UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
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[_] Soliciting Material Pursuant to (S) 240.14a-11(c) or (S) 240.14a-12
Wisconsin Energy Corporation
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(Name of Registrant as Specified In Its Charter)
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Notes:
Reg. (S) 240.14a-101.
SEC 1913 (3-99)
[LOGO] Wisconsin Energy
Corporation
Wisconsin Energy Corporation
.. Notice of 2002 Annual Meeting of Stockholders
.. Proxy Statement
.. Annual Financial Statements & Review of Operations
[LOGO]
Wisconsin Energy
Corporation Wisconsin Energy Corporation
231 W. Michigan St.
Milwaukee, WI 53203
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
March 20, 2002
To the Stockholders of Wisconsin Energy Corporation:
You are cordially invited to attend the 2002 Annual Meeting of Stockholders.
The meeting will be held in Milwaukee, Wisconsin as follows:
Thursday, May 2, 2002
10:00 a.m., Central Time
U.S. Cellular Arena
500 West Kilbourn Avenue
Milwaukee, WI 53203
A map showing the location of the meeting is on your proxy card.
During the meeting, stockholders will be asked to:
1. Elect three directors for terms expiring at the 2005 Annual Meeting of
Stockholders,
2. Consider a stockholder proposal, if presented to the meeting, and
3. Consider any other matters which may properly come before the meeting.
Stockholders of record at the close of business on March 6, 2002 are entitled
to vote. Your vote is important. You may vote using the Internet, by telephone,
or by returning the proxy card in the envelope provided. Instructions for
voting via the Internet or by telephone are included on your proxy card.
Internet and telephone voting are convenient and will help us reduce costs.
The following pages provide additional details about the meeting as well as
other useful information.
By Order of the Board of Directors
/s/ Kristine Rappe
Kristine Rappe
Corporate Secretary
TABLE OF CONTENTS
Page
----
Notice of Annual Meeting of Stockholders
Proxy Statement
Item 1: Election of Directors..................................... 1
Item 2: Stockholder Proposal...................................... 3
Other Matters..................................................... 4
Voting of Shares.................................................. 4
Independent Public Accountant..................................... 5
Corporate Governance.............................................. 6
Audit and Oversight Committee Report.............................. 8
Compensation of the Board of Directors............................ 9
Compensation Committee Report on Executive Compensation........... 10
Executive Officers' Compensation.................................. 13
Employment and Severance Arrangements............................. 15
Retirement Plans.................................................. 16
Wisconsin Energy Corporation Common Stock Ownership............... 18
Section 16(a) Beneficial Ownership Reporting Compliance........... 19
2003 Annual Meeting............................................... 19
Performance Graph................................................. 20
Availability of Form 10-K......................................... 20
Appendices
Appendix A: Audit and Oversight Committee Charter................. A-1
Appendix B: Annual Financial Statements and Review of Operations.. B-1
PROXY STATEMENT
This proxy statement is being furnished to stockholders beginning on or about
March 20, 2002, in connection with the solicitation of proxies by the Wisconsin
Energy Corporation ("WEC") Board of Directors to be used at the Annual Meeting
of Stockholders on May 2, 2002, at the U.S. Cellular Arena, 500 West Kilbourn
Avenue, Milwaukee, Wisconsin, and at all adjournments or postponements of the
meeting, for the purposes listed in the preceding Notice of Annual Meeting of
Stockholders.
ITEM 1: ELECTION OF DIRECTORS--TERMS EXPIRING IN 2005
The WEC Bylaws provide that the directors be divided into three classes, as
nearly equal in size as possible. The term of one class expires each year. The
terms of Directors Richard A. Abdoo, John F. Ahearne and George E. Wardeberg
expire at the 2002 Annual Meeting.
Directors Abdoo, Ahearne and Wardeberg have been nominated by the Board to
serve for terms expiring at the 2005 Annual Meeting of Stockholders and until
their respective successors are duly elected and qualified. Each nominee has
consented to being nominated and to serve if elected. In the unlikely event
that any nominee becomes unable to serve for any reason, the proxies will be
voted for a substitute nominee selected by the WEC Board upon the
recommendation of the Nominating and Board Affairs Committee.
The Board of Directors recommends that you vote FOR director nominees Richard
A. Abdoo, John F. Ahearne and George E. Wardeberg.
Biographical data regarding each nominee and each continuing director is shown
below. Ages are as of March 20, 2002.
Nominees for Terms Expiring in 2005
-----------------
[PHOTO] Richard A. Abdoo. Age 58. Chairman of the Board, President and Chief Executive Officer of WEC
Richard Abdoo since 1991. Chairman of the Board and Chief Executive Officer of Wisconsin Electric Power Company,
WEC's subsidiary, since 1990. Chairman of the Board and Director of Wisconsin Gas Company, WEC's
subsidiary, since April 2000. Director of WEC since 1988. Director of Wisconsin Electric since 1989.
Director of AK Steel Holding Corporation, Cobalt Corporation (formerly known as United Wisconsin
Services, Inc.), Marshall & Ilsley Corporation and Sensient Technologies, Inc.
