of record entitled to vote at the meeting will be available for inspection by stockholders at WE's principal business office at 231 West Michigan Street, Milwaukee, Wisconsin, prior to and at the meeting.
RELATIONSIIIP WITH INDEPENDENT PUBLIC ACCOUNTANT PricewaterhouseCoopers or i's predecessor has served as independent public accountant for Wisconsin Electric continuously since 1932, and was appointed by Wisconsin Energy's board of directors to serve as independent public accountant of WEC and its subsidiaries, including WE, during the current year Representatives of the firm will not attend the annual meeting, but will be present at Wisconsin Energy's annual meeting on June 2,1999 to make any statement they may consider appropriate and to respond to questions which may be directed to them.
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a TIIE BOARD OF DIRECTORS AND ITS COMMITTEES The Board of Directors is responsible for overseeing the performance of WE. In 1998, the Board held 8 meetings.
The average attendance of all directors for Board and committee meetings was 99E WE has an Executive Committee, Compensation Committee and a Finance Committee; it does not have a'udit or
- nominating committees. The Executive Committee, which did not meet in 1998, may exercise all of the powers vested in the Board during periods between Board meetings except action regarding dividends or other distributions to stockholders, the filling of vacancies on the Board and other powers which by law may not be delegated to a committee. Directors Abdoo, Ahearne, Cornog, Grigg, Johnson and Stratton are members of the Executive Committee. The Compensation Committee, which met five times in 1998, considers succession planning issues and provides a competitive, performance-based executive sad director compensation program that enables WE to attract and retain key individuals and to motivate them to achieve WE's short and long-term goals. Directors Ahearne, Bergstrom, Cornog and MacDonough are members of the Compensation Committee. The Finance Committee, which met once in 1998, may take or authorize all necessary actions to effect financings, refinancings and refundings pursuant to financing plans approved by the Board of Directors, thus enhancing WE's ability to act quickly with respect to certain financing matters when market conditions warrant. Directors Bergstrom, Grigg, MacDonough and l
Porter are members of the Finance Committee.
ELECTION OF DIRECTORS At the 1999 annual meeting, there will be an election of ten directors. The individuals named below, who currently serve as WE directors, have been nominated by the Board to serve one-year terms or until they are reelected or until their respective successors are duly elected and qualified.
Under the Directors' Retirement Policy, Director Geneva B. Johnson will be retiring effective with the 1999 Annual Meeting. The size of the Board will be reduced by one at that time. The Board of Directors thanks Director Johnson for her valuable service over the past eleven years.
Directors are elected by a plurality of the votes cast by the shares entitled to vote in the election at a meeting at which a quorum is present. " Plurality" means that the individuals who receive the largest number of votes are elected as directors up to the maximum number of directors to be chosen in the election. Therefore, any shares not voted, whether by withheld authority, broker non-vote or otherwise, have no effect in the election of directors.
The nominees named below have consented to being nominated and to serve if elected. The Board of Directors does not expect that any of the nominees will become unavailable for any reason. If that should occur before the meeting, another nominee or nominees may be selected by the WE Board of Directors.
Biographical information regarding each nominee is shown below. Ages are shown as of December 31,1998.
Information Concerning Nominees For Terms Expiring in 2000 RICIIARD A, ABDOO. Age 54. Chairman of the Board, President and Chief Executive Officer of WEC since 1991. Chairman of the Board and Chief Executive Officer of Wisconsin Electric Power Company ("WE"),
WEC's principal subsidiary, since 1990. Director of WEC since 1988. Director of Wisconsin Electric since 1989.
Chairman of the Board and Chief Executive Officer of Wisconsin Natural Gas Company from 1990 to 1995.
Wisconsin Natural was WEC's gas utility subsidiary and merged into Wisconsin Electric effective January 1, 1996. Director of Wisconsin Natural from 1989 to 1995. Director of Marshall & Ilsley Corporation, Sundstrand Corporation, United Wisconsin Services, Inc. and Universal Foods Corporation.
JOIIN F. AIIEARNE. Age 64. Director of the Sigma Xi Center for Sigma Xi,The Scientific Research Society, an organization that publishes American Scientist, provides grants to graduate students and conducts national meetings on major scientific issues, since 1989. Adjunct Scholar of Resources for the Future, an economic 2
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1 research, non-profit institute, since 1993. Lecturer and Adjunct Professor, Duke University, since 1995. Vice President and Senior Fellow of Resources for the Future from 1984 to 1993. Commissioner of the United States Nuclear Regulatory Commission from 1978 to 1983, serving as its Chairman from 1979 to 1981. Member, National Academy of Engineering. Director of WEC and Wisconsin Electric since 1994.
JOHN F. BERGSTROM. Age 52. Chairman and Chief Executive Officer of Bergstrom Corporation since January 1997; President and Chief Executive Officer of Bergstrom Corporation from 1974 to 1996. Bergstrom Corporation owns and operates numerous automobile sales and leasing businesses. Director of WEC since 1987.
Director of Wisconsin Electric since 1985. Director of Bergstrom Corporation, Banta Corporation, First National Bank Fox Valley, Kimberly-Clark Corporation, MiC :-t E c ess Holdings, Inc., Universal Foods Corporation and The Green Bay Packers.
BARBARA L. BOWLES. Age 51. Founder, President and Chief Executive Officer of The Kenwood Group,Inc.
since 1989. The Kenwood Group is a Chicago-based investment advisory firm that manages pension funds for corporations, public institutions and endowments. Director of WEC and Wisconsin Electric since 1998. Director of The Black & Decker Corporation, Fort James Corporation and Hyde Park Bank and Trust Company.
ROBERT A. CORNOG. Age 58. Chairman of the Board, President and Chief Executive Officer of Snap-on Incorporated since 1991. Snap-on Incorporated is a developer, manufacturer and distributor of professional hand and power tools, diagnostic and shop equipment, and tool storage products. Director of WEC since 1993. Director of Wisconsin Electric since 1994. Director of Snap-on Incorporated and Johnson Controls,Inc.
RICHARD R. GRIGG. Age 50. Vice President of WEC and President and Chief Operating Officer of Wisconsin Electric since 1995; Chief Nuclear Officer of Wisconsin Electric from December 1996 to March 1998.
President and Chief Operating Officer of Wisconsin Natural during 1995. Group Executive and Vice President of Wisconsin Electric from June to December 1994. Vice President of Wisconsin Electric from 1990 to 1994.
Director of WEC since 1995. Director of Wisconsin Electric since 1994. Director of Wisconsin Natural during 1995.
JOHN N.MACDONOUGH. Age 55. Former Chairman and Chief Executive Officer of the Miller Brewing Company, a manufacturer and brewer of malt beverages. Director of WEC and Wisconsin Electric since 1998.
Director of M&I Marshall & Ilsley Bank, The Milwaukee Brewers, The Green Bay Packers and Ugly Duckling Corporation.
JULIA B. NORTH. Age 51. President and Chief Executive Officer of VSI Enterprises Inc. since 1997. VSI i
I Enterprises is an Atlanta-based company that designs, manufactures, markets and supports videoconferencing software and services. President from 1996 to 1997 and Vice President from 1994 to 1996 - Consumer Services, BellSouth Telecommunications. Director of WEC and Wisconsin Electric since 1998. Director of Winn-Dixie Stores, Inc. and ChoicePoint, Inc.
DAVID K. PORTER. Age 55. Senior Vice President of WE since 1989. Vice President of Wisconsin Natural from 1989 to 1995. Director of WE since 1989. Director of Wisconsin Natural from 1988 to 1995.
FREDERICK P. STRATTON, JR. Age 59. Chairman and Chief Executive Officer of Briggs & Stratton Corporation, a manufacturer of small gasoline engines. Director of WEC since 1987. Director of Wisconsin Electric since 1986. Director of Briggs & Stratton Corporation, Bank One Corporation, Midwest Express Holdings, Inc. and Weyco Group, Inc.
OTHER MATTERS The Board of Directors is not aware of any other matters which may properly come before the meeting. The WE Bylaws set forth the requirements that must be followed should a stockholder wish to propose any floor nominations for director or floor proposals at annual or special meetings of stockholders. In the case of annual meetings, the 3
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Bylaws state, among other things, that notice ano certain other documentation must be provided to WE at least 70 days and not more than 100 days before the scheduled date of the annual meeting. No such notices have been received by WE.
COMPENSATION Directors' Compensation In order to further align the Board's interests with stockholders, a portion of directors' fees is paid in WEC common stock. Directors can elect to receive the fee in common stock or defer the fee in the WEC phantom common stock account under the Directors' Deferred Compensation Plan.
During 1998, each nonemployee director received one annual retainer fee of $18,000 for serving as a director of WE and WEC (half in WEC common stock and half in cash) plus an attendance fee of $1,250 for each Board or conunittee meeting attended. Effective January 1,1999, the attendance fee was increased to $1,500. In addition, a per diem fee of $1,000 for travel on company business is paid for each day on which a Board or committee meeting is not also held. Nonemployee directors are also paid $300 for each signed, written unanimous consent in lieu of a meeting. Non-employee chairs of the committees of the Board received a quarterly committee chair retainer of
$1,250. Employee directors receive no directors' fees. Although certain WE directors also serve on WEC's board and its finance and compensation committees, only single fees are paid for meetings held by both boards or committees on the same day. In these cases, fees are allocated between WE and WEC based on services rendered.
Nonemployee directors may defer fees so long as they serve on the Board of WE and/or its affiliates pursuant to the Directors' Deferred Compensation Plan. Under the plan, fees may be deferred into an account which accrues interest semiannually at the prime rate or into a WEC phantom common stock account, the value of which will appreciate or depreciate based on the market performance of WEC stock, as well as through the accumulation of any reinvested dividends. Deferral amounts are credited to accounts in the name of each participating director on the books of WE, are unsecured and are payable only in cash following termination of the director's service to WE. The deferred amounts will be paid out of the general corporate assets or the trust described under " Retirement Plans"in this information statement.
Each nonemployee director annually receives one option to purchase 3,000 shares of WEC common stock under WEC's 1993 Omnibus Stock Incentive Plan for serving as a director of WE and WEC. The Omnibus Stock Incentive Plan is a long-term incentive plan amended by the WEC board in 1998 to permit nonemployee directors to 1
receive such awards. Each option will have an exercise price equal to the fair market value of the shares on the date the option is granted, will be exercisable for 10 years after the date of grant, and will terminate no later than five years after the nonemployee director ceases to be a director for any reason. Options vest over a three year period; one-third on each anniversary grant date. Upon a change in control of WEC, or upon retirement from the Board after age 60, disability or death, these options shall become immediately exercisable. The exercise price of an option may, at the nonemployee director's election, be paid in cash or with previously owned shares of common stock or a f
combination thereof.
I A Directors' Charitable Awards Program has been established to help further the company's policy ef charitable giving. Under the program, the company intends to contribute up to $100,000 per year for 10 years to a charitable organization (s) chosen by each director, upon the director's death. Directors who serve on both the WE and WEC boards are provided one charitable award benefit. Beneficiary organizations under the program must be approved by the WEC Board's Nominating and Board Affairs Committee. The program is funded by life insurance on the lives I
of the Board members. Directors derive no financial benefit from the program since all insurance proceeds and charitable deductions accrue solely to the company. Because of the tax deductibility of these charitable donations, and the use ofinsurance, the long-term cost to the company is expected to be modest.
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Executive Officers' Compensation The following table shows, for the last three fiscal years, compensation awarded to, earned by or paid to WE's Chief Executive Officer and each of WE's other four most highly-compensated executive officers for services in all capacities to WEC and its subsidiaries, including WE. The amounts shown in this and all subsequent tables in this information statement are WEC consolidated compensation data. The portion of time devoted by each officer to WE in 1998, as determined by the percent of compensation paid by WE to each officer versus paid by the other affiliated companies, is as follows: Mr, Abdoo (80%), Mr. Grigg (95%), Mr. Sellman (100%), Mr. Baker (85%), and Ms. Krause (100%).
Summary Compensation Table Long-Term Compensation Awards Annual Compensation Restricted Securities Other Annual Stock Underlying All Other Name and Principal Position Year Salary Bonus Compensation Awards Options Compensation
- $)
($)
($)
($)(1)
(#)(2)
($)(3)
Richard A. Abdoo Chairman of the Board, President and 1998 585,000 209,935 11,176 235,000 40,000 64.996 Chief Executive Officer of WEC; 1997 585,000 0
9,974 0
0 70,312 Chairman of the Board and Chief 1996 560,000 306,472 8,953 0
38,000 113,297 Executive Officer of WE Richard R. Grigg Vice President of WEC; President and 1098 330,000 102,002 6,983 117,500 20.000 29,359 Chief Operating Officer of WE 1997 320,000 137,927 6,176 0
0 33,881 1996 295,000 62,835 5,206 0
19,000 43,412 Michael B. Sellman Senior Vice President sad Chief 1998 208,333 113,754 (4) 9,465 58,750 10,000 5,863 Nuclear Officer of WE (as of March 1998)
Calvin IL Baker Treasurer and Chief Financial Officer 1998 205,000 85,363 2,318 58,750 10,000 17,499 of WEC; Vice President-Finance and 1997 190,000 32,666 1,889 0
0 16.046 Chief Financial Officer of WE 1996 170,000 70,298 1,420 0
9,500 21,996 Kristine M. Krause Vice President-Fossil Operations of 1998 215,000 66,874 0
58,750 10,000 19,738 WE 1997 205,000 26,454 0
0 0
19,770 1996 190,000 68,750 0
0 9,500 23,239 (1) On May 19,1998, WEC restricted stock awards were granted to Messrs. Abdoo, Grigg, Sellman, Baker and Ms. Krause in the amounts of 8,000 shares,4,000 shares,2,000 shares,2,000 shares, and 2,000 shares, respectively, which are subject to forfeiture until vested. The dollar values shown for these shares are based on the WEC closing price of $29375 per share on the grant date. The shares awarded to these individuals are subject to a vesting schedule dependent upon the attainment of cumulative carnings targets based on company performance, with ultimate vesting occurring at the end of ten years. However, earlier vesting may occur due to termination of employment by death, disability, or normal retirement, a change in control of the company, or action by the Compensation Committee. Dividends are paid on shares of restricted stock at the same rate as on unrestricted shares and are used to acquire additional restricted shares. As of December 31,1998, the named executive officers held the
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o following number of shares of restricted stock, including restricted dividends, with the following values (based on a closing price of $31.4375 on December 31,1998): Mr. Abdoo - 8,208 shares ($258,039), Mr. Grigg - 4,104 shares
($129,020), Mr. Sellman, Mr. Baker, and Ms. Krause - 2,052 shares ($64,510) each.
(2) The 1996 grants of options were in combination with contingent dividend awards. Contingent dividend award,s will be paid if total shareholder return (appreciation in the value of WEC common stock plus reinvested dividends) over a four-year period beginning on the grant date equals or exceeds the median return earned by the companies included in a self-defined peer group. There will be no payout if WEC's total shareholder return is negative over the course of such period. If payable, each participant shall receive an amount equal to the actual dividends paid on WEC common stock for the four-year period multiplied by the number of performance units awarded to such participant.
(3) All Other Compensation for 1998 for Messrs. Abdoo, Grigg, Sellman, Baker, and Ms. Krause, respectively, includes: (i) employer matching of contributions by each named executive into the 401(k) plan in the amount of
$5,000 for each named executive officer, (ii) "make whole" payments under the Executive Deferred Compensation Plan with respect to matching in the 401(k) plan on defer.ed salary or salary received but not otherwise eligible for matching in the amounts of $14,013, $4,950, $863, $2,540, and $3,354, respectively, and (iii) $45,983, $19,409,50, 59,959, and $11,384, respectively, which represents the present value ofinterest projected to accrue for the executive's benefit on the current year's insurance premiums paid by the company under a split-dollar life insurance program. In 1997, the method of reporting insurance premiums was changed to more accurately reflect the benefit received by the executive.
(4) Included in this total is a signing bonus in accordance with Mr. Sellman's employment arrangement.
Option Grants in Last Fiscal Year This table shows additional data regarding the options summarized above.
Grant Date Individual Grants (1)
Value Percent of Number of Total Grant Securities Options Exercise Date Underlying Granted to or Base Present Options Employees in Price Expiration Value Name Granted (#)
Fiscal Year
($/Sh)
Date
($)(2) s Richard A. Abdoo 40,000 13.00 %
29.34 5/18/2008
$121,376 j
Richard R. Grigg 20,000 6.50%
29.34 5/18/2008
$60,688
(
Michael B. Sellman 10,000 3.25 %
29.34 5/18/2008
$30,344 Calvin H. Baker 10,000 3.25 %
29.34 5/18/2008
$30,344 Krittine M. Krause 10.000 3.25 %
29.34 5/18/2008
$30.344 (1) Consists ofincentive and non-qualified stock options to purchase shares of WEC common stock granted pursuant to the 1993 Omnibus Stock Incentive Plan on May 19,1998. These options have exercise prices equal to the fair market value of the WEC shares on the date of grant and first become exercisable on the first anniversary of the grant date, with 25% of the underlying shares becoming exercisable at that time, an additional 25% of the option shares becoming exercisable on each successb e anniversary date, and full vesting on the fourth anniversary date. Upon a
" change in control" of WEC, as defined in the plan, or upon retirement, permanent total disability or death of the option holder, these options shall become immediately exercisable. These options were granted for a term of ten years, subject to earlier termination in certain events related to termination of employment. In the discretion of the Compensation Committee, the exercise price may be paid by delivery (or attestation) of already-owned shares and tax withholding obligations related to exercise may be satisfied by withholding shares otherwise deliverable upon exercise, subject to certain conditions. Subject to the limitations of the 1993 Omnibus Stock Incentive Plan, the
Compensation Committee has the power with the participant's consent to modify or waive the restrictions on vesting of these options, to amend these options and to grant extensions or to accelerate these options.
(2) An option pricing model (developed by Black-Scholes) was used to determine the options' present value as of the date of the grant. The assumptions used in the Black-Scholes equation are: market price of stock: $29.34; exercise price of option: $29.34; stock volatility: 13.9%; annualized risk-free interest rate: 4.67%; exercise at the end of 10-year option term; and dividend yield: 5.13%. WE's use of this model should not be construed as an endorsement of its accuracy. The ultimate value of the options,if any, will depend upon the future value of the WEC common stock, which cannot be forecast with reasonable accuracy, and the optionee's investment decisions.
Aggregated Fiscal Year-End Option Values No stock options were exercised by the named executive officers in 1998. This table shows the number and value of exercisable and unexercisable options at fiscal year-end. Value is calculated using the difference between the exercise price and the year-end market price multiplied by the number of shares underlying the option.
Number of Securities Underlying Value of Unexercised Unexercised Options In-the-Money Options at Fiscal Year-End at Fiscal Year-End
(#)
($)
Name Exercisable Unexercisable Exercisable Unexercisable Richard A. Abdoo 47,500 116,000 187,710 259,798 Richard R. Grigg 13,000 58,000 51,181 129,899 Michael B. Sellman 0
10,000 0
16,870 Calvin H. Baker 6,000 27.100 23,622 63,348 Kristine M. Krause 7,750 29.000 31,987 64,950 SEVERANCE POLICY In 1995, the WEC Board adopted a Senior Executive Severance Policy to encourage certain executive officers and other key employees, whose expertise has been critical to WE's success, to remain with WE. The Severance Policy provides for payment of severance to participants whose employment is terminated under certain circumstances (e.g.,
terminations by WE that are other than for cause, disability or retirement; terminations resulting from certain mergers or sales of a business by WE; and terminations resulting from reductions in participants' salaries, responsibilities or benefits) at any time before April 28,2000. Messrs. Abdoo and Sellman do not participate in the Severance Policy.
The severance benefits under the Severance Policy consist of: (i) three years' salary and annual incentive compensation; (ii) payment of the actuarial equivalent of the additional retirement benefits the participant would have earned if he or she had remained employed for three more years; (iii) continued medical, dental and life insurance coverage for three years; (iv) outplacement services or the use of office space and support; and (v) financial planning.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION Compensation Philosophy and Objectives. The Compensation Committee, which is comprised entirely of independent nonemployee directors, is responsible for making decisions regarding succession planning and executive compensation. The committee, which functions as a combined Compensation Committee for WE and WEC, seeks to provide a competitive, performance-based executive compensation program that enables WE to attract and retain key individuals and motivate them to achieve WE's short-and long-term goals.
The committee believes that a substantial portion of overall executive compensation should be at risk.
Compensation plans for executives have been designed so that compensation will vary from year to year dependent I
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on achievement of individual and corporate goals that are aligned with the interests of WE's and WEC's stockholders and customers.
The committee employs a nationally recognized compensation consultant, Towers Perrin, to advise it on matters relating to the administration and design of the executive compensation program. The consultant provides the committee with information regarding competitive compensation levels, practices and trends.
To be fully informed of competitive compensation for WE's executive officer positions, the committee relies an analysis of compensation data from a survey of approximately 85 utilities conducted by the Edison E!ectric Institute, a consortium of utilities considered to be the company's industry peers, and (ii) a survey of compen practices in general industry. The committee does not mathematically average the data from these analyses but, rather, considers them as separate views of the external market.
The committee also applies subjective judgment in evaluating the relative importance of the many factors that are t basis for determining the various elements of compensation.
Elements of Compensation. The executive compensation program primarily consists of three elements:
base salary, annual incentive compensation and long-term incentive compensation.
