ML20206Q186

1986 Annual Rept to Stockholders & Form 10-K

ML20206Q186
Person / Time
Site:	Point Beach
Issue date:	12/31/1986
From:	Goetsch J WISCONSIN ELECTRIC POWER CO.
To:	Office of Nuclear Reactor Regulation
References
NUDOCS 8704210358
Download: ML20206Q186 (57)

Text

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lMsconsin Electnc powca covesur 231 W. MICHIGAN, P.O. BOX 2046. MILWAUKEE. Wi SJ201 (414)221-2345 April 13, 1987 Director of Nuclear. Reactor Regulation U.S. Nuclear Regulatory Commission Washington, DC 20555 Gentlemen:

In accordance with 10 C.F.R. Section 50.71, enclosed is the Annual Report to Stockholders of Wisconsin Electric Power Company, which includes certified financial statements.

Wisconsin Electric Power Company is the holder of Facility Operating License Nos. DPR-24 and DPR-27 issued by your Commission under Dockets 50-226 and 50-301, respectively.

Sincerely, k f J. H. Goetsch Secretary Enclosure D A 0

M4 WISCONSIN ELECTRIC POWER COhfPANY 1986 ANNUAL REPORT TO STOCKHOLDERS AND FORhf l0-K M

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April 13, 1987 l

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Dear Stockholder:

This is the Annual Report on Wisconsin Electric Power Co.'s 1986 operations

! that is prepared for the Securities & Exchange Commission. It is being sent I

to you and other WE preferred stockholders this year to provide detailed reviews of Wisconsin Electric's activities as well as complete 1986 financial information.

The Annual Report to Stockholders which you received in past years is now the report on the activities of Wisconsin Energy Corp., the new parent company of Wisconsin Electric, Wisconsin Natural Gas Co., and five non-utility subsidiaries. Wisconsin Energy was established as a holding company effective at midnight Dec. 31, 1986. A copy of Wisconsin Energy's t

Annual Report has also been sent to you for your information.

If you have any questions about your stock, please call our toll-free Stockholder Hotline at 221-2100 in Milwaukee, 800-242-9686 in Wisconsin, or 800-558-9663 outside Wisconsin.

Sincerely, l

4 l Charles S. McNeer Chairman of the Board &

Chief Executive Officer i

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I

SECURITIES AND EXCHANGE COMNISSION WASHINGTON,.D. C. 20549 FORM 10_K i ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) 0F THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1986 Commission File No. 1-1245 WISCONSIN ELECTRIC POWER COMPANY (Exact Name of Registrant as Specified.in.its Charter)

WISCONSIN 39-0476280 (State or Other Jurisdiction of Incorporation (I.R.S. Employer Identification  ;

or Organization) No.)

231 WEST MICHIGAN STREET, P. O. BOX 2046, MILWAUKEE, WISCONSIN 53201 (Address of Principal Executive Offices) (ZipCode)

Registrant's Telephone Number, Including Area Code (414) 221-2345 Securities Registered Pursuant to Section 12 (b) of the Act:

Name of Each Exchange Title of Each Class .on which.. Registered PREFERRED STOCK, 8.90% SERIES, $100 PAR VALUE NEW YORK STOCK EXCHANGE PREFERRED STOCK, 7.75% SERIES, $100 PAR VALUE NEW YORK STOCK EXCHANGE Securities Registered Pursuant to Section-12 (g) of the Act:

PREFERRED STOCK, 3.60% SERIES, $100 PAR VALUE PREFERRED STOCK, 8.80% SERIES, $100 PAR VALUE SIX PER CENT. PREFERRED STOCK, $100 PAR VALUE (Title of Class)

Indicate by check mark whether the Registrant (1) .has filed all reports required to be filed by Section 13 or 15'(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to j such filing requirements for the past 90 days. Yes X No i The aggregate market value of the voting stock of the Registrant held by non-affiliates is approximately $87,050,000 based on the reported.last sale prices

! or the average bid and asked prices of such securities as of March 2,1987.

j ______.._____________

!. Indicate the number of shares outstanding of each of the issuer's classes of l common stock, as of the latest practicable date.

7

( Class Outstanding at March 2, 1987 l

i COMMON STOCK, $10 PAR VALUE 33,289,327 Shares  ;

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't d Document Incorporat d by Refer nce Portions of the Registrant's definitive Information Statement to be dated' April 20.1987 are incorporated by reference into Part III hereof, i

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WISCONSIN ELECTRIC POWER COMPANY FORM 10-K ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION FOR THE YEAR ENDED DECEMBER 31,' 1986 TABLE OF CONTENTS ITEM PAGE PART I

1. Business ........................... 5

2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . 17

3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 18

4. Submission of Matters to a Vote of Security Holders . . . . . 22 Executive Officers of the Registrant . . . . . . . . . . . . . 23 PART II

5. Market for Registrant's Common Equity and Related Stockholder Matters . . . . . . . . . . . . . . 25

6. Selected Financial Data . . . . . . . . . . . . . . . . . . . 26 Electric Revenue, Kilowatt-Hour Sales and Custorer Statistics ....................27

7. Management's Discussion and Analysis of Financial Condition and Results of Operations ............28

8. Financial Statements and Supplementary Data . . ... . . . . . 31 Report of Independent Accountants . . . . . . . . . . . . . . 43

9. Disagreements on Accounting and Financial Disclosure . . . . . 44 PART III

10. Directors and Executive Officers of the Registrant . . . . . . 44

11. Executive Compensation . . . . . . . . . . . . . . . . . . . . 44

12. Security Ownership of Certain Beneficial Owners a n d Ma n a geme n t . . . . . . . . . . . . . . . . . . . . . . . 44

13. Certain Relationships and Related Transactions . . . . . . . . 44 PART IV

14. Exhibits, Fi- 3:!el Statement Schedules, and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . 44 Consent of Independent Accountants . . . . . . . . . . . . . . 53 Signatures . . . . . . . . . . . . . ... . . . . . . . . . . . 54 l

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f DEFINITIONS Abbreviations and acronyms used in the text are defined below.

Abbreviations and Acronyms Tenn Act.............................. Nuclear Waste Policy Act of 1982 AFBC............................. Atmospheric Fluidized-Bed Combustion BTU.............................. British Thermal Units Company.......................... Wisconsin Electric Power Company DNR.............................. Wisconsin Department of Natural Resources

D0E.............................. U.S. Department of Energy l

EPA.............................. Environmental Protection Agency l

l FERC............................. Federal Energy Regulatory Comission IRS.............................. Internal Revenue Service MPSC............................. Michigan Public Service Comission NEIL............................. Nuclear Electric Insurance Limited NML.............................. Nuclear Mutual Limited NRC.............................. Nuclear Regulatory Comission i NYSERDA.......................... New York Energy Research and Development Authority P&M.............................. The Pittsburg & Midway Coal Mining Co.

PSCR............................. Power Supply Cost Recovery PSCW............................. Public Service Comission of Wisconsin RCRP............................. Replacement Coal Recovery Provisions US............................... Utility Services WED.............................. Wisconsin's Environmental Decade, Inc.

Wisconsin Energy................. Wisconsin Energy Corporation Wisconsin Natural................ Wisconsin Natural Gas Company WHIC............................. Wisconsin Michigan Investment Corporation WPL.............................. Wisconsin Power and Light Company l WUMS............................. Wisconsin-Upper Michigan Systems l

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M PART I

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ITEM.1. BUSINESS l  ;

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i ' Wisconsin Electric Power Company (the " Company") is an operating public utility organized under the' laws of the State of Wisconsin. Its operations. l l are conducted through two business segments, the primary operations of which.

y are as follows:

I Business Segment Operations  !

1

Electric Operations The Company generates, transmits, distributes

and sells electric energy in a territory of approximately 12,600 square miles with a

! population estimated at over 2,000,000 in j southeastern (including the Milwaukee area),

i east central and northern Wisconsin and in i the Upper Peninsula of Michigan.

! Steam Operations The Company distributes and sells steam i supplied by certain of its electric genera-l ting plants to space heating and processing  ;

j customers in downtown Milwaukee.  ;

} The Company is a subsidiary of Wisconsin Energy Corporation (" Wisconsin Energy"), which owns all of the Company's Common Stock. Wisconsin Energy, formerly an inactive subsidiary of the Company, became the parent holding j company in a corporate restructuring on December 31, 1986. For further r information on this matter, see Item 1. BUSINESS " Corporate Restructuring". ,

l For financial information about industry segments, see Note M to the Financial .

Statements under Item 8.

CORPORATE RESTRUCTURING j As reported in the Company's Current Report on Form 8-K dated January 2, 1987, i the corporate restructuring referred to in the Company's Quarterly Report on 1 L Form 10-Q for the quarter ended September 30, 1986 became effective at l midnight, Milwaukee time, on December 31, 1986. In the restructuring, all i outstanding Common Stock of the Company was converted into an equal number of  :

1 i shares of Wisconsin Energy Common Stock and the Company transferred by a i noncash dividend to Wisconsin Energy all of the shares of its subsidiaries,

! including Wisconsin Natural Gas Company (" Wisconsin Natural"). The out-l standing Preferred Stock and indebtedness of the Company was not changed in i the restructuring. As a result of the restructuring, the Company's former investments in Wisconsin Natural and its other subsidiaries will no longer be

' of potential benefit to the holders of its Preferred Stock and debt securi-ties. The aggregate book value of the Company's investment in these sub-sidiaries transferred to Wisconsin Energy in the corporate restructuring was i $134 million.

I A petition for review dated June 27, 1986 was filed by Wisconsin's Environ- ~

i mental Decade, Inc. ("WED") with the Circuit court for Dane County, Wisconsin,  ;

i requesting review and reversal of the May 27, 1986 Public Service Comnission

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of Wisconsin ("PSCW") order approving the corporate restructuring and such  !

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ITEM 1. BUSINESS - Corporate Restructuring (Cont'd) other relief as may be appropriate. The petition alleges, among other things, that the PSCW proceedings were conducted without due process and involved irregularities, that the order was not supported by substantial evidence, and that such order is outside the PSCW's range of discretion, and claims that as a result, the order is in violation of constitutional and statutory provi-sions. The Company believes the petition is without merit. On September 26, 1986, the Company and Wisconsin Energy filed a motion asking the Dane County Circuit Court to dismiss WED's petition for review of the May 27, 1986 order of the PSCW approving the proposed corporate restructuring. On March 20, 1987 the Dane County Circuit Court denied the Company's and Wisconsin Energy's motion for dismissal. The matter is pending.

ELECTRIC UTILITY OPERATIONS Electric energy sales by the Company in 1986, to all classes of customers, totaled 18,953 million kilowatt-hours, an increase of 1.1% from 1985.

Excluding sales to other public utilities, electric energy sales to retail, municipal and cooperative customer classes increased by 1.5% in 1986 compared to 1985. There were 847,761 electric customers at December 31, 1986, an l increase of 1.1% since December 31, 1985. For further information on revenues, kilowatt-hour sales, and customer statistics by class, see " Electric Revenue, Kilowatt-Hour Sales and Customer Statistics" on page 27 of this report.

In 1986, the Company's net generation amounted to 19,136 million kilowatt-hours. Generation was supplemented with 1,044 million kilowatt-hours pur-chased from neighboring utilities and, to a minor extent, from other sources.

The dependable capability of the Company's generating stations was 4,354 megawatts in July, 1986 as more fully described in Item 2. PROPERTIES.

The Company's peak demand in 1986 was 3,810 megawatts and occurred on July 18.

This exceeded by 3.4% the Company's previous peak demand of 3,684 megawatts, which occurred on August 29, 1984. The increase in peak demand during 1986 was a result of unusually hot and humid summer weather.

No power plants are under construction at the present time and the Company does not expect to bring additional generating capacity on line until the late 1990s. The Company's latest forecast through 1996 anticipates an annual growth in peak demand of about 1.6% and shows a 1996 peak of 4,269,000 l kilowatts. The Company expects to maintain adequate reserve capacity into the l foreseeable future.

As reported in the Company's Annual Report on Form 10-K for the year ended December 31, 1985, the Company in December 1985 announced a multi-faceted plan to extend the operating lives of the Oak Creek and Port Washington Power Plants. This major restoration program, which is expected to be completed in l 1992 at an anticipated aggregate cost of $600 million, is intended to defer l the need for construction of costly new power plants and achieve significant I reductions in sulfur dioxide emissions.

Under this program, four of the units at the Oak Creek Power Plant would be converted to a new clean-coal technology -- atmospheric fluidized-bed combustion ("AFBC"). The four units are rated at approximately 500 megawatts, or about 15% of the Company's coal-fired capacity. The other units at Oak Creek and Port Washington Power Plants would undergo major renovations to improve their performance and extend their operating lives.

ITEM 1. BUSINESS - Electric Utility Operatiens (C:nt'd)

PSCW authorization is required before proceeding with the above mentioned projects. The Company on February 6,1986 requested authorization to proceed with the AFBC conversion of four units at its Oak Creek Power Plant. The Company's proposed schedule calls for Oak Creek Units 3 and 4, which were shut down in 1986, to be converted to AFBC by mid-1990. After completion of work on the first two units, conversion of Oak Creek Units 1 and 2 would commence with completion scheduled for 1992. On January 21, 1987 the Company retained the Stearns-Roger division of United Engineers & Constructors, Inc. to proceed with preliminary engineering services for the AFBC project.