-----------------
[PHOTO]
John Ahearne John F. Ahearne. Age 67. Director of the Ethics Program for the Sigma Xi Center for Sigma Xi, The
Scientific Research Society, an organization that publishes American Scientist, provides grants to
graduate students and conducts national meetings on major scientific issues, since 1999. Executive
Director of Sigma Xi from 1989 to 1997, and Director of Sigma Xi Center from 1997 to 1999. Adjunct
Scholar of Resources for the Future, an economic research, non-profit institute, since 1993. Lecturer and
Adjunct Professor, Duke University, since 1995. Commissioner of the United States Nuclear Regulatory
Commission from 1978 to 1983, serving as its Chairman from 1979 to 1981. Member, National Academy
of Engineering. Director of WEC and Wisconsin Electric since 1994. Director of Wisconsin Gas since
April 2000.
[PHOTO]
George Wardeberg George E. Wardeberg. Age 66. Vice Chairman of the Board of WEC, Wisconsin Electric and
Wisconsin Gas and Director of WEC and Wisconsin Electric since April 2000. Director of WICOR and
Wisconsin Gas since 1992. Mr. Wardeberg also held numerous positions with WICOR and its
subsidiaries, including CEO of WICOR from 1994 to April 2000. Mr. Wardeberg served as President of
WICOR from 1994 to 1997 and Chairman of the Board from 1997 to April 2000. Director of Marshall &
Ilsley Corporation and Twin Disc, Inc. Mr. Wardeberg has indicated that he will be retiring as Vice
Chairman of the Board in April 2002, but has indicated his willingness to continue to serve as a director.
1
Directors Continuing in Office--Terms Expiring in 2003
[PHOTO]
John Bergstrom John F. Bergstrom. Age 55. Chairman and Chief Executive Officer of Bergstrom Corporation since
January 1997, and President and Chief Executive Officer of Bergstrom Corporation from 1974 through
1996. Bergstrom Corporation owns and operates numerous automobile sales and leasing businesses.
Director of WEC since 1987. Director of Wisconsin Electric since 1985. Director of Wisconsin Gas since
April 2000. Director of Bergstrom Corporation, Banta Corporation, Kimberly-Clark Corporation,
Midwest Express Holdings, Inc., Sensient Technologies, Inc. and The Green Bay Packers.
[PHOTO]
Barbara Bowles Barbara L. Bowles. Age 54. Chairman and Chief Executive Officer of The Kenwood Group, Inc. since
July 2000, and President and Chief Executive Officer from 1989 to July 2000. The Kenwood Group is a
Chicago-based investment advisory firm that manages pension funds for corporations, public institutions
and endowments. Director of WEC and Wisconsin Electric since 1998. Director of Wisconsin Gas since
April 2000. Director of The Black & Decker Corporation, Dollar General Corporation and Georgia-
Pacific Corporation.
[PHOTO]
Willie Davis Willie D. Davis. Age 67. President and Chief Executive Officer of All Pro Broadcasting, Inc. since 1977.
All Pro Broadcasting owns and operates radio stations in Los Angeles and Milwaukee. Director of WEC
and Wisconsin Electric since April 2000. Director of Wisconsin Gas since 1990. Director of WICOR
from 1990 to April 2000. Director of Alliance Bank, Bassett Furniture Industries Inc., Checkers Drive-In
Restaurants, Inc., The Dow Chemical Co., Johnson Controls, Inc., Kmart Corp., MGM Grand Inc., Metro-
Goldwyn-Mayer, Inc., Sara Lee Corporation and Strong Capital Management, Inc.
Directors Continuing in Office--Terms Expiring in 2004
[PHOTO]
Robert Cornog Robert A. Cornog. Age 61. Chairman of the Board of Snap-on Incorporated since 1991. Served as
President and Chief Executive Officer of Snap-on Incorporated from 1991 to his retirement in April 2001.
Snap-on Incorporated is a developer, manufacturer and distributor of professional hand and power tools,
diagnostic and shop equipment, and tool storage products. Director of WEC since 1993. Director of
Wisconsin Electric and Wisconsin Gas since 1994 and April 2000, respectively. Director of Snap-on
Incorporated and Johnson Controls, Inc.
[PHOTO]
Richard Grigg Richard R. Grigg. Age 53. Senior Vice President of WEC since July 2000. President and Chief
Operating Officer of Wisconsin Electric and Wisconsin Gas since 1995 and July 2001, respectively. Vice
President of WEC from 1995 to June 2000. Chief Nuclear Officer of Wisconsin Electric from December
1996 to March 1998. Director of WEC since 1995. Director of Wisconsin Electric since 1994 and
Director of Wisconsin Gas since April 2000.
2
[PHOTO] Frederick P. Stratton, Jr. Age 62. Chairman of the Board of Briggs & Stratton Corporation. Served as
Frederick Stratton Chairman and Chief Executive Officer of Briggs & Stratton Corporation until June 2001. Briggs &
Stratton Corporation is a manufacturer of small gasoline engines. Director of WEC since 1987. Director
of Wisconsin Electric since 1986, and Director of Wisconsin Gas since April 2000. Director of Briggs &
Stratton Corporation, Bank One Corporation, Midwest Express Holdings, Inc. and Weyco Group, Inc.