Overview of Compensation in 1998. As noted above, the committee seeks to tie its compensation program to performance.1998 was a year of transition. While all goals were not met, significant improvements were genera in most areas and strategic direction was provided to set the stage for growth and success in 1999 and beyond.
Specific values of 1998 compensation for the Chief Executive Officer and the four other most highly-compensa executive officers are included in the Summary Compensation Table. The committee's basis for determining appropriate levels of executive compensation for 1998 base salary, annual incentive compensation and long-term incentive compensation is described below.
Base Salary. To determine appropriate executive base salaries, the committee considered factors such as individual experience, performance and potential, changes in duties and responsibilities, customer satisfaction, the reputation WE's utility operations, competitiveness of utility service rates and impact of cost-control achievements. In addition, the committee reviewed executive compensation practices for comparable positions at industry pee companies. In general, base salaries are targeted at or near the 50th percentile of the industry peer group.
Except for Mr. Sellman, who was hired in March 1998, the base salaries for 1998 as listed in the Summary Compensation Table were determined in January 1998 and were effective as of January 1,1998.
AnnualIncentive Compensation. The committee administers WEC's Short-Term Performance Plan, which provides annual cash incentive opportunities to executive officers and other key employees. This annual incentive plan is designed to promote the achievement of shareholder, customer, and employee-focused objectives of WEC and its utility subsidiaries, including WE, while recognizing individual and team performance of participants.
Annual incentive compensation awards are targeted at approximately the 75th percentile ofindustry peer grou practices. In 1998, target incentive awards were set for participants that ranged from 15% to 55% of base salary.
Each participant is eligible to receive an award if pre-established corporate performance goals are met. Aw be increased by up to 100% of targeted amounts, or reduced to zero, based on individual and team performance.
Performance goals for 1998 for most executives were weighted as 40% operational,30% corporate financial 20%
business unit / department financial performance, and 10% related to improving customer satisfaction. Operational goals related to, among other things, energy supply and transmission availability, delivery reliability, responsiveness to customers, safety of operations, service recovery initiatives, environmental stewardship, and employee training and development. Corporate financial goals focused on achievement of target earnings per share. Business unit / departmental financial performance focused on achievements specific to each area. Customer satisfaction was measured by surveys to determine the perceived value of the company's products and services relative to those provided by competitors.
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The performance goals for Chairman of the Board and Chief Executive Officer Abdoo were weighted as 70%
corporate financial,20% operational and employee-related and 10% toward improving customer satisfaction. The performance weightings for President and Chief Operating Officer Grigg were comparable to Mr. Abdoo, except corporate financial goals were weighted 30% and operational and employee-related goals were weighted 60%.
Awards for the named executive officers are shown in the Summary Compensation Table. The committee cited several accomplishments, including, among others:
continued progress made in improving the company's nuclear operations, a
conversion to a state-of-the-art customer services system, e
storm restoration efforts, e
significan* involvement in the creation of the Midwest Independent System Operator for the transmission e
system, and the recognition received for diversity initiatives and environmental efforts.
e Long-Term Incentive Compensation. The committee administers WEC's 1993 Omnibus Stock Incentive Plan, a long-term incentive plan designed to link the interests of executives and other key employees to long-term shareholder value. The long-term incentive plan allows the company to grant stock options, stock appreciation rights, stock awards and performance units to participants. Equity interests in WEC common stock provide an incentive to improve the performance and value of the company in exchange for a share in the appreciation of the value of WEC common stock. Long-term incentive awards are targeted at the 75th percentile ofindustry peer group grant practices.
In 1998, the committee reviewed the long-term incentive program to ensure its effectiveness in focusing executives to achieve the corporation's long-term objectives. Awards to named executive officers were granted as indicated in the Summary Compensation Table.
The committee believes that an important adjunct to the long-term incentive program is significant stock ownership by participants. Accordingly, as a condition of participating in the long-term incentive plan, the committee has implemented stock ownership guidelines for participants. Guidelines for executive officers range from 150% to 300% of base salary.
Chief Executive Officer Compensation. Among the principal responsibilities of the committee are the review of performance and determination of compensation for the Chief Executive Officer.
1 The committee evaluated Mr. Abdoo's performance and compensation was determined in accordance with the executive compensation policies described above.
As part of a procedure instituted in 1995, the Comnensation Committee chair requested that nonemployee directors provide a written evaluation of the CEO's performance. The directors' written feedback was reviewed by committee members as part of its compensation determinations and has been shared with the CEO.
Mr. Abdoo's base salary of $585,000 continues to approximate the 50th percentile of the data reviewed by the committee and therefore was not adjusted for 1998.
With respect to annual incentive compensation for 1998, the Compensation Committee reviewed Mr. Aodoo's performance against his 1998 objectives. The committee believes that Mr. Abdoo made significant progress on a number of matters which has positioned the company for continued growth. The committee specifical'y noted the role of the CEO in several operational accomplishments, including:
his work toward continued improvements in nuclear operations, including his frequent c;ialogue with nuclear glators on the company's progress, the successful operation of Wisconsin Electric s fossil plants to meet increased system demands, e
continued growth in the organization's customer base, e
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the establishment of the Midwest Independent System Operator for the transmission system, e
expanded environmental initiatives to protrate clean energy alternatives and support the development of e
renewable energy sources, his support of the use of state-of-the-art technologies, and e
his consistent support of strong labor-management relationships, cross-cultural sensitivity, equal opportunity.
a and diversity.
With respect to long-term incentive compensation, in keeping with the Compensation Committee's philosophy as stated above, Mr. abdoo was awarded stock options and restricted stock in 1998 as set forth in the "Long-Term Compensation Awards" column of the Summary Compensation Table to specifically link a portion of his compensation to the achievement of WEC's long-term goals.
Compliance With Tax Regulations Regarding Executive Compensation. It is the company's policy to take reasonable steps to obtain the corporate tax deduction for compensation paid to its executive officers by qualifying for the exemptions from limitation on such deductibility under Section 162(m) of the Internal Revenue Code of l
1986.
Respectfully submitted to WE's stockholders by the Compensation Committee of the Board of Directors.
Robert A. Cornog, Committee Chair John F. Ahearne John F. Bergstrom John N. MacDonough STOCK OWNERSillP OF DIRECTORS, NOMINEES AND EXECUTIVE OFFICERS WE directors, nominees and executive officers as a group (17 permas) do not own any of WE's stock, but do beneficially own 230,397 shares, including phantom shares, of c. mmon stock of its parent company, Wisconsin Energy (less than 1% of total WEC common stock outstanding). Le following table lists the beneficial ownership of WEC common stock of each director, nominee and executive officer named in the Summary Compensation Table below, as of March 5,1999. Included are shares owned by each individual's spouse, minor children or any other relative sharing the same residence, as well as shares held in a fiduciary capacity or held in WEC's Stock Plus Investment Plan and Wisconsin Electric's Employee Retirement Savings Plan ("ERSP").
Number of Number of Name Shares Name Shares Richard A. Abdoo 86,335 Geneva B. Johnson 3,955 John F. Ahearne 1,569 Kristine M. Krause 17,852 Calvin H. Baker 17,541 John N. MacDonough 552 John F. Bergstrom 6,675 Julia B. North 742 Barbara L. Bowles 398 David K. Porter 21,699 Robert A.Cornog 6,556 Michael B. Sellman 3,515 i Richard R. Grigg
_ 22.621 Frederick P. Stratton, Jr.
8.492 The shares listed above include (i) shares that may be purchased within 60 days of March 5,1999, pursuant to outstanding stock options, as follows: Mr. Abdoo (47,500), Mr. Origg (13,000), Mr. Baker (6,000), Ms. Krause (7,750), Mr. Porter (9,500) and all directors and executive officers as a group (92,250) and (ii) share units held in the WEC phantom common stock account under WEC's deferred compensation plans as follows: Mr. Abdoo (10,981), Mr. Baker (5,405), Mr. Bergstrom (3.675), Mr. Cornog (2,762), Mr. Grigg (778), Mrs. Johnson (1,048),
Ms. Krause (686), Ms. North (693), Mr. Porter (411), Mr. Sellman (1,204), Mr. Stratton (3,092), and all directors and executive officers as a group (32,744); share units are intendcd to reflect the performance of WEC comme #
stock and are payable in cash.
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s Except for unexercised options and phantom shares, each individual has sole voting and investment power as to all shares listed for such individual, except the following individuals have shared voting and/or investment power as indicated: Mr. Abdoo (8,994), Mr. Baker (336), Mr. Cornog (150), Ms. Krause (3,929), Mr. Stratton (2,400), and all directors and executive officers as a group (16,285).
Information on beneficially owned shares is based on data furnished by the specified persons and is determined in accordance with Rule 13d-5 under the Securities Exchange Act of 1934, as required for purposes of this information statement. It is not necessarily to be construed,s an admission of beneficial ownership for other purposes.
As indicated above, all of WE's outstanding common stock is owned by WEC.
SECTION 16(a) BCNFICIAL OWNERSli!P REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934, requires the corporation's officers, directors, and persons owning more than ten percent of a registered class of the corporation's equity securities to file reports of ownership of equity and derivative securities of WE. To the company's knowledge, all required reports for fiscal year 1998 were filed in a timely manner with the Securities and Exchange Commission, except one report that was tiled a few days late to permit the company to obtain information regarding the initial WE stock ownership position of Mr.
MacDonough.
RETIREMENT FLANS Wisconsin Electric maintains a defined benefit pension plan of the cash balance type for most employees, including WE executive officers. The plan bases a participant's defined oenefit pension on the value of a hypothetical account balance. For individuals participating in the plan as of December 31,1995, a starting account balance was created equal to the present value of the benefit accmed as of December 31,1994, under the plan benefit formula prior to the change to a cash balance approach. That formula provided a retirement income based on years of credited service and final average compensation for the 36 highest consecutive months, with an adjustment to reflect the Social Security integrated benefit. In addition, individuals participating in the plan as of December 31,1995 received a special one-time transition credit amount equal to a specified percentage varying with age multiplied by credited service and 1994 base pay.
The present value of the accrued benefit as of December 31,1994, plus the transition credit were also credited with interest at a stated rate. For 1996 and thereafter, a participant receives annual credits to the account equal to 5% of base pay (including certain incentive payments, pre-tax deferrals and other items), plus an interest credit on all prior accruals equal to 4% plus 75% of the annual time-weighted trust investment return for the year in excess of 4%.
The life annuity payable under the plan is determined by converting the hypothetical account balance credits into annuity form. Individuals who were participants in the plan on December 31,1995 are in no event to receive any less than what would have been provided under the prior formula, had it continued, if they terminate on or before January 1,2011.
For the individuals listed in the Summary Compensation Table, except for Mr. Sellman who has a special agreement described below, estimated benefits under the prior plan formula are higher than under the cash balance plan formula.
As a.esult, their benefits would currently be determined by the prior plan benefit formula. The following table shows estimated annual benefits payable in life annuity form on normal retirement for persons in various compensation and years of service classifications during 1998, based on the continuation of the prior plan formula (including supplemental amounts providing additional benefits described below in the "Other Retirement Benefits" section):
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Pension Plan Table Years of Service Remuneration 15 20 25 30 35 40 5 50,000
$ 10,715 5 14,287 5 17,859
$ 21,431
$ 23,498 5 25,565,
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100,000 23,652 31,536 39,420 47,304 51,808 56,312 150,000 36,590 48,787 60,984 73,176 80,123 87,065 200,000 49,527 66,036 82,545 99,054 108,433 117,812 250,000 62,464 83.285 104.106 124.927 136,744 148,561 300,000 75,402 100,536 125,670 150,804 165,058 179,312 400,000 101,277 135,036 168,795 202,554 221,683 240,812 500,000 127,152 169,536 211,920 254,304 278,308 302,312 600,000 153,027 204,036 255,045 306,054 334,933 363,812 700,000 178,902 238,536 298,170 357,804 391.558 425,312 800,000 204,777 273,036 341,295 409,554 448,183 486,812 1
900.000 230,652 307,536 384,420 461,304 504,808 548,312 1,000,000 256,527 342,036 427,545 513,054 561,433 609,812 1,100,000 282.402 376,536 470,670 564,804 618,058 671,312
)
1,200.000 308,277 411,036 513,795 616.554 674.683 732,812 The compensaCon for the individuals listed in the Summary Compensation Table in the columns l and " Bonus" is virtually equivalent to the compensation considered for purposes of the retirement plans various supplemental plans, excel't that Mr. Sellman's covered compensation is $272,087.
Messrs. Abdoo, Grigg, Sellman, Baker and Ms. Krause, currently have 23,28,1,7 and 20 credited years of service, respective As noted above, Mr. Sellman is not eligible under the prior plan benefit formula. The estimated annual benefits payable in life annuity form at ages 60 and 65 for Mr. Sellman under the cash balance plan formula, u assumptions under that plan and assuming average annual compensation increases of approximately 4% and including supplemental amounts providing additional benefits described below under "Other Retirement Be are $92,469 and $151,384, respectively.
Other Retirement Benefits. Designated officers of WEC and WE, including all of the individuals named in the Summary Compensation Table, participate in the Supplemental Exec __se Retirement Plan (" SERP"). The provides monthly supplemental pension benefits to participants, which will be paid out of unsecured corp assets, or the grantor trust described below, as follows: (i) an amount equal to the difference between the actual pension benefit payable under the pension plan and what such pension benefit would be if calculated to any limitation imposed by the Internal Revenue Code on pension benefits or covered compensation; and (
amount calculated so as to provide participants with a supplemental lifetime annuity, estimated to amount to betwe 8% and 10% of final average compensation depending on which pension payment option is selected. E
" change in control" of WEC, as defined in the SERP, no payments are made until after the participant's ret death. WEC and/or WE have entered into agreements with Messrs. Abdoo, Baker, and Se!! man who cannot accumulate by normal retirement age the maximum number of years of credited service under the pension formula in effect immediately before the change to the cash balance formula, as described below:
According to Mr. Abdoo's agreement, Mr. Abdoo at retirement will receive supplemental retirement paym which will make his total retirement benefits at age 58 or older substantially the same as those payable t employees who are age 60 or older, who are in the same compensation bracket and who became plan participants at the age of 25.
According to Mr. Baker's agreement Mr. Baker at retirement will receive supplemental retirement paymen which will make his total retirement benefits at age 60 or older substantially the same as those payable to employees who are in the same compensation bracket and who became plan participants at the age of 25.
Mr. Sellman has a special contingent deferred compensation benefit under which he would receive payment on his termination of employment with WE at or after age 60 or because of disability or death time. The payment would be equal to the total amount that would have resulted if an amount of $422 000 had i
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o been initially credited to him as of January 1,1998, in the WE pension plan described above and is credited with the same investment results as if held in such plan. This amount has been included in the estimated annual life annuity benefits information provided for Mr. Sellman described above. The benefit is forfeitable should Mr.
Sellman's employment cease prior to age 60 other than because of disability or death.
The WEC Amended Non Qualified Trust, a grantor trust, has been established to fund the SERP, the Executive Deferred Compensation Plan and Mr. Abdoo's, Mr. Baker's and Mr. Sellman's agreements. The plans and agreements provide for optional lump sum payments and, in the instance of a change in control, mandatory lump sum payouts without regard to whether the executive's employment has terminated. In each case, the interest rate benchmark formula for calculating the lump sum amount is the five-year U. S. Treasury Note yield as of the last business day of the month prior to date of payment.
AVAILABILITY OF FORM 10-K A copy (without exhibits) of the Annual Report on Form 10-K for the fiscal year ended December 31,1998 as filed with the Securities and Exchange Commission is available without charge to any stockholder of record or beneficial owner of WE common stock by writing to the Corporate Secretary, Thomas II. Fehring,231 West Michigan Street, P. O. Box 2046, Milwaukee, Wisconsin 53201. Financial statements and certain other information found in the Form 10-K are included in the accompanying WE 1998 Annual Report to Stockholders.
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WISCONSIN ELECTRIC POWER COMPANY 1998 ANNUAL REPORT TO STOCKHOLDERS ACCOMPANYING INFORMATION STATEMENT TAHLE OF CONTENTS ITEM PAGE Business A-2 Market for Common Equity and Related Stockholder Matters A-2 Selected Financial Data A-3 Management's Discussion and Analysis of Financial Condition and Results of Operations A-4 Income Statement A-35 Balance Sheet Assets A-36 Capitalization and Liabilities A-37 Statement of Cash Flows A-38 Capitalization Statement A-39 Common Equity Statement A-40 Notes to Financial Statements A-41 Report ofIndependent Accountants A-54 Directors A-55 Executive Officers A-55 k
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BUSINESS Wisconsin Electric Power Company (" Wisconsin Electric") is an electric, gas and steam utility incorporated in the State of Wisconsin in 1896. Wisconsin Electric's operations are conducted in the following three business segments.
Electric Operations: Wisconsin Electric's electric operations generate, transmit, distribute and sell electric energy in a territory of approximately 12,000 square miles with a population estimated at 2,300,000 in southeastern (including the metropolitan Milwaukee area), east central and northern Wisconsin and in the Upper Peninsula of Michigan.
Gas Operations: Wisconsin Electric's gas operations purchase, distribute and sell natural gas to retail customers and transport customer-owned gas in four distinct service areas of about 3,800 square miles in Wisconsin: west and south of the City of Milwaukee, the Appleton area, the Prairie du Chien area and areas within Iron and Vilas Counties. The gas service territory has an estimated population of approximately 1,200,000.
Steam Operations: Wisconsin Electric's steam operations generate, distribute and sell steam supplied by its Valley and Milwaukee County Power Plants. Steam is used by customers for space heating and processing in the metropolitan Milwaukee area.
For additional financial information about Wisconsin Electric's business segments, see " Note K - Segment Reporting" in the Notes to Financial Statements.
MARKET FOR COMMON EQUITY AND RELATED STOCKIIOLDER MATTERS Cash dividends declared on Wisconsin Electric Power Company's common stock during the two most recent fiscal years are set for:h below. Dividends were paid to Wisconsin Electric's sole common stockholder, Wisconsin Energy Corporation.
Total Dividend Ouarter 1998 1997 First
$ 44,322,000
$ 80,726,000 Second 44,893,000 44,322,000 Third 44,893.000 44,322,000 Fourth 44.893.000 44.322.000 Total 11110RLO90
$213.692.000 A-2
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WISCONSIN ELECTRIC POWER COMPANY SELECTED FINANCIAL DATA (Thousands of Dollars)
Financial 1998 1997 1996 1995 1994 Year Ended December 31 Earnings available for common stockholder
$ 182,971
$ 69,412 (a) $ 210,112
$ 239,465
$ 180,403 (b)
Operating revenues Electric
$1,641,403
$1,412,115
$1,393,270
$1,437,480
$1,403,562 Gas 295,848 355,172 364,875 318,262 324,349 Steam 20,506 22,315 15,675 14,742 14,281 Total operating revenues
$1,957,757
$1.789,602
$1,773,820
$1,770,484
$1,742,192 At December 31 Total assets
$4,768,942
$4,667,840
$4,507,160
$4,318,924
$4,202,193 Long-term debt and preferred stock -redemption required
$1,512,531
$1,448,558
$1,371,446
$1,325,169
$1,257,776 Sales and Customers - Utility 1998 1997 1996 1995 1994 Electric Megawatt-hours sold 29,475,163 27,671,946 27,560,428 27,283,869 26,911,363 Customers (End ofyear) 988,929 978,835 968,735 955,616 944,855 Gas "Iherms delivered ('Ihousands) 922,836 983,676 936,894 886,729 811,219 Customers (End ofyear) 388,478 376,732 367,275 357,030 347,080 Steam -
Pounds sold (Millions) 2,773 3,161 2,705 2,532 2,395 Customers (End ofyear) 454 474 465 473 471 QUARTERLY FINANCIAL DATA (Thousands of Dollars)
March June Three Months Ended 1998 1997 1998 1997 (a)
Total operating revenues
$510,681
$510,383
$461,771
$403,214 Operating income 67,411 65,637 54,623 31,716 Earnings available for common stockholder 49,995 43,386 31,071 (6,353)
September December "Ihree Months Ended 1998 1997 1998 1997 (a)
Total operating revenues
$496,603
$400,614
$488,702
$475,391 Operating income 82,839 46,441 68,823 55,665 Eamings available for common stockholder
$7,956 22,321 43,949 10,058 Quarterly results of operations are not directly comparable because of seasonal and other factors. See Management's Discussion and Analysis of Financial Condition and Results of Operations.
Eamings and dividends per share are not provided as all of Wisconsin Electric Power Compan/s common stock is held by Wisconsin Energy Corporation.
(a) includes May 1997 nonrecurring $22 million charge ($13 million net of tax) to write-off deferred merger costs related to the terminated merger agreement with Northem States Power Company and December 1997 S30 million write-down
($18 million net of tax) of equipment purchased for the Kimberly Cogeneration Project.
(b) Includes 1994 nonrecurring $74 raillion charge ($45 million net of tax) for Wisconsin Electric Power Company's restructuring program.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Wisconsin Energy Corporation is a holding company whose principal subsidiary is Wisconsin Electric Power Company (" Wisconsin Electric"), an electric, gas and steam utility. Unless qualified by the context used.in this document, the terms " Wisconsin Energy" or the " Company" refer to the holding company and all ofits subsidiaries.