On February 6, 1987 the PSCW issued a Notice of Preliminary Hearing concerning the Company's AFBC application indicating a preliminary hearing would be held on March 24, 1987 to review the schedule of the application. The notice indicates that 1) additional information would be required for the project to ensure compliance with the Least Cost Integrated Planning Process ordered for use by Wisconsin utilities in Advance Plan 4, and 2) a preliminary review by the PSCW staff suggests the AFBC project could be delayed because adequate reserve margins are expected to be available through the early 1990s without the project. The notice indicated the March 24 hearing would specifically consider the reserve margin issue and whether there is sufficient justifi-cation for accelerating PSCW review of the Company's AFBC proposal. On February 12, 1987, WED requested full party status in this proceeding and applied for intervenor compensation.

By letter dated February 27, 1987 the Company requested that the PSCW delay the March 24 preliminary hearing at least 60 days to allow the Company to further analyze various additional considerations related to the AFBC project. The Company has advised the PSCW that as part of its internal review, it intends to reevaluate the timing of the AFBC project, including whether the Company should proceed with the conversion of only two units at this time. On March 17, 1987 the PSCW approved the Company's requested delay in the hearing schedule for submission of additional data by the Company, but indicated that testimony from other interested parties would be accepted on March 24 as originally scheduled. The matter is pending.

An application to proceed with the renovation work at the remaining Oak Creek units was filed on September 30, 1986 and is pending before the PSCW. Reno-vation work on the Oak Creek units is scheduled to be completed during normal annual outages. An application to proceed with renovation work at the Port Washington plant has not yet been filed.

The Port Washington Clean Energy Project, a clean-coal technology previously proposed for the plant's Unit 5, has been cancelled due to lack of federal funding. The Company is now evaluating other plans for renovating Unit 5 in conjunction with the renovation of the plant's four other units.

For information regarding estimated costs of the Company's construction program for the five years ending December 31, 1991, see Item 7 " MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -

LIQUIDITY AND CAPITAL RESOURCES".

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ITEM 1. BUSINESS (Cont'd)

SOURCES OF GENERATION The table below indicates sources of energy generation for the Company:

Year Ended December 31 1986 1987*

Coal 59.7% 61.2%

Nuclear 37.5 36.1 Hydro-electric 2.2 2.2 Gas 0.3 0.3 011 0.3 0.2 TOTAL 100.0% 100.0%

35333E 333333

• Estimated, assuming that there are no unforeseen contingencies such as unscheduled maintenance or repairs.

C0AL: The Company diversifies its coal sources by purchasing from Northern Appalachia, the Illinois Basin and the Southern Powder River Basin mining districts. Approximately 93% of the Company's 1987 coal requirements are expected to be delivered by Company owned unit trains. The unit trains transport coal for the Oak Creek and Pleasant Prairie Power Plants from Pennsylvania, Illinois, and Wyoming mines. Coal from Pennsylvania mines, for Port Washington and Valley Power Plants, is delivered by lake vessels. The Company's 1987 coal requirements, projected to be 6.7 million tons, are 79%

under contract. The Company does not anticipate any problem in procuring its remaining 1987 requirements through spot or short term purchases.

Oak Creek Power Plant: All of the estimated 1987 coal requirements for the Company's Oak Creek Power Plant are covered by contracts. A Wisconsin Department of Natural Resources ("DNR") rule reducing sulfur dioxide emission levels was implemented October 1, 1986, preventing the Company from burning higher sulfur content coal which was to have been supplied under three long-term contracts for the Oak Creek Power Plant. Negotiations with the suppliers resulted in the cancellation of two of the contracts, one effective December 31, 1985, and the second August 31, 1986. For information regarding claims in connection with this matter, see Item 3. LEGAL PROCEEDINGS "Other Litigation -

Coal Contracts". The third Oak Creek contract, which continues through 1988, was amended in 1985 to provide for the substitution of lower sulfur content coal from another mine to permit compliance with the DNR emission level. A new long-term contract that replaces the cancelled contracts and the contract that was amended in 1985 are designed to supply this plant's requirements through 1988.

Pleasant Prairie Power Plant: Approximately 77% of the estimated 1987 coal requirements at the Company's Pleasant Prairie Power Plant are presently covered by contract or purchase order. Negotiations are under way to secure the balance of the plant's 1987 requirements and the uncontracted portion of '

the requirements for 1988. One contract running through 2002 contains a take-or-pay provision allowing the Company to pay an amount, determined by formula, in lieu of taking coal during any annual period. Price escalations since the contract was signed have increased the mine price of coal to a level

, ITEM 1. BUSINESS - Coal (Cont'd) that exceeds the sum of spot purchases and the take-or-pay charges determined in the contract. As a result of this disparity, the Company has elected to invoke the take-or-pay provisions and purchase spot coal. For information regarding litigation involving this contract, see Item 3. LEGAL PROCEEDINGS "Other Litigation - Coal Contracts".

Port Washington Power Plant: A long term coal contract for the Company's Port Washington Power Plant is to supply this plant's requirements through 1991.

Coal supplied under this contract allows the plant to meet the new DNR emission requirements which became effective on October 1, 1986. In the event of further air quality emission requirements affecting this plant, the contract can be terminated without liability. Due to the shifting of electric generation to the Company's Pleasant Prairie Power Plant, it is anticipated that Port Washington will have a surplus coal supply through 1991.

Valley Power Plant: The Valley Power Plant has a contract supplying approxi-mately 56% of the plant's 1987 annual coal requirements. The balance of the 1987 requirements will be secured through diversion of Port Washington's excess contracted coal. Beginning in 1988 and continuing through 1991 the portion of Valley's requirements not then currently under contract is expected to be supplied either by diversion of Port Washington's contracted shipments or through new contracts or spot purchases for delivery to Valley.

Edgewater: Coal for Edgewater, Unit 5, in which the Company has a 25%

interest, is purchased by Wisconsin Pcwer and Light Company ("WPL"), a non-affiliated utility.

The periods and annual tonnage amounts for the Company's principal coal contracts are as follows:

Contract Period Annual Tonnage Jan. 1978 to Dec. 1988 1,000,000 Jan. 1980 to Dec. 2000 2,000,000 Jul. 1983 to Dec. 2002 1,000,000 Dec. 1984 to Nov. 1988 250,000 Jan. 1986 to Dec. 1991 250,000*

Jan. 1987 to Sep. 1992 800,000

• Option to renew for an additional three year period.

For further information regarding emission restrictions, see Item 3. LEGAL PROCEEDINGS " Air Quality - Acid Rain Legislation".

NUCLEAR: The Company purchases uranium concentrates ("yellowcake") and contracts for its conversion, enrichment and fabrication. The Company maintains title to the nuclear fuel until the fabricated fuel assemblies are delivered to the Point Beach Nuclear Plant, whereupon it is sold to and leased back from Wisconsin Electric Fuel Trust. See Note C to the Financial Statements under Item 8.

Uranium Requirements: The Company requires approximately 450,000 pounds of yellowcake annually for its two-unit Point Beach Nuclear Plant. At the end of 1986, the Company had approximately 111,000 pounds of yellowcake in inventory.

In late 1983, an agreement was concluded with Energy Resources of Australia, 9

l ITEM 1. BUSINESS - Nuclear (Cont'd)

Ltd. for the supply of up to two-third's of the Company's projected uranium requirements during the 1986 to 1996 period. In 1985, the Company entered intu an agreement with Malapai Resources Company to supply the remaining one-third of operating requirements during the 1983 to 1996 period. The Company believes that adequate supplies of yellowcake will be available to satisfy future operating requirements which are not currently under contract.

Conversion: On March 20, 1986, the Company entered into an agreement with Sequoyah Fuels Corp., a subsidiary of Kerr-McGee Corp., to provide all uranium conversion service required for Point Beach Units 1 and 2. The contract covers the period 1987 through 1995.

Enrichment: The Company currently has a Utility Services ("US") enrichment contract with the U.S. Department of Energy ("00E") for 70% of the enrichment services required for the operation of both of the Point Beach units. The contract covers enrichment services for the entire operating life of each l unit. The Company has entered into a supplemental agreement with the DOE to supply the remaining 30% of enrichment service requirements for the period I 1987 through 1995 at prices below those offered under the US enrichment l contract.

Fabrication: Fabrication of fuel assemblies from enriched uranium for Point Beach is covered through 1995 under a contract with Westinghouse Electric Corporation.

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Spent Fuel Storage and Disposal: The Company has the ability to store certain amounts of spent nuclear fuel at its Point Beach Nuclear Plant. Previous modification of the storage facilities at Point Beach has made it possible for l the Company to accommodate all spent fuel expected to be discharged from the reactors through about 1995. A decision to provide storage at Point Beach for spent fuel discharged from the reactors after 1995 will not be made until the Company has received more reliable information on the future availability and cost of away-from-reactor storage and advanced technologies for on-site storage.

The Nuclear Waste Policy Act of 1982 ("Act") requires the DOE to provide for the disposal of spent fuel from all U.S. nuclear plants. In accordance with the Act, the Company in 1984 entered into a disposal contract with the DOE which provides for deliveries of spent fuel to the DOE for ultimate disposal commencing in January, 1998. Under the Act, the Company has paid the DOE I approximately $83 million through December 31, 1986 for disposal of spent nuclear fuel generated at Point Beach Nuclear Plant.

Point Beach Nuclear Plant: The Point Beach Nuclear Plant provided 37.5% of l the Company's net generation in 1986. The plant has two generating units, i

each of which had a dependable capability of at least 485 megawatts and which l

together constituted 22.1% of the Company's dependable generating capability l at December 1986.

The Nuclear Regulatory Commission ("NRC") has, at various times, directed that certain inspections, modifications and changes in operating procedures be made at all nuclear plants. At Point Beach, such inspections have been made and necessary modifications to equipment and changes in operating procedures have either been completed or are expected to be completed within the time schedules permitted by the NRC or within approved extensions thereof. The

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ITEM 1. BUSINESS - Nuclear (Cont'd)

Company does not believe that the cost of equipment modifications or changes in operating procedures at the Point Beach Nuclear Plant will have a material adverse effect upon the financial condition of the Company.

On March 17, 1987, pursuant to the Company's request, the NRC issued license amendments which change the expiration date of the Point Beach Nuclear Plant y Unit I license from July 19, 2007, to October 5, 2010, and the Point Beach l Nuclear Plant Unit 2 license from July 25, 2008, to March 8, 2013. These extensions are consistent with the NRC's present practice of issuing licenses for 40 years of operation measured from the date of issuance of the initial full power operating license in lieu of the earlier practice of measuring from the date of issuance of the construction permit.

Decommissioning Costs: On December 5, 1985, the PSCW issued an order requiring the Company to provide for costs associated with the eventual decommissioning of Point Beach Nuclear Plant through the use of an external trust fund. Accordingly, during 1986 the Company changed to an external

, sinking fund method. Funds for future nuclear decommissioning costs had i previously been collected through depreciation charges using the straight-line negative salvage method and, when collected, had been available for other purposes pending the need for decommissioning.

l As required by the order, in December 1986 the Company transferred funds previously collected in the amount of approximately $100 million to an external decommissioning trust fund.

I Nuclear Plant Insurance: The Price-Anderson Act provides an aggregate  ;

limitation, currently $700 million, on public liability claims arising out of I

a single nuclear incident. The Company has $160 million of liability insurance from commercial sources, as well as $540 million of additional insurance under an industry retrospective rating plan. Under that plan, in connection with each major nuclear incident, if any, each participating utility could be assessed retrospective premiums of up to $5 million per owned reactor (the Company owns two), subject to a limit of $10 million per reactor within any one year. The Price-Anderson Act is currently scheduled to expire on August 1, 1987. Legislation to extend and modify the Act is expected to be

, enacted prior to that date. Proposed modifications are likely to include increases in the existing public liability limits and higher retrospective premiums in connection with each such incident, if any.

The Company has property damage insurance with Nuclear Mutual Limited ("NHL"),

Nuclear Electric Insurance Limited ("NEIL") and American Nuclear Insurers /

Mutual Atomic Energy Liability Underwriters with total coverage of $1,230 1

million. The Company has potential maximum retrospective premium liabilities under the NHL and NEIL policies of $16.8 million and $8.5 million, respectively.

The Company also maintains additional insurance with NEIL covering extra expenses of obtaining replacement power during any prolonged accidental outage (in excess of six months) at the Point Beach Nuclear Plant. Such insurance coverage provides weekly indemnities of approximately $1.8 million per unit for outages of Units 1 and 2 during the first twelve months, thereafter declining to 50% of these amounts during the next twelve month period, subject to a maximum limit of $137.3 million for Unit 1 and $138.4 million for Unit 2.

Under the policy, the Company's maximum retrospective premium liability is 1 approximately $6.4 million.

ITEM 1. BUSINESS-Nuclear (C:nt'd) .*

It should not be assumed that, in 'the event of a major nuclear incident, any insurance or statutory limitation of liability would protect the Company from material adverse impact. In the event of such an incident, various factors might lead to such an impact, including insufficiency of insurance proceeds and other funds to meet all liabilities to third parties and all costs for decontamination, repair or replacement of facilities; delays or disputes concerning collection of insurance proceeds; imposition of regulatory limita-tions on operation; changes in tariff provisions; accounting adjustments; impairment of access to financial markets and other factors.

NATURALGAS(FORELECTRICGENERATION): The boilers at the Commerce Power Plant and the combustion turbine at the Oak Creek Power Plant are equipped to burn either natural gas or oil. These facilities have used natural gas when available.