Shareholder Derivative Lawsuit
On August 21, 2000 and September 29, 2000, two shareholders who had made prior
demands upon Wisconsin Energy Corporation and Wisconsin Electric Power Company
to initiate a shareholder derivative suit against certain officers, directors,
employees and agents as a result of the City of West Allis/Giddings & Lewis
litigation, filed suits on behalf of Wisconsin Energy Corporation shareholders
in Milwaukee County Circuit Court. A special committee of independent directors
of Wisconsin Energy Corporation determined after investigation that a
derivative proceeding was not in the Company's best interests. The Company
agreed to mediation of the matter which resulted in an acceptable proposal to
settle the cases. The settlement agreement calls for WEC to adopt certain
corporate governance measures as well as pay plaintiffs' attorneys' fees
arising out of the lawsuits. In November 2001, the Company mailed notice of the
proposed settlement agreement to shareholders. A final hearing on approval of
the settlement agreement was held on January 25, 2002, at which time the Court
gave final approval to the settlement and dismissed the cases. No shareholders
opposed the settlement at the final hearing.
ITEM 2: STOCKHOLDER PROPOSAL
Information regarding a stockholder proposal is set forth below. WEC disclaims
any responsibility for the content of this proposal and statement of support,
which is presented as received from the stockholder. The affirmative vote of a
majority of the votes cast on the proposal is necessary to approve this
proposal. As discussed below, the Board of Directors recommends that you vote
AGAINST this proposal.
Stockholder Proposal to Declassify the Board
The New York City Employees' Retirement System, 1 Centre Street, New York, New
York 10007-2341, which has indicated that it holds 193,071 shares of WEC common
stock, has given notice of its intention to present the following proposal for
action at the Annual Meeting:
"BE IT RESOLVED, that the stockholders of Wisconsin Energy Corporation request
that the Board of Directors take the necessary steps to declassify the Board of
Directors and establish annual elections of directors, whereby directors would
be elected annually and not by classes. This policy would take effect
immediately, and be applicable to the re-election of any incumbent director
whose term, under the current classified system, subsequently expires."
Proponent's Supporting Statement
"We believe that the ability to elect directors is the single most important
use of the shareholder franchise. Accordingly, directors should be accountable
to shareholders on an annual basis. The election of directors by classes, for
three-year terms, in our opinion, minimizes accountability and precludes the
full exercise of the rights of shareholders to approve or disapprove annually
the performance of a director or directors.
In addition, since only one-third of the Board of Directors is elected
annually, we believe that classified boards could frustrate, to the detriment
of long-term shareholder interest, the efforts of a bidder to acquire control
or a challenger to engage successfully in a proxy contest.
We urge your support for the proposal to repeal the classified board and
establish that all directors be elected annually."
3
Directors' Statement in Opposition to the Stockholder Proposal
After lengthy and careful consideration, the Board of Directors continues to
believe that a staggered board, where approximately one-third of the directors
are elected annually, is in the best interests of WEC and its stockholders.
The Board believes a staggered board helps provide continuity and stability of
WEC's leadership and policies because a majority of the directors at any one
time will have prior experience as WEC directors and in-depth knowledge of WEC.
This system permits directors to more effectively represent the long-term
interests of all stockholders in a variety of circumstances, including
responding to circumstances created by demands or actions by a minority
stockholder or group, proponents of a takeover or restructuring or other
extraordinary corporate action. The Board of Directors believes that the
continuity and quality of leadership that results from a staggered board helps
directors focus on creating long-term value for the stockholders. The proponent
has not provided any evidence, other than its own opinion, to demonstrate that
declassifying the Board would benefit WEC or its stockholders. Over 60% of the
corporations that make up the Standard and Poor's 500 Index have staggered
boards, and the Board knows of no empirical data suggesting that an unstaggered
board is better for stockholders.
Last year, WEC stockholders considered this same proposal requesting that the
Board take steps to seek to end WEC's staggered board. It received the
favorable vote of 55.7% of the shares voting, but only 39.4% of outstanding
shares. WEC's Bylaws require the affirmative vote of 80% of the outstanding
shares to amend the Bylaws to declassify the Board.
For the reasons set forth above, the Board of Directors recommends a vote
AGAINST this Stockholder Proposal.
OTHER MATTERS
The WEC Bylaws set forth the requirements that must be followed should a
stockholder wish to propose any nominations for director or make any other
proposals. The Bylaws state, among other things, that notice and certain
information regarding any nomination or proposal must be provided to WEC at
least 70 days and not more than 100 days before the annual meeting. Since no
such notice has been received, the Board of Directors is not aware of any other
matters that may properly come before the meeting. If any other matters do
properly come before the meeting, the persons named as the proxies in the
accompanying form of proxy will vote the proxy in their discretion.
VOTING OF SHARES
Stockholders of Record. Common stockholders of record at the close of business
on March 6, 2002, are entitled to vote on matters presented at the Annual
Meeting. On that date, there were 114,852,815 shares of WEC common stock
outstanding.