As of December 31,1998, approximately 89% of the Company's consolidated total assets were attributable to Wisconsin Electric. The following discussion and analysis of financial condition and results of operations includes both Wisconsin Energy and Wisconsin Electric un ess otherwise stated.
l Acquisition Of ESELCO, Inc.r Effective May 31,1998, Wisconsin Energy acquired ESELCO, Inc. ("ESELCO"),
a holding company whose principal subsidiary was Edison Sault Electric Company (" Edison Sault"), in a tax free reorganization accounted for as a pooling ofinterests. Due to the immaterial nature of the transaction, Wisconsin Energy has not restated any historical financial or statistical information. Wisconsin Energy is operating Wisconsin Electric and Edison Sault, an electric utility, as separate subsidiaries within their historical service territories. The discussion that follows below includes Edison Sault's activity since June 1,1998. Wisconsin Electric and Edison Sault continue to be separately regulated by their respective states. For additional information, see " Factors Affecting Results of Operations - Mergers" below.
Cautionary Factors: A number of forward-looking statements are included in this document. When used, the terms
" anticipate", "believe", " estimate", " expect", " objective", " plan", "possible", " potential", " project" and similar expressions are intended to identify such forward-looking statements. Forward-looking statements are subject to certain risks, uncertainties and assumptions which could cause actual results to differ materia!!y from those that are described, including the factors described below under " Factors Affecting Results of Operations" and under
" Cautionary Factors."
RESULTS OF OPERATIONS See " Note K - Segment Reporting" in the Notes To Financial Statements for additional information related to Wisconsin Energy's and Wisconsin Electric's results of operations.
Earnings 1993 Compared To 1997r During 1998, Wisconsin Energy's consolidated net income and earnings per share of common stock were $188 million and $1.65, respectively, compared to $61 million and $0.54 per share during 1997.
Between the comparative periods, Wisconsin Electric's earnings increased from $69 million curing 1997 to
$183 million during 1998. As described in further detail below,1998 carnings increased primarily because increased revenues from interim and final 1998 retail rate increases for Wisconsin Electric's customers in the Sta of Wisconsin and from an increase in total 1998 electric kilowatt-hour sales more than offset the effects of re natural gas therm deliveries as well as the effects of increased operating expenses during 1998. Strengthened performance at Wisconsin Electric's Point Beach Nuclear Plant (" Point Beach") also contributed to increased comparative earnings during 1998. Comparative earnings during 1997 were negatively impacted by (1) a one-time charge of $31 million at Wisconsin Energy ($19 million net of tax or 17 cents per share) for the write-off of deferred costs related to Wisconsin Energy's terminated merger agreement with Northern States Power Company, a Minnesota corporation ("NSP"), (2) a one-time $30 million impairment charge at Wisconsin Electric ($18 million net of tax or 16 cents per share) for its Kimberly Cogeneration Equipment, and (3) increased costs beyond those included in electric rates associated with buying replacement power for both generating units at Point Beach, which were out of service during a large part of 1997.
1997 Compared To 1996: Compared to consolidated net income of $218 million and earnings per share of $1.97 during 1996, Wisconsin Energy's consolidated ~ net income and earnings per share were $61 million and $0.54 per share, respectively, during 1997. Wisconsin Electric's earnings decreased from $210 million in 1996 to $69 million in 1997. As described further below,1997 earnings decreased primarily due to (1) significantly higher fuel and purchased power expenses,(2) increased other operation and maintenance expenses,(3) higher depreciation expense,(4) the one-time write-off in the second quarter of 1997 of deferred costs related to Wisconsin Energy l
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e terminated merger agreement with NSP, (5) the c ne-time impairment charge in the fourth quarter of 1997 for the write-down to fair value of Wisconsin Electric's Kimberly Cogeneration Equipment, and (6) retail electric and gas rate decreases that became effective in February 1997.
Electric Revenues, Gross Margins And Sales The following table summarizes Wisconsin Energy's and Wisconsin Electric's electric revenues, gross margins, sales and customers for each of the three years ended December 31.
% Change
% Change 1997 1996 Electric Onerations 122.3 1997 to 1998 1224 Ig_1222 IYisconsin Energy:
Electric Gross Margin ($000's)
Total Operating Revenues
$1,663.632
$1,412,115 17.8 %
$1.393,270 1.4%
Total Fuel & Purchased Power 461.365 444.655 3.8%
331.867 34.0 %
Gross Margin
$1,202262 s 967.460 24.3 %
$ 1061.403 (8.9%)
Total Electric Sales (Mwh) 29,940,384 27,671,946 8.2%
27,560,428 0.4%
Total Average Customers 1,009.223 972,593 3.8%
962,020 1.1%
tVisconsin Electric:
Electric Gross Margin ($000's)
Operating Revenues Residential
$ 571,378
$ 487,219 17.3 %
$ 494,142 (1.4%)
Small Commercial / Industrial 487,549 430,193 13.3 %
421,511 2.1%
Large Commercial / Industrial 450,138 402,684 11.8 %
383,047 5.1%
Other-Retail / Municipal 51,211 55,246 (7.3%)
56,318 (1.9%)
Resale-Utilities 60,927 24,538 148.3 %
26,372 (7.0%)
Other Operating Revenues 20.200 12.235 65.1 %
11.880 3.0%
Total Operating Revenues 1,641,403 1,412,115 16.2 %
1,393,270 1.4%
Fuel & Purchased Power Fuel 308,374 311,966 (1.2%)
295,651 5.5%
Purchased Power 141.619 132.689 6.7%
36.216 266.4 %
Total Fuel & Purchased Power 449.993 444.655 1.2%
331.867 34.0 %
Gross Margin
$1.191.410
$ 967.460 23.2 %
$1.061.403 (8.9%)
Sales (Mwh)
Residential 7.327,024 6,863,569 6.8%
6,998,769 (1.9%)
Small Commercial / Industrial 7,612,397 7,433,087 2.4%
7,204,694 3.2%
Large Commercial / Industrial 11,391,979 11,021,476 3.4%
10,785,505 2.2%
Other-Retail / Municipal 1,287,162 1,412,623 (8.9%)
1,476,999 (4.4%)
Resale-Utilities 1.856.601 941.191 97.3 %
1.094.461 (14.0%)
Total Electric Sales 29.475.163 27.671.946 6.5%
27.560.428 0.4%
Average Customers Residential 886,635 876,776 1.1%
867,917 1.0%
Small Commercial / Industrial 94,675 93,259 1.5%
91,565 1.9%
Large Commercial / Industrial 720 714 08%
706 1.1%
Other-Retail / Municipal 1,804 1,811 (0.4%)
1,812 0.0%
Resale-Utilities 51 33 54.5 %
70 65.0 %
Total Average Customers
.28)t$15 22 4123 1.2%
242A23 1.1%
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1998 Compared To 1997: Primarily due to retail electric rate increases during 1998 for Wisconsin Electric's customers in the State of Wisconsin and to an increase in total 1998 electric kilowatt-hour sales, total electric operating revenues increased by $252 million or 17.8% during 1998 compared to 1997. Between the compa periods, the gross margin on electric operating revenues (total electric operating revenues less fuel and purchas power expenses) increased by $235 million or 24.3%. The discussion that follows reflects Wisconsin Electric's contribution to Wisconsin Energy's 1998 electric revenues, gross margin and sales.
Wisconsin Electric's total electric operating revenues increased by $229 million or 16.2% during 1998 compar 1997 and the gross margin on electric operating revenues increased by $224 million or 23.2%. Wisconsin Electric attributes these increases to (1) an interim Wisconsin retail electric rate increase, effective from lanuary 1,1998 through April 30,1998, of $135 million on an annualized basis,(2) a final Wisconsin retail electric rate increase, effective May 1,1998, of $160 million or 12.7% on an annualized basis, and (3) increased total electric kilowatt-hour sales during 1998. The increase in gross margin can also be partly attributed to a smaller rate of increase in total fuel and purchased power costs during 1998 compared to the rate of increase in total electric sales and electric operating revenues.
Total fuel and purchased power expenses at Wisconsin Electric increased by $5 million or 1.2% compared to 1997.
Increased availability oflower cost per kilowatt-hour generating capacity at Point Beach during 1998 allowed Wisconsin Electric to generate 11.3% more electricity while enjoying a 1.2% decrease in fuel cuts compared to 1997. However, despite a 17.7% decrease in megawatt-hour power purchases between the comparative periods, purchased power expense increased 6.7%, resulting in the net increase in total fuel and purchased power expenses.
Contributing to the increased purchased power expenses, Wisconsin Electric arranged for the purchase of more reliable firm supplies of energy and incurred a full twelve months of demand charges for the first time under a long-term power purchase contract with LSP-Whitewater Limited Partnership ("LS Power") during 1998, resulting in higher fixed contract and power transportation costs. In addition, the per unit cost of wholesale electric energy fluctuated more during 1998 compared to 1997, increasing the cost of certain spot market purchases.
Total electric kilowatt-hour sales increased 6.5% during 1998 compared to 1997. Increased use per customer by residential and large commerciaUindustrial customers, combined with growth in the number of residential and small commerciaUindustrial customers, contributed to the increase in total electric kilowatt-hour sales. Warmer weather during the cooling load months of 1998 also contributed to the increase in 1998 sales, especially to residential and small commerciaUindustrial customers who tend to be more weather sensitive. Electric energy sales to the Empire and Tilden ore mines, Wisconsin Electric's two largest electric retail customers, increased 7.4% between the comparative periods primarily due to a temporary shutdown of the Tilden mine during July and August 1997.
Excluding the Empire and Tilden ore mines, total 1998 electric sales at Wisconsin Electric increased 6.4% and sales to the remaining large commerciaUindustrial customers increased 2.3%. During 1998, sales in the other-retaiUmunicipal customer class decreased 8.9% primarily due to reduced contractual requirements nominations, effective May 1997, by Wisconsin Public Power Inc., Wisconsin Electric's largest municipal wholesale customer.
This customer had been reducing its purchases from Wisconsin Electric over the past several years subsequent to acquiring generating capacity and expanding use ofits existing generation facilities. Mostly due to higher opportunity sales, sales for resale to other utilities, the resale-utilities customer class, increased 97.3% in 1998 compared to 1997.
1997 Compared To 1996: Primarily due to a fuel surcharge in Wisconsin Electric's electric retailjurisdiction in the State of Wisconsin, effective May 24,1997, total electric operating revenues increased by $19 million or 1.4%
during 1997 compared to 1996. Revenues from the fuel surcharge offset the impact on electric operating revenues of a retail electric rate decrease in the State of Wisconsin, effective February 18,1997, of $7 million or 0.6% on an annualized basis.
The gross margin on electric operating revenues decreased by $94 million or 8.9% primarily due to significantly higher fuel and purchased power expenses. Ccmpared to 1996, fuel and purchased power expenses increased by
$113 million or 34.0% during 1997 as a result of(1) extended outages at Point Beach,(2) an extended maintenance outage at Oak Creek Power Plant that was concluded in June 1997, (3) delayed commercial operation of contractual generating capacity from LS Power, and (4) higher costs per megawatt-hour of power purchases due to regional generation outages. During 1997, Wisconsin Electric replaced its lost generating capacity with higher cost A-6 4
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generation and with a 218% increase in megawatt-hours of power purchases. Partially offsetting the increased 1997 fuel and purchased power expenses, Wisconsin Electric recorded $24 million of revenues during 1997 as a result of the fuel surcharge. For further information concerning the 1997 fuel surcharge and the extended outages at Point Beach, see " Rates and Regulatory Matters" and " Nuclear Matters", respectively, below under " Factors Affecting Results of Operations."
Total electric sales increased by 0.4% during 1997 compared to 1996. Increased 1997 sales to small commerciaUindustrial and to large commerciaVindustrial customers were almost completely offset by decreased sales to customers in the residential, the other-retaiUmunicipal and resale-utilities customer classes.
Total 1997 electric sales were positively impacted by growth in the number of customers in the residential, the small commerciaVindustrial and especially in the large commercial / industrial customer classes and by increased use per customer by small and by large commercial / industrial customers. Cooler weather during the summer of 1997 compared to the summer 1996, however, primarily contributed to lower use per residential customer and to the decrease in 1997 residential electric sales. Compared to 1996, electric energy sales to the Empire and Tilden ore mines decreased by 5.4% in 1997 due to the temporary shutdown in 1997 of the Tilden ore mine noted above.
Excluding the Empire and Tilden ore mines, total electric sales increased 1.0% and sales to the remaining large commerciaVindustrial customers increased 4.3% between the comparative periods.
1997 sales in the other-retaiUmunicipal customer class decreased 4.4% compared to 1996 primarily due to the continued phase out,in 1997 of firm requirements contracts totaling 12.5 megawatts with two wholesale customers and a reduction of 30 megawatts in contractual requirements nominations during 1997 by Wisconsin Public Power Inc.. Sales for resale to other utilities, the resale-utilities customer class, decreased 14.0% primarily as a result of reduced opportunity sales caused by the Point Beach and Oak Creek Power Plant outages mentioned above.
Gas Revenues, Gross Margins And Therm Deliveries The following table summarizes Wisconsin Electric's gas operating revenues, gross margins, therm deliveries and average customers for each of the three years ended December 31.
% Change
% Change 1997 1996 Gas Operations 1223 19.22 to 1998 1995 to 1997 Gas Gross Margin ($000's)
Operating Revenues Residential
$176,499
$221,968 (20.5%)
$218,811 1.4%
CommerciaVIndustrial 87,899 113,609 (22.6%)
108,100 5.1%
Interruptible 7,003 8,970 (21.9%)
11,531 (22.2%)
Interdepartmental 138 3.096 (95.5%)
3.050 1.5%
Total Gas Sales 271,539 347,643 (21.9%)
341,492 1.8%
Transported Customer Owned Gas 12,014 11,295 6.4%
11,006 2.6%
Transported - Interdepartmental 2,462 2,105 17.0 %
725 190.3 %
Other Operating Revenues 9.833 (5.8711 267.5 %
11.652 (150.4%)
Total Operating Revenues 295,848 355,172 (16.7%)
364,875 (2.7%)
Cost of Gas Sold 175.475 233.877 (25.0%)
234.254 (0.2%)
Gross Margin
$122J23
$12L295 (0.8%)
$130.621 (7.1%)
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% Change
% Change 1997 1996 Qas Ooerations -(cont'd)
Jp96 1222 to 1998 122.6
. to 1997 Therms Delivered (000's)
Residential 289,509 347,859 (16.8%)
371,990 (6.5%)
Commercial / Industrial 182,033 211,453 (13.9%)
225,169 (6.1%)
Interruptible 22,872 24,532 (6.8%)
35,869 (31.6%)
Interdepartmental 398 9,696 (95.9%)
. I1.280 (14.0%)
Total Gas Sales 494,812 593,540 (16.6%)
644,308 (7.9%)
Transported Customer Owned Gas 349,443 313,466 11.5%
268,163 16.9 %
Transported - Interdepartmental 78.581 76,670 2.5%
24.423 213.9 %
Total Gas Delivered
.222,826 9EM76 (6.2%)
.22fLH2d 5.0%
Average Customers Residential 347,747 339,002 2.6%
330,153 2.7%
Commercial / Industrial 31,586 30,594 3.2%
29,936 2.2%
Interruptible 146 170 (14.1%)
190 (10.5%)
Interdepartmental 2
(100.0%)
4 (50.0%)
Total Sales Customers 379,479 369,768 2.6%
360,283 2.6%
Transportation 271 254 6.7%
230 10.4 %
Transportation - Interdepartmental 6
5 20.0 %
4 25.0 %
Total Average Customers 22236 32Q,Q22 2.6%
3sQS2 2.6%
1 1998 Compared To 1997: Despite an interim retail gas rate increase, effective from January 1,1998 through April 30,1998, of $19 million on an annualized basis and despite a final retail gas rate increase, effective May 1,1998, of $19 million or 5.4% on an annualized basis, total gas operating revenues decreased by $59 million or 16.7% and the gross margin on gas operating revenues (gas operating revenues less cost of gas sold) decreased by
$1 million or 0.8% during 1998 compared to 1997. Between the comparative periods, the cost of gas sold decreased by $58 million or 25.0% due to decreased gas sales and to a lower cost per unit of purchased gas. Changes in the cost of natural gas purchased at market prices are included in customer rates through the purchased gas adjustment mechanism, reducing 1998 operating revenues but not gross margin. See " Rates and Regulatory Matters" below in
" Factors Affecting Results of Operations" for additional information concerning the purchased gas adjustment mechanism. Total gas operating revenues and gross margin both declined in 1998 due to a decrease in therm deliveries, especially to residential and commerciaVindustrial customers who contribute higher margins to earnings than other customers. Other operating revenues re'ket adjustments for over and under collection of gas costs included in operating revenues from gas sales.
Compared to the same period in 1997, total natural gas therm deliveries decreased 6.2% during 1998 primarily due to significantly lower therm use per residential and commercial / industrial customer. While the number of residential and commercial / industrial customers increased between the comparative periods, residential and commercial / industrial therm deliveries decreased 16.8% and 13.9%, respectfully, due in large part to warmer weather during the heating months of 1998. During 1998, therm deliveries to the Whitewater Cogeneration Facility, owned by LS Power, an unaffiliated independent power producer, primarily contributed to an 11.5% increase in transported customer owred gas deliveries. The Whitewater Cogeneration Facility, a gas-fired electric cogeneration plant in Wisconsin Electric's gas service territory, went into commercial operation in September 1997. Wisconsin Electric purchases the majority of the electricity generated by the Whitewater Cogeneration Facility under a long-term power purchase contract. During 1998, natural gas therm deliveries to the interdepartmental customer classes decreased 8.6% primarily due to increased availability of Point Beach, allowing Wisconsin Electric to reduce generation at its Concord and Paris Power Plants, natural gas-fired peaking facilities. Therm deliveries to the Concord and Paris Power Plants are at rates approved by the Public Service Commission of Wisconsin ("PSCW").
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e Excluding deliveries to Wisconsin Electric's facilities. total therm deliveries during 1998 decreased 6.0% compared to 1997.
1997 Compared To 1996: Total gas operating revenues decreased by $10 million or 2.7% during 1997 compared to,1996, and the gross margin on gas operating revenues decreased by $9 million or 7.1%. Total gas operating revenues and gross margin declined primarily due to an annualized gas retail rate decrease, effective February 18, 1997, of $6 million or 2.0% on an annualized basis and to a weather-related decrease in therm deliveries to residential and commercial / industrial customers. As noted above, other operating revenues reflect adjustments for over and under collection of gas costs included in operating revenues from gas sales.
Cost of gas sold was unchanged between the comparative periods. An 8.4% increase in 1997 in the per unit cost of purchased gas was offset by a 7.9% decrease in total gas purchases during 1997. Wisconsin Electric arranges for its own gas supply contracts with terms of various lengths. As noted above, changes in the cost of natural gas purchased affect operating revenues due to the purchased gas adjustment mechanism but do not affect gross margin.
Total natural gas therm deliveries increased by 5.0% in 1997 compared to 1996. Decreased deliveries to the residential, the commercial / industrial and the interruptible customer classes during 1997 were more than offset by increased interdepartmental deliveries to Wisconsin Electric-owned gas-fired generating facilities and increased deliveries of transported customer owned gas. Despite an increase in the average number of residential and commercial / industrial customers during 1997 compared to 1996, deliveries to these two customer classes decreased between the comparative periods primarily due to warmer weather during the 1997 heating seasons. These customers are more sensitive to weather variations as a result of heating requirements and contribute higher margins to earnings than other customer classes. Therm deliveries to interruptible customers decreased during 1997 compared to 1996 due to a decrease in the average number ofinterruptible customers and the average therm use per Interruptible customer.
Deliveries of transported - customet owned gas increased by 16.9% during 1997 compared to 1996 due to an increase in the average number of transport customers and to an increase in the average therm use per transport customer. During 1997, a number of sales customers switched to become transportation customers. Also, increased deliveries of transported - customer owned gas in 1997 reflect start-up in September 1997 of commercial operations of LS 19wer's Whitewater Cogeneration Facility.
Due to the Point Beach and Oak Creek plant outages noted above, Wisconsin Electric increased generation at its natural gas-fired Concord and Paris Power Plants, resulting in a 142% increase in total 1997 interdepartmental deliveries compared to 1996. Excluding interdepartmental deliveries, total 1997 therm deliveries decreased 0.8%
compared to 1996.
For further information concerning Wisconsin Electric's 1996,1997 and 1998 Rate Orders, see " Rates and Regulatory Matters" below under " Factors Affecting Results of Operations."
Operating Expenses 1998 Compared To 1997: During 1998, Wisconsin Energy's other operation and maintenance expenses increased by $107 million or 19.7% compared to 1997, including a $49 million increase in Wisconsin Electric's nuclear non-fuel expenses, a $40 million increase in Wisconsin Electric's administrative and general expenses, an $ 11 million increase in Wisconsin Electric's electric distribution expenses and a $10 million increase in Wisconsin Electric's non-nuclear, non-fuel power generation expenses. Nuclear non-fuel expenses increased during 1998 primarily due to cfforts by Wisconsin Electric to continue to improve the overall performance at Point Beach. Also influencing the 1998 increase in nuclear non fuel expenses, Wisconsin Electric deferred $18 million of nuclear non-fuel operation expenses during 1997 and began amortizing these deferred costs to expense in 1998 on a five-year straight line basis.