Gas for the Oak Creek combustion turbine is supplied on an interruptible basis l by Wisconsin Natural. Beginning in April 1986, natural gas supplied by Wisconsin Natural became available at the Co e ny's Pleasant Prairie Power Plant. The Company has converted from oil to natural gas for boiler ignition l

and warm-up purposes at Pleasant Prairie. Based on the information provided by Wisconsin Natural's pipeline supplier, the Company believes adequate gas supplies will be available for the Oak Creek and Pleasant Prairie Power Plants.

Gas for the Commerce and Valley Power Plants is supplied by Wisconsin Gas Company, a non-affiliated company. Based on information provided by Wisconsin Gas Company, the Company believes adequate gas supplies will be available for the Commerce and Valley Power Plants.

OIL: Oil is used for combustion turbines at the Germantown and Port l Washington Power Plants and at the Point Beach Nuclear Plant. Small amounts l of oil are also used for boiler ignition and flame stabilization at some coal-fired plants. While the Company currently has no contracts for oil delivery, it does not anticipate a problem in obtaining its relatively small requirements.

HYDRO: The Company has various licenses from the Federal Power Commission (now the Federal Energy Regulatory Commission or "FERC") concerning its hydro generating facilities which expire from June 30, 1993 to June 30, 2004. Hydro facilities provided 2.2% of the Company's generation in 1986. The Company intends to seek renewal of such licenses as they expire.

INTERCONNECTIONS WITH OTHER UTILITIES: The electric system of the Company is l interconnected at various locations with the systems of Madison Gas and l

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Electric Company, Wisconsin Power and Light Company, Wisconsin Public Service Corporation, Cliffs Electric Service Company, Commonwealth Edison Company, Northern States Power Company and Upper Peninsula Power Company. These inter-l connections provide for interchange of power to assure system reliability.

i The Company is a member of Wisconsin-Upper Michigan Systems ("WUMS") a coordinating group which includes four other electric companies in Wisconsin and Upper Michigan. WUMS, in turn, is a member of Mid-America Interpool Network, which is one of nine regional members of the National Electric Reliability Council. Membership in these groups permits better utilization of reserve generating capacity and coordination of long-range system planning and day-to-day operations.

ITEM 1. BUSINESS (Cont'd) ,,

SALES TO MUNICIPAL AND WHOLESALE CUSTOMERS: The Company currently provides wholesale electric energy to eight municipally owned systems, one municipal joint action agency, one privately owned system and two rural cooperatives in Wisconsin Illinois, and the Upper Peninsula of Michigan under rates approved by the FERC. Sales to these wholesale customers accounted for 7.5% of total kilowatt-hour sales in 1986. Service to such customers is provided under service agreements which generally require 3 years notice to cancel.

Commencing May 1, 1986 the Company began supplying all the electrical service requirements for the city of Geneva, Illinois. Transmission of energy from the Company to Geneva is provided by Commonwealth Edison Company, a non-affiliated utility.

On June 16, 1986 the city of Elkhorn, Wisconsin notified the Company that it proposed to cease receiving electric energy from the Company effective June 16, 1989. During 1986, the city purchased 56,262,000 kilowatt-hours from the Company at a cost of $2.5 million. By letter dated October 28, 1986, the Company requested the city reconsider its decision to receive electric energy from a non-affiliated Wisconsin utility and indicated that it would continue to supply the city's energy requirements if the city reverses it decision by the end of 1937. The Company cannot predict whether the city will ultimately reconsider its decision to obtain electric energy from a non-affiliated utili ty. The matter is pending.

The Company's existing FERC tariffs provide for transmission service to its wholesale customers. During 1986, the Company had one customer taking transmission service. That customer's service agreement currently provides for transmission of 16 megawatts of firm demand.

The electric utility industry is becoming increasingly competitive. Electric utilities with competitive rates and sufficient capacity are being approached by municipal and industrial customers searching for lower energy prices.

Other electric wholesale customers of the Company or other non-affiliated utilities may determine, from time to time, to switch energy suppliers. The Company has announced that a major corporate objective is to be the region's lowest-priced energy supplier.

SALES TO LARGE CUSTOMERS The Company provides utility service to a diversified base of industrial customers. Major industries served include the paper industry, food products industry and machinery production. No single customer accounted for more than 1.3% of total electric kilowatt-hour sales.

STEAM UTILITY OPERATIONS The Company operates a district steam system for space heating and processing in downtown Milwaukee. The system consists of 26 miles of high and low pressure mains and related regulating equipment. Steam for the system is supplied principally by the Company's Valley Power Plant and is augmented by steam from the Commerce Power Plant. The Company's Commerce Power Plant, originally constructed in 1941, is scheduled to be retired in 1989. During 1986, the Company completed the installation of two new replacement 30-inch steam mains from the Valley Power Plant to the central business district of Milwaukee to ensure reliable service to the steam system's customers. At ITEM 1. BUSINESS - Steam Utility Operations (Cont'd)

December 31, 1986, there were 510 customers on the system. Steam sales in 1986 were 1,941 million pounds, a decrease of 3.1% from the 2,004 million pounds sold in 1985. The decrease was due prirnrily to warmer weather during the 1986 heating season compared to the prior year.

REGULATION The Company is subject to the jurisdiction of the Public Service Commission of Wisconsin as to electric and steam rates, standards of service, issuance of securities, construction of new facilities, transactions with affiliates, levels of short term debt obligations, billing practices and various other matters. The Company is also subject to the jurisdiction of the Michigan Public Service Comission ("MPSC") as to the various matters noted above except as to construction of new facilities and levels of short term debt obligations. The Company, with respect to wholesale rates and accounting, is subject to Federal Energy Regulatory Commission jurisdiction. Operation and construction relating to the Company's Point Be'.cn Nuclear Plant facilities are subject to regulation by the Nuclear Regulatory Commission. The Company's operations are also subject to regulations of the Environmental Protection Agency (" EPA") and the Wisconsin Department of Natural Resources. Wisconsin Energy is an exempt holding company under Section 3(a)(1) of the Public Utility Holding Company Act of 1935, as amended, and accordingly is exempt from the provisions of that act, other than with respect to certain acquisitions of securities of a public utility.

The Company is subject to a power plant siting law in Wisconsin which requires that electric utilities file updated advance plans for the location, size and type of future large generating plants and high voltage transmission lines every two years for PSCW approval after public hearings. The law provides that the PSCW may not authorize the construction of any large generating plants or high voltage transmission lines unless they are in substantial compliance with the most recently approved plan. The law also prohibits the Company from acquiring any interest in land for such plants or transmission lines by condemnation until construction authorization has been received. The PSCW's order in Advance Plan 4 dated August 5, 1986 requires Wisconsin utilities to use a least cost integrated planning process in their next advance plan. Under such process, Wisconsin utilities must consider a full range of supply and demand side options to meet their electric needs. The Company's Fifth Advance Plan is expected to be filed on or about October 15, 1987. The Company currently does not anticipate that any major new power plants will be required until the late 1990's.

RATE MATTERS See Item 3. LEGAL PROCEEDINGS " Rate Matters" for a discussion of rate matters, including recent rate changes and a discussion of the tariffs and procedures with respect to recovery of changes in the costs of fuel and purchased power.

ENERGY CONSERVATION The management of the Company believes that a strong and continuing emphasis must be placed on energy management and efficient energy use. The Company is continuing to develop programs to inform and assist its customers with respect to conservation options. This policy is regarded by the Company as in the best interests of its custemers and the owners of its securities.

ITEM 1. BUSINESS - Energy Conservation (Cont'd)

Conservation of energy is not limited to reduced consumption. It also includes the efficient use of energy resources. Time-of-use rates for certain of the Company's electric customers promote the shifting of electricity usage to those times when electric generating facilities are not fully utilized.

Direct load control of some residential electric water heaters and interruptible rates to certain industrial customers are used to control peak demand.

To promote its energy management and conservation policies, the Company offers various programs and services to its customers, including a weatherization program, energy audits, an advisory service to assist in building energy efficient homes, appliance information and rebate programs, shared savings financing program for commercial and industrial customers, and a comprehensive customer information program.

In order to obtain additional energy savings for industrial and commercial customers, the Company is reviewing several new concepts, including low interest loans, grants and other incentives to encourage the installation of high-efficiency lighting, motors and processing equipment. Additional conservation incentives are also being developed for residential customers to encourage the replacement of older appliances with more efficient models. See Item 3. LEGAL PROCEEDINGS " Rate Matters Wisconsin Retail Electric Jurisdiction - 1987" for further information concerning conservation related programs.

ENVIRONMENTAL COMPLIANCE Compliance with federal, state and local environmental protection requirements resulted in capital expenditures by the Company of approximately $15 million in 1986 and $18 million in 1985, primarily for the transfer of overhead lines to underground, pollution abatement facilities installed at the Company's power plants, environmental studies associated with power plants, and improvement of the aesthetic appearance of facilities and equipment. Such expenditures are budgeted at $17 million for 1987.

Operation, maintenance and depreciation expenses of the Company's fly ash removal equipment and other environmental protection systems are estimated to i

have been $29 million in 1986. Other environmental costs, primarily for environmental studies, amounted to $1.1 million in 1986.

See Item 3. LEGAL PROCEEDINGS " Air Quality - Acid Rain Legislation".

OTHER The service areas of the Company are principally protected in Wisconsin by indeterminate permits secured by statute. The service areas in the State of Michigan are protected by franchises granted by municipalities.

Research and development expenditures of the Company amounted to $5,519,000 in 1984, $5,615,000 in 1985, and $6,412,000 in 1986. Such expenditures were primarily for improvement of service and abatement of air and water pollution.

The capitalized portion of research and development costs amounted to $5,000 in 1984, $75,000 in 1985 and $299,000 in 1986. Research and development activities include work done by employees, consultants and contractors, plus Company sponsorship of research by industry associations.

+.

ITEM 1.- BUSINESS - Other (Cont'd)

'At December 31, 1986,-the Company employed-5,444 persons, of.which 174 were part-time.

i- Sales of the steam utility fluctuate with the heating cycle of the year and are impacted by varying weather conditions from year-to-year.

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' ITEM 2. PROPERTIES The Company owns the following generating stations with-1986 capabilities as indicated:

Dependable Capability In Megawatts (1)

No. of Generating July December Name Fuel Units 1986 1986 Steam Plants:

Point Beach Nuclear 2 970 970 Oak Creek (2) Coal 8 1,237 1,248 Pleasant Prairie Coal 2 1,160 1,160 Port Washington (2) Coal 5 253 257

! Valley Coal 2 268 236 Edgewater(3)

Coal 1 99 97 Commerce Gas /0il 1 31 27 TOTAL STEAM 21 4,018 3,995 Hydro Plants (16 in number) 38 79 76 Germantown Combustion Turbines Oil 4 200 244 Other Combustion Turbines & Diesel Gas /0il 4 57 73 TOTAL SYSTEM 67 4,354 4,388 23 22=22 NEEEE (1) Dependable capability is the net power output under average operating conditions with equipment in an average state of repair as of a given month in a given year. Changing seasonal conditions are responsible for the different capabilities reported for the winter and summer periods in the above table. The values were established by test and

, may change slightly from year to year.

I (2) Oak Creek Units 3-4 and Port Washington Unit 5 are presently shut down pending renovation as described in Item 1. BUSINESS " Electric Utility Operations". Dependable capability excludes 112 and 119 megawatts for Oak Creek Units 3-4, respectively, and 78 megawatts for Port Washington Unit 5.

(3) The Company has a 25% interest in Edgewater Unit 5, which is operated by WPL, a non-affiliated utility.

At December 31, 1986, the system had 2,522 miles of transmission circuits, of which 563 miles were operating at 345 kilovolts,123 miles at 230 kilovolts, 1,426 miles at 138 kilovolts, and 410 miles at voltage levels less than 138 kilovolts. At December 31, 1986, the Company was operating 22,215 pole miles of overhead distribution lines and 8,470 miles of underground distribution cable, as well as 368 distribution substations and 183,634 line transformers.

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ITEM 2. PROPERTIES (Cont'd)

The Company owns various office buildings and service centers throughout its service area. A five story annex to the Company's downtown Milwaukee corpor-ate headquarters was completed in the fall of 1986.

The principal properties of the Company are owned in fee except that the major portion of electric transmission and distribution lines and steam distribution mains are located on or in streets and highways and on land owned by others.

ITEM 3. LEGAL PROCEEDINGS ENVIRONMENTAL MATTERS The Company is subject to federal, state and local laws, ordinances and regulations governing the environmental aspects of its operations. The Company believes that, with immaterial exceptions, its existing facilities are in compliance with applicable environmental requirements.

Air Quality - Acid Rain Legislation In 1986 the Wisconsin Legislature passed legislation establishing new sulfur dioxide limitations on the state's five major electric utilities. The new law requires each of the five major electric utilities to meet a 1.20 lb sulfur

, dioxide per million BTU corporate average annual emission rate limit beginning

! in 1993. Current Wisconsin law limits total annual sulfur dioxide emissions from the five major Wisconsin Electric utilities (including the Company) to 500,000 tons per year. During 1986, approximately 316,000 tons of sulfur dioxide were emitted by such utilities, equivalent to an annual average emission rate of 2.0 lb. sulfur dioxide per million BTV.

The Company believes that compliance with the new state limitations can be achieved through the increased use of low-sulfur coal at certain power plant units and the planned conversion to AFBC of Units 1 to 4 at the Oak Creek Power Plant. Some modification of existing power plant equipment may also be necessary to accommodate the use of low-sulfur coals. The Company estimates that the cost of compliance related to the increased use of low-sulfur coal will be approximately $30 million per year, beginning in 1993. In the event the PSCW does not issue a construction certificate for the timely conversion of Oak Creek Units 1-4 to AFBC, additional fuel switching would be required.