Each outstanding share is entitled to one vote upon each matter presented. A
majority of the votes entitled to be cast by the shares entitled to vote,
represented in person or by proxy, shall constitute a quorum. Abstentions and
shares which are the subject of broker non-votes will count toward establishing
a quorum. A list of stockholders of record entitled to vote at the meeting will
be available for inspection by stockholders at WEC's principal business office
at 231 West Michigan Street, Milwaukee, Wisconsin, prior to the meeting. The
list will also be available on the day of the Annual Meeting at the meeting
site.
Stockholders whose shares are held in the name of a broker, bank or other
holder of record are invited to attend the meeting, but may not vote at the
meeting unless they have first obtained a proxy, executed in the stockholder's
favor, from the holder of record.
Multiple Stockholders Sharing the Same Address. In accordance with notices sent
to stockholders with multiple accounts at the same address, or multiple
stockholders at the same address, we are sending a single annual report and
proxy statement to that address unless we received instructions to the
contrary. Each stockholder, however, will continue to receive a separate proxy
card. This practice, known as "Householding," is designed to reduce our
printing and postage costs. If you wish to receive separate copies of the
annual report and proxy statement now or in the future, or to discontinue
Householding entirely, you may call our transfer agent, EquiServe, at
1-800-558-9663, or provide written instructions to EquiServe, P.O. Box 43004,
Providence, RI 02940.
If you receive multiple copies of the annual report and proxy statement, you
may contact our transfer agent, EquiServe, at 1-800-558-9663 to request
Householding. If your shares are held through a bank, broker or other holder of
record, you may request Householding by contacting the holder of record.
4
Voting by Proxy. You may vote in person or by properly appointed proxy.
Electronic proxy voting by stockholders of record is also valid under Wisconsin
law. As a convenience to you and as a step toward reducing costs, we are
providing you with the option to vote by proxy via the Internet or via
toll-free touch-tone telephone. You may still, however, cast your vote by
returning your signed and dated proxy card.
Specific instructions to vote electronically are listed on your proxy card or
the information forwarded by your bank or broker. These procedures are designed
to authenticate your identity as a stockholder and to allow you to confirm that
your instructions have been properly recorded. Please be aware that if you vote
over the Internet, you may incur costs such as telephone and Internet access
charges for which you will be responsible. The Internet and telephone voting
facilities will close at 10:00 a.m. Central Time on May 2, 2002.
You may revoke your proxy by voting in person at the meeting, by written notice
to WEC's Corporate Secretary, or by executing and delivering a later-dated
proxy via the Internet, via telephone or by mail, in each case prior to the
closing of the polls. Attendance at the meeting will not in itself constitute
revocation of a proxy. All shares entitled to vote and represented by properly
completed proxies timely received and not revoked will be voted as you direct.
If no direction is given, the proxies will be voted as the Board of Directors
recommends.
If you are a participant in WEC's Stock Plus Investment Plan ("Stock Plus") or
own shares through investments in the WEC Common Stock Fund of one of the
401(k) plans under the Wisconsin Energy Corporation Master Trust, your proxy
will serve as voting instructions for your shares held in those plans. The
administrator for Stock Plus and the trustee for the 401(k) plans will vote
your shares as you direct. If a proxy is not returned for shares held in Stock
Plus, the administrator will not vote those shares. If a proxy is not returned
for shares held in a 401(k) plan, the trustee will vote those shares in the
same proportion that all shares in the plan fund for which voting instructions
have been received are voted.
Solicitation of Proxies. WEC will bear the cost of the solicitation of proxies.
WEC has retained Georgeson Shareholder Communications Inc. to assist in
soliciting proxies from stockholders, including brokers' accounts, at a fee
anticipated not to exceed $15,000 plus reasonable out-of pocket expenses. Also,
employees of WEC or its subsidiaries may solicit proxies by mail, by telephone,
personally or by other communications, without compensation apart from their
normal salaries.
Voting Requirements and Procedures. Directors will be elected by a plurality of
the votes cast by the shares entitled to vote, as long as a quorum is present.
"Plurality" means that the individuals who receive the largest number of votes
are elected as directors up to the maximum number of directors to be chosen.
Therefore, shares not voted, whether by withheld authority or otherwise, have
no effect in the election of directors.
If a quorum is present, the affirmative vote of a majority of the votes cast
will be required for approval of the stockholder proposal. Abstentions and
shares which are the subject of broker non-votes will be counted for the
purpose of determining whether a quorum exists at the meeting, but will have no
effect on the outcome of the voting on the proposal.
EquiServe L.P., which will also serve as inspector of election, will tabulate
the voted proxies.
INDEPENDENT PUBLIC ACCOUNTANT
Arthur Andersen LLP served as independent public accountant for the Company for
the fiscal year ended December 31, 2001. The Board, pursuant to a
recommendation of its Audit and Oversight Committee, has also selected the firm
of Arthur Andersen LLP as the independent public accountant for the Company for
the fiscal year ended December 31, 2002.
Representatives of Arthur Andersen LLP will be present at the Annual Meeting
and will have an opportunity to make a statement, if they so desire, and to
respond to appropriate questions that may be directed to them.