See " Nuclear Matters" below in " Factors Affecting Results of Operations" for additional information concerning Wisconsin Electric's Point Beach Nuclear Plant. Administrative and general expenses increased during 1998 primarily due to efforts to resolve Year 2000 technology issues, to various other corporate technology improvement efforts and to increased staffing and higher employee pension and benefit expenses. For further information, see
" Year 2000 Technology Issues" below in " Factors Affecting Results of Operations." Electric distrib" tion expenses A-9 I
increased in large part as a result of damage from an unusually high number of violent storms that struck Wisconsin Electric's service territory during 1998 and as a result of increased tree trimming / forestry efforts intended to improve reliability of the electric distribution system. Non-nuclear, non-fuel power generation expenses increased primarily due to a scheduled maintenance outage at Wisconsin Electric's Oak Creek Power Plant during the second quarter of 1998 and to other reliability improvement efforts.
The increase in depreciation expense during 1998 is the net result of several factors at Wisconsin Electric.
Depreciation expense increased as a result of increased (1) depreciable plant during 1998, (2) amortizable software during 1998, and (3) decommissioning expenses during 1998 compared to 1997. This was offset to a large extent by a change in the regulatory accounting treatment of pre-1991 contribution in aid of construction balances, which had I
the effect of reducing current year depreciation expense. For further information, see " Note C - Depreciation" in the l
Notes to Financial Statements. Total operating income taxes increased as a result of higher taxable income.
1997 Compared To 1996: During 1997, Wisconsin Energy's other operation and maintenance expenses increased by $48 million or 9.6% compared to 1996, including a $33 million increase in non-fuel nuclear expenses, an
$11 million increase in administrative and general expenses and an $8 million increase in transmission system expenses. Non-fuel nuclear expenses increased during 1997 due to extended and unscheduled generating unit outages at Point Beach and due to efbrts by Wisconsin Electric's nuclear operations to strengthen plant performance. During 1997, administrative and general expenses increased primarily due to higher salaries and outside services employed, and transmission expenses increased due to significantly higher 1997 power purchases.
An $11 million decrease in customer service expenses during 1997, primarily due to reduced conservation expenses, partially offset the higher 1997 other operation and maintenance expenses.
Depreciation expense increased between the comparative periods primarily due to higher depreciable plant balances in 1997 and to higher depreciation rates included in the PSCW's 1997 Rate Order. Total operating income taxes decreased as a result of lower taxable income.
During 1997, Wisconsin Electric deferred $18 million of nuclear non-fuel operation and maintenance costs under authority granted by the PSCW in July 1997. For further information concerning Wisconsin Electric's deferred nuclear non-fuel operation and maintenance costs, see " Note F - Nuclear Operations" in the Notes to Financial Statements.
Other Items 1998 Compared To 1997: During the second quarter of 1997, Wisconsin Energy recorded a one-time $31 million charge to write off deferred merger costs related to the terminated merger agreement with NSP of which $22 million was attributable to Wisconsin Electric. Also during 1997, Wisconsin Energy recorded $1 million of merger expenses related to the acquisition of ESELCO. For further information concerning the terminated merger with NSP and the acquisition of ESELCO, see " Mergers" below under " Factors Affecting Results of Operations."
Miscellaneous net other income and deductions increased by $47 million or 99.5% at Wisconsin Energy and by
$37 million or 98.2% at Wisconsin Electric during 1998 compared to 1997. Significantly contributing to these increases, Wisconsin Electric recorded a one-time $30 million impairment charge in December 1997 for its Kimberly Cogeneration Equipment based upon the results of a discounted cash flow analysis. For further information concerning the Kimberly Cogeneration Equipment, see " Note L - Commitments and Contingencies" in the Notes to Financial Statements. In addition, miscellaneous net other income and deductions increased during 1998 due to (1) a $9 million increue in net pretax miscellaneous income at WITECH Corporation,(2) a $5 million increase in net pretax miscellaneous income at WISPARK Corporation, and (3) a $4 million reduction during 1998 in charitable donations by Wisconsin Electric. WITECH Corporation and WISPARK Corporation are non-utility subsidiaries of Wisconsin Energy.
Primarily due to increased short-term borrowing levels between the comparative periods, other interest expense increased by $10 million or 102.4% at Wisconsin Energy and by $3 million or 34.7% at Wisconsin Electric.
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a e
k 1997 Compared To 1996: As noted above, Wisconsin Energy recorded a one-time $31 million charge in 1997 to write off deferred merger costs related to the terminated merger agreement with NSP of which $22 million was attributable to Wisconsin Electric. During 1997, Wisconsin Energy also recorded $1 million of merger expenses related to the acquisition of ESELCO by Wisconsin Energy.
Compared to 1996, Wisconsin Energy's miscellaneous net other income and deductions decreased by $45 million during 1997 of which $34 million was attributable to Wisconsin Electric. As noted above, Wisconsin Electric recorded a one-time $30 million impairment charge in December 1997 for the Kimberly Cogeneration Equipment.
During 1997, miscellaneous net other income and deductions also decreased due to increased 1997 charitable donations by Wisconsin Electric and due to fair market valuation adjustments of non-utility investments.
Interest income increased by $6 million or 34.8% during 1997 compared to 1996 primarily due to increased earnings on Wisconsin Electric's decommissioning trust fund. Interest charges on long-term debt increased between the comparative periods as a result ofincreased average outstanding long-term debt during 1997, primarily at Wisconsin Electric.
I FACTORS AFFECTING RESULTS OF OPERATIONS Mergers Northern States Power Company: On May 16,1997, the Boards of Directors of Wisconsin Energy and NSP l
agreed to terminae the Agreement and Plan of Merger which provided for a business combination of Wisconsin l
Energy and NSP to form Primergy Corporation. As a result, Wisconsin Energy recorded a $31 million charge in the second quarter of 1997 ($19 million net of tax or approximately 17 cents per share) to write off the deferred transaction costs and costs to achieve the merger. Approximately $22 million of merger write-off costs were attributable to Wisconsin Electric.
ESELCO, Inc.: Effective May 31,1998, Wisconsin Energy acquired ESELCO in a tax free reorganization accounted for as a pooling of interests. In connection with the acquisition, Wisconsin Energy issued 2,407,275 shares of common stock, with fractional interests paid in cash, based upon an exchange ratio of 1.5114 shares of Wisconsin Energy common stock for each outstanding share of ESELCO common stock.
Due to the immaterial nature of the transaction, Wisconsin Energy has not restated any historical financial or statistical information. Instead, Wisconsin Energy combined ESELCO's May 31,1998 balance sheet with Wisconsin Energy's, including a $1.2 million credit to retained earnings of which $0.9 million represents ESELCO's consolidated net income during the first five months of 1998.
ESELCO was the parent company of Edison Sault, an electric utility which serves approximately 21,000 residential, i
I commercial and industrial customers in the State of Michigan's eastern Upper Peninsula. Where appropriate, discussions as well as financial or statistical information of Wisconsin Energy include Edison Sault's operations since June 1,1998. Wisconsin Energy is operating Wisconsin Electric and Edison Sault as separate utility subsidiaries within their historical service territories. Wisconsin Electric and Edison Sault continue to be separately regulated by their respective states.
Nuclear Matters 1
Point Beach Nuclear Plant: Wisconsin Electric owns and operates two approximately 500 megawatt electne generating units at Point Beach Nuclear Plant in Two Rivers, Wisconsin. During 1998,1997 and 1996, Point Beach provided 18%,6% and 24% of Wisconsin Electric's net electric energy supply, respectively. The United States Nuclear Regulatory Commission ("NRC") operating licenses for Point Beach expire in October 2010 for Unit I and in March 2013 for Unit 2.
From late 1996 through early 1999, Point Beach experienced extended generating unit outages. During a scheduled outage of Unit 2 that began in October 1996 and was completed in August 1997, Wisconsin Electric replaced the unit's steam generators. For additional information concerning the Unit 2 steam generator replacement, see A-Il i
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.vn
" Investing Activities" below in " Liquidity and Capital Resources" In February 1997 Unit I was TAM Of service for equipment repairs. Wisconsin Electric decided to keep Unit 1 out of service to allow l\\suu P@tamo focus their attention on the work necessary to bring Unit 2 back to service. During the Unit I outae NS" Electric replaced two low pressure turbines which increased Unit l's maximum dependable genent"WNY from 500 to approximately 510 megawatts. Wisconsin Electric returned Unit I to service from Dve00M through mid February 1998, when it began a scheduled refueling outage that was completed in late hue IN8. With completion of this outage, Wisconsin Electric initiated its first extended fuel cycle which should allo" " **
operation of Unit I until its next refueling and maintenance outage scheduled for the fall of 1999. In 34 Niarch 1999, Wisconsin Electric returned Unit 2 to service following a scheduled refueling and maintenance potge that began in early December 1998. During this outage, Wisconsin Electric replaced the unit's low lum"'# "
rotors, which is expected to increase the maximum dependable generating capability of Unit 2 fiom @'
approximately 510 megawatts, As a result of the low pressure turbine work recently performed on t hu g,
Wisconsin Electric expects to reduce future maintenance costs at Point Beach. During the Unit 2 0"t#
e sin M
Electric initiated an extended fuel cycle, which should allow for the operation of the unit until ih unt ted" maintenance outage scheduled for the fall of 2000. Over the last few years, Point Beach Unit's I did I #
experienced some unplanned short-term shutdowns or power reductions to address various equipment n'""
As a result of the outages noted above and various performance improvement initiatives, Wisconski #
nuclear operation and maintenance expenses, excluding fuel and benefit overheads, have increav'd fh""
t n
in 1996 to $107 million in 1997 to $156 million in 1998. See " Note F-Nuclear Operations"in lho NalM0 Financial Statements for information concerning Wisconsin Electric's deferral during 1997 of spino *"'M
$18 million of nuclear non-fuel operating and maintenance costs in excess of those included in 199/ Ud*
large part to the need for Wisconsin Electric to replace Point Beach's low cost generating capacily al"d"
,fr d
1996 through 1998 with higher cost sources of electric energy, Wisconsin Electric's total fuel and p"" h costs have increased from $332 million in 1996 to $445 million in 1997 to $450 million in 199%
Additional unplanned shutdowns or power reductions of Point Beach Units I or 2 may be necemt y " #" "
Electric continues to perform reviews of facility design and to implement other improvement irumHV'"'
availability of Point Beach increased significantly during 1998 compared to 1997, and Wisconw 6' "'# N the reliability of the units to continue to improve toward historical levels as these efforts progrew IH d' Wisconsin Electric expects that nuclear non-fuel operating and maintenance expenses will begin el"'
99, On January 27,1997, the NRC notified Wisconsin Electric of a declining trend in performance W l'""d *"
NRC issues trend letters to provide early notification of declining performance and to offer a ut,h'/ 'M "PP"I""
to take early corrective actions. During 1997, Wisconsin Electric undertook a comprehensive c1N' '" ' '
specific concerns and to take advantage of industry best practices to further strengthen performaw; A ' ' I
- t. In January 1998, the NRC rescinded its declining trend letter and informed Wisconsin Electric that M '<"HN, actions taken or being taken by Wisconsin Electric appeared to be effective in addressing the adeM O"'h in performance at Point Beach.
In a March 12,1999 inspection report to Wisconsin Electric, the NRC requested a meeting with N'"N lifectric to discuss Wisconsin Electric's response to the condition of certain systems at Point Beach in lare IM"i er 1998 and early January 1999. The NRC indicated that there was an apparent violation ofits requiren#
"E " the status of certain safety related equipment. An analysis indicates that the hei intended function if called upon. On March 26,1999, representatives of Wisconsin Electric mer "2* N j
NRC and provided information to assist the NRC in its evaluation of the apparent violation. The frai# # E#nding.
in August 1998, Wisconsin Electric announced that it was participating in cooperative alliance reW Nth three i
l other unaffiliated utilities: Alliant Energy, NSP and Wisconsin Public Service Corporation. The FM ' f these teams was to examine opportunities to enhance safety and improve performance and reliability ar M V jpants' l
I nuclear generating plants. The participants operate seven nuclear generating units at five sites irc M W f
Wisconsin, Minnesota and lowa with a total combined generating capacity exceeding 3,600 meg 7#
The alliance work led the participants to a conclusion that, in some areas of technical expertise; V# wncfit could be gained in a more formal, integrated structure. In February 1999, Wisconsin Electric, NSP aned *3 Public A-12 I
e Service Corporation announced the formation of Nuclear.Vm-rnent Company, L.L.C. to further pursue the initial alliance objectives. At the same time, Alliant Energy annon-its intention to join the other members of the j
nuclear management company but that it required prior apprms of the Securities and Exchange Commission.
Services to be delivered by the nuclear management comparrf r the participating utilities will also be subject to additional state and federal regulatory approvals.
Nuclear Management Company L.L.C. is in the process of-=shing a senior management team that will focus on consolidating the expertise and talents of their nuclear empicwr--r, building on the best business practices identified as strengths at each plant site, reducing the overhead of corrmmly used services and commodities, and more effectively integrating the resources of all seven nuclear g+.
"g units. Each utility will continue to own its respective nuclear units, maintain exclusive rights to the eneg generated, and retain financial responsibility for safe operation, maintenance and decommissioning.
Wisconsin Electric and Wisconsin Public Service Corporaticz.znticipate transfer of their NRC operating licenses for Point Beach and Kewaunee generating stations, respectively.
Nuclear Management Company L.L.C.. A submittal, seeking approval of the NRC for the license transfer of Poux L=ach, is planned during the second quarter of 1999.
Spent FuelStorage And Disposalt Wisconsin Electric ccred construction of an Independent Spent Fuel Storage Installation ("ISFSI") in 1995 for the temporary dry scrage of spent nuclear fuel at Point Beach. The PSCW has authorized Wisconsin Electric to load up to tweive masks containing a total of 288 fuel assemblies with spent fuel and transfer the casks to the ISFSI. To date, five 'T-24 casks, designed by Sierra Nuclear Corporation and containing a total of 120 spent fuel assemblies, have beet maded and moved to the ISFSI. Wisconsin Electric currently plans to load four additional casks during 1999 anc :n-remaining three authorized casks in 2000.
To maintain flexibility associated with the continued tempcrar, dry storage of spent fuel at Point Beach, Wisconsin Electric is in the process of procuring alternative model TNC : asks from Transnuclear Corp. TN-32 dry storage casks have been previously approved by the NRC for specifc ttse at other nuclear generating facilities in the United States. Wisconsin Electric currently plans to obtain three T% 22 casks by the spring of 2000. In August 1998, the PSCW issued an order approving the substitution of up to si-t ~N-32 casks for VSC-24 casks at Point Beach in the event that this becomes necessary. Wisconsin Electric bellem that the NRC will authorize TN 32 casks for use at Point Beach by early in the year 2000.
Wisconsin Electric estimates that, with implementation of the extended fuel cycles noted above, with the remaining authorized casks and with the remaining space in the spent he' pool in its current configuration, it has sufficient temporary spent fuel storage capacity to continue operating.%bt Beach until 2004. Wisconsin Electric currently plans to apply with the PSCW in the fall of 1999 for authorin to load additional casks beyond the twelve that are currently authorized.
l l
Temporary spent fuel storage alternatives are necessary at Paan Beach until the United States Department of Energy
(" DOE") takes ownership of and permanently removes the spent fuel as mandated by the Nuclear Waste Policy Act of 1982, as amended in 1987 (" Waste Act"). The DOE has 6'icated that it does not expect a permanent spent fuel repository to be available until at least 2010.
As of January 31,1998, the DOE has failed to meet its contractual obligation to begin removing spent fuel from Point Beach. In February 1998, Wisconsin Electric joined other utilities in a motion to enforce a July 1996 mandate of the United States Court of Appeals for the District of Columbia Circuit (" Court") that the DOE had an unconditional obligation to begin accepting spent fuel by January 31,1998. Wisconsin Electric and the other utilities requested an order (1) compelling the DOE to submit a detailed program for disposing of spent fuel from utilities, (2) declaring that the utilities are relieved of their obligation to pay fees into the Nuclear Waste Fund for a permanent spent fuel repository and are authorized to place such fees into escrow until the DOE commences with disposing of spent fuel pursuant to its obligation, and (3) precluding the DOE from using any fees paid into the Nuclear Waste Fund to reimburse utilities for damages they have incurred as a result of the DOE's breach ofits obligations. On May 5,1998, the Court issued a decision denying the motion of Wisconsin Electric and the other utilities to enforce the Court's mandate, principally on the ground that the question of whether the DOE could properly use the Nuclear Waste Fund as a source to pay damages to utilities was not ripe for review. The Court A-13 i
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.- S,,. es
- ,,?
4 further held that the other requested remedies fell outside the scope ofits mandate, which was limited to definin nature of the DOE's statutory obligations and did not extend to requiring the DOE to perform under its contracts with Wisconsin Electric and the other utilities. At this time, Wisconsin Electric is unable to predict when the DOE will actually begin accepting spent nuclear fuel.
During 1997 and again in 1998, the United States Senate and the United States House of Representatives each passed versions of the Nuclear Waste Policy Acts of 1997 and 1998, respectively. The legislation would require the DOE to establish a temporary spent fuel repository in the State of Nevada until the permanent repository is available and to begin taking ownership from utilities and removing spent fuel as required by the Waste Act. Differences between Senate and House versions of the bill were not reconciled in 1997 nor in 1998. In early January 1999, the Nuclear Waste Policy Act of 1999 was introduced in the Ilouse, and in mid-March 1999, a similar bill was introduced in the Senate. President Clinton has threatened to veto any legislation which mandates a DOE temporary spent fuel reposit'ory in Nevada.
Electric System Reliability Matters During the summer of 1998 Wisconsin Electric had adequate capacity to meet all ofits firm load obligations. While Wisconsin Electric did make public appeals for conservation on two days during the summer; this was due to constraints on the regional electric network in the Midwest caused by high weather-induced demand as well as generation and transmission unavailability. Wisconsin lilectrie also experienced curtailments of power purchases from other companies on various occasions during the sununer of 1998.
The regional electric energy supply was especially tight in late June,1998, as unusually warm, humid weather coincided with storm-related outages of major transmission lines and generating plants in nearby states. Under such circumstances, utilities with available capacity are required to make that capacity available to neighboring utilities who are experiencing shortages. Wisconsin Electric has available the ability to free up generation by interrupting and /or curtailing certain custorr ers. Said customers who participate, voluntarily, in these load management programs receive rate discounts in exchange for allowing their service to be curtailed or interrupted when power supplies become tight. Wisconsin Electric has used such hud management programs regularly since the early 1980s.
During late June,1998, Wisconsin Electric was one of the niilities in the region which contributed its available resources, including curtailable and interruptible capacity, to help maintain regional reliability.
Wisconsin Electric expects to have adequate capacity during 1999 to meet all of its firm load obligations. However, the Company anticipates that the regional electric energy supply will remain tight during 1999. As a result of this, or of extremely hot weather along with unexpected equipment unavailability, Wisconsin Electric could be required to call upon its load management procedures, as it has in the past.
Wisconsin Electric is proceeding with several long-term measures to enhance the reliability ofits own system and that of the midwestern region. The measures described in the following sections will begin to contribute as early as the summer of 1999.
300 Megawatt Contract With Southern Energy: In August 1998, Wisconsin Electric and Atlanta-based Southern Energy, Inc., a subsidiary of Southern Company, signed a formal power purchase agreement wherein Southern Energy Inc. will license, construct, own and operate a 300 megawatt natural gas-fired peaking power plant, located in Neenah, Wisconsin, and sell its electric output to Wisconsin Electric for eight years. The agreement sati>fies Wisconsin Electric's responsibility under directives from the PSCW and under the new reliability legislation,1997 Wisconsin Act 204, signed into law in April 1998 by the governor of the State of Wisconsin.
In February 1999, Southern Energy received a certificate of public convenience and necessity for the facility from the PSCW and a construction air permit from the Wisconsin Department of Natural Resources ("WDNR"). The facility is scheduled for commercial operation by June 20M Combustion Turbine Inlet Coolers: Wisconsin Electrie received PSCW approval to proceed with the installation ofinlet coolers at its Concord and Paris Power Plants in l'ebruary and April 1998, respectively. PSCW approval was granted promptly upon Wisconsin Electric's receipt of amended air emission permits from the WDNR. Construction i
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w of the inlet cooling facilities at both plants is on schedule for the facilities to be operational by the summer of 1999.
The facilities will counteract the reduction in generating capacity due to hot summer weather experienced by these two plants. Approximately 112 megawatts of total hot weatner capacity degradation will be recovered. Wisconsin Electric estimates that the inlet coolers for the two plants will cost a total of approximately $24 nullion during the 1998-1999 biennial period. The costs of these projects are included in anticipated construction expenditures described below in " Capital Requirements" under " Liquidity and Capital Resources."
Germantown Generation Projects: As a result of updated load growth projections based upon summer of 1998 experience, Wisconsin Electric determined that it has the need for additional generating capacity by the summer of 2000 and selected its Germantown Power Plant for instaliation of a new combustion turbine unit and other facilities.
The addition of an 85 megawatt combustion turbine is planned for a June 2000 in-service date. Further, inlet cooling facilities, similar to those at the Concord and Paris Generating Stations, are planned to be installed on the four existing combustion turbine units at the Germantown Power Plant as well as on the neg unit. The inlet cooling facilities will counteract the reduction in generating capacity due to hot summer weather. A net increase in summer capacity of approximately 133 megawatts is planned to be available by June 2000 as a result of these efforts. Natural gas facilities are also planned to be added at the Germantown site to provide dual fuel capability for the new as well as the existing units. As part of the dual fuel project, dry low-nitrogen oxide burners will be installed on the existing units to reduce air emissions. The dual fuel facilities will be installed over a four-year period with completion in 2003. The project is subject to approval of various state and local authorities. Applications with the PSCW to install the new combustion turbine, inlet cooling and dual fuel facilities were submitted in March 1999. The matter is pending.1999 expenditures for this project are included in anticipated construction expenditures described below in " Capital Requirements" under " Liquidity and Capital Resources."