The Company is unable at this time to estimate the additional capital

, expenditures or operating costs which may be necessary to meet any more )

stringent environmental protection regulations, including proposed federal i acid rain legislation, which may be imposed in the future or the effects of l any such regulations as to generating capacity, delays in construction, or operation of its facilities.

RATE MATTERS Wisconsin Retail Electric Jurisdiction Fuel and Purchased Power Adjustment: The Company's Wisconsin electric retail rates do not contain an automatic fuel adjustment clause, but can be adjusted ,

by the PSCW if actual fuel and purchased power costs vary by more than certain l monthly and cumulative ranges and if it can be demonstrated that fuel and purchased power costs will vary beyond a 3% annual range.

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I  ; ITEM 3. LEGAL PROCEEDINGS . Rate Matters (Cont'd) i

! 1985 Rate-Order: On January 3,1985, the PSCW-issued an order authorizing the ~

1 Company to place in effect a $26,480,000' annual decrease in Wisconsin retail j electric rates effective January 4,.1985. Such order was based on a 1985~ test

year and authorized a 14.75% return on comon equity, as determined for j rate-making purposes.

I 1985 Supplemental Rate Order: On April 9, 1985 the PSCW approved,the Com-4 pany's request to implement a fuel credit reflecting lower fuel, costs, .

I effective April 10, 1985. The approved fuel credit reduced. rates by.$21.5 i million on an annual basis. The rate adjustment was made under the fuel cost i procedures authorized by the PSCW in which an adjustment to rates may be made if the Company's fuel costs are expected to be above or below the authorized i

annual range.

1986 Rate Order: On December 20, 1985,-the PSCW issued an order authorizing the Company to place in effect a $33,684,000 annual ~ increase in Wisconsin retail electric rates effective January 1,1986. Such order was based on a l 1986 test year with a 14.5% rate of return on common equity, as determined for.

i rate-making purposes. The order reflects the full year impact of the two new i power plants placed in service in 1985, a change in Wisconsin utility

taxation, and a change in the method of accounting for.the eventual

. decommissioning of the Company's Point Beach Nuclear Plant. The order also

eliminated the seasonal rate differential.-

l On January 10, 1986, WED filed a petition for rehearing.on grounds which

! included allegations that such order unlawfully authorized the Company to l calculate its rates based upon a capital structure which assumed a $40 million i reduction in common equity during 1986, as determined for rate-making purposes. On January 31, 1986, the PSCW authorized the' Company to make a capital contribution to WMIC, to accomplish such equity reduction. On February 2,1986, the PSCW denied WED's petition for rehearing of the December l 20, 1985 rate order. On February 7,1986, WED filed a petition in Dane County Circuit court for review of (1) the portion of such rate-order which . includes l the assumption that in 1986 $40 million may be removed from the Company's 3 common equity, as determined for rate-making purposes, and (2) the January 31, i 1986 approval for transfer of such amount to WMIC. On November 21, 1986, the ,

Dane County Circuit Court issued a decision denying WED's petition. WED filed a motion for a new trial dated December 11, 1986, on the basis of " newly discovered evidence." The Company has asked the, court to deny WED's motion.

The matter is pending.

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l 1986 Supplemental Rate Order: On May 29, 1986 the Company filed a request

! under the fuel cost adjustment procedures established by the PSCW to decrease its Wisconsin electric retail rates by $16.8 million on an annual basis,-'or i approximately 1.6%. The decrease reflected lower fuel and fuel transportation

costs. On June 3, 1986, the PSCW approved the interim fuel credit-adjustment l proposed by the Company.

i 1987 Rate Order: On December 30, 1986, the PSCW issued an order authorizing

the Company to place in effect a $28.8 million annual decrease in Wisconsin -

i retail electric rates effective January 1,1987. Such order was based on a ,

j 1987 test year with a 13.0% rate of return on common equity, as determined for -

rate-making purposes, a reduction from the previously allowed return of 14.5%.

The rate decrease also reflects the estimated impact of. the Tax Reform Act of 1986. In the December 30, 1986 Order the PSCW authorized the Company to

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ITFM 3 LEGAL PROCEEDINGS - Rate Matt:rs (Cont'd) spend $73 million to fund capitalized conservation related investments. To encourage such investments, an additional 1% return on the conservation investments will be granted for each 125 megawatts of demand reduction that is economically achieved through conservation efforts. The Company is actively pursuing the development of cost-effective conservation programs.

The December 30, 1986 Order also established a range for 1987 of 47.24% to 52.0% for the level of the Company's common equity as a percentage of total capitalization. The PSCW's order states that the Company cannot reduce its average level of common equity in 1987 below 47.24% without the PSCW's prior approval. The Company does not believe this requirement will affect its operations in 1987.

Wholesale Electric Jurisdiction Fuel and Purchased Power Adjustment Tariffs: The Company's fuel adjustment tariffs for wholesale customers provide for adjusting rates to reflect varying fuel and purchased power costs.

Transmission Agreements: On October 21, 1986 the FERC approved a partial settlement of certain billing arrangements for transmission by the Company of energy purchased by Wisconsin Public Power Inc., System from other utilities after June 1,1985. The settlement agreement allows the transmission of firm power under a non-firm transmission rate in instances where customers can prove the power was purchased for reasons of economy rather than capacity.

1986 FERC Order: On February 3,1986, the FERC issued an order approving a settlement agreement between the Company and all of it's wholesale customers, providing for a revenue increase of $2.3 million, or 3.9%, on an annual basis.

The settlement agreement, based on a 1986 test year, became effective on January 1, 1986. Under terms of the settlement agreement, the Company agreed not to place any further rate increases into effect prior to January 1,1987.

1987 FERC Order: On December 29, 1986, the FERC issued an order approving a

$910,000, or 1.5%, annual reduction in electric base rates charged to wholesale customers effective January 1,1987. In response to a motion to intervene made by several customers, the FERC ordered an investigation and hearing on the wholesale rate level and the replacement coal recovery provision ("RCRP"). The Company submitted cost support data substantiating the rate decrease. The RCRP allows the Company to charge customers for their ratable share of take-or-pay payments made under a contract with a coal supplier if coal is purchased from a source other than that provided for under the contract. The matter is pending.

^

Mich.igan Retail Electric Jurisdiction Power Su'pply Cost Recovery Clause: Pates are adjusted to reflect varying fuel and purchased power costs through a power supply cost recovery ("PSCR") clause in the Company's electric tariffs. Such PSCR clause provides for, among other thingr, an annual filing of a PSCR plan and, after notice and an opportunity for . hearing, the development of PSCR factors to be applied to customers' bills during the period covered by the PSCR plan to allow the Company to recover its costs of fuel and purchased power transactions, as estimated in its annual filing. The amounts so collected are subject to a reconciliation proceeding conducted by the MPSC at the end of the period covered by the plan for L .

ITEM 3. LEGAL PROCEEDINGS - Rate Matters (Cont'd) recovery of any undercollections of actual costs or for refund or credit of any amounts in excess of its actual costs in such period. Kilowatt-hour sales in the state of Michigan were 1.6% of the Company's total retail sales in 1986. On December 2,1986, the MPSC approved the Company's PSCR factors for the year 1987.

1986 Rate Case: On June 3, 1986 the MPSC issued an order approving a settlement agreement increasing Michigan retail electric rates $900,000 or

-3.75% on an annual basis. The settlement agreement utilized a 1986 test year and included a 13.5% return on common equity as determined for rate-making purposes.

Wisconsin Retail Steam Jurisdiction 1986 Rate Case: On July 16, 1986 the PSCW issued an order authorizing the Company to place in effect a $786,000 annual increase in its steam rates effective August 7, 1986. Such order was based on a 1986 test year and authorized a 14.5% return on common equity as determined for rate-making purposes.

1987 Rate Case: On December 30, 1986 the PSCW issued an order authorizing the Company to place in effect a $752,000 annual increase in its steam rates effective July 1, 1987. Such order was based on a 1987 test year and authorized a 13.0% return on common equity as determined for rate-making purposes.

OTHER LITIGATION i 1986 Debt Financing: On December 2, 1986, the PSCW issued an order granting the Company authority to issue and sell up to $100 million of first mortgage bonds. On or about December 8,1986, WED and Peter Anderson filed in the Dane County Circuit Court a joint petition for review of the PSCW order on grounds that such order enables the Company to remove $40 million dollars of utility equity from its capital structure in alleged violation of state constitutional and statutory provisions. The petition requests that the court reverse the order with directions to reduce the authorization by $40 million or, in the alternative, require an escrowing of that amount of the proceeds of the bonds.

The Company has filed a notice of appearance 'and statement of position asking that the petition be dismissed. The Company believes that the petitioner's claims are without merit. In any event, the validity of bonds issued at the time when final PSCW authorization therefor was in effect would not be-affected by any subsequent court decision terminating, suspending or modifying

i. such authorization. The matter is pending.

Spent Nuclear Fuel Storage: On December 24, 1986, the U.S. District court for the Western District of New York entered judgment directing the Company to pay to New York Energy Research and Development Authority ("NYSERDA") the sum of

$733,000 (including both principal and interest through December 24,1986) plus interest to the date of payment for storage of the Company's spent nuclear fuel at NYSERDA's West Valley, New York facility. Under a proposed agreement in principle, which is subject to final execution, a motion by NYSERDA to amend the court's judgment is to be terminated and the Company expects to pay NYSERDA an additional $44,000.

ITEM 3. LEGAL PROCEEDING - Other Litigation (Cont'd)

Coal Contracts: On January 24, 1987, trial was concluded in the U.S. District court for the District of Wyoming in an action brought by Atlantic Richfield Company against the Company alleging that the Company breached a certain coal supply agreement between the two parties by electing to make "take-or-pay" payments in lieu of accepting certain deliveries of coal thereunder, while purchasing coal from other suppliers during the period July 1,1985 to the present. Atlantic Richfield is seeking damages of approximately $14.8 million for the period July 1,1985 to December 31, 1986 against which would be credited the "take-or-pay" amounts of approximately $7 million for the same period. The Company believes it has meritorious defenses in this action, however, if additional payments are required by the court, it is believed that they would be considered a cost of providing service and should be recognized for ratemaking purposes. The Company believes that the ultimate outcome of the litigation will not have material adverse impact upon its financial statements. The matter is pending.

The Company and The Pittsburg & Midway Coal Mining Co. ("P&M") are continuing negotiations regarding claims p~ resented to the, Company by P&M for reclamation costs P&M estimated it would experience in closing two coal mines which were the sources of coal supplied to the Company under contracts terminated by the Company. P&M's claims for both mines total about $25 million. The Company has taken the position that it is not liable for mine closing costs for anything other than reclamation of areas disturbed in producing coal sold to the Company.

Stray Voltage: Several actions have been commenced or claims made against the Company by dairy farmers for loss of milk production and other damages to their livestock allegedly caused by stray voltage resulting from the operation of the Company's primary distribution system. The Company does not believe the actions commenced or claims thus far made or threatened against it in connection with stray voltage will have a material adverse effect on its financial statements. The Company is participating in a State Department of Agriculture task force to determine the effects of stray voltage on farm animals and provide a mechanism to identify and solve such problems.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS A Special Meeting of Stockholders, for which proxies were solicited, was held on October 29, 1986, in connection with the corporate restructuring to create a holding company.

At the meeting, the stockholders approved the Plan of Merger involved in the restructuring by the vote of (a)-a majority of the outstanding shares of the Company's Common Stock, voting separately as a class (with 25,243,550 shares voting for and 1,806,434 shares voting against) and (b) a majority of the outstanding shares of the Company's Common Stock and Preferred Stock, voting together without regard to class or series (with 25,859,779 shares voting for and 1,870,216 shares voting against).

EXECUTIVE OFFICERS OF THE REGISTRANT The names, ages at December 31, 1986 and positions of all of the executive-officers of the Company are listed below along with their business experience during the past five years. All officers are elected. annually. Present terms expire May 13, 1987. There are no family relationships among these officers, nor is there any agreement or understanding between any officer and any other person pursuant to which the officer was selected.

Business Experience Name, Age and Position During.Past Five Years Charles S. McNeer, 60 Director, Chairman of the Board and Chief Chairman of the Board and Executive Officer of the Company since 1982; Chief Executive Officer and Director, President and Chief Executive Director Officer of the Company 1975 to 1982; Director, President and Chief Executive Officer of Wisconsin Energy since 1981; Director, Chairman of the Board and Chief Executive Officer of Wisconsin Natural since 1982; Director, President and Chief Executive Officer of Wisconsin Natural 1975 to 1982.

Russell W. Britt, 60 Director, President and Chief Operating Offi-President and Chief Operating cer of the Company since 1982; Director and Officer and Director Executive Vice President of the Company from 1975 to 1982; Director and Vice President of Wisconsin Energy since 1981; Director, President and Chief Operating Officer of Wisconsin Natural since 1982; Director and Vice President - Finance of Wisconsin Natural 1974 to 1982.

Sol Burstein, 64 Director and Vice Chairman of the Board since Vice Chairman of the Board 1984; Director and Executive Vice President and Director of the Company 1973 to 1984; Director and Vice President of Wisconsin Energy since 1981; Director and Vice Chairman of the Board of Wisconsin Natural since 1984; Director and Vice President of Wisconsin Natural 1975 to 1984.