On March 8, 2001, based on a recommendation of its Audit and Oversight
Committee, the Company notified PricewaterhouseCoopers LLP that its appointment
as principal accountant would be terminated effective upon completion of the
audit of the Company's results for the fiscal year ended December 31, 2000. On
March 8, 2001, based on a recommendation of its Audit and Oversight Committee,
the Company engaged the firm of Arthur Andersen LLP as independent public
accountant for the Company for the fiscal year ended December 31, 2001.
5
The reports of PricewaterhouseCoopers LLP on the financial statements for the
two fiscal years immediately prior to PricewaterhouseCoopers LLP's replacement
contained no adverse opinion or disclaimer of opinion and were not qualified or
modified as to uncertainty, audit scope or accounting principle. Between
January 1, 1999 and the termination of PricewaterhouseCoopers LLP's appointment
as principal accountant, there were no disagreements with
PricewaterhouseCoopers LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of PricewaterhouseCoopers
LLP, would have caused that firm to make reference to the subject matter of the
disagreement in connection with its report on the Company's financial
statements. Between January 1, 1999 and the engagement of Arthur Andersen LLP
on March 8, 2001, neither the Company nor anyone acting on behalf of the
Company consulted with Arthur Andersen LLP regarding the application of
accounting principles to a specified transaction, the type of audit opinion
that might be rendered on the Company's financial statements or any matter that
was the subject of a disagreement with PricewaterhouseCoopers LLP or other
event with respect to PricewaterhouseCoopers LLP that would be required to be
disclosed under SEC regulations.
CORPORATE GOVERNANCE
Corporate Governance Guidelines. The Board maintains Corporate Governance
Guidelines, which provide a framework from which it conducts business. The
Guidelines are reviewed annually to ensure that the Board is providing
effective governance over the affairs of the corporation. Several changes were
recently approved by the Board principally to strengthen the definition of
director independence, in part as a result of settling the shareholder
derivative lawsuit described above.
Evaluation of the Chief Executive Officer (CEO). The Board annually evaluates
the performance of the CEO. As part of this practice, the Compensation
Committee requests that independent directors provide their opinions to the
Compensation Committee chair on the CEO's performance relating to: leadership
and vision, financial stewardship, strategy development, management
development, effective communication to constituencies, and effective
representation of the corporation in community and industry affairs, as well as
other areas. The chair of the Compensation Committee shares the responses with
the CEO. The process is also used by the committee to determine appropriate
compensation for the CEO. This procedure allows the Board to evaluate the CEO
and to communicate the Board's expectations.
Self-Evaluation of the Board. The Board also annually evaluates its own
collective performance. Each director is asked to rate the performance of the
Board on such things as: providing appropriate oversight for key affairs of the
corporation (including its long-range goals, financial performance and
strategic plans), providing necessary and timely advice and counsel to the CEO,
communicating the Board's expectations and concerns to the CEO, having in place
effective processes to aid in its deliberations, monitoring of the issues and
trends affecting the corporation, and operating in a manner that ensures open
communication, objective and constructive participation and timely resolution
of issues.
The Nominating and Board Affairs Committee uses the results of this process as
part of its annual review of the Corporate Governance Guidelines and to foster
continuous improvement of the Board's activities.
Committees of the Board of Directors. Committees play a significant role in the
corporate governance practices of the Board. Principal responsibilities and
membership of the Board's standing committees are shown below. Committees of
the Board are generally comprised of outside, independent directors. Committees
may also include one or more non-directors who serve as ad hoc members due to
their considerable expertise in a particular field.
Members of the Audit and Oversight Committee include Ms. Bowles (chair), Mr.
Bergstrom, Mr. Cornog, and Mr. Stratton, all of whom are independent directors.
The Committee operates under a charter approved by the Board which is attached
as Appendix A to this proxy statement. In January 2002, the Board of Directors
amended the charter to reflect additional oversight functions regarding
litigation and environmental compliance matters and to change the name of the
Committee to the Audit and Oversight Committee, in part as a result of settling
the shareholder derivative lawsuit described above. Other principal functions
of the Committee and its activities during fiscal year 2001 are described under
the heading "Audit and Oversight Committee Report" which follows.
Members of the Compensation Committee include Mr. Bergstrom (chair), Dr.
Ahearne, and Mr. Davis. The Committee considers succession planning issues and
provides a competitive, performance-based executive compensation program that
enables WEC to attract and retain key individuals and to motivate them to
achieve WEC's short- and long-term goals. The Committee also provides a
competitive director compensation program based on many of the same criteria.
6
Members of the Executive Committee include Mr. Abdoo (chair), Mr. Bergstrom,
Ms. Bowles, Mr. Cornog, and Mr. Stratton. The Committee may exercise all of the
powers vested in the Board except action regarding dividends or other
distributions to stockholders, the filling of vacancies on the Board and other
powers, which by law may not be delegated to a committee.
Members of the Finance Committee include Mr. Stratton (chair), Mr. Bergstrom,
Ms. Bowles, and Mr. Cornog. The Committee reviews and monitors WEC's current
and long-range financial policies and strategies, including its capital
structure and dividend policy, and authorizes issuance of corporate debt within
limits set by the Board. In January 2002, the Board of Directors amended the
Finance Committee charter to reflect additional responsibilities for oversight
of insurance and risk management functions.