Electric Transmission Projects: Wisconsin Electric is pursuing multiple projects designed to increase the electric import capability into eastern Wisconsin and to improve electric system reliability. The Northern Interface Project involves operation of an existing 138 kilovolt transmission line at 345 kilovolts (for which the line was originally designed and ccnstructed) and construction of a new 345-138 kilovolt Morgan Substation. The project will allow an additional 80 megawatts of generating capacity in the Upper Peninsula of Michigan to be available to Wisconsin Electric's transmission system in the State of Wisconsin. PSCW approval was received in June 1998, and the project is under construction with a scheduled in-service date of June 1999. The Southern Interface Project is the first of several projects being undertaken to improve system reliability in southeast Wisconsin and the metropolitan Milwaukee area as well as to eliminate constraints on the Wisconsin Electric system for future increased transfer capability between northern Illinois and southern Wisconsin. The Southern Interface Project will replace 138 kilovolt substation facilities and upgrade 345 kilovolt substation facilities at Wisconsin Electric's Oak Creek Substation. Authorization from the PSCW was received in June 1998, and the project is scheduled to be in service by June 1999. The Oak Creek-Arcadian 345 kilovolt Transmission Upgrade Project will upgrade a 230 kilovolt transmission line to 345 kilovolt operation and will also upgrade substation facilities at Wisconsin Electric's Oak Creek and Arcadian Substations to improve system reliability. An application with the PSCW for authorization to proceed with the project was submitted in March 1999. Expenditures during 1999 for these projects are included in anticipated construction expenditures described below in " Capital Requirements" under " Liquidity and Capital Resources." Other transmission projects to improve system reliability are in the planning stage for submission to the PSCW later in 1999.
Wisconsin Reliability Assessment Organization: The Wisconsin Reliability Assessment Organization ("WRAO")
was formed in early 1998 to coordinate activities relating to generation and transmission reliability issues in the State of Wisconsin. Wisconsin Electric is an active participant in the WRAO, whose members include all of the state's other investor owned utilities, members of the PSCW Staff, several municipal utilities and coops, and utilities from surrounding states. Activities of the WRAO include reliability policy development, performance evaluations of its members with respect to the adequacy of their supplies, and sponsorship of regional transmission planning studies (see " Wisconsin Interface Reliability Enhancement Study" below). The WRAO also conducts meetings and regional reliability symposia with external organizations with interests in system reliability to provide forums for information and idea sharing.
Wisconsin Interface Reliability Enhancement Study: Under WRAO direction, the Wisconsin Interface Reliability Study group is conducting a continuing study which examines numerous options for improving the reliability of the A-15 i
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state's electric system by strengthening its connections with the interstate transmission grid. The group includes transmission planners from WRAO members as well as planning and regulatory staff from throughout the region.
j The Wisconsin Interface Reliability Study group produced a report from the first phase of its current study which became the basis for the PSCW's recent " Report to the Wisconsin Legislature on the Regional Electric Transmission System."
An assessment of the strengths and weaknesses of various reliability improvement options is expected to be completed by the end of March 1999. The WRAO will combine this information with the results of an environmental screening process and other relevant information to recommend a preferred expansion plan and two alternatives to the PSCW by the end of April 1999. Filing for the required Certificate of Public Convenience and Necessity is planned for the third quarter of 1999.
New Renewable Electric Energy: In early August 1998, Wisconsin Electric issued a request for proposal soliciting bids for one or more contracts totaling up to 75 megawatts of renewable electric generating capacity. Renewable electric energy, also known as green energy, includes power generated by wind, water, sun, biomass and other renewable resources. The request for proposals is in response to the requirements of 1997 Wisconsin Act 204 and supports Wisconsin Electric's " Energy for Tomorrow " renewable energy program. The deadline for proposals was October 1,1998. By the October 1,1998 deadline, Wisconsin Electric received more than 20 responses to the request for proposal. After evaluation of all the proposals that were submitted, Wisconsin Electric developed a short list of proposals and is currently engaged in contract negotiations. Wisconsin Electric expects to complete these negotiations and sign purchase power agreements in the spring of 1999.
1997 Wisconsin Act 204 calls for the investor-owned utilities in the eastern part of the State of Wisconsin to add a combined total of 50 megawatts of renewable electric generating capacity to their energy mix by the end of year 2000. Wisconsin Electric is responsible for 27 megawatts of this total. The August 1998 request for proposal fulfills this obligation.
In June 1999, Wisconsin Electric will place in service two 660 kilowatt Vestas V47 wind turbines. The wind turbines will be located in southern Fond du Lac County in the Town of Byron. The electricity generated from this approximately $1.8 million dollar project will be sold to " Energy for Tomorrow " customers.
Midwest ISO: Wisconsin Electric is currently participating in the formation of a regional independent electric transmission system operator (" ISO") to promote reliability in the Midwest (the " Midwest ISO"). On January 15, 1998, Wisconsin Electric, along with eight other utilities, filed a proposal with the Federal Energy Regulatory Commission ("FERC") to establish the Midwest ISO, which would operate member electric transmission systems within the region as a single system. Regional oversight is required to maintain reliability because the system is being used increasingly for broad, regional transactions. In addition to reliability benefits, a regional ISO helps to ensure open and equal access to the electric transmission system and broadens the energy market by eliminating redundant transmission fees. As a net buyer of electric energy, Wisconsin Electric expects the Midwest ISO to result in lower energy costs for its customers as well as to improved regional reliability.
The PSCW completed a review of ISOs and issued an order in June 1998 that laid out new ISO guidelines that are more consistent with guidelines of the FERC. However, in its order, the PSCW stated that the Midwest ISO did not
,I entirely meet the PSCW's guidelines. While not necessarily required, Wisconsin Electric plans to seek approval of the Midwest ISO from the PSCW.
The FERC conditionally approved the Midwest ISO proposal by order issued September 16,1998. By order dated December 17,1998, the FERC granted the Midwest ISO applicants' request for rehearing of certain portions of the September 1998 order. Hearings on the transmission rate aspects of the proposal are expected to commence before the FERC in June 1999. An independent Board of Directors for the Midwest ISO was elected in December 1998.
Industry Restructuring And Competition Driven by a combination of market forces, regulatory and legislative initiatives, and technological changes, the electric industry continues a trend towards restructuring and increased competition. To date, competitive forces have A-16
e been most prominent in the wholesale power market but are expected to continue to develop in the electric retail markets. The State ofIllinois has passed legislation introducing retail electric choice for large customers in 1999 and for all customers by May 2002. For information concerning restructuring in the State of Michigan, see "MPSC Electric Restructuring" below. While the Company cannot predict the ultimate timing or impact of a restructured electric industry, Wisconsin Electric believes that, as a low-cost energy provider, it is well positioned to compete in a deregulated and competitive market. Among others, the following electric and gas industry restructuring initiatives are underway in regulatory jurisdictions where the Company currently does business.
PSCW's Electric Utility Industry investigation: Because of electric power shortages experienced during the summer of 1997, the PSCW expressed a desire in October 1997 to work on infrastructure issues and to develop a robust competitive electric wholesale market. The PSCW also stated its belief that the question of whether to implement electric retail competition in Wisconsin ultimately should be decided by the Wisconsin Legislature rather than by the PSCW. The PSCW agreed to pursue the following priority infrastructure issues as prerequisites to other restructuring work:
Improvements to existing and addition of new electric transmission lines in the State of Wisconsin.
Additions of new generating capacity in the State of Wisconsin.
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Modifications to State of Wisconsin statutes to allow merchant generating plants to be built in Wisconsin without prior PSCW determination of need as one means of ensuring adequate generation.
Development of an ISO for either the electric transmission system in the State of Wisconsin or in the region.
The Governor of the State of Wisconsin recently proposed in his current budget that the PSCW conduct a one year i
study on what it would take to get retail access in Wisconsin. This proposal will need to go through the legislative review process before such a study would be conducted.
Affiliate Interest Docket (05-BU-101): The PSCW is developing policies governing activities that can be performed by a utility or a utility affiliate. The activities under review include providing or selling any product or service other than core utility products. Wisconsin Electric has taken the position that state policy should protect j
competition, not individual competitors, and that customers should have the choice to use either Wisconsin Electric
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or another vendor for these products and services. Technical and public hearings were held in October and November of 199E. The PSCW is expected to issue an order by June 1999.
Public Benefits: The Wisconsin Legislature has formed a Council to draft legislation forming a Public Benefits Board. The Cous d is using the PSCW order in Docket 05-BU-100 as the starting point for the draft legislation.
This PSCW order recommends plans to protect low-income utility customers, conservation programs and the environment under a deregulated electric industry. Wisconsin Electric has supported the development of such an approach to public benefits to ensure that Wisconsin Electric is not competitively disadvantaged by being required to continue to provide these benefits. It is likely legislation creating such a Public Benefits Board will be submitted in 1999.
MPSC Electric Restructuring: In 1998, the Michigan Public Service Commission ("MPSC") continued to move toward implementation of direct access for retail electric markets beginning on January 1,2002. In February, the MPSC issued an order clarifying restructuring issues and directing Detroit Edison and Consumers Energy, the two largest utilities in the State of Michigan, to file tariff sheets and draft implementation plans for direct access.
Following company submittals in late February 1998, the MPSC staff held several public meetings to discuss the plans with stakeholders. On June 30,1998, the two companies filed revised implementation plans reflecting some of issues raised during the meetings. While the MPSC is currently reviewing other issues raised by the meetings, a phase-in of direct access is expected to commence in late 1999 for Michigan's two largest utilities with full access by January 1,2002.
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During 1993, public meetings on electric restructuring were also conducted in Michigan's Upper Peninsula to discuss direct access. Following meetings with the MPSC staff and the opening of dockets to begin the proce electric restructuring for smaller utilities, the smaller Michigan utilities, including Wisconsin Electric, filed proposals with the MPSC for implementing retail direct access on January 1,2002 without a phase-in program. On February 2,1999, the MPSC issued an order closing the above dockets, citing the progress made to date., Issues requiring further resolution will be the subject of future dockets for the smaller companies. The MPSC is expected to address access programs for smaller utilities after the initial phase-in has commenced in late 1999 for the la utilities in Michigan.
FERC Open Access Transmission Proceedings: As a result of the Energy Policy Act of 1992, the FERC issued Order Nos. 888 and 889 in April 1996 relating to open access transmission service, stranded costs, standards of conduct and open access same-time information systems. The ruling was intended to create a more competitive wholesale electric power market.
In April 1997, Wisconsin Electric submitted a revised transmission tariffin compliance with FERC's orders on rehearing of its Order No. 888. In connection with Wisconsin Energy's acquisition of ESELCO, the FERC approved ajoint transmission tariff covering both Wisconsin Electric and Edison Sault by order issued June 29,1998. On December 18,1998, the FERC approved Wisconsin Electric's Standards of Conduct required by Order No. 889.
Order Nos. 888 and 889 have been appealed by many parties to the U.S. Court of Appeals for the Second Circuit.
Wisconsin Electric has long advocated open access to electric transmission facilities as a necessary step in the competitive restructuring of the electric utility industry. Wisconsin Electric does not believe that the FERC rulings
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orjudicial review of these orders will have a detrimental effect on its liquidity, financial position or results of operations.
Wholesale Competition: Wholesale sales of electric energy accounted for 6%,5% and 5% of Wisconsin Electric's total electric operating revenues in 1998,1997 and 1996, resp:ctively. Wisconsin Electric attributes the increase in the past year to additional sales for resale that offset decreasing sales to municipal and rural electric wholesale customers as a result of renegotiated power sales contracts in 1995 and 1996. The renegotiated contracts contain discounts from previous rates charged to these customers.
A current contract with a 75 megawatt wholesale customer includes nominations of 90 megawatts as of May 1999 and 120 megawatts as of May 2000. A second wholesale customer with a current 50 megawatt demand may become a partial requirements customer beginning in October 2000. Wisconsin Electric expects to continue providing transmission services to this customer.
PSCW Natural Gas Utility Industry Investigation: The PSCW continued a generic investigation of the natural gas industry in the State of Wisconsin and addressed the extent to which traditional regulation should be replaced with a different approach. On July 1,1997, Wisconsin Electric filed a modified dollar for dollar gas cost recovery mechanism ("GCRM") in accordance with a November 1996 PSCW order. This filing was updated on June 30, 1998. Purchased gas adjustment mechanisms have been evaluated by the PSCW as part of the PSCW's generic investigation. A GCRM will include after the fact prudence reviews by the PSCW. The matter is pending with anticipated implementation in the third quarter of 1999. Wisconsin Electric does not expect that a major portion of gas costs that are currently passed through to customers will be subject to price risk under this GCRM.
Rates And Regulatory Matters The table below summarizes the anticipated annualized revenue impact of recent rate changes authorized by regulatory commissions for Wisconsin Electric's electric, natural gas and steam utilities based upon the sales projections utilized by those commissions in cetting rates. Edison Sault implemented a temporary price cap in 1995.
The PSCW regulates retail electric, steam and natural gas rates in the State of Wisconsin, while the FERC regulates wholesale power, electric transmission and gas transportation service rates. The MPSC regulates retail electric rates in the State of Michigan.
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j, Revenue Percent Increase Change servjgg (Decrease) m Rates Effective Date (Millions)
(%)
Retail electric, WI (a)
$ 160.2 12.7 05/01/98 Retail gas (a) 18.5 5.4 05/01/98 Steam heating (a) 1.2 9.3 05/01/98 Retail electric, WI (a) 134.9 10.7 01/01/98 Retail gas (a) 18.5 5.5 01/01/98 Steam heating (a) 0.8 6.3 01/01/98 Retail electric, WI (b) 27.2 2.2 05/23/97 Retail elect ic, WI (7.4)
(0.6) 02/18/97 Retail gas (6.4)
(2.0) 02/18/97 Steam heating 0.1
.5 02/18/97 Retail electric, WI (33.4)
(2.8) 01/01/96 Retail electric, WI (1.1)
(3.3) 01/01/96 Retail gas (8.3)
(2.6) 01/01/96 Steam heating (0.8)
(5.1) 01/01/96 (a)
The January 1,1998 order was an interim PSCW order that was effective untilie May 1,1998 final order was received from the PSCW. The final May 1,1998 order superseded the Juuary 1,1998 interim order.
(b)
Fuel surcharge which ended as of May 1,1998. Reflecting the combined effect of two PSCW orders, this surcharge was initially ordered on May 23,1997 and was amended by the PSCW on December 23,1997.
The PSCW requires that rate cases be conducted once every two years. Wisconsin Electric's next test year filing under the biennial cycle is scheduled to be filed with the PSCW in 1999. Discussion of rate changes for the 1998, 1997 and 1996 test years follow.
1998 Test Yearr On December 23,1997, the PSCW issued an order authorizing Wisconsin Electric to implement interim Wisconsin retail rate increases effective January 1,1998 in the amount of $154 million on an annualized basis, including $135 million for electric operations, $19 million for gas operations and $1 million for steam operations. The PSCW authorized permanent annualized retail base rate increases in the State of Wisconsin effective May 1,1998 of $160 million for electric operations, $19 million for gas operations and $1 million for steam operations. The increases were based upon an authorized regulatory return on common equity of 12.2%.
In November 1998, Wisconsin Electric filed testimony and exhibits with the MPSC showing a $4 million annual revenue deficiency for its electric utility operations in the State of Michigan. Wisconsin Electric proposed a two stage increase in the filing. The first stage would increase rates 9.4% on an annualized basis effective with issuance of an order in the case. The second stage, proposed to be effective July 1,1999, would increase the stage-one rates by another 4.8% on an annualized basis.
The primary factors influencing the 1998 rate changes in the State of Wisconsin and the proposed rate changes in the State of Michigan include:
Increased costs related to the construction, operation and maintenance of generation, transmission and distribution facilities to assure reliability of electric service.
Increased costs associated with the need to implement technological solutions to make computer systems
" Year 2000 Ready" and to meet customer expectations.
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Increased payroll and benefits due to (1) additional personnel to fill vacant positions that occurred while Wisconsin Energy and Northern States Power Company were pursuing the Primergy merger and (2) increased staff to support key areas such as nuclear operations, customer service and information services.
Increased fuel and purchased power costs.
Increased cost of capital.
Accelerated amortization of the remaining balance of pre-1991 contributions in aid of construction at December 31,1997.
See " Mergers" above for additional information concerning the Wisconsin Energy's terminated merger agreement veith NSP. See " Year 2000 Technology Issues" below for further information concerning the estimated costs to examine and modify existing software application and operational programs and hardware that is date sensitive and may not be " Year 2000 Ready." See Note C - Depreciation"in the Notes to Financial Statements for information about the accelerated amortization of certain contributions in aid of construction.
1997 Test Year In an order dated February 13,1997, the PSCW directed Wisconsin Electric to implement rate decreases for retail electric and gas customers in the State of Wisconsin of $7 million and $6 million, respectively, on an annualized basis, and a steam rate increase of $0.1 million on an annualized basis. The order was effective February 18,1997 and was based upon a regulatory return on common equity of 11.8% The PSCW had determined that it required a special full review of Wisconsin Electric's rates for the 1997 test year in connection with consideration of the application for approval of the proposed merger of Wisconsin Energy and NSP discussed above under " Mergers."
1996 Test Year: In a letter order dated September 11,1995, the PSCW directed Wisconsin Electric to implement rate decreases for Wisconsin retail electric, gas and steam customers of $33 million, $8 million and $0.8 million, respectively, on an annualized basis effective January 1,1996. Also effective January 1,1996, the MPSC authorized Wisconsin Electric to implement a rate decrease for Michigan non-mine retail electric customers of $1 million or 3.3% on an annualized basis. The Empire and Tilden ore mines are separately regulated by the MPSC.
Edison Sault Price Cap On August 22,1995, Edison Sault filed an application with the MPSC for authority to implement price cap regulation for its electric customers in the State of Michigan. In the application, Edison Sault proposed that its base rates be capped at existing levels, that its existing Power Supply Cost Recovery factor be rolled into base rates and that its existing Power Supply Cost Recowry Clause be suspended. On September 21, 1995, the MPSC approved Edison Sault's application subject to the modification that Edison Sault give thirty days notice rather than two weeks notice for rate decreases. Edison Sault will file an application with the MPSC by October 1,2000 to address the experience under the price cap mechanism. The MPSC's order authorizing Edison Sault's price cap represents a temporary experimental regulatory mechanism and allows Edison Sault to file an application seeking an increase in rates under extraordinary circumstences.
Fuel Cost Adjustment Procedure: Effective in 1998 under the PSCW's retail electric fuel cost adjustment procedure in the State of Wisconsin, retail electric rates may be adjusted, on a prospective basis, if cumulative fuel and purchased power costs, when compared to the costs projected in the retail electric rate proceeding, deviate from a prescribed range and are expected to continue to be above or below the authorized annual range of 2E During 1997, extended outages at Point Beach, an extended maintenance outage at Oak Creek Power Plant that was concluded in June 1997, delayed commercial operation of LS Power's cogeneration facility, and higher than projected purchased power costs per megawatt-hour due to regional electric energy supply constraints resulted in increased fuel and purchased power costs at Wisconsin Electric. Wisconsin Electric estimates that such costs were approximately $116 million higher than those included in 1997 base electric rates in alljurisdictions.
On December 23,1997, the PSCW issued a combined final order on two 1997 Wisconsin Electric filings under Wisemsin's fuel cost adjustment procedure, authorizing Wisconsin Electric to recover $27 million of additional l
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3 1997 fuel and purchased power costs from Wisconsin retail electric customers during the 1997-1998 biennial period.
This temporary fuel surcharge ended as of May 1,1998. Wisconsin Electric estimates that of the $116 million of excess fuel and purchased power costs incurred dwing 1997, it recovered a total of $27 million as a result of the i
PSCW's December 1997 order, leaving $89 million unrecovered.
s part of the PSCW's 1998 Rate Order, Wisconsin Electric was required to file by October 1,1998 its forecast of electric fuel costs for the 1999 calendar year. Wisconsin Electric filed the forecast, which indicated no change in fuel costs compared to the 1998 Rate Order, with the PSCW on September 25,1998. This matter is currently under review by the PSCW.
In December 1995, the MPSC approved the suspension of the Power Supply Cost Recovery Clause (fuel adjustment procedure) for a five-year period for Michigan retail electric customers.
Nuclear Operation And Maintenance Cost Deferral: See " Note F - Nuclear Operations" in the Notes to Financial v
Statements for information regarding approval by the PSCW during 1997 for Wisconsin Electric to defer certain non-fuel nuclear operation and maintenance costs.
Purchased Gas Adjustment Mechanism: In the case of natural gas costs, differences between the test year estimate and the actual cost of purchased gas are accounted for through a purchased gas adjustment clause. See " Industry Restructuring and Competition" above for information concerning a PSCW order changing the purchased gas adjustment mechanism in 1999.
Non-Utility Asset Cap: Wisconsin Energy is subject to certain current restrictions which may limit diversification in non-utility activities. Under a formula included in the provisions of Wisconsin's Public Utility Holding Company Law, the sum of the assets of all non-utility affiliates in a holding company system generally may not exceed 25% of the assets of all public utility affiliates. As of December 31,1998, the assets of Wisconsin Energy's non-utility affiliates approximated 12% of the assets ofits public utility affiliates. Following WISVEST Corporation's pending acquisition of $272 million of generating facilities in the second quarter of 1999, Wisconsin Energy anticipates that the percent of asset cap formula non-utility assets will increase from approximately 12% to over 18%. Wisconsin Energy is currently working with the other utility holding companies in the State of Wisconsin in an effort to modify the asset cap provisions of Wisconsin's Public Utility Holding Company Law. However, there can be no assurance that the current asset cap restrictions will be modified or that the restrictions will not affect Wisconsin Energy's future non utility diversification activities.