Thomas J. Cassidy, 61 Executive Vice President of the Company since Executive Vice President 1985; Senior Vice President of the Company 1975 to 1985; Vice President of Wisconsin Natural since 1984; Director of Wisconsin Natural since 1973.

Richard A. Abdoo, 42 Senior Vice President since 1984; Vice Senior Vice President President - Customer Relations during 1984; Vice President - Corporate Planning 1981 through 1983.

EXECUTIVE OFFICERS OF THE REGISTRANT (Cont'd)

Business Experience I

Name, Age and Position During Past Five Years l John W. Boston, 53 Senior Vice President of the Company since l Senior Vice President 1982; Executive Vice President, Procedures and Performance of the Power Authority of the State of New York, 1980 to 1982.

Robert H. Gorske, 54 Vice President and General Counsel of the Vice President and Company since 1976; General Counsel of General Counsel Wisconsin Energy since 1981; Director, Vice l President and General Counsel of Wisconsin Natural since 1976.

Carlyle W. Fay, 60 Vice President of the Company since 1983; Vice President . Nuclear Power Assistant Vice President from 1982 to 1983; Director of Nuclear Power Department from 1979 to 1982.

Nancy R. Noeske, 49 Vice President of the Company since 1986; Vice President - Consumer Assistant Vice President 1984 to 1986; Affairs Director - Consumer Affairs 1981 to 1984.

Huberto R. Platz, 57 Vice President of the Company since 1975.

Vice President - Engineering and Construction David K. Porter, 43 Vice President of the Company since 1986; Vice President - Assistant Vice President 1985 to 1986; Corporate Planning Director - Corporate Planning 1984 to 1985; Manager - Nuclear Engineering 1980 to 1984.

Jerry G. Remmel, 55 Vice President and Treasurer of the Company Vice President and Treasurer since 1983; Treasurer of the Company 1973 to 1983; Treasurer of Wisconsin Energy since 1981; Treasurer of Wisconsin Natural since 1974.

Richard E. Skogg, 58 Vice President of the Company since 1978.

Vice President -

Operating Services John E. Speaker, 55 Vice President of the Company since 1978.

Vice President -

Communications Fred A. Trebatoski, 51 Vice President of the Company since 1986; Vice President - Division Director - Division Operations 1985 to 1986; Operations Director - Human Resources 1983 to 1985; Manager - Service and Control Division 1979 to 1983.

f EXECUTIVE.0FFICERS OF THE REGISTRANT (Cont'd)

Business Experience Name, Age and Position During Past Five Years Kenneth E. Wolters, 61 Vice President of the Company since 1983; Vice President - System Assistant Director - System Operations Operations Department 1982 to 1983; Manager of Power Plant Operations and Maintenance 1980 to 1982.

John H. Goetsch, 53 Secretary of the Company since -1979; Secretary Secretary of Wisconsin Energy since 1981; Secretary of Wisconsin Natural since 1979.

Richard R. Piltz, 46 Controller of the Company since 1977.

Controller PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS As a result of the corporate restructuring which became effective December 31, 1986 all of the Company's Common Stock is held by Wisconsin Energy. Wisconsin Energy's Common Stock, to which the Company's shares were converted on a share for share basis, is listed on the New York Stock Exchange (trading symbol WEC). As a result of the corporate restructuring, the Company's Common Stock has been delisted from the New York Stock Exchange.

The amount of cash dividends on the Company's Common Stock during the two most recent fiscal years are set forth below.

Quarter Dividend per Share 1986 1 $0.62 2 $0.67 3 $0.67 4 $0.67 1985 1 $0.57 2 $0.62 3 $0.62 4 $0.62

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PARI II ITEM 6. SELECTED FINANCIAL DATA FINANCIAL 1986 1985 1984 1983 1982 (Ihousands of Dollars)

Earnings available for common stockholder $ 148,614 $ 142,561 $ 137,231 $ 123,909 $ 106,317 Operating revenues:

Electric $1,121,267 $1,086,192 $1,091,473 $1,070,405 $ 974,896 Steam 11,895 12,062 11,937 10,653 10,897 Total operating revenues $1,133,162 $1,098,254 $1,103,410 $1,081,058 $ 985,793 T tal assets $2,223,395 $2,065,127 $2,018,670 $2,053,952 $1,936,878 Long term debt and preferred stock-redemption required $ 822,214 $ 663,447 $ 590,783 $ 674,243 $ 719,498 SALES AND CUSTOMERS 1986 1985 1984 1983 1982 Electric Megawatt-hours 1 sold 18,952,796 18,744,323 18,612,449 17,776,847 17,279,680 l Customers (End I of year) 847,761 838,851 830,648 822,119 818,850 Steam Pounds (millions) sold 1,941 2,004 2,023 1,909 2,041 Customers (End of year) 510 517 529 540 543 QUARTERLY FINANCIAL DATA Three Months Ended March June 1986 1985 1986 1985 (Thousands of Dollars)

Total operating revenues $287,633 $284,013 $269,213 $254,041 Operating income $ 56,464 $ 56,097 $ 48,976 $ 38,069 Earnings available for common stockholder $ 41,742 $ 44,431 $ 35,594 $ 26,876 Three Months Ended September December 1986 1985 1986 1985 (Thousands of Dollars)

Total operating revenues $290,165 $282,921 $286,151 $277,279 Operating income $ 52,909 $ 56,155 $ 47,687 $ 48,283 Earnings available for common stockholder $ 38,852 $ 40,883 $ 32,426 $ 30,371 Because of seasonal factors which affect the utility business the quarterly 4 results cf operations are not directly comparable. l The foregoing financial data has been restated for all periods presented to give effect to the corporate restructuring. Earnings and dividends per share cre not provided as all the Company's Common Stock is held by Wisconsin Energy.

Electric Revenue, Kilowatt-Hour Sal &3 and Cu;tomer Sectistic3 Year Ended December 31 1986 1985 1984 1983 1982 OPERATING REVENUES ($000)

Residential $ 403,248 $ 387,514 $ 385,148 $ 386,897 $352,348 Small commercial and industrial 335,277 326,532 326,929 313,784 282,138 Large commercial and industrial 290,639 281,681 287,256 280,535 257,061 Other retail revenues 16,861 16,985 14,088 16,305 19,469 Resale - municipals 61,635 58,651 59,117 60,537 49,263 Total retail and municipals 1,107,660 1,071,363 1,072,538 1,058,058 960,279 Resale public utilities 5,085 7,405 11,311 4,483 6,447 Total revenue from sales 1,112,745 1,078,768 1,083,849 1,062,541 966,726 Other operating revenue 8,522 7,424 7,624 7,864 8,170 Total Operating Revenues $1,121,267 $1,086,192 $1,091,473 $1,070,405 $974,896 KILOWATT-HOUR SALES (Millions)

Residential 5,696 5,573 5,501 5,486' 5,344 Small commercial and industrial 4,948 4,885 4,798 4.539 4,263 Large commercial and industrial 6,409 6,304 6,278 5,950 5,789 Other retail sales 265 271 193 224 290 Resale - municipals 1,419 1,419 1,425 1,430 1,374 Total retail and municipals 18,737 18,452 18,195 17,629 17,060 Resale public utilities 216 292 417 148 220 Total Sales 18,953 18,744 18,612 17,777 17,280 NUMBER OF CUSTOMERS - Average Residential 763,413 756,503 750,38', 743,788 741,286 Small commercial and industrial 76,626 74,856 74,086 73,394 72,375 Large commercial and industrial 620 611 600 599 585 Other 1,995 2,016 1,391 1,404 1,430 Total 842,654 833,986 826,461 819,185 815,676 DECREE DAYS (Milwaukee)

Heating (Normal 7,326) 6,788 7,324 6,835 7,203 7,486 Cooling (Normal 470) 557 639 716 895 421 l

i ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Earnings for the Company increased to $148,614,000 in 1986 from $142,561,000 in 1985 reflecting primarily higher electric sales and a rate increase for Wisconsin retail electric customers.

Electric kilowatt-hour sales of the Company to retail, municipal and coopera-tive wholesale customers increased 1.5% in 1986 compared to a 1.4% increase in 1985. Electric kilowatt-hour sales to large commercial and industrial customers increased 1.7% in 1986 compared to a less than 1% gain the prior year.

Electric revenues for 1986 reflect an increase in Wisconsin retail electric rates of $33.7 million, or 3.3% on an annual basis, effective January 1, 1986.

This increase followed three rate reductions in the previous two years.

Electric revenues were also affected by the Wisconsin retail electric fuel cost adjustment procedure. This procedure allows the PSCW to adjust Wisconsin retail electric rates if fuel costs are expected to vary above or below a projected annual range. Under this procedure, a fuel adjustment credit of

$16.8 million on an annual basis .2came effective in June 1986 for Wisconsin retail electric customers.

For the three years ended December 31, 1986, kilowatt-hour sales of elec-tricity increased at a compound annual rate of 2.1%. Electric revenues for the same period increased at a compound annual rate of 1.6%. The cost of fuel and purchased power declined 11.3% over this three-year period. Electric rate reductions in 1984 and 1985, along with fuel cost credits for Wisconsin retail electric customers in April 1985 and June 1986, held electric revenues relatively flat. Other electric operating expenses, excluding income taxes and depreciation, increased at a compound rate of 4.5% a year over this period.

Results for 1986 reflect higher taxes other than income taxes due to the transition in Wisconsin public utility taxation in 1985 from an ad valorem to a gross receipts basis.

Assuming forecasted growth in the economy, the Company projects that kilowatt-hour sales of electricity will grow at a compound annual rate of approximately 2% over the five years ending December 31, 1991. This rate of growth anticipates increasing energy conservation by customers.

During December 1986, the PSCW approved a 2.8%, or $28.8 million electric rate decrease effective January 1, 1987 for the Company's Wisconsin retail electric customers. This decrease is based on a 1987 test year with a 13% rate of return on common equity, as determined for rate-making purposes, a reduction fron the previously allowed return of 14.5%. The rate decrease also reflects the estimated impact of the Tax Reform Act of 1986.

A settlement providing for a 4%, $2.3 million rate increase for the Campany's wholesale electric customers became effective on January 1,1986, but this was partially offset a year later when wholesale rates were lowered by $910,000.

In other rate der.isions, a 3.75%, $900,000 increase for Michigan retail electric customers was effective June 3,1986. A steam rate increase of

$786,000 was effective for the Company's steam customers in downtown Milwaukee on August 7, 1986, with a further $752,000 increase to be applied July 1, 1987.

Liquidity and Capital Resources The Company's capital requirements for the three years ended December 31, 1986 totaled $975 million, of which $352 million was for the construction of new or improved facilities, $198 million for the retirement of long term debt, $100 million for payment to an external trust for the eventual decommissioning of the Company's Point Beach Nuclear Plant, $89 million for net deposits with trustees under certain industrial revenue bond financing arrangements, $67 million for acquisition of nuclear fuel, $116 million for purchase of capital stock and $53 million for increases in working capital and other items. Of such capital requirements, $521 million was obtained from internal sources of funds, including depreciation accruals, normalization of investment tax credits and retained earnings. All estimates of such construction program costs exclude the Allowance for Funds Used During Construction.

The remaining $454 million of the Company's capital requirements during this three year period was supplied through the sale and lease back of $87 million of nuclear fuel, short term borrowings of $25 million, the issuance of $328 l million aggregate long term debt of which $185 million was issued during 1986, and $14 million from other sources.

During 1984 and 1985, $79 million was used to purchase 849,898 shares of the Company's $100 par value Serial Preferred Stock and $37 million to purchase i 1,188,500 shares of Common Stock.

The Company is continuing efforts to reduce its overall cost of capital. The 4

Company has called for redemption on April 14, 1987 all the 333,325 outstanding shares of the 8.90% Series Preferred Stock ($100 Par Value) at a redemption price of $101 per share, the 225,810 outstanding shares of the 7.75% Series Preferred Stock ($100 Par Value) at a redemption price of $101 per shares and the 140,967 outstanding shares of the 8.80% Series Preferred Stock ($100 Par Value) at a redemption price of $105.87 per share, together in each case with accrued dividends to the date of redemption. The Company intends to issue on April 14, 1987, 700,000 shares of a new series _of sinking fund 6.75% Series Preferred Stock ($100 Par Value) to provide substantially all the funds required for such redemption. Also, in February 19.87, the Company purchased $31.3 million of its 111/2% Series First Mortgage Bonds.

1 In September 1986, the Company received a $17 million refund (including $3 million of interest) from the State of Wisconsin as settlement of certain 2 claims regarding collection of Wisconsin state ad valorem taxes for the years 1981 through 1984. Such amount has been reflected as a deferred credit on the 4

Company's balance sheet as of December 31, 1986.

The Internal Revenue Service (" IRS") has conducted audits of the Company's open tax years and has determined that tax deficiencies were incurred over several years. As a result of the IRS audits the Company made in December

1986 tax payments to both Federal and State tax at.horities aggregating $73 million, including $37 million of interest of which approximately 50% had previously been accrued. The Company intends to claim the deductions in subsequent years. ,

l The PSCW issued an order on December 30, 1986 for the 1987 test year which authorized the Company to offset the amount of unaccrued interest on such tax payments against the amount of the Wisconsin State ad valorem tax refund, i resulting in a net additional revenue requirement of approxirnately $0.5 i million for which the PSCW has allowed recovery during 1987. Because of the

prior accrual of a portion of the interest, the ad valorem offset and the recording of the tax payment as a timing difference, no significant impact on current earnings is anticipated.