Members of the Nominating and Board Affairs Committee include Mr. Davis
(chair), Ms. Bowles, and Mr. Cornog. The Committee establishes and reviews
corporate governance guidelines to ensure that the Board is effectively
performing its fiduciary responsibilities to stockholders and recommends
candidates to be named as nominees to the Board for election as directors.
Stockholders may propose director candidates for consideration by the Committee.
Members of the Nuclear Oversight Committee include Dr. Ahearne (chair), Mr.
Grigg, and Mr. Stratton. Ad hoc members of the Committee include three nuclear
industry experts: Dr. Thomas E. Murley, former director of the Nuclear
Regulatory Commission's Office of Nuclear Reactor Regulation; Dr. C. Frederick
Sears, formerly responsible for overseeing Northeast Utilities' nuclear and
environmental functions; and Mr. Leon R. Eliason, former President--Generation
at Northern States Power Company, and former President--Nuclear Business Unit
and Chief Nuclear Officer at Public Service Enterprise Group Incorporated. The
Committee advises and assists the Board in its responsibilities relating to
overseeing the corporation's nuclear operations.
Meetings of the Board and its Committees. The Board held 6 meetings during
2001. The number of committee meetings held in 2001 were: Audit and
Oversight-4; Compensation-4; Executive-0; Finance-4; Nominating and Board
Affairs-1; Nuclear Oversight-2. The average meeting attendance during the year
was 96%. No director attended fewer than 89% of the total number of meetings of
the Board and Board committees on which he or she served.
7
AUDIT AND OVERSIGHT COMMITTEE REPORT
The Wisconsin Energy Corporation Audit and Oversight Committee is comprised of
four directors who are not officers of the Company. The Board of Directors has
determined that all members of the Audit and Oversight Committee are
''independent'' as defined in the listing standards of the New York Stock
Exchange regarding audit committees. A responsibility of the Committee is to
monitor and review the Company's financial reporting process on behalf of the
Board of Directors. Management is responsible for the Company's internal
controls and the financial reporting process, while the independent public
accountant is responsible for performing an independent audit of the Company's
consolidated financial statements in accordance with generally accepted
auditing standards and to issue a report thereon.
Meetings are designed to facilitate and encourage open communication between
the Committee and the internal auditors and the Company's independent public
accountant. During these meetings, the Committee reviewed and discussed the
Company's quarterly and annual financial statements with management and the
independent public accountants. The Audit and Oversight Committee believes that
management maintains an effective system of internal controls that results in
fairly presented financial statements. The Committee discussed with Arthur
Andersen matters relating to communications with audit committees as required
by Statement on Auditing Standards No. 61. Arthur Andersen also provided to the
Committee the written disclosures and the letter relative to auditor
independence as required by Independence Standards Board Standard No. 1, and
the Committee discussed with Arthur Andersen its independence. The Committee
also reviewed with Arthur Andersen a list of non-audit services billed during
fiscal year 2001 and determined that such services would not affect the
independence of Arthur Andersen in performing their audit services.
Based on these reviews and discussions, the Audit and Oversight Committee
recommended to the Board of Directors that the audited financial statements be
included in Wisconsin Energy Corporation's Annual Report on Form 10-K for the
year ended December 31, 2001.
The following table shows the fees billed or expected to be billed for audit
and other services provided by Arthur Andersen LLP for fiscal year 2001.
Audit Fees.................................................. $653,000
Financial Information Systems Design and Implementation Fees $ 0
All Other Fees:
Audit Related /(1)/...................................... $390,087
All Other /(2)/.......................................... 333,311
--------
Total All Other Fees........................................ $723,398
/(1)/ Audit-related fees include benefit plan audits, acquisition due
diligence, accounting consultation and services related to filings made
with the Securities and Exchange Commission.
/(2)/ All other fees consist primarily of income tax related consultation and
employee benefit plan activities.
Respectively submitted to Wisconsin Energy Corporation stockholders by the
Audit and Oversight Committee of the Board of Directors.
Barbara L. Bowles, Committee Chair
John F. Bergstrom
Robert A. Cornog
Frederick P. Stratton, Jr.
8
COMPENSATION OF THE BOARD OF DIRECTORS
In order to more closely link directors' pay to performance and to further
align the Board's interests with stockholders, a portion of directors' fees is
paid in WEC common stock. Directors can elect to receive the fee in common
stock or defer the fee in a WEC phantom common stock account under the
Directors' Deferred Compensation Plan.
During 2001, each nonemployee director received one annual retainer fee of
$18,000 paid half in WEC common stock and half in cash. Effective January 1,
2002, following a review of competitive practices, the annual retainer fee was
increased, with identical payment terms, to $24,000 annually. Nonemployee
chairs of the committees of the Board received a quarterly committee chair
retainer of $1,250. Nonemployee directors also receive a fee of $1,500 for each
Board or committee meeting attended. In addition, a per diem fee of $1,250 for
travel on Company business is paid for each day on which a Board or committee
meeting is not also held. Nonemployee directors are also paid $300 for each
signed, written unanimous consent in lieu of a meeting. Employee directors
receive no directors' fees.