For additional information concerning WISVEST Corporation's pending acquisition of generating assets in the State of Connecticut, see " Note L - Commitments and Contingencies" in Wisconsin Energy's Notes to Financial Statements.
Year 2000 Technology Issues The Company is working to resolve the potential impact of the Year 2000 on its ability to operate critical systems and to accurately process information that may be date sensitive. Wisconsin Energy, including Wisconsin Electric, Edison Sault and the non-utility subsidiaries, utilize business application software as well as infrastructure and process control systems across their operations. Related computer programs and hardware may use two-character digits such as '00' to define the applicable year rather than four-character digits such as '2000'. When these systems or applications encounter the Year 2000, they could potentially read the year as '1900' and either process data j
incorrectly or shut down altogether. If not addressed in a timely manner, this Year 2000 problem could have a j
materially adverse impact on the operations or financial condition of the Company.
Year 2000 Project: During 1997, the Company created Year 2000 program teams, overseen by executives of the Company, to address its Year 2000 issues. The teams, comprising representatives with subject matter expertise, are addressing:
Business applications that provide function and process to the business units; A-21 1
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le Infrastructure including information technology voice, video, data systems and related structure; Process control systems including the impact of embedded systems across all operations; e
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Supplier compliance dealing with critical direct suppliers of services and materials; and Signiicant customers ard Weir ability to avoid major Year 2000-related business interruptions.
e The Year 2000 team., are followbg a structured process ofinventorying and assessing potential Year 2000 problems, of remediating, testing, rad certifying Year 2000 readiness and of developing and implementing Year 2000 risk management contingenc,e plans. Although additional systems or processes may be identified as the program moves forward, the Company has substantially completed an initial inventory of potential Year 2000 problems across all operating areas and completed its assessment of critical areas in the fourth quarter of 1998. The remediation and testing phases are currently in progress and extensive contacts with critical third party suppliers are ongoing. Based upon an initial assessment of critical supplier Year 2000 readiness that was completed in the third quarter of 1998, the Company is currently initiating additional supplier risk mitigation actions. Wisconsin Energy expects to evaluate its significant customers during 1999.
The Company has structured its Year 2000 program to identify, prioritize and address critical business functions within the Company including:
Providing Energy Supply, which includes the safe operation and maintenance of all nuclear, fossil and hydro generating facilities; Providing a Reliable Energy Pathway, which includes the safe operation and maintenance of the Company's e
electric transmission and electric, gas and steam distribution systems; Providing Customer Service, which includes the ability to respond to customer emergencies both from a customer contact point of view and from a restoration perspective as well as the ability to handle customer calls, to bill customers and to process payments; Supporting the Business, which includes the critical human resource, supply chain, fmance and information e
resource activities that suppcrt operation of the business; and Critical Facilities operations.
a With the exception of those projects that are dependent upon activities such as scheduled power plant maintenance outages later in 1999, the Company currently expects its core, critical business functions to be " Year 2000 Ready" by June 30,1999. However, additional refmements and testing may continue through the end of 1999. Based upon the Nuclear Energy Institute's standard definition, which has been adopted by Wisconsin Energy, " Year 2000 Ready" systems or applications will be suitable for continued use into the Year 2000 even though the system or application may not be fully " Year 2000 Compliant."
PotentialRisks And Contingency Planningr The Company is continuing an ongoing process of assessing potential
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Year 2000 risks and uncertainties. Internal and external risks are included in the Company's assessment and identification of mitigation strategies. Wisconsin Energy expects to successfully mitigate its controllable internal Year 2000 problems.
For its core operation, Wisconsin Energy also relies upon third parties such as (1) other power providers to and operators of the integrated electric transmission and distribution grid, (2) fuel suppliers, (3) producers of natural gas and suppliers of interstate natural gas transportation services, and (4) providers of external infrastructure such as
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telecommunications, municipal sewer and water as well as emergency services. Failure of these critical third parties to identify and remediate their Year 2000 problems could have a material impact on the Company's operation and 4
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financial condition. The Company's Year 2000 program is structured to identify, assess and mitigate these third party risks where possible. At this time, Wisconsin Energy believes that mitigation efforts will be successful.
As part of its normal business practice, the Company maintains and periodically initiates various contingency plans to tnaintain and restore its energy services during emergency circumstances, some of which could arise from Year 2000 related problems. During 1999, Wisconsin Energy intends to leverage this experience in the development and implementation of Year 2000 related contingency and business. continuity plans. As part of this effort, the Company is coordinating its Year 2000 readiness program with various trade associations and industry groups and is working with the Mid-America Interconnected Network, Inc.,(" MAIN"), the North American Electric Reliability Council and the Wisconsin Reliability Assessment Organization to develop and implement regional electric reliability contingency plans. Wisconsin Electric is participating with other utilities in MAIN to develop reasonably likely worst case scenarios for the region. The scenarios currently identified as reasonably likely represent situations that have been encountered under normal operating conditions. Contingencies for these scenarios are generally I
addressed through normal operating procedures. Scenarios that have been jointly identified and assessed are:
Loss or unavailability of some generation; Partial loss of system monitoring and control functions, including data communication; Partial loss of voice communications; Loss of transmission facilities; and e
Loss of load and/or uncharacteristic loads.
Wisconsin Electric presently agrees with MAIN's assessment that the probability of these scenarios occurring due to Year 2000 is not significantly in excess of normal expectations. The Company's current operating and contingency plans are expected to adequately handle the above scenarios. The Company is currently reviewing operating and contingency plans to identify further enhancements or updates specifically addressing Year 2000 issues.
FinancialImplications: Wisconsin Energy currently estimates that it will incur approximately $44 million of expenses during 1998 through 2000 for its Year 2000 program. $15 million has been incurred as of December 31, 1998. In addition, the Company expects to capitalize costs of approximately $20 million to replace certain existing infrastructure and process control systems of which $9 million has been capitalized as of December 31,1998. In its May 1998 Rate Order from the PSCW, Wisconsin Electric received approval for recovery in rates of approximately
$13 million per year of Year 2000-related expenses in the Wisconsin retail jurisdiction during the 1998-1999 biennial period. In addition, the 1998 PSCW rate order included the associated capital expenditures related to Wisconsin Electric's Year 2000 program.
The, discussion above includes many forward looking statements concerning potential schedules, plans, costs, risks and uncertainties facing Wisconsin Energy as a result of the Year 2000 problem. Besed upon its activities to date, the Company expects to successfully implement the changes necessary to become " Year 2000 Ready" by the end of 1999. However, the Year 2000 problem has many elements and potential consequences, some of which may not be reasonably foreseeable, and there can be no assurances that every Year 2000 problem will be identified and g
addressed or that unforeseen consequences will not arise. Unanticipated factors while implementing the changes necessary to mitigate Year 2000 problems, including the ongoing availability and costs of trained personnel, the ability to locate and correct all relevant codes in computer and embedded systems, or the failure of critical third Parties to communicate about and to mitigate their Year 2000 problems could result in unanticipated interruptions in certain core business activities or operations of Wisconsin Energy.
Environmental Matters j f.
gy National Ambient Air Quality Standants: On July 18,1997 the United States Environmental Protection Agency (" EPA") revised the National Ambient Air Quality Standards for ozone and particulate matter. Although 7
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e specific emission control requirements are not yet defined, Wisconsin Electric believes that these revised standards
< will likely require significant reductions in sulfur dioxide ("SO ") and nitrogen oxide ("NO,") emissiots from coal-2 fired generating facilities. Wisconsin Electric expects that reductions needed to achieve compliance with the ozone attainment standards will be implemented in stages from the year 2003 through the year 2012, beginning with the ozone transport reductions described below under " Final EPA Ozone Transport Rulemaking." Reductions, associated with the new particulate matter standard wi!! likely be implemented in stages after 6e year 2010 and extending to the year 2017. Beyond the cost estimates identified below in " Final EPA Ozone Transport Rulemaking", Wisconsin Electric is currently unable to determine the impact of the revised air quality starAo, on its future liquidity, financial condition or results of operztion.
FinalEPA 0:one Transporf Rulemaking: On October 27,1998, the EPA promulgated ozone transport rules to address transport of NO, and ozone into ozone non-attainment areas in the eastem half of the United States. The rules require electric utilities in 22 eastern states and the District of Columbia, including the State of Wisconsin, to significantly reduce NO, emissions by May 1,2003. Affected states are required to submit their respective state implementation plans to the EPA by September 1999. The rules have been legally challenged by numerous affected states and other stakeholders.
Wisconsin Electric is working with :. variety of state and regional stakeholders to provide input to the plan under development by the State of Wisconsin. Wisconsin Electric is evaluating various NO, control techniques to develop a least cost compliance plan and currently estimates total capital costs of $250 million to $300 million and annual operation and maintenance costs of $10 million to $25 million to comply with such a plan. Wisconsin Electric believes that compliance with the NO, emission reductions required by the EPA's f' mal ozone transport rules will likely mitigate costs to comply with the EPA's July 18,1997 revisions to the ozone National Ambient Air Quality Standards discussed abnve.
As a result of the EPA's October 1998 final ozone transport rules, the Company also expects to incur capital costs in the trage of $20 million to $35 million prior to May 2003 at the two fossil-fueled power plants in the State of Connecticut, which the Company expects to acquire in the second quarter of 1999. For ac'ditional information conce.aing the acquisition of these two Connecticut power plants, see " Liquidity and Capital Resources - Capital Requirements" below as well as " Note L Commitments and Contingencies" in Wisconsin Energy's Notes to Financial Statements.
Afcnufactured Gar PlantSites Wisconsin Electric is voluntarily reviewing and addressing environmental conditions at a number of former manufactured gas lant sites. See " Note L - Commitments and Contingencies"in c
the Notes to Financial Statements for additional information.
Ash LandfillSites: Wisconsin Electric aggressively seeks environmentally acceptable, beneficial uses for its combustion byproducts. However, ash materials have been, and to some degree, continue to be disposed in company-owned, licen>ed landfills. Some early designed and constructed landfills may allow the release oflow levels of constituents resulting in the need for various levels of remediation. Where Wisconsin Electric has become aware of these conditions, efforts have been performed to address these conditions. These costs are lacluded in the environmental operating and maintenance costs of Wisconsin Electric.
Coal Supply And Transportation Matter-During 1997, coal deliveries to certain Wisconsin Electric generating facilities, as well as to the electric generating facilities of many other utilities, had been impaired by massive congestion problems on the Union Pacific Railroad.
As a result of the merger of the Union Pacific Railroad with the Southern Pacific Railroad, a backlog cf coal deliveries had caused stockpiles to decline at some of Wisconsin Electric's power plants and forced Wisconsin Electric to seek alternative coal delivery n utes. While coal delivery performance by the Uaion Pacific Railroad has not %)ly recovered, performance improved during 1998 and Wisconsin Electric's coal inventories have now returned to acceptable levels.
During the fall of 1997, Wisconsin Electric completed construction of a rail spur at the Pleasant Prairie Power Plant,
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which barns over 40% of Wisconsin Electric's annual coal requirements. The ne w rail spur, connecting to the rail A-24 I
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As of the,beginning of 1999, WisconrM Electric had approximately a 94-day supply of coal in inventory at its coal-fired facilities. As part of its Year 2000-related contingency planning and implementation, Wisconsin Electric expects to build the inventory of coal during 1999 at its coal-fired facilities to an estimated 111-day supply by December 31,1999.
Outlook The following forecasts are forward-looking statements subject to certain risks, uncertainties and assumptions.
Actual results may vary materially. Factors that could cause actual results to differ materially include, but are not limited to: business and competitive conditions in the energy industry, in general, and in the Company's service territory; availability of the Company's generating facilities; changes in purchased power costs; and the economy, weather, the restructuring of the electric and a;as utility industries, and unforeseen problems associated with non-utility diversification efforts. See " Cautionary Factors" below.
Earningsr The Company currently estimates that its earnings during 1999 will be in the range of $1.85 to $2.05 per share, an increase of between 12 and 24 percent over 1998 canings.
Electric Salesr Assuming moderate growth in the economy ofits service territory and normal weather, the Company presently anticipates total retail and municipal electric kilowatt-hour sales to grow at a compound annual rate of 2.1% over the five-year period ending December 31,2003.
Gas Deliver 9st Assuming moderate crowth in the economy ofits service territory and normal weather, the Company currently forecasts total therm deliveries of natural gas to grow at a compound annual rate of approximately 1.9 % over the five-year period ending December 31,2003.
Additional Gas Service Territoryr In July 1997, the PSCW approved Wisconsin Electric's application to expand natural gas service to more than 4,500 potenf al customers in northeastern Wisconsin. When completed, the project willinvolve the installation of more than 350 miles of new gas main. During 1998, about 2,400 customers were connected and the remainder are expected to be connected during 1999.1999 capital expenditures for this project are included in anticipated construction expenditures shown below under " Capital Requirements" in " Liquidity and Capital Resources."
Employeesr The Company ecpects to add approximately 570 full-time equivalent employees during 1999. Of the total 570 full-time equivalent employees, approximately 370 are attributable to Wisconsin Electric, primarily in such key areas as distribution operations, nuclear operations, customer service and information resources. Approximately half of the new :mployees at Wisconsin Electric are expected to replace contract labor that has been used during the past couple of years. Appcuximately 200 full-time equivalent non-utility employees are expected to be added in the second quarter of 1999 when WISVEST Corporation closes on the acquisition of two fossil-fuel power plants from The United Illuminating Company, an unaffiliated investor owned utility in New Haven, Connecticut. For additional information concerning this acquisition, see " Note L - Commitments and Contingencies" in Wisconsin Energy's Notes to Financial Statements.
Effects Of Weather By the nature of its utility business segments, Wisconsin Energy's and Wisconsin Electric's earnings are sensitive to l
weather variations from period to period. Variations in winter weather affect heating load for both the gas and electric utilities. Variations in summer weather affect cooling load for the electric utilities as well as therm delivenes to gas-fired electric generating customers. The table below summarizes weather as measured by degree days at Mitchell International Airport in Milwaul,ee, Wisconsin for each of the three years ended December 31 l
A-25 I
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% Change
% Change 1997 1996 Decree Days 1223 1997 to 1998 1925 to 1997 Ileating (7,005 Normal) 5,848 7,101 (17.7%)
7,469 (4.9%)
Cooling (657 Normal) 800 407 96.6 %
608 (33.1%)
=
Effects OfInflation With expectations of low-to-moderate inflation, the Company does not believe the impact ofinflation will have a material effect c,.. its future results of operations.
Market Risks The Company is potentially exposed to market risk due to changes in interest rates, the return on marketable securities and the market price of electricity as well as to changes in fuel costs incurred to generate electricity and in the cost of gas for its gas operations. Exposure to interest rate changes relates to the Company's short and long-term debt as well as its preferred equity obligations, while exposure to fluctuations in the retarn on marketable securities relates to debt and equity securit - vestments held in various trust funds. Exposure to electricity market price risk relates to forward activities *
, manage the supply of and demand for electric energy, and exposure to fuel and gas cor variations relates to' apply of and demand for coal, uranium, natural gas and fuel oil. Currently, the Company does not utilize de:., ative financial instruments. Griffin Energy Marketing L.L.C. a subsidiary of Wisvest, began marketing energy related services and limited trading of electricity in 199S. Griffin's activities during 1998 were financially insignificant. The Company is evaluating to what extent it will use derivative financial and commodity instruments in the normal course of their future business.
I For additional information concernine risk factors, including market risks, see " Cautionary Factors" below.
j Interest Rate Risk: The Company, including its affiliates, have various short-term borrowing arrangements to provide working capital and general corporate funds. The level of borrowings under such arrangements vary from period to period, depending upon, among other factors, capital investments. Future short-te m '.aterest expense and payments will reflect both the level of future short-term interest rates and borrowing levels.
The table that follows provides information about long-term financial instruments that were held by the Company at December 31,1998 and that are sensitive to changes in interest rates. For long-term debt, the table presents principal cash flows that exist by maturity date and the related annualized average interest rate of the maturing long-term debt. The aaaualized average interest rate on the variable rate long-term debt was estimated based upon a y eighted average interest rate at December ':1,1998.
Fair Value Expspted Maturity Date as of J222 M
M M
M Thereafter Intal 12/31/98 (Millions of Dollars)
Fixed Rate Long-Term Debt Wisconsin Electric
$92.9
$ 1.9
$ 1.9
$ 1.9
$ 1.9
$1,193.1
$ 1,293.6
$1,378.7 A verage Interest Rate 6.6%
7.5%
7.5%
7.5%
7.5%
7.2%
7.2%
Wisconsin Energy (a)
$95.9
$31.9
$20.7
$16.9
$ 16.0
$ 1,338.3
$1,519.7
$ 1.605.7 Average Interest Rate 6.6%
6.4%
6.8%
6.6%
6.9%
7.2%
7.1%
=
A-26 t
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Fair Value Excected Maturity Date (cont'd) as of 1222 M
M M
M Thereafter Int.a. ]
12/31/98 (Millions of Dollars)
oki 3,
include, among others, the following:
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'o Factors affecting utility operations such as unusual weather conditions; catastrophic weather-related damage; availability of Wisconsin Electric's or Edison Sault's generating facilities; unscheduled generation outages, maintenance or repairs; unanticipated changes in fossil fuel, nuclear fwl, purchased power, gas supply or water supply costs or availability due to higher demand, shortages, transportation prc.blems or other developments; nonperformance by electric energy or natural gas suppliers under existing power purchase or gas supply contracts; nuclear or environmental incidents; resolution of spent nuclear fuel storage and disposal issues; electric transmission or gas pipeline system constraints; unanticipated organizational structure or key personnel changes; collective bargaining agreements with union employees or work stoppages; inflation rates; or demographic and economic factors affecting utility service territories or operating environment.
Regulatory factors such as unanticipated changes in rate-setting policies or procedures; unanticipated changes in regulatory accounting policies and practices; industry restructuring initiatives; transmission system operation and/or administration initiatives; recovery of costs of previous investments made under traditional regulation; required approvals for new construction; changes in the United States Nuclear Regulatory Commission's regulations related to Point Beach Nuclear Plant; changes in the United States Environmental Protection Agency's as well as the Wisconsin or Michigan Department of Natural Resources' regulations related to emissions from fossil-fuel-fired power plants; or the siting approval process for new generation and transmission facilities.
The rapidly changing and increasingly competitive electric and gas utility environment as market-based forces e
replace strict industry regulation and other competitors enter the electric and gas markets resulting in increased wholesale and retail competition.
l Consolidation of the industry as a result of the combination and acquisition ot utilities in the midwest, nationally and globally.
Certain restrictions imposed by various financing arrangements and regulatory requirements on the ability of Wisconsin Electric to transfer funds to Wisconsin Energy in the form of cash dividends, loans or advances.
Changes in social attitudes regarding the utility and power industries.
Customer business conditions including demand for their products or services and supply of labor and material used in creating their products and services.
The cost and other effects of legal and administrative proceedings, settlements, and investigations, claims and changes in those matters.
Factors affecting the availability or cost of capital such as changes in interest rates; market perceptions of the utility indusu y, the Company or any of its subsidiaries; or security ratings.
Federal, state or local legislative factors such as changes in tax laws or rates; changes in trade, monetary and fiscal policies, laws and regulations; electric and gas industry restructuring initiatives; or changes in environmental laws and regulation.
Authoritative generally accepted accounting principle or policy changes from such standard setting bodies as the j
Financial Accounting Standards Board and the Securities and Exchange Commission.
Unanticipated technological developments that result in competitive disadvantages and create the potential for impairmer.t of existing assets.
Unanticipated developments while implementing the modifications necessary to mitigate Year 2000 compliance problems, including the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes in computer and embedded systems, the indirect impacts of third parties with whom the A-33
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Company does business and who do not mitigate their Year 2000 compliance problems, and similar uncertainties.
Possible risks associated with non utility diversification such as competition; operating risks; dependence upon certain suppliers and customers; the cyclical nature of property values that could affect real estate investments;.
unanticipated changes in environmental or energy regulations; timely regulatory approval without onerous conditions of potential acquisitions; and risks associated with minority investments, where there is a limited ability to control the development, management or operation of the project.
Legislative or regulatory restrictions or caps on non-utility acquisitions, investments or projects, including the State of Wisconsin's Public Utility Holding Company Law, which could limit the Company's diversification and growth opportunities or require the Company to divest of certain existing non-utility assets.
Factors affecting foreign non-utility operations including foreign governmental actions; foreign economic and currency risks; political instability; and unanticipated changes in foreign environmental or energy regulations.
Other business or investment considerations that may be disclosed from time to time in Wisconsin Energy's or e
Wisconsin Electric's Securities and Exchange Commission filings or in other publicly disseminated written documents.
\\
Wisconsin Erergy and Wisconsin Electric undertake no obligation to publicly update or revise any forward-looking I
statements, whether as a result of new information, future events or otherwise.