At December 31, 1986, the Company's capitalization, including short term debt and long term debt due currently, consisted of 45% debt, 5% preferred stock and 50% common equity. The Company's short term indebtedness at December 31, 1986 consisted of $25 million of notes payable to an investment company.

Leased nuclear fuel was approximately 3 percent of capitalization. At year end, the Company had $92 million of unused lines of bank credit, $38 million of short term investments, and $90 million of construction funds held by trustees.

The Company estimates that for the five years 1987 through 1991, its capital requirements will total $1,346 million, of which approximately 81% will be required for construction projects. Although it is anticipated that no new power plants will be required until the late 1990s, the Company has announced plans to convert four units at the Oak Creek Power Plant to atmospheric fluidized-bed combustion (AFBC), a new clean-coal technology. In addition, major renovations are planned for the remaining units at Oak Creek and at the Port Washington Power Plant. These plans are designed to extend the units' operating lives, defer the need for construction of new power plants and achieve significant reductions in sulfur dioxide emissions. The cost of these i

planned improvements, including associated operating and maintenance costs, is expected to aggregate approximately $600 million when completed in 1992.

The remaining construction expenditures during the five-year period through 1991 are primarily for additions to and replacement of portions of the distribution and transmission systems, for new service centers and other

! buildings, and for equipment and improvements at existing power plants.

The balance of utility capital requirements during this period is principally j for energy conservation programs, for sinking fund requirements and maturities of long term debt, for changes in fuel inventories, and for payments to a trust for the eventual decommissioning of the Point Beach Nuclear Plant.

During 1987 and 1988, the Company expects internal sources of funds from operations to provide approximately 64% of its capital requirements which are projected at $571 million, including $428 million for construction. The remaining capital requirements for this period are expected to be met principally through reductions of existing cash investments, short term borrowings, and, depending on market conditions, the issuance of up to $100 million of long term debt.

The percentage of funds to be obtained from internal sources during the period 1987-1988 reflects the impact of the Tax Reform Act of 1986 on the Company's opera tions. Elimination of the investment tax credit and modifications to the accelerated cost recovery system will result in lower internal cash generation. The lower corporate tax rates under the act are expected to result in lower utility revenue requirements and lower pretax interest coverages.

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ITEM 8. FINANCIAL STATEMFllTS AND SUPPLEMENTARY DATA WISCONSIN ELECTRIC POWER COMPANY INCOME STATEMENT Year Ended December 31 1986 1985 1984 (Thousands of Dollars)

Operating Revenues Electric $1,121,267 $1,086,192 $1,091,473 Steam 11,895 12,062 11,937 Total Operating Revenues 1,133,162 1,093,254 1,103,410 Operating Expenses Fuel (Note C) 276,663 276,055 284,654 Purchased power 25,627 23,494 38,554 Other operation expenses (Note D) 214,561 200,775 197,012 Maintenance 116,422 116,406 120,052 Taxes other than income taxes 51,738 34,524 52,060 Depreciation (Note E)

Straight line 110,531 116,951 105,507 Deferred income taxes (Note F) 20,056 11,287 7,242 F:daral income tax (Note F) 96,315 94,623 88,500 Investment tax credit adjustments -

net (Note F) (4,237) 5,692 7,588 State income tax (Note F) 19,450 19,843 18,169 Total Operating Expenses 927,126 899,650 919,338 Operating Income 206,036 198,604 184,072 Oth:r Income and Deductions Interest Income 9,485 6,565 14,937 Allowance for other funds used during construction (Note G) 3,744 4,873 11,478 Hiscellaneous - net (711) (4,321) (2,292)

F;deral income tax (Note F) (2,662) (636) (4,922)

State income tax (Note F) (701) (190) (971)

Total Other Income and Deductions 9,155 6,291 18,230 Income Before Interest Charges 215,191 204,895 202,302 Intirest Charges Long term debt 58,216 53,253 56,533 Other interest 2,883 1,984 412 Allowance for borrowed funds used during construction (Note G) (1,682) (1,991) (4,688)

Total Interest Charges 59,417 53,246 52,257 Net Income 155,774 151,649 150,045 Pr:f:rred Stock Dividend Requirement 7,160 9,088 , 12,814 Earnings Available for Common Stockholder $ 148,614 $ 142,561 $ 137,231 See Notes to Financial Statements.

WISCONSIN ELECTRIC POWER COMPANY STATEMENT OF CHANGES IN FINANCIAL POSITION Year Ended December 31 1986 1985 1984 (Thousands of Dollars)

Financial Resources Provided Operations Net income $155,774 $151,649 $150,045 Depreciation - straight line 110,531 116,951 105,507

_ deferred income taxes 20,056 11,287 7,242 Accumulated deferred investment tax credits (5,151) 4.444 6,232 Nuclear fuel expense 1,527 409 6,240 Amortization of precertification expenditures - -

779 Allowance for funds used during construction (5,426) (6,864) (16,166)

Total from operations 277,311 277,876 259,879 Long term debt 183,519 144,432 -

Short term borrowings 767 19,973 4,260 Sale of nuclear fuel 25,799 24,538 36,419 Contributions and advances in aid of construction 1,556 3,110 2,746 Deferred chargas/ credits and other (11,971) 14,882 4,099

$476,981 $484,811 $307,403 Financial Resources Used Construction expenditures $115,086 $122,019 $115,193 Nuclear decocaissioning trust fund 100,095 - -

Nuclear fuel 18,943 22,998 24,433 Dividends 127,843 82,195 83,849 Retirement of long term debt 72,053 77,399 48,734 Purchase of company capital stock - 69,582 46,886 Spent nuclear fuel disposal - 30,185 -

Construction funds held by trustees 79,617 9,069 -

Increase (decrease) in working capital (other than short term borrowings and long term debt due currently) (36,656) 71,364 (11,692)

$476,981 $484,811 $307,403 Increase (Decrease) in Components of Working Capital Cash and temporary cash investments $(45,428) $ 6,677 $(12,921)

Accounts receivable and accrued utility revenues 3,450 (1,498) 11,349 Fossil fuel (5,123) (2,592) (15,457)

Notes receivable from associated companies (16,395) 5,457 (7,395)

Prepayments 1,854 33,202 (145)

Accounts payable and accrued liabilities 10,521 24,096 14,133 Other 14,465 6,022 (1,256)

$(36,656) $ 71,364 $(11,692)

See Notes to Financial Statements.

WISCONSIN ELECTRIC POWER COMPANY-BALANCE SHEET DECEMBER 31 ASSETS 1986 1985 (Thousands of Dollars)'

Utility Plant Electric $2,855,073L $2,756,151 Steam 26,011 22,040 2,881,084 2,778,191 Accumulated provision for-depreciation (1,326,282) (1,219,120) 1,554,802 1,559,071 Construction work in progress 24,745 35,926 Nuclear fuel (Note C) 22,141 28,997 Net Utility Plant 1,601,688 1,623,994 Other Property and Investments Nuclear deconmissioning trust fund (Note E) 100,124 --

Construction funds held by trustees 90,297 10,679 Other 3,815 10,137 Total Other Property and Investments 194,236 20,816 Current Assets Cash 5,989 16,906 Temporary cash investments 38,000 72,511 Accounts receivable, net of allowance for doubtful accounts - $5,573 and $5,084 62,373 57,806 Accrued utility revenues 85,621 86,738 Notes receivable from associated companies (Note H) 6,700 23,095 Fossil fuel (at average cost) 62,459 67,582 Materials and supplies (at average cost) 52,274 47,643 Prepayments 38,996 37,142 Other assets 12,777 2,943 Total Current Assets 365,189 412,366 f

Deferred Charges and Other Assets 62,282 7,951

$2,223,395 $2,065,127 j See Notes to* Financial Statements.

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WISCONSIN ELECTRIC POWER COMPANY BALANCE SHEET DECEMBER 31 LIABILITIES 1986 1985 (ThousandsofDollars) l Capitalization (See Capitalization Statement)

Common stock equity $ 924,175 $ 896,244 l

! Preferred stock 100,461 100,461 Long term debt 822,214 663,447 l

Total Capitalization 1,846,850 1,660,152 Current Liabilities Long term debt due currently (Note J) - 47,277 Notes payable (Note K) 25,000 24,233 Accounts payable 74,752 63,190 Payroll and vacation accrued 18,921 17,806 t Taxes accrued - income and other 24,826 24,388 l Interest accrued 14,720 35,012 Other 3,860 7,204 Total Current Liabilities 162,079 219,110 Deferred Credits and Other Liabilities

, Accumulated deferred investment tax credits 130,742 135,893

Unamortized accrued utility revenues . 2,732 Other 48,319 13,127 Total Deferred Credits and Other Liabilities 179,061 151,752 Contributions in Aid of Construction 35,405 34,113 Commitments and Contingencies (Note L) i $2,223,395 $2,065,127 l

See Notes to Financial Statements.

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WISCONSIN ELECTRIC POWER COMPANY CAPITALIZATION STATEMENT DECEMBER 31 1986 1985 (Thousands of Dollars)

CONN STOCK EQUITY (See Common Stock Equity Statement)

Common stock ($10 par value; authorized 65,000,000 shares; outstanding - 33,289,327 shares) $ 332,893 $ 332,893 Other paid in capital 99,532 99,532 Retained earnings 491,750 463,819 Total Cosmon Stock Equity (Note B) 924,175 896,244 PREFERRED STOCK - Cumulative Six per cent. preferred stock - $100 par valueg authorized 45,000 shares; outstanding - 44,508 shares 4,451 4,451 Serial preferred stock - $100 par values authorized 2,360,000 sharess outstanding -

3.60% series - 260,000 shares 26,000 26,000 8.90% series - 333,325 shares 33,332 33,332 7.75% series - 225,810 shares 22,581 22,581 8.80% series - 140,967 shares 14,097 14,097 Total Preferred Stock (Note 1) 100,461 100,461 IDNG TERM DEBT First mortgage bonds Series Due 3-7/8% 1986 -

20,611 13 3/44 1986 -

26,666 11.40% 1987 -

23,334 4-1/8% 1988 20,929 21,279 5  % 1990 26,605 26,660 4 3/4% 1991 3,570 3,570 4-1/2% 1993 4,985 4,991 5 7/8% 1996 36,942 36,987 6-1/2% 1997 11,386 11,433 6-7/8% 1997 37,629 37,664 6 5/8% 1998 9,772 9,797 6-7/8% 1998 33,394 33,424 6.10 % 1999-2008 25,000 25,000 6.25 % 1999-2008 1,000 1,000 7-1/4% 1999 38,929 38,936 8-3/8% 1999 39,230 39,285 8 1/2% 1999 11,678 11,678 6.45 % 2004 12,000 12,000 8-3/4% 2006 $9,897 59,955 6.45 % 2006 4,000 4,000 6.50 % 2007-2009 10,000 10,000 8-7/8% 2008 79,934 79,958 9-3/4% 2015 46,350 46,350 11-1/2% 2015 100,000 100,000 8 1/2% 2016 100,000 -

713,230 684,578 Itbentures (unsecured) 7% Series due 1993 27,994 28,800 Note (unsecured)

Variable rate due 2016 85,000 -

Unamortised discount net (4,010) (2,654)

Lcng term debt due currently - (47,277)

Total Long Term Debt (Note J) 822,214 663,447 Total Capitalisation $1,846,850 $1,660,152 Ses Notes to Financial Statements.

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WISCONSIN ELECTRIC POWER COMPANY COMON STOCK IQU11T STATDENT 1

l Casunon Stock Common Stock Other Psid Retained Shares $10 Par Value In Capital Total

............ ............. .......... Earnin8.s (2housands of Dollars) ,

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! Belance - December 31, 1983 34,477,827 $344,778 $95,352 $351,%2 $792,072 Net income 150,045 150,045

Cash dividends l Common stock (70,809) (70,809) j Preferred stock (13,040) (13,040) 1 Purchase of cosmon stock (651,800) (6,518) (1,797) (12,001) (20,316)

Purchase of preferred stock (Note I) (1,570) (1,570)

Balance - December 31, 1984 33,826,027 338,260 93,555 404,567 836,382 Net income 151,649 151,649 Cash dividends Common stock (72,673) (72,673)

Preferred stock (9,522) (9,522)

Purchase of common stock (536,700) (5,367) (1,481) (10,202) (17,050)

Purchase of preferred stock (Note I) 7,458 7

........... ........ ....... ........ .... 458...

Balance - December 31, 1985 33,289,327 332,893 99,532 463,819 896,244

! Net income 155,774 155,774 Cash dividends Common stock (113,596) (113,596) l Preferred stock (7,160) (7,160) l i

[ Non cash dividend (7,087) (7,087) r ........... ........ ....... ........ ........

l Balance - December 31, 1986 33,289,327 $332,893 $99,532 $491,750 $924,175 See Notes to Financial Statements.

l WISCONSIN ELECTRIC POWER COMPANY NOTES TO FINANCIAL STATEMENTS A - Summary of Significant Accounting Policies General The accounting records of the company are kept as prescribed by the Federal Energy Regulatory Commission, modified for requirements of the Public Service Commission of Wisconsin (PSCW).

Revenues Meters are read and accounts are billed monthly. 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. Nuclear fuel expensa includes the estimated cost for disposal of spent fuel based on a contract with the U.S. Department of Energy.

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

Replacements of minor items of property are charged to maintenance expense.

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

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

The federal investment tax credit is accounted for on the deferred basis and is reflected in income ratably over the life of the related property.

Debt Premium, Discount and Expense

..._____... 6.....................