Although WEC directors also serve on the Wisconsin Electric and Wisconsin Gas
boards, only single fees are paid for meetings held on the same day. In these
cases, fees are allocated between WEC, Wisconsin Electric and Wisconsin Gas
based on services rendered.
Nonemployee directors may defer fees pursuant to the Directors' Deferred
Compensation Plan. Under the plan, fees may be deferred into an account which
accrues interest semiannually at the prime rate or into a WEC phantom common
stock account, the value of which will appreciate or depreciate based on the
market performance of WEC stock, as well as through the accumulation of any
reinvested dividends. Deferral amounts are credited to accounts in the name of
each participating director on the books of WEC, are unsecured and are payable
only in cash following termination of the director's service to WEC and its
subsidiaries. The deferred amounts will be paid out of the general corporate
assets or the trust described under "Retirement Plans" in this proxy statement.
Each nonemployee director annually receives an option to purchase 5,000 shares
of WEC common stock under WEC's long-term incentive plan. Each option has an
exercise price equal to the fair market value of the shares on the date the
option is granted and is exercisable for 10 years after the date of grant.
Options vest over a three-year period on the anniversary of the grant date.
Upon a change in control of WEC, disability or death, or if the director leaves
the Board after completing a full term, these options become immediately
exercisable. The exercise price of an option may, at the nonemployee director's
election, be paid in cash or with previously-owned shares of common stock or a
combination thereof.
The Company has established a Directors' Charitable Awards Program to help
further its policy of charitable giving. Under the program, the Company intends
to contribute up to $100,000 per year for 10 years to a charitable
organization(s) chosen by each director, upon the director's death. Directors
are provided with one charitable award benefit for serving on the boards of WEC
and its subsidiaries. There is a vesting period of three years of service on
the Board required for participation in this program. Beneficiary organizations
under the program must be approved by the Nominating and Board Affairs
Committee. The program is funded by life insurance on the lives of the Board
members. Directors derive no financial benefit from the program since all
insurance proceeds and charitable deductions accrue solely to the Company.
Because of the tax deductibility of these charitable donations and the use of
insurance as a funding vehicle, the long-term cost to the Company is expected
to be modest.
9
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
Compensation Philosophy and Objectives. The Compensation Committee is
responsible for making decisions regarding compensation for the executives of
Wisconsin Energy Corporation and its principal subsidiaries. All Committee
members are independent, nonemployee directors. We seek to provide a
competitive, performance-based executive compensation program that enables WEC
to attract and retain key individuals and to motivate them to achieve WEC's
short- and long-term goals.
We believe that a substantial portion of executive compensation should be at
risk. As a result, WEC's compensation plans have been structured so that the
level of total compensation is strongly dependent upon achievement of business
results that are aligned with the interests of WEC's stockholders and customers.
The primary elements of WEC's executive compensation program are base salary,
annual incentive compensation, and long-term incentive compensation. For WEC
executives, all elements of compensation are targeted at the 50th percentile of
general industry practices--that is, we target compensation at the median
levels paid for similar positions at similarly sized companies.
In order to determine competitive compensation practices, we rely upon
compensation surveys provided to us by Towers Perrin, an independent
compensation consultant. We believe that the labor market for WEC executives is
that of general industry in the United States. As a result, we principally rely
upon a survey of compensation practices of similarly sized companies in general
industry. However, we also recognize that a significant portion of WEC's
business is in the energy industry. Therefore, for executives whose positions
principally relate to utility operations, we place a greater emphasis upon
compensation practices in the energy industry.
Specific values of 2001 compensation for the Chief Executive Officer and the
four other most highly compensated executive officers are shown in the Summary
Compensation Table. Our basis for determining each element of compensation is
described below.
Base Salary. For 2001, we adjusted base salaries to reflect updated survey
results of executive compensation practices for similar positions at comparable
companies. In making these adjustments, we also considered factors such as the
relative levels of individual experience, performance, responsibility, and
contribution to the results of Company operations.
Annual Incentive Compensation. The annual incentive plan provides for annual
awards to executives based on achievement of pre-established stockholder-,
customer-, and employee-focused objectives. All payments under the plan are at
risk; payments are only made if performance goals are achieved, and awards may
be less or greater than targeted amounts based on actual performance. Based
upon a review of competitive practices for comparable positions at similarly
sized companies, for 2001, awards were targeted at 35% to 100% of base salary
and actual awards may range from 0% to 200% based on performance. The plan also
provides the Committee with the discretion to recognize individual performance.
At the Committee's direction, the annual performance incentive program for 2001
principally focused on the attainment of key financial measures.
.. The financial goals for Messrs. Abdoo, Wardeberg, and Donovan were based upon
earnings per share, return on equity and cash flow for Wisconsin Energy. The
earnings per share goal was weighted at 50%; the other two measures were
weighted at 25% each.
.. For Mr. Grigg, 75% of his goals were tied to utility financial performance,
including net income, return on net assets, and cash flow; the remaining 25%
of his goals were tied to customer and employee components.