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b WISCONSIN ELECTRIC POWER COMPANY INCOME STATEMENT Year Ended December 31 I998 1997 1996 (Thousands ofDollars)
Operating Revenues Electric
$1,641,403
$1,412,115
$1,393,270 Gas 295,848 355,172 364,875 Steam 20,506 22,315 15,675 Total Operating Revenues 1,957,757 1,789,602 1,773,820 Operating Expenses Fuel (Note H) 308,374 311,966 295,651 Purchased power (Note H) 141,619 132,689 36,216 Cost of gas sold 175,475 233,877 234,254 Other operation expenses 476,279 407,114 391,520 Maintenance 168,120 135,096 103,046 Depreciation (Note C) 241,572 237,698 202,796 Taxes other than income taxes 78,652 73,914 77,866 Federalincome tax (Note D) 79,198 40,221 105,656 State income tax (Note D) 18,605 10,558 24,976 Defened income taxes - net (Note D)
(438) 7,937 (1,575)
Investment tax credit - net (Note D)
(3.395)
(927)
(2,430)
Total Operating Expenses 1,684,061 1,590,143 1,467,976 Operating Income 273,696 199,459 305,844 Other income and Deductions Interest income 21,651 17,974 13,553 Allowance for other funds used during construction (Note E) 2,936 3,349 3,036 Merger expenses (Note B)
(21,881)
Miscellaneous - net (Note L)
(684)
(37,53 !)
(3,642)
Federalincome tax (Note D)
(2,124) 19,687 (631)
State income tax (Note D)
(605) 3,090 (570)
Total Other Income and Deductions 21,174 (15,312) 11,746 Income Before Interest Charges 294,870 184,147 317,590 Interest Charges Long-term debt 100,420 106,573 100,133 Other interest 11,756 8,730 7,821 Allowance for bonowed funds used during construction (Note E)
(1,480)
(1,77I)
(1,679)
TotalInterest Charges 110.696 113,532 106,275 Net income 184,174 70,615 211,315 Preferred Stock Dividend Requirement 1,203 1,203 1,203 Eamings Available for Common Stockholder
$ 182,971
$ 69,412
$ 210,112 I
Note: Earnings and dividends per share of common stock are not applicable because all of Wisconsin Electric Power Company's common stock is owned by Wisconsin Energy Corporation.
The accompanying notes are an integral part of these financial statements.
A-35 l
b
WISCONSIN ELECTRIC POWER COMPANY BAI.ANCE SIIEET December 31 ASSETS 1998 1997 (Thoursands of Dollars)
Utility Plant Electric
$4,820,239
$4,690,347 Gas
$23,187 492,271 Steam 62,832 61,921 l
Common 420,750 330,761 5,827,008 5,575,300 Accumulated provision for depreciation (2,973,007)
(2,700,839) 2,854,001 2,874,461 Construction work in progress 109,412 81,612 Leased facilities - net (Note H) 133,007 138,687 Nuclear fuel - net (Note H) 87,660 90,219 Net Utility Plant 3,184,080 3,184,979 Other Property and Investments Nuclear decommissioning trust fund (Note F) 518,505 404,240 Other 60,123 84,223 Total Other Property and Investments 578,628 488,463 Current Assets Cash and cash equivalents 14,183 10,100 Accounts receivable, net of allowance for doubtful accounts - $16,621 and $15,641 166,648 140,111 Accrued utility revenues 129,463 141,273 Fossil fuel (at average cost) 123,616 124,045 Materials and supplies (at average cost) 74,399 73,159 Piepayments 59,046 56,192 Other 767 6,035 Total Current Assets 568,122 550,915 Deferr $ Charges and Other Assets Accuraulated deferred income taxes (Note D) 190,114 169,306 Defe.ned regulatory assets (Note A) 222,951 215,200 Other 25,047 58,977 Total Deferred Charges and Other Assets 438,112 443,483 Total Assets
$4,768,942
$4,667,840 The accompanying notes are an integral part of these finan-ial statements.
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WISCONSIN ELECTRIC POWER COMPANY BALANCE SIIEET December 31 CAPITALIZATION AND LIABILITIES 1998 1997 (Thousands of Dollars)
Capitalization (See Capitalization Statement)
Common stock equity
$1,698,478
$1,694,508 Preferred stock 30,450 30,450 Long-term debt (Note H) 1,512,531 1,448,558 Total Capitalization 3,241,459 3,173,516 Current Liabilities Long-term debt due currently (Note H) 112,454 81,389 Notes payable (Note I) 219,289 242,633 Accounts payable 169,503 142,797 Payroll and vacation accrued 29,569 25,392 Taxes accmed -income and other 31,475 38,475 Interest accrued 19,864 20,012 Other 46,574 57,871 Total Current Liabilities 628,728 608,569 Deferred Credits and Other Liabilities Accumulated deferred income taxes (Note D) 559,574 521,429 Accumulated deferred investment tax credits 83,476 86,871 Deferred regulatory liabilities (Note A) 157,951 173,688 Other 97,754 103,767 Total Deferred Credits and Other Liabilities 898,755 885,755 Commitments and Contingencies (Note LJ Total Capitalization and Liabilities
$4,768,942
$4,667,840 The accompanying notes are an integral part of these financial statements.
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WISCONSIN ELECTRIC POWER COMPANY STATEMENT OF CASII FLOWS Year Ended December 31 1998 1997 1996 (Thousands of Dollars)
Operating Activities Net income
$ 184,174 5 70,615
$ 211,315 Reconciliation to cash Depreciation 241,572 237,698 202,796 Nuclear fuel expense - amortization 18,922 5,426 21,887 Conservationexpense amortization 22,498 22,498 22,498 Debt premiura, discount &
expense - amortization 3,794 7,56I 9,762 Deferred income taxes - net (438) 7,937 (1,575)
I Investment tax credit - net (3,395)
(927)
(2,430) l Allowance for other funds used during construction (2,936)
(3,349)
(3,036)
Write-otTof merger costs 21,881 Write-down of equipment 30,000 Change in - Accounts receivable (26,537) 145 4,220 Inventories (811)
(12,788)
(30,703)
Accounts payable 26,706 (3,097) 38,779 Other current assets 14,224 10,782 (14,297)
Other current liabilities (14,268) 29,074 (2,780)
Other 26,868 (52,759) 4,874 Cash Provided by Operating Activities 490,373 370,697 461,310 Investing Activities Construction expenditures (328,482)
(260,649)
(319,832)
Allowance for borrowed funds used during construction (1,480)
(1,771)
(1,679)
Nuclear fuel (10,183)
(6,352)
(26,053)
Nuclear decommissioning trust (31,379)
(27,248)
(26,309)
Other (1,873) 22,359 (7,892)
Cash Used in Investing Activities (373,397)
(273,661)
(381,765)
Financing Activities Retirement of preferred stock (1)
Sale oflong-term debt 169,434 230,094 Retirement oflong-term debt (78,77 0 (171,155)
(52,921)
Change in short-term debt (23,344) 197,243 (105,304)
Stockholder capital contnbution 100,000 Dividends on - Common stxk (179,001)
(213,692)
(167,889)
Preferred stock (1,203)
(1,203)
(1,203)
(
Cash Used in Financing Activities (112,893)
(88,807)
(97,224) l Change in Cash and Cash Equivalents
$ 4,083 5 8,229
$ (17,679)
I i
SupplementalInformation Cash Paid For Interest (net of amount capitalized)
$ 125,344
$ 112,682 5 94,845 Income taxes 106,550 45,210 107,682 The accompanying notes are an integral part of these financial statements.
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WISCONSIN ELECTRIC POWER COMPANY CAPITALIZATION STATEMENT December 31 I998 1997 (Thousands ofDollars)
Common Stock Equity (See Con mon Stock Equity Statement)
Common stock - $10 par value authorized 65,000,000 shares; outstanding - 33,289,327 shtws
$ 332,893
$ 332,893 Other paid in capital 380,689 380,689 Retained earnings 984,896 980,926 Total Common Stock Equity 1,698,478 1,694,508 Preferred Stock - Cumulative Six Per Cent. Preferred Stock - $100 par value; authorized
)
45,000 shares; outstanding - 44,498 shares 4,450 4,450 Serial preferred stock - $100 par value; authorized 2,286,500 shares; outstanding - 3.60% Series - 260,000 shares 26,000 26,000 Total Preferred Stock (Note G) 30,450 30,450 Long-Term Debt First mortgage bonds 1/8% to 7-1/4% due 1998-2004 231,000 291,000 6.85% to 7-3/4% due 2016-2023 209,000 209,000 7.05% to 9-1/8% due 2024-2027 363,443 363,443 Debentures (unsecured)- 6-1/2% to 9.47% due 2006-2095 480,600 331,300 Notes (unsecured) - Variable rate due 2006-2030 165,350 165,350 6.36% effective rate due 2006 9,t:42 10,847 Obligations under capitalleases 189,980 182,450 Unamortized discount - net (24,030)
(23,443)
Long-term debt due currently (112,454)
(81,389)
Total Long-Term Debt (Note H) 1,512,531 1,448,558 Total Capitalization
$3,241,459
$3,173,516 The accompanying notes are an integral part of these financial statements.
A-39
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WISCONSIN ELECTRIC POWER COMPANY COMMON STOCK EQUffY STATEMENT Common Stock
$10 Par Other Paid Retained Shares Value In Capital Earnings Total (Thousands of Dollars)
Balance - December 31,1995 33,289,327
$332,893
$280,689
$1,082,983
$1,696,565 Net income 211,315 211,315 Cash dividends Common stock (167,889)
(167,889) j Preferred stock (1,203)
(1,203)
Balance - December 31,1996 33,289,327 332,893 280,689 1,125,206 1,738,788 l
Net income 70,615 70,615 Cash dividends Common stock (213,692)
(213,692)
Preferred stock (1,203)
(1,203)
Stockholder capital contribution 100,000 100,000 Balance - December 31,1997 33,289,327 332,893 380,689 980,926 1,694,508 Net income 184,174 184.174 l
Cash dividends Common stock (i79,001)
(179,001)
Preferred stock (1,203)
(1,203)
Balance - December 31,1998 33,289,327
$332,893
$380,689
$984,296
$1,698,478 The accompanying notes are an integral part of these financial statements.
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WISCONSIN ELECTRIC POWER COMPANY NOTES TO FINANCIAL STATEMENTS 1 Summary Of Significant Accounting Policies General: The accounting records of Wisconsin Electric Power Company (" Wisconsin Electric") are maintained as prescribed by the Federal Energy Regulatory Commission, modified for requirements of the Public Service Commission of Wisconsin ("PSCW").
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenues: Utility revenues are recognized on the accrual basis and include estimated amounts for service rendered but not billed.
Fuel: The cost of fuel is expensed in the period consumed.
Property: Property is recorded at cost. Additions to and significant replacements of utility property are charged to utility plant at cost; minor items are charged to maintenance expense. Cost includes material, labor and allowance for funds used during construction (see Note E). The cost of depreciable utility property, together with removal cost less salvage, is charged to accumulated provision for depreciation when property is retired.
In 1998, Wisconsin Electric began classifying certain utility plant as common. Common plant is allocated to electric, gas and steam utility plant in rate proceedings. All periods presented have been reclassified for comparative purposes.
Regulatory Matters: Pursuant to Statement of Financial Accounting Standards No. 71, Accounting for the Effects of Certain Types of Regulation, Wisconsin Electric capitalizes, as regulatory assets, incurred costs which are expected to be recovered in future utility rates. Wisconsin Electric also records, as regulatory liabilities, the current
{
recovery in utility rates of costs which are expected to be paid in the future.
The following deferred regulatory assets and liabilities are reflected in the Balance Sheet at December 31.
1923 1221 (Thousands of Dollars)
Deferred Regulatory Assets Deferred income taxes
$160,752
$151,157 Department of Energy assessments 24,841 28,575 Deferred nuclear costs 15,324 17,681 j
Purchase power commitment 13,379 5,050 Other 8.655 12.737 Total Defetred Regulatory Assets 9 22.951
$215.200 Deferred Regulatory Liabilities Deferred income taxes
$141,356
$148,292 Tax and interest refunds 8,667 13,943 Other 7.928 11.453 I
Total Deferred Regulatory Liabilities
$157.951
$173.638 f
A-41 i
< t Wisconsin Electric directs a variety of demand-side management programs to help foster energy conservation by its customers. As authorized by the PSCW, Wisconsin Electric capitalized certain conservation program costs prior to 1995. Utility rates approved by the PSCW provide for a current return on these conservation investments. As of December 31,1998, there were $46.4 million of conservation investments on the Balance Sheet in other property and investments which will be amortized on a straight line basis to income over the next two years as well as
$69.5 million of conservation investments as of December 31,1997.
Statement Of Cash Flows: Cash and cash equivalents include marketable debt securities acquired three months or less from maturity. During 1997, Wisconsin Electric recorded a $140 million non-cash capital lease transaction for a long-term power purchase contract (see Note H).
New Pronouncements: On June 15,1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No.133, Accounting for Derivative Instruments and Hedging Activities ("FAS 133").
FAS 133 is effective January 1,2000 for Wisconsin Electric. FAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or in other comprehensive income depending upon how the derivative is designated. Based upon the current limited use of derivative instruments at Wisconsin Electric, the adoption of FAS 133 would not have a significant effect on its results of operations or financial position.
H - Mergers Nonhern States Power Company: On May 16,1997, the Boards of Directors of Wisconsin Energy and Northern States Power Company, a Minnesota corporation, agreed to terminate by mutual written consent an Agreement and Plan of Merger which provided for a business combination of Wisconsin Energy, parent company of Wisconsin Electric, and Northern States Power Company to form Primergy Corporation. Primergy Corporation would have become the parent company of Wisconsin Electric under the proposed business combination. As a result, Wisconsin Energy recorded a $30.7 million charge in the second quarter of 1997 ($18.8 million net of tax or approximately 17 cents per share) to write off deferred transaction costs and costs to achieve the merger, of which approximately
$21.9 million was attributable to Waconsin Electric.
C - Depreciation Depreciation expense is accrued at straight line rates over the estimated useful lives of the assets. These rates are certified by the PSCW and include estimates for salvage and removal costs. Depreciation as a percent of average depreciable utility p: ant was 4.4% in 1998,4.5% in 1997 and 4.1% in 1996. Nuclear plant decommissioning is accrued as depreciation expense (see Note F). For contributions in aid of construction remaining on the Balance Sheet that were collected prior to 1991, Wisconsin Electric had been amortizing approximately $3 million per year as a credit to depreciation expense. In its 1998 Rate Order, the PSCW authorized Wisconsin Electric to amortize the remaining $45.7 million balance of pre-1991 contributions in aid of construction at December 31,1997 on a straight line basis over the 1998-1999 biennial period. As a result, credits to depreciation expense for pre-1991 contributions were $22.9 million in 1998, $3.5 million in 1997 and $3.4 millior in 1996.
D -Income Taxes Wisconsin Electric follows the liability method in accounting for income taxes. The liability method provides that deferred tax assets and liabilities be recorded based on the difference between the tax bases of assets an and their carrying amounts for financial reporting purposes.
The following table is a summary ofincome tax expense and a reconciliation of total income tax expense with the tax expected at the federal statutory rate.
A-42
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1998 1922 1996 (Thousands of Dollars)
$100,532
$ 28,002
$131 d3 Current tax expense (438) 7,937 (1,575)
Deferred income taxes - net (3.395)
(927)
(2.430)
Investment tax credit - net
$ 96.699 5 35.012
$1E316, i
l Total Tax Expense l
Income Before Income Taxes
$280.873
$jpjg2
$lElg and Preferred Dividend
$ 98,306 5 36,969
$ ? 18,700 Expected tax at federal statutory rate State income tax net of federal tax benefit 13,461 6,125 17,624 Flowback of prior contributions in aid of construction (8,039)
(1,157)
(1,157) l Investment tax credit restored (4,690)
(4,487)
(4,509)
(2.339)
(2.438)
(2.830)
Other (no item over 5% of expected tax)
$ 96.699
$ 35.012 s127.828 Total Tax Expense i
Statement of Financial Accounting Standards No.109, Accounting for Income Taxes ("FAS 109"), requires the recording of deferred assets and liabilities to recognize the expected future tax consequences of events that have been reflected in Wisconsin Electric's financial statements or tax returns and the adjustment of deferred tax balances to reflect tax rate changes. Following is a summary of deferred income taxes under FAS 109 at December 31.
1223 1222 (Thousands of Dollars)
DeferredIncomeTax Assets S 48,812
$ 43,405 Decommissioning trust Construction advances 54,820 49,202 86.482 76.699 Other
$190.114
$169.306 Total Deferred Income Tax Assets Deferred Income Tax Liabilities
$542,898
$510,621 Property related 16.676 10.808 Other Total Defarred Income Tax Liabilities 1512 2,4 152L422 3
l Wisconsin Electric has also recorded deferred regulatory assets and liabilities representing the future expected impact of deferred taxes on utility revenues (see Note A).
E-Allowance For Funds Used During Construction Allowance for funds used during construction ("AFUDC") is included in utility plant accounts and represents the cost of borrowed funds used during plant construction and a return on stockholders' capital used for construction purposes. On the Income Statement, the cost of borrowed funds (before income taxes) is a reduction of interest expense and the return on stockholders' capital is an item of non-cash other income.
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i e t As approved by the PSCW, AFUDC was capitalized during the following periods on 50% of construction work in progress at the following rates:
June 1,1998 - December 31,1998 10.21 %
e February 18,1997 - May 31,1998 10.29 %
January 1,1996 - February 17,1997 10.17 %
e F-Nuclear Operations Point Beach Nuclear Plant: Wisconsin Electric owns and operates two approximately 500 megawatt electric generating units at Point Beach Nuclear Plant (" Point Beach") in Two Rivers, Wisconsin. During 1998,1997 and 1996, Point Beach provided 18%,6% and 24%, respectively, of Wisconsin Electric's net electric energy supply.
The United States Nuclear Regulatory Commission operating licenses for Point Beach expire in October 2010 for Unit I and in March 2013 for Unit 2.
In 1997, the PSCW authorized Wisconsin Electric to defer certain nuclear non-fuel operation and maintenance costs in excess of those included in 1997 rates. As a result, Wisconsin Electric deferred $18 million during 1997. During 1998, the PSCW authorized a five year recovery in the electric retailjurisdiction in the State of Wisconsin of the excess 1997 nuclear non-fuel operation and maintenance costs, and Wisconsin Electric began amortizing the
$18 million of deferred costs on a straight line basis over the five year recovery period. As of December 31,1998,
$15 million of deferred costs remain on the Balance Sheet in Deferred Charges and Other Assets - Deferred Regulatory Assets (see Note A).
Nuclear Insurance: The Price-Anderson Act as amended and extended to August 1,2002, currently limits the total public liability for damages arising from a nuclea incident at a nuclear power plant to approximately $9.8 billion, of which $200 million is covered by liability insurance purchased from private sources, and $9.6 billion is covered by an industry retrospective loss sharing plan whereby in the event of a nuclear incident resulting in damages exceeding the private insurance coverage, each owner of a nuclear plant would be assessed a deferred premium of up to
$88.1 million per reactor (Wisconsin Electric owns two) with a limit of $10 million per reactor within one calendar year. As the owner of Point Beach, Wisconsin Electric would be obligated to pay its proportionate share of any such assessment.
Wisconsin Electric participated in an industry-wide insurance program, with an aggregate limit of $200 million which covered radiation injury claims of nuclear workers first employed after 1987. This program was replaced with a new program (which has no retrospective assessment provisions) at the end of 1997. However, the discovery period for claims covered under the former program remains open until the end of 2007 for those few former insureds who no longer need to participate in the new, replacement program. If claims in excess of the funds available under the old program develop, Wisconsin Electric would be assessed up to a maximum of approximately
$3.1 million per reactor.
Wisconsin Electric, through its membership in Nuclear Electric Insurance Limited ("NEIL"), carries decontamination, property damage and decommissioning shortfall insurance covering losses of up to $1.5 billion (subject to a $1 million deductible for each loss) at Point Beach. Under policies issued by NEIL, the insured member is liable for a retrospective premium adjustment in the event of catastrophic losses exceeding the full financial resources of NER., Wisconsin Electric's maximum retrospective liability under its policies is
$10.1 million.
Wisconsin Electric also maintains insurance with NEIL covering business interruption and extra expenses during any prolonged accidental outage (in excess of 23 weeks) at Point Beach, where such outage is caused by accidental property damage from radioactive contamination or other risks of direct physical loss. Wisconsin Electric's maximum retrospective liability under this policy is $5.1 million.
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It should not be assumed that, in the event of a major nuclear incident, any insurance or statutory limitation of liability would protect Wisconsin Electric from material adverse impact.
Nuclear Decommissioning: Wisconsin Electric expects to operate the two units at Point Beach to the expiration of their current operating licenses. The estimated cost to decommission the plant in 1998 dollars is $489 million based upon a site specific decommissioning cost study completed in 1998. Assuming plant shutdown at the expiration of the current operating licenses, prompt dismantlement and annual escalation of costs at specific inflation factors established by the PSCW, it is projected that approximately $1.8 billion will be spent over a thirty-three year period, beginning in 2010, to decommission the plant.
Nuclear decommissioning costs are accrued as depreciation expense over the expected service lives of the two units following an external sinking fund method. It is expected that the annual payments to the Nuclear Decommissioning Trust Fund (" Fund") along with the earnings on the Fund will provide sufficient funds at the time of decommissioning. Wisconsin Electric believes it is probable that any shortfall in funding would be recoverable in utility rates.