Long term debt premium or discount and expense of issuance are amortized by the straight line method over the lives of the debt issues and included as 37

interest exp;nse. Unamortized amounts pertaining to debt reacquired for sinking fund purposes are written off currently.

B - Corporate Restructuring Pursuant to a corporate restructuring plan effective at midnight December 31, 1986, Wisconsin Energy Corporation (WEC) became the sole holder of Wisconsin Electric (WE) common stock and common shareholders of WE became common shareholders of WEC on a share for share basis. As part of the restructuring WE transferred the common stock of Wisconsin Natural Gas Company, Badger Service Company, Wisconsin Michigan Investment Corporation, Wispark Corpora-tion and two inactive subsidiaries to WEC.

The accompanying financial statements give effect to the restructuring for all periods presented. As a result, equity in subsidiary earnings and investment in subsidiary companies have been eliminated. The Company's capital contri-butions of cash in the amount of $44,257,000 and property in the amount of i $7,087,000 to subsidiaries during the period 1984 1986 have been classified as I

dividends.

l C - Rental Expense l

Total rental expense was $36,471,000 in 1986, $39,418,000 in 1985 and

$43,335,000 in 1984. This includes charges of $33,646,000 in 1986,

$36,349,000 in 1985 and $40,569,000 in 1984 relating to the company's nuclear fuel leasing arrangement with Wisconsin Electric Fuel Trust (Trust). The nuclear fuel is leased for a period of 60 months or until the removal of the fuel from the reactor, if earlier. Lease payments include charges for the l cost of fuel burned, financing costs and a management fee. In the event the company or the Trust terminates the lease, the Trust would recover its unamortized cost of nuclear fuel from the company. Under the lease terms, the company is in effect the ultimate guarantor of the Trust's commercial paper and line of credit borrowings financing the investment in nuclear fuel.

l The nuclear fuel lease has been treated as an operating lease in the financial i

statements and by the PSCW in determining revenue requirements. The value of the leased fuel is not included in the company's rate base. Had the lease been accounted for as a capital lease, an asset and corresponding liability equal to the unamortized cost of the leased nuclear fuel would have been recorded at December 31 in the amounts of $48,344,000 in 1986 and $51,445,000 in 1985.

D - Pension Plans l

Several noncontributory pension plans cover all eligible employees. Normal employee pension cost is accrued and funded currently. Unfunded prior service liability is amortized over periods from ten to thirty years. Pension expense was $3,400,000 in 1986, $6,567,000 in 1985 and $10,944,000 in 1984.

Pension expepse decreased in 1986 by approximately $3.2 million as a result of a change in the investment rate of return assumption from 7.5% in 1985 to 8.0%

in 1986 and an increased return on plan assets offset in part by a retiree increase granted on July 1,1986 and by negotiated plan changes occurring in 1986. In 1985 pension expense decreased approximately $4.2 cillion as a result of a change in the actuarial asset valuation method from the spread gain method which recognizes gains and losses over a five year period, to a current market value method, which gives immediate recognition to the year end asset value.

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

December 31 1986 1985 (Thousands of Dollars)

Actuarial present value of accumulated plan benefits:

Vested benefits $198,180 $182,768 Nonvested benefits 6,182 5,556

$204,362 $188,324 33333333 3535353E Net plan assets $312,812 $279,216 555E3333 33333333 The weighted average rate of return used in determining the actuarial present value of accumulated plan benefits was 8.0% in 1986 and 7.5% in 1985.

E _ Depreciation Depreciation expense is accrued at straight line rates, certified by the PSCW, which include estimates of salvage and plant removal costs. Nuclear plant decommissioning is accrued as depreciation expense. In December 1985 the PSCW issued an order changing the accounting and funding methods for nuclear power plant decommissioning. In 1986 the company changed from a straight line negative salvage method with internal funding to an external sinking fund method. In December 1986, WE placed $100,095,000 which is equal to the December 31, 1986 accumulated provision for the eventual decommissioning, in an external trust fund.

Additional depreciation is accrued, in accordance with the PSCW requirements, which is equal to the tax effects of timing differences related to property and nuclear fuel including principally the use of accelerated depreciation methods for federal tax purposes in 1986 and 1985 and for federal and state tax purposes in 1984 (see Note F).

Straight line depreciation as a percent of average depreciable utility plant was 4.2% in 1986, 4.8% in 1985 and 4.9% in 1984.

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

1986 1985 1984 (ThousandsofDollars)

Current tax expense $119,128 $115,292 $112,562 Investment tax credit adjustments -

net (4,237) 5,692 7,588 Deferred taxes charged to ,

depreciation expense 20,056 11,287 7,242 Total tax expense hib4,94h h5bh hhi hihh,b9h Income before income taxes $290,721 $283,920 $277,437 Expected tax at federal statutory rate S133,731 $130,603 $127,622 l Allowance for funds used during construction (2,496) (3,157) (7,437)

State income tax net of federal tax  !

reduction 9,832 9,763 11.026 Investment tax credit restored (8.233) (7,455) (6,357)

Other (no item over 5% of expected tax) 2,113 2,517 2,538 Total tax expense $134,947 $132,271 $127,392 The aggregate amount of deferred income taxes included in the accumulated provision for depreciation at December 31 was $258,369,000 in 1986 and

$238,368,000 in 1985. Beginning in 1985, accumulated deferred state income tax of $19,099,000 at December 31, 1984 is being recorded as a reduction to deferred tax expense in equal amounts over an 18 year period as prescribed by the PSCW. At December 31, 1986, the cumulative amount of timing differences for which deferred income taxes have not been provided was approximately $83 million for federal tax purposes and $180 million for state tax purposes. Any tax effect of this amount is expected to be recovered through future utility rates.

G - Allowance for Funds Used During Construction (AFDC)

AFDC is included in utility plant accounts and represents the cost of borrowed L

funds used during plant construction and a rate of return on stockholders' i l capital used for construction purposes. On the income statement the cost of I borrowed funds (before income taxes) is a reduction of interest expense and l the return on stockholders' capital is an item of noncash other income.

AFDC was capitalized at a rate of 11.79% in 1986,11.15% in 1985 and 7% in 1984 as approved by the PSCW.

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H - 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. The company also buys gas from Wisconsin Natural for electric generation at rates approved by the PSCW. To take advantage of the company's access to short term funds at a lower cost than that available to Wisconsin Natural, the company .nakes loans to Wisconsin Natural at an interest rate approximating the cost to the company.

I - Preferred Stock In 1985 the company purchased and retired a total of 459,033 shares of 8.80%

Series, 66,675 shares of 8.90% Series and 74,190 shares of 7.75% Series, $100 par value Serial Preferred Stock at an aggregate cost of $52,532,000.

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

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

Series Redemption Price Per Share 3.60% $101 8.90% $101 7.75% $101 8.80% $105.87 to January 1, 1989; $102.94 to January 1, 1994 and

$101 thereaf ter Serial Preferred Stock authorized but unissued is cumulative, $25 par value, 5,000,000 shares and $100 par value, 550,000 shares.

J . Long Term Debt The maturities and sinking fund requirements through 1991 for the aggregate amount of long term debt outstanding at December 31, 1986 are shown below. Of the annual sinking fund requirements, $3,690,000 may be satisfied by certifying additional mortgaged property.

1987 $ 5,190,000 1988 25,819,000 1989 4,890,000 1990 31,495,000 1991 8,160,000 Future sinking fund requirements have been anticipated by advance purchases of bonds to the extent of $1,575,000.

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

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K - Notes Payable Short-term notes payable consisted of a $25,000,000 note with an investment company at December 31, 1986 and $24,233,000 of commercial paper at December 31, 1985. Unused lines of credit for short term borrowing amounted to

$91,600,000 at December 31, 1986. In support of various informal lines of credit from banks, the company has agreed to maintain unitstricted compen-sating balances. With the exception of funds required for daily operations, the cash balance shown on the balance sheet at December 31, 1986 represents compensating balances.

L . Commitments and Contingencies l

Plans for the construction and financing of future additions to utility plant can be found elsewhere in this report in " Management's Discussion and Analysis of Financial Condition and Results of Operations".

M - Information by Segments of Business 1986 1985 1984 Year ended December 31 (ThousandsofDollars) i

Electric Operations Operating revenues $1,121,267 $1,086,192 $1,091,473 Operating income before income taxes 335,754 328,003 303,049 I Depreciation - straight line 109,819 116,289 104,853

! Construction expenditures 109,919 118,171 112,996 l

l Steam Operations

! Operating revenues 11,895 12,062 11,937 Operating income before income taxes 1,866 2,046 2,522 Depreciation - straight line 712 662 654 Construction expenditures 3,867 1,604 345 Total Operating revenues 1,133,162 1,098,254 1,103,410 Operating income before income taxes 337,620 330,049 305,571 Depreciation - straight line 110,531 116,951 105,507 Constructionexpenditures(including nonutility) 115,086 122,019 115,193 At December 31 Net Identifiable Assets Electric $2,204,143 $2,042,215 $1.998,697 Steam 16,663 14.040 13,029 Nonutility 2,589 8,872 6,944 l Total Assets $2,223,395 $2,065,127 $2,018,670 l

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REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and the Stockholders of Wisconsin Electric Power Company In our opinion, the financial statements listed under Item 14.(a) 1. and 2. on pages 44 and 45 herein present fairly the financial position of Wisconsin Electric Power Company at December 31,198G and 1985, and the results of its operations and the changes in its financini position for each of the three years in the period ended December 31, 1986, in conformity with generally accepted accounting principles applied on a consistent basis after restatement for the change, with which we concur, to give effect to the corporate restruc-turing as described in Note B to the financial statements. Our examinations of these statements were made in accordance with generally accepted auditing standards and accordingly included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.

PRICE WATERHOUSE Milwaukee, Wisconsin January 28, 1987 ,

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ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE <

None. .

PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT In accordance with General Instruction G(3) of Form 10-K, the information in '

"Information Concerning Nominees and Other Directors", " Nominees for Class III Directors", " Class I Directors Continuing in Office" and " Class II Directors Continuing in Office", appearing on pages 5-7 of the Company's definitive Information Statement to be dated April 20, 1987 is incorporated herein by l reference. Also see " Executive Officers of The Registrant" in Part I of this F report.

ITEM 11. EXECUTIVE COMPENSATION l

In accordance with General Instruction G(3) of Form 10-K, the information in

" Compensation" appearing on pages 9-12 of the' Company's definitive Information Statement to be dated April 20, 1987, is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT In accordance with General Instruction G(3) of Form 10-K, the information in

" Nominees for Class III Directors", " Class I Directors Continuing in Office",

and " Class II Directors Continuing in Office", appearing on pages 5-7 of the Company's definitive Information Statement to be dated April 20, 1987 is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS L None, j PART IV ITEM 14. EXHIBITS, FINtNCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)1.FinancialStatementsandReportofIndependentAccountants included in Part II of this report:

Income Statement for the three years ended December 31, 1986 Statement of Changes in Financial Position for the three years ended December 31, 1986 l Balance Sheet at December 31, 1986 and 1985 f

Capitalization Statement at December 31, 1986 and 1985 Common Stock Equity Statement for the three years ended December 31, 1986 f l Notes to Financial Statements ,

Report of Independent Accountants 44 i l

l i

'l

2. Financial Statement Schedul:s l l

Included in Part IV of this report:

For the three years ended December 31, 1986 Schedule V Property, Plant and Equipment Schedule VI Accumulated Depreciation, Depletion, and Amortization of Property, Plant and Equipment Schedule IX Short Term Borrowings Schedule X Supplementary Income Statement Information l As of December 31, 1986 Guarantees of Securities of Other Schedule VII Issuers Other schedules are omitted because of the absence of conditions '

under which they are required or because the required information is given in the financial statements or notes thereto. 1 l

3. Exhibits Exhibit No.

(4)-25 Conformed Twenty-Fifth Supplemental Indenture of the Company dated December 15, 1986. L (28)-1 Consent of Independent Accountants, dated March 27, 1987 appearing on page 53 of this Annual Report on l Form 10-K for the year ended December 31, 1986. ,

I l In addition to those Exhibits shown above, the Company hereby incorporates the

following Exhibits pursuant to Exchange Act Rule 12b-32 and Regulation Section 201.24 by reference to the filings set forth below:

(3)-1 Bylaw of Wisconsin Electric Power Company, as amended January 28, 1987. (Exhibit (4)-1 to the Company's Registration Statement on Form S 3, File No. 33-12058) 2 Restated Articles of Incorporation dated May 22, 1985. (Exhibit (3)-1totheCompany'sForm10-QforthequarterendedSeptember30, 1985inFlieNo.1-1245)

Mortgage or Supplemental

Indenture Company Date Exhibit # Under File No.