As required by Statement of Financial Accounting Standards No. I15, Accounting for Certain Investments in Debt and Equity Securities, Wisconsin Electric's debt and equity security investments in the Fund are classified as available for sale. Gains and losses on the Fund were determined on the basis of specific identification; net unrealized holding gains on the Fund were recorded as part of accumulated provision for depreciation.
Following is a summary of decommissioning costs and earnings charged to depreciation expense and the Fund balance included in accumulated provision for depreciation at December 31. The Fund balance is stated at fair value.
1223 1222 1926 (Thousands of Dollars)
Decommissioning costs
$ 15,461
$ 11,402
$15,418 Earnings 15.918 15.846 10.891 Depreciation Expense
$ 31.379
$ 27.248
$2Q02 Total costs accrued to date
$320,356
$288,977 Unrealized gain 198.149
_115.263 I
Accumulated Provision for Depreciation
$$lljg5
$404.240
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Decontamination And Decommissioning Fund: The Energy Policy Act of 1992 establishes a Uranium Enrichment Decontamination and Decommissioning Fund ("D&D Fund") for the United States Department of Energy's nuclear fuel enrichment facilities. Deposits to the D&D Fund are derived in part frcm special assessments on utilities using enrichment services. As of December 31,1998, Wisconsin Electric has recorded its remaining estimated liability equal to the projected special assessments of $21.4 million. A corresponding deferred regulatory asset is detailed in l
l Note A. The deferred regulatory asset will be amortized to nuclear fuel expense and included in utility rates over the next nine years. In the 1998 Rate Order, the PSCW approved recovery aver the 1998-1999 biennial period of D&D Fund costs disallowed in 1997.
G - Preferred Stock Serial preferred stock authorized but unissued is cumulative, $25 par value,5,000,000 shares.
In the event of default in the payment of preferred dividends, no dividends or other distributions may be paid on Wisconsin Electric's common stock.
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The 3.60% series preferred stock is redeemable in whole or in part at the option of Wisconsin share plus any accrued dividends, The fair value of Wisconsin Electric's preferred stock was $20.2 million and $17.8 million at and 1997, respectively.
II-Long Term Debt The maturities and sinking fund requirements through 2003 for the First Mortgage Bonds, Debentures And Notes:
998 aggregate amount of long-term debt outstanding (excluding obligations under capital l are shown below.
l l
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1999
$02,905.
1,905 2000 1,905 2001 1,905 2002 1,905 2003 Sinking fund requirements for the years 1999 through 2003, included in the table above, are Substantially all utility plant is subjec. to the mortgage.
t Long-term debt premium or discount and expense of issuance are amortized by the s of the debt issues and included as interest expense. Unamortized amounts pertaining to rea off currently, when acquired for sinking fund purposes, or amortized in accordance with PSCW acquired for early retirement.
In June 1998, Wisconsin Electric issued $150 million of 6-1/2% debentures due 2028. Procee l
added to Wisconsin Electric's general funds and were used to reduce short-term borrowings and fo corporate purposes.
Following is Wisconsin Electric's long-term debt outstanding at December 31.
H2.6 1222 Lonn-Term Debt (Thousands of Dollars)
$ 60,000 First Mortgage Bonds 5-1/8% Series due 1998 40,000 40,000 6-1/2% Series due 1999 51,000 51,000 6-5/8% Series due 1999 140,000 140,000 7-1/4% Series due 2004 100,000 100,000 7-1/8% Series due 2016 9,000 9,000 6.85% Series due 2021 100,000 100,000 7-3/4% Series due 2023 60,000 60,000 7.05% Series due 2024 3,443 3,443 91/8% Series due 2024 100,000 100,000 8-3/8% Series due 2026 200,000 200,000 7.70% Series due 2027.
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Lone-Term Debt -(cont'd) 1223 1922 (Thousands of Dollars)
Debentures,(unsecured) 6:5/8% due 2006 200,000 200,000 9.47% due 2006 5,600 6,300 8-1/4% due 2022 25,000 25,000 6-1/2% due 2028 150,000 6-7/8% due 2095 100,000 100,000 Notes (unsecured)
Variable rate due 2006 1,000 1,000 Variable rate due 2015 17,350 17,350 Variable rate due 2016 67,000 67.000 Variable rate due 2030 80,000 80,000 6.36% effective rate due 2006 9,642 10,847 Obligations under capitalleases 189,980 182,450 Unamortized discount - net (24,030)
(23,443)
Long-term debt due currently (112.454)
(81.389)
Total Long-Term Debt
$1.511531
$ 1.448.558 At December 31,1998, the interest rate for the $67 million variable rate note due 2016 was 4.10% and the interest rate for the $98.35 million variable rate notes due 2006-2030 was 3.95%.
Obligations Under CapitalLease: Wisconsin Electric has a nuclear fuel leasing arrangement with Wisconsin Electric Fuel Trust (" Trust") which is treated as a capital lease. The nuclear fuel is leased and amortized to fuel expense for a period of 60 months or until the removal of the fuel from the reactor,if earlier. Lease payments include charges for the cost of fuel burned, financing costs and management fees. In the event Wisconsin Electric or the Trust terminates the lease, the Trust would recover its unamortized cost of nuclear fuel from Wisconsin Electric.
Under the lease terms, Wisconsin Electric is in effect the ultimate guarantor of the Trust's commercial paper and line of credit borrowings financing the investment in nuclear fuel. Interest expense on the nuclear fuel lease, included in fuel expense, was $3.1 million, $0.9 million and $2.3 million during 1998,1997 and 1996, respectively.
To meet a portion of its electric energy supply needs, Wisconsin Electric entered into a long-term power purchase contract with an unaffiliated independent power producer, LSP-Whitewater Limited Partnership ("LS Power"). The contract, for 236 megawatts of firm capacity from LS Power's gas-fired cogeneration facility located in Whitewater, Wisconsin, includes no minimum energy requirements. When the contract expires in 2022, Wisconsin Electric may, at its option and with proper notice, renew for another ten years or purchase the generating facility at fair value or allow the contract to expire. Wisconsin Electric treats this contract as a capital lease. The leased facility and entresponding obligation under capital lease were recorded at the estimated fair value of the plant's electric
(
generating facilities. The leased facility is being amortized on a straight line basis over the original 25-year term of the contract.
Beginning with commercial operation of LS Power's facility in Scotember 1997, imputed interest costs on the purchase power obligation were $22.9 million and $6.5 million during 1998 and 1997, respectively, and total amortization costs of the leased facilities were $5.7 million and $1.6 million during 1998 and 1997, respectively.
The long-term power purchase contract is treated as an operating lease for rate-making purposes. As a result, the
)
difference betweer the minimum lease payraents and the sum of the imputed interest and amortization costs are recorded as a deferred regulatory asset (see Note A). Due to the timing of the minimum lease payments, Wisconsin Electric expects the regulatory asset to increase to approximately $78 million by the year 2009 and the total obligation under capital lease to increase to $160 million by the year 2005 before each is reduced over the remaining A-47 I
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? ! w:nntract. The minimum lease payments are classified as purchased power expense on the Income yet Interest expense on the purchase power obligation, included in purchased power expense, was
" -An ard $5.6 million during 1998 and 1997, respectively.
d c!ow is a summary of Wisconsin Electric's nuclear fuel and leased facilities at December 31.
=
(Thousands of Dollars)
' :,x =A
'/*r:apital lease
$100,809
$ 95,464
^-:medated provision for amortization (62,888)
(59,783)
'rwr4 stock 49.739 54.538
'W !br.: ear Fuel s 87 660 s 90.219
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'-** heilities "t'erm purchase power commitment
$140,312
$140,312 h-widated provision for amortization (7.305)
(1.625)
W 're,ed Facilities i133.007
[d)H&S1,
=
- f immum lease payments under the capital leases and the present value of the net minimum lease payments as e,her 31,1998 are as follows:
=.
Purchase Nuclear Power Fuel Lease Commitmsnl Iolal (Thousands of Dollars)
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$ 21,678
$ 24,123
$ 45,801
$N N'
?##
13,841 25,031 38,872
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7,433 25,968 33,401 7//'
3,664 26,961 30,625 2'#/'
1,071 27,954 29,025 Iser'/ cars 560.191 560.191 T'A M.mmum Lease Payments 47,687 690,228 737,915 h narimated Executory Costs (139.956)
(139.956)
M.mmum Lease Payments 47,687 550,272 597,959 O Inverest (4.003)
(403.886)
(407.979)
Pre *r '/alue of Net Minimum Lease Payments 43,594 146,386 189,980 I*66' The Currently (19.549)
(19.549)
$ 24.045
$146.386
$ 170.431
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Dalen The carrying amount of Wisconsin Electric's long-term debt outstanding (excluding obligations under C"P41leane) was $1,459 million and $1,371 million at December 31,1998 and 1997, respectively, with a fair value "IIll,44 million and $1,411 million, respectively. The fair value of the first mortgage bonds and debentures is
""9"*>f based upon the market value of the same or similar issues. Book value approximates fair value for WW**in Electric's unsecured notes.
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I - Notes Payable Short-term notes payable balances and their corresponding weighted average interest rates at December 31 consist of:
1998 1997 Interest Interest Balance Ene Balance Enc (Thousands of Dollars)
Banks
$ 50,495 5.42 %
$ 50,495 5.89 %
Commercial paper 168.794 5.32 %
192.138 5.84 %
$219.289
$242.633 Unused lines of credit for short-term borrowing amounted to $128 million at December 31,1998, all of which supports commercial paper. In support of various informal lines of credit from banks, Wisconsin Electric has agreed to maintain unrestricted compensating balances or to pay commitment fees; neither the compensating balances nor the commitment fees are significant.
J Benefits Wisconsin Electric provides defined benefit pension and other postretirement benefit plans to e.mployees. The status of these plans, including a reconciliation of benefit obligations, a reconciliation of plan assets and the funded status of the plans folbws. Also disclosed below is the aggregate funded status of those pension and other postretirement benefit plans with accumulated net benefit obligations in excess of plan assets.
Other Postretirement Pension &
Pension Benefits Benefits.-
Postretirement Plan Status 1923 1997 1223 J222 (Thousands of Dollars)
Change in Benefit Obligation Benefit Obligation at January 1
$649,256
$601,213
$148,181
$142,783 Service cost 12,408 9,216 2,654 1,911 Interest cost 46,261 45,613 11,676 10,343 Plan participants' contributions 5,908 4,903 Plan amendments 1,379 3,737 (4,828)
Actuarial loss 51,512 35,985 22,283 6,359 Benefits paid (45.001)
(44.150)
(15.603)
(13.290)
Benefit Obligation at December 31
$714.436
$649.23.
$178.836
$148.181 Change in Plan Assets Fair Value at January 1
$761,881
$687,482
$ 59,841 5 49,424 Actual return on plan assets 104,264 114,294 8,515 10,555 Employer contributions 7,347 4,255 10,252 8,249 Plan participants' contributions 5,908 4,903 Benefits paid (4i00].)
(44.150)
(15.603)
(13.290)
Fair Value at December 31
$F28.491
$761.881 5 68.9E
$ 59.841 l
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Other Postretirement Postretirement Plan Status -(cont'd) fension Benefits Benefits M
1222 M
.1222 (Thousands of Dollars)
Funded Status of Plans Funded status at December 31
$ 114,055
$ 112,625
$(109,923)
$ (88,340)
Unrecognized Net actuarial (gain) loss (119,025)
(123,094) 4,587 (14,458)
Prior service cost 31,284 34,344 2,582 (938)
Net transition obligation (asset) 127.207)
(31.009) 64.239 68.825 Net Accrued Benefit Cost (893)
(7.134)
$ (38.515)
$ (34.911)
Funded Status of Plans with Net Benefit Obligations at December 31 Fair value of plan assets 5
$ 68,444
$ 59,394 1ess: Benefit obligation (178.563)
(147.919)
Net Benefit Obligation
$(110.119)
$ (88.525)
The components of net periodic pension and other postretirement benefit costs as well as the weighted-average assumptions used in accounting for the plans include the following:
Other Postretirement Pension Benefits Benefits 1223 1222 1226 1223 1221 1226 (Thousand of Dollars)
Net Periodic Benefit Cost Service cost
$12,408
$ 9,216
$ 9,912 5 2,654
$ 1,911 5 2,436 Interest cost 46,261 45,613 41,454 11,677 10,343 10,456 Expected return on plan assets (56,822)
(51,592)
(48,494)
(5,008)
(4,085)
(3,708)
Amortization of Transition obligation (asset)
(3,801)
(3,802)
(3,802) 4,586 4,586 4,887 Prior service cost 3,061 3,061 1,755 217 (100)
(100)
Actuarialloss (gain)
(270)
(235)
(272)
Net Periodic Benefit Cost MLC
$_2A9ft M
$1133,,
$RRQ.
111629,.
Weighted-Average Assumptions at December 31 (%)
Discount rate 6.75 7.25 7.75 6.75 7.25 7.75 Expected return on plan assets 9.0 9.0 9.0 9.0 9.0 9.0 Rate of compensation increase 4.75 to 4.75 to 4.75 to 4.75 to 4.75 to 4.75 to 5.0 5.0 5.0 5.0 5.0 5.0 Pension Plans: Pension plan assets, the majority of which are equity securities, are held by pension trusts. Other pension plan assets include corporate and government bonds and real estate. In the opinion of Wisconsin Electric, current pension trust assets and amounts which are expected to be paid to the trusts in the future will be adequate to meet pension payment obligations to current and future retirees.
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Other Postrctirement Benefit Plans: Wisconsin Electric uses Employees' Benefit Trusts to fund a major portion of other postretirement benefits for its employees. The majority of the trusts' assets are mutual funds.
The assumed health care cost trend rate at December 31,1998 was 6.0% for those under age 65 and 6.8% for those over age 65, decreasing gradually to 5.0% in 2004 and thereafter. Assumed health care cost trend rates have a sig'ificant effect on the amounts reported for the health care plans.
n A one-percentage-point change in assumed health care cost trend rates would have the following effects:
1 % Increase 1% Decreass (Thousands of Dollars)
Effect on Postretirement benefit obligation
$17,058
($14,957)
Total of service and interest cost components 1,650 (1,430)
K - Segment Reporting Wisconsin Electric, a public utility incorporated in the State of Wisconsin, has organized its operating segments according to how it is currently regulated. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly in deciding how to allocate resources or in assessing performance. Wisconsin Electric's reportable operating segments include electric, gas and steam utility segments.
The electric utility segment derives its revenues from the generation, transmission, distribution and sale of electric energy in southeastern (including metropolitan Milwaukee), east central and northern Wisconsin and in the Upper Peninsula of Michigan. The gas utility segment derives its revenues from the purchase, distribution and sale of natural gas to retail customers and the transportation of customer-owned gas in four service areas in southeastern, east central, western, and northern Wisconsin. The steam utility segment derives its revenues from the production, distribution and sale of steam to space heating and processing customers in the Milwaukee area.
The following summarizes the reportable operating segments of Wisconsin Electric fu the years ended December 31.
Reportable Ooeratine Seements (a)
Electnc Gas Steam Inlal (Thousands of Dollars) 1998 External revenues
$1,641,283
$293,250
$20,506
$1,955,039 Intersegment revenues (b) 120 2=598 2.718 j
Total Operating Revenues
$1.641.403
$221815
$2Q$$
$1.957.757 Depreciation 5 215,669
$ 23,272
$ 2,631
$ 241,572 j
Operating Income Taxes 92,582 1,055 333 93,970 Operating Income (c) 251.582 19,180 2,934 273,696 Segment Assets (d) 4,087,413 421,951 48,358 4,557,722 Construction Expenditures 283,367 43,447 1,600 328,414 A-51 l
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Reportable Operatine Seements (a)-(cont'd)
Electric Gas Steam Intal (Thousands of Dollars) 1997 External revenues
$1,411,962
$349,971
$22,315
$1,784,248 Intersegment revenues (b) 153 5.201 kJ14 Total Operating Revenues
$Lf]L111 5355.172 M
$12f1@2 Depreciation
$ 213,785
$ 21,421
$ 2,492 5 237,698 Operating Income Taxes 48,442 7,973 1,374 57,789 Operating Income (c) 170,117 25,122 4,220 199,459 Segment Assets (d) 3,900,889 392,865 45,131 4,338,885 Construction Expenditures 236,384 22,977 1,006 260,367 1996 External revenues
$1,393,057
$361,101
$15,675
$1,769,833 Intersegment revenues (b) 213 3.774 3.987 Total Operating Revenues 51.393.270
$364.875 11321
$1.773.820 Depreciation
$ 183,159
$ 18,246
$ 1,391
$ 202,796 Operating Income Taxes 110,752 14,516 1,359 126,627 Operating Income (c) 269,068 33,204 3,572 305,844 Segment Assets (d) 3,646,997 400,582 46,499 4,094,078 Construction Expenditures 272,838 22,851 21,651 317,340 (a) The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies (see Note A).
(b) Wisconsin Electric accounts for intersegment revenues at a tariff rate established by the PSCW.
(c) Interest income and expense are not recorded to the segments to determine segment operating income.
(d) Common utility plant is allocated to electric, gas and steam to determine segment assets (see Note A).
A reconciliation of the totals reported for the operating segments to the applicable line items in the financial statements is as follows:
Operatine Seements Reconciliation 1993 1222 122f (Thousands of Dollars)
Assets Reportable segments
$4,557,722
$4,338,885
$4,094,078 Non-utility 4,769 5,308 9,199 Other - corporate (a) 206.45.1 323.647 403.883 Total Assets
$Mjl232
$gf,iLMQ jfSILlM (a) Primarily other property and investments, materials and supplies and deferred charges.
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Construction Expenditures F,eportable segments
$ 328,414
$ 260,367
$ 317,340 Non-utility 68 282 2.492 Total Construction Expenditures 1 328.482
$__260.649
$ 319.832 L - Commitments And Contingencies Kimberly Cogeneration Equipment: In conjunction with a proposal to construct a cogeneration facility in Kimberly, Wisconsin, Wisconsin Electric purchased three combustion turbines, three heat recovery boilers and a steam turbine (the " Equipment"). Wisconsin Electric carried the Equipment at a cost of approximately
$66.3 million, entertaining numerous proposals and projects for which the Equipment could be used. During 1997, Wisconsin Electric continued to review its options for use or sale of the Equipment. In the fourth quarter of 1997, WISVEST Corporation, a non-utility subsidiary of Wisconsin Energy, entered into the final phase of negotiations for a joint independent power project involving the Equipment. Under the provisions of Statement of Financial Accounting Standards No.121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, Wisconsin Electric refined its cash flow projection for the Equipment based upon this proposal. As measured by expected gross cash flows to be earned under this project, Wisconsin Electric determined that an impairment existed. As a result, Wisconsin Electric recorded a $30.0 million impairment charge in the fourth quarter of 1997 which was included in the Miscellaneous - Net Other Income and Deductions line of the Income Statement.
During the second quarter of 1998, WISVEST Corporation purchased the Equipment from Wisconsin Electric.
Manufactured Gas Plant Sitest Wisconsin Electric continues a voluntary program to investigate the remediation of eleven former manufactured gas plant sites. Wisconsin Electric currently estimates that future costs for detailed site investigation and remediation will be $25 million to $40 million over the next ten years. Actual costs are uncertain pending the results of further site specific investigations and the selection of site specific remediation.
Of the eleven sites, Wisconsin Electric has begun remediation activities at the former. manufactured gas plant site in the City of Burlington, Wisconsin. Wisconsin Electric also expects to begin remediation in 1999 at sites in Fort Atkinson and Kenosha, Wisconsin. Wisconsin Electric's expected remediation of these sites is anticipated to be accomplished at an aggregate cost of between $6 million and $11 million.
In Wisconsin Electric's February 13,1997 Rate Order, se PSCW amplified its position on the recovery of manufactured gas plant site remediation costs. It reiterated its position that such costs should be deferred and amortized and recovered, without carrying costs, in future rate cases. Since the timing and recovery of MGP remediation costs will be affected by the biennial rate case cycle, the timing and magnitude of remediation expenditures, and their recovery may be affected.
M - Transactions With Associated Companies Managerial, financial, accounting, legal, data processing and other services may be rendered between associated companies and are billed in accordance with service agreements approved by the PSCW. Wisconsin Electric received stockholder capital contributions from Wisconsin Energy of $100 million in 1997.
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REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and the Stockholder of Wisconsin Electric Power Company In our opinion, the financial statements appearing on pages A-35 through A-53 of this report present fairly, in all material respects, the financial position of Wisconsin Electric Power Company at December 31,1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31,1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
Milwaukee, Wisconsin January 27,1999 s'
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DIRECTORS The information under " Election of Directors" in Wisconsin Electric's definitive Information Statement dated April 22,1999, attached hereto, is incorporated herein by reference.
EXECUTIVE OFFICERS l
Figures in parenthesis indicate age and years of service with Wisconsin Electric as of December 31,1998.
I Richard A. Abdoo(54;23)
Charles T. Govin, Jr. (52;20)
Chairman of the Board Vice President - Electric and Chief Executive Officer and Gas Operations Richard R. Grigg (50;28)
Kristine M. Krause (44;20) l President and Chief Operating Officer Vice President - Fossil Operations l
i David K. Porter (55;29)
Kristine A. Rapp6 (42;16) l Senior Vice President Vice President - Customer Services Michael B. Sellman (51;**)
Anne K. Klisurich (51;26)
Senior Vice President - Nuclear Power Controller Business Unit and Chief Nuclear Officer Calvin H. Baker (55;7)
Vice President - Finance and Chief Financial Officer
" Service with Wisconsin Electric began in 1998.
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