(4)- 1 Mortgage and Wisconsin 10/28/38 B-1 2-4340 Deed of Trust Electric

("WE")

2 Second WE 6/1/46 7-C 2-6422 3 Third WE 3/1/49 7-C 2-8456 4 Fourth WE 6/1/50 7-D 2-8456 5 Fifth WE 5/1/52 4-G 2-9588 l 6 Sixth WE 5/1/54 4-H 2-10846 l

7 Seventh WE 4/15/56 4-1 2-12400 8 Eighth WE 4/1/58 2-I 2-13937 l 9 Ninth WE 11/15/60 2-J 2-17087 10 Tenth WE 11/1/66 2-K 2-25593 11 Eleventh WE 11/15/67 2-L 2-27504 12 Twelfth WE 5/15/68 2-M 2-28799 1

13 Thirteenth WE 5/15/69 2-N 2-32629

)

14 Fourteenth WE 11/1/69 2-0 2-34942 i 15 Fifteenth WE 7/15/76 2-P 2-54211 l 16 Sixteenth WE 1/1/78 2-Q 2-61220 17 Seventeenth WE 5/1/78 2-R 2-61220 18 Eighteenth WE 5/15/78 2-S 2-61220 19 Nineteenth WE 8/1/79 (a)2(a) 1-1245(9/30/79 Form 10-Q) 20 Twentieth WE 11/15/79 (a)2(a) 1-1245(12/31/79 Form 10-K)

! 21 Twenty-First WE 4/15/80 (4)-21 2-69488 i 22 Twenty-Second WE 12/1/80 (4)-1 1-1245(12/31/80 '

i Form 10-K) 23 Twenty-Third WE 9/15/85 (4)-1 1-1245(9/30/85 Form 10-Q) 24 Twenty-Four WE 9/15/85 (4)-2 1-1245(9/30/85

) Form 10-Q) 26 Mortgage and Wisconsin 7/15/36 2-Al 2-61220

! Deed of Trust Michigan

("WM")

i 27 Supplemental Indenture WM 12/15/37 2-C1 2-61220 1

28 Third WM 4/1/48 2-01 2-61220 29 Fourth WM 2/1/50 2-El 2-61220 30 Fifth WM 10/1/51 2-F1 2-61220 31 Sixth WM 10/15/54 2-G1 2-61220 32 Seventh WM 11/1/59 2-H1 2-61220 l 33 Eighth WM 11/15/61 2-11 2-61220 34 Ninth WM 4/1/63 2-J1 2-61220 35 Tenth WM 8/1/66 2-K1 2-61220

, 36 Eleventh WM 8/15/67 2-L1 2-61220 37 Twelfth WM 10/1/68 2-M1 2-61220 38 Thirteenth WM 9/15/69 2-N1 2-61220 39 Fourteenth WM 10/15/70 2-01 2-61220 40 Fifteenth WM 11/15/77 2-P1 2-61220 41 Sixteenth WM 12/31/77 2-Q1 2-61220 l

x (10)-l' Supplemental BInefits Agr;ement betwe:n the Company-and employee Robert H. Gorske dated March 16, 1984. (Exhibit (10)-1 to the Company's 1984 Form'10-K in File No. 1-1245)

-2 Supplemental Benefits Agreement between the Company and employee -

Sol Burstein dated April 29, 1976. (Exhibit (10)-3 to the Company's 1980 Form-10-K in File No. 1-1245)

'3 Supplemental Benefits Agreement between the Company and employee John W. Boston dated April 4, 1983. (Exhibit (10)-1tothe Company's 1983 Form 10-K in File No. L1-1245) 4 . Director's Deferred Compensation Plan of Wisconsin Electric Power Company, effective January 1,1987. (Exhibit (10)-(b)to-the Company's Form 8-K dated January 2, 1987 in File No. 1-1245)-

5 Executive Deferred Compensation Plan of Wisconsin Electric Power -

Company system.- restated as of January 25, 1984. (Exhibit (10)-2 to the Company's 1983 Form 10-K-in File No.1-1245) 6 Form of Director's Compensation Short-Term Deferral Agreement of Wisconsin Electric-Power Company.- (Exhibit (10-(c)totheCompany's Form 8-K dated January 2, 1987 in File No. 1-1245).

7 Service Agreement between Wisconsin Electric Power Company, Wisconsin C

Energy (10)- (a)orporation andForm to the Company's other8-K non-utility dated January affiliated companies 2, 1987 in File No.(Exhibit 1-1245)

All agreements and instruments with respect to 1ong term' debt not exceeding 10% of the assets of the Registrant have been omitted as- -

permitted by related instructions. The Registrant agrees pursuant to Item 601(b)(4) of Regulation S-K to furnish to the Securities and Exchange Comission, upon request, a copy of all such agreements and instruments.

(b) Reports on Form 8-K The Company filed a report on Form 8-K dated December 11, 1986 discussing developments in its 1987 rate proceedings with the Public Service Com-mission of Wisconsin and the issuance of its First Mortgage Bonds, 8 1/2% Series due 2016.

Another report on Form 8-K dated January 2,1987 was filed by the Company reporting the completion of the corporate restructuring at year end 1986.

Another report on Fonn 8-K dated March 20,1987 was filed by the Company providing audited financial statements giving effect to the corporate restructuring.

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, WISCCESIN ELECTRIC POWER COMPANY

% SCHEDULE V - PROPER 1T, PLANT AND EQUIPMENT (Note A)

DECEMBER 31.,

• Col. A Col. F Classification 1986 -

1985. 1984 (Thousands of Dollars)

Electric Utilitj Plant Production Plact $1,486,363 $1,470,729 $1,045,862 Transmission Plant 209,295 215,207 206,771 Distribution Plant 952,249 915,784 871,209 General Plant 200,215 147,817 140,862 Proprey Held for Future Use 6,951 6,614 6,354 Work in Progress 24,738 35,632 414,495

'" Total Electric Utility Plant 2,879,811 2,791,783 2,685,553 Steap Utility Plant

Distilbution Plant 25,559 21,700 20,195 General Plant 452 340 312 Work in Progress 7 .. 294 267 Total Steam Utility Plant 26,018 22,334 20,774 Nuclear Fuel 22,141 28,997 30,537 Total Utility Plant 2,927,970 2,843,114 2,736,864 Nonutility Property 3,609 10,227 8,191 Total Property and Plant $2,931,579 $2,853,341 $2,745,055 s s i =

Note A . Neither total additions nor total retirements in 1986, 1985 or 1984 amounted to nore than 10% of the total property balances at December 31, of the respective year. All additions were for ordinary exten-sions and irprovements of the system. Total additions including Allowance for Funds Used During Construction of $S,426,000 in 1986,

$6,864,000 in 1985, and $16,166,000 in 1984, retirements and other changer are shown below.

1986 1985 1984 Total Additions t $139,455,000 $151,881,000 $155,792,000 Total Retirements 35,418,000 19,057,000 18,266,000 Total hter Changes (25,799,000) (24,538,000) (36,419,000)

In 1986,11985 and 1984 total other changes is the sale of nuclear fuel to E consin Electric Puel Trust.

Depreciation i.

Depreciation expensa.is accrued at straight-line rates certified by the PSCW.

Average depreciatiote rates we:S 4.2% in 1986, 4.8% in 1985 and 5.0% in 1984 for electric utilf ry plant, and 3.2% in 1986 and 1985 and 3.3% in 1984 for stesa utility plant.

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l l WISCONSIN ELECTRIC POWER COMPANY SCHEDULE VI - ACCLHULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMEhT (Thousands of Dollars)

Col. A Col. B Col. C Col. D Col. E Col. F Additions Other Balance at Charged to Changes- Balance at l Beginning Costs and Add End of Description of Period Expenses Retirements (Deduct) Period (Note A)

Year Ended December 31, 1986:

Accumulated Depreciation Electric Utility $1,208,612 $129,646 $29,018 $5,678 (B)

(394)(D) $1,314,524 Steam Utility 10,508 887 (34 6) 17 (B) 11,758 Total Utility 1,219,120 130,533 28,672 5,301 1,326,282 Nonutility Property 1,355 -

835 105 (C) 394 (D) 1,019 Total $1,220,475 $130,533 $29,507 $5,800 $1,327,301 Year Ended December 31, 1985:

Accumulated Depreciation Electric Utility $1,090,730 $128,615 $15,847 $5,117 (B)

(3)(D) $1,208,612 Steam Utility 9,786 761 56 17 (B) 10,508 Total Utility 1,100,516 129,376 15,903 5,131 1,219,120 Nonutility Property 1,247 -

12 117 (C) 3 (D) 1,355 Total $1,101,763 $129,376 $15,915 $5,251 $1,220,475 Year Ended December 31, 1984:

Accumulated Depreciation Electric Utility $ 989,717 $115,794 $20,568 $5,786 (B) 1 (D) $1,090,730 Steam Utility 9,115 746 91 16 (B) 9,786 Total Utility 998,832 116,540 20,659 5,803 1,100,516 Nonutility Property 2,433 -

1,286 101 (C)

(1)(D) 1,247 Total $1,001,265 $116,540 $21,945 $5,903 $1,101,763 Notes: A - Af ter deduction of net salvage from property retired.

B - Charged to clearing accounts.

C - Charged to nonoperating rental income.

D - Transfers between electric utility, steam utility and nonutility property.

.WISCONSIN, ELECTRIC POWER COMPANY '

SCHEDULE VII - GUARANTEES OF SECURITIES OF OTHER ISSUERS DECEMBER 31, 1986 Column A Column B Column C Column D Amount Owned By Person or Name of Issuer of Title of Issue - Total Amount Persons for Securities Guaranteed of Each Class of Guaranteed Which By Person for ihich Securities and Statement is Statement is Filed Guaranteed Outstanding Filed Wisconsin Electric Cossnercial $55,430,000 (a)(b) ---

Fuel Trust Paper Column E Column F Column C Name of any Default Amount in By Issuer of Securities Treasury of Guaranteed in Principal, Issuer of Interest, Sinking Fund Securities Nature of or Redemption Provisions, Guaranteed Guarantee or Payments of Dividends Principal, ---

interest and other financing costs (c)

(a) The Wisconsin Electric Fuel Trust owns nuclear fuel financed by the sale of commercial paper. The nuclear fuel is leased to the Company. The cossnercial paper is backed by a revolving line of bank credit.

(b) A maximum of $75,000,000 of obligations may be incurred.

(c) Principal, interest and other financing costs of borrowings are guaran-teed through rent payments by the Company under a nuclear fuel lease agreement and are further guaranteed by a group of banks which will loan money if needed if payments by the Company are not sufficient. The line of revolving bank credit would be generally available to finance the trust's ownership for a perio of three years if the trust were unable to d

sell its commercial paper. L.c Company is in effect the ultimate guarantor of the commercial paper and ch ravolving line of bank credit.

t WISCONSIN EIECTRIC POWER COMPANY SCHEDULE IX - SHORT TERM BORROWINGS (Thous:nds cf Dollars)

Col. A Col. B Col. C Col. D Col. E Col. F Maxiom Average Weighted Weighted Amount Amount Average Balance at Average Outstanding Outstanding Interest Category of Aggregate End of Interest During the During the Rate During Short Term Borrowings Period Rate Period Period the Period (Note A) (Note B)

Y;ar 1986 Notes payable to investment company $25,000 7.55% $25,000 $15,658 6.87%

Commercial paper - -

49,752 17,606 7.81%

Y2ar 1985 Commercial paper $24,233 8.40% $59,982 $19,800 8.22%

Y:ar 1984 Commercial paper $ 4,260 11.75% $ 4,260 $ 1,204 11.19%

Note A - Based on daily amounts outstanding.

Note B - The weighted average interest rate was derived by relating short term interest expense to average short term loans outstanding.

WISCONSIN ELECTRIC POWER COMPANY l

SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION Col. A ' Col. B Charged to Costs and Expenses Item 1986 1985 1984 (Thousands of Dollars)

Taxes other than payroll and income taxes Wisconsin ad valorem tax $ -

$- .$36,078 Wisconsin license fee tax 33,921 17,323 -

Michigan real estate and personal property tax 2,160 2,570 2,422 Various 2,244 2,264 '1,858 -

$38,325 $22,157 $40,358

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Note - Maintenance expense and depreciation are shown on the Income State-ment. No royalties were paid and advertising costs did not exceed 1%

of revenues.

e CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Prospectus constituting part of the Registration Statement on Form S-3 (No. 33-12058) of Wisconsin Electric Power Company of our report dated January 28, 1987 appearing on page 43 of this Form 10-K.

PRICE WATERHOUSE Milwaukee, Wisconsin March 27, 1987 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of-1934, the Registrant-has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

WISCONSIN ELECTRIC POWER COMPANY s/ C. S. McNeer By -------.-------------_-_.-------_----

Date March 27, 1987 (C. S. McNeer, Chairman of the Board and Chief Executive Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Signature and Title .

Date s/ C. S. McNeer (C. S. McNeer, Chairman of the Board and Chief March 27, 1987 Executive Officer and Director - Principal Executive Officer) s/ R. W. Britt (R. W. Britt, President and Chief Operating March 27, 1987 OfficerandDirector) s/ J. G. Remmel (J. G. Remmel, Vice President and Treasurer - March 27, 1987 Principal Financial Officer) s/ R. R. Piltz (R. R. Piltz, Controller - Principal Accounting March 27,1987 Officer) s/ J. F. Bergstrom (J. F. Bergstrom, Director) March 27,1987 s/ Sol Burstein (Sol Burstein, Director) March 27, 1987 i

1 Signature and Title Date s/ J. F. Heil, Jr.

(J. F. Heil, Jr., Director) March 27, 1987 s/ J. L. Murray (J. L. Murray, Director) March 27, 1987 s/ M. W. Reid (M. W. Reid, Director) March 27, 1987 s/ F. P. Stratton, Jr.

(F. P. Stratton, Jr. Director) March 27, 1987 s/ J. G. Udell (J. G. Udell, Director) March 27, 1987

WISCONSIN ELECTillC POWEllCOMPANY 231 WEST AllClllGAN STREET P.O. BOX 2046 BULX MAIL

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hilLWAl*KEE, WISCONSIN 53201 U.S. POSTAGE PAID Milwaukee, Wis.

Permit No. 435 g

O Wisconsin Electnc POWER COMPANY.