.. For Mr. Donnelly, 75% of his goal was tied to WICOR Industries, Inc.
financial performance, based on return on capital; the remaining 25% of his
goal was discretionary, based on recommendations to the Committee from the
CEO.
In February 2002, the Committee met to review the extent to which 2001
performance goals were met. The results are summarized as follows.
Wisconsin Energy's 2001 financial goals were principally met. In 2001, results
for earnings per share before non-recurring costs represented an increase of
$0.53 per share compared to 2000. The increase was due principally to strong
performance of the electric and gas businesses, improved earnings for
non-utility energy businesses and the favorable impact of the share repurchase
program. Messrs. Abdoo, Wardeberg, and Donovan earned 79.71% of their target
awards.
10
The utility group financial performance exceeded target performance in all
three measures: net income, return on net assets and cash flow. Record revenues
were achieved by the utility segment in 2001 while successfully combining the
utility operations of Wisconsin Electric and Wisconsin Gas, improving customer
service and reducing operating costs. While the utility group made some notable
improvements in its customer interactions, the selected customer measure was
not met. This was largely due to unusually high natural gas prices early in the
year that negatively impacted customer perception of the utilities. Although
substantial progress was made in integrating Wisconsin Electric and Wisconsin
Gas operations and processes, cultures and employee talent during 2001, the
selected employee measure did not contribute to the incentive result for Mr.
Grigg. In aggregate, Mr. Grigg earned 86.64% of his target award.
In 2001, WICOR Industries, Inc. financial performance was negatively impacted
by the slowdown in the economy and financial targets were not met. Several of
its products are discretionary purchases and, therefore, economic conditions
can significantly influence financial results. Mr. Donnelly's incentive award
was based on a discretionary evaluation of his performance in 2001. Among the
factors considered were his leadership in minimizing the financial impact of
economic conditions on the Company's manufacturing subsidiaries.
Based upon these results and any discretion to recognize individual
performance, awards for 2001 were granted to the named executive officers as
shown in the Summary Compensation Table.
For 2002, the Committee set goals for key officers of WEC similar to those set
for 2001. For Messrs. Abdoo, Wardeberg, and Donovan, the annual incentive is
dependent upon attainment of earnings per share, return on equity and cash flow
for WEC. We believe that this incentive structure will help focus management
and help ensure attainment of WEC's financial objectives. For Mr. Grigg, 75% of
his 2002 goals are tied to utility financial performance; the remainder is tied
to utility operational performance. For Mr. Donnelly, 75% of his 2002 award is
tied to WICOR, Industries, Inc. financial performance with the remaining 25%
being at the discretion of the Committee.
Long-Term Incentive Compensation. The Committee administers WEC's 1993 Omnibus
Stock Incentive Plan, as amended. This is a stockholder-approved, long-term
incentive plan designed to link the interests of executives and other key
employees to long-term stockholder value. It allows for various types of awards
keyed to the performance of WEC's common stock, including stock options.
In 2001, we reviewed the long-term incentive program to ensure its
effectiveness in focusing WEC executives to achieve the corporation's long-term
objectives. Awards to named executive officers were granted as indicated in the
Summary Compensation Table.
Our Committee believes that an important adjunct to the long-term incentive
program is significant stock ownership by participants. Accordingly, as a
condition of participating in the long-term incentive plan, we have implemented
stock ownership guidelines for officers of the Company. Guidelines for
executive officers range from 100% to 300% of base salary.
Chief Executive Officer Compensation. The assessment of the Chief Executive
Officer's performance and determination of the CEO's compensation are among our
principal responsibilities.
In reviewing the performance of WEC's Chief Executive Officer, we requested
that all nonemployee directors evaluate the CEO's performance. The Compensation
Committee chair reviewed the evaluations, met with Mr. Abdoo to discuss them,
and the Committee factored the results into our compensation determinations.
We set Mr. Abdoo's base salary at $707,500 for 2001. This base salary is
somewhat below the median of comparably sized companies in the survey of
general industry compensation practices.
Mr. Abdoo's annual incentive compensation for 2001 was based upon achievement
of the financial initiatives described above.
In view of the discretionary component of the annual incentive plan, the
Committee also noted the significant accomplishments of Mr. Abdoo during 2001;
however, no adjustments to his annual incentive award were made. Significant
accomplishments for Mr. Abdoo included:
.. receipt by the Company of a favorable declaratory ruling from the Public
Service Commission of Wisconsin, enabling the Company to proceed with
necessary planning, studies and purchases for 2,800 megawatts of new,
in-state generation,
11
.. formation of a new subsidiary, W.E. Power, LLC, for the sole purpose of
financing, constructing and owning the new power plants proposed under our
Power the Future plan,
.. approval for a 35-mile Wisconsin Gas lateral to Guardian Pipeline, which will
bring needed natural gas from Chicago and introduce meaningful gas pipeline
competition to southeastern Wisconsin,
.. completion of the 2001 Point Beach Nuclear Plant refueling safely, ahead of
schedule and within budget,
.. implementation of combined billing and customer service operations, allowing
customers to have one account, receive one bill and make one call for
electric and gas services, and
.. progress made in the common stock buy-back program resulting in repurchasing
over $234 million of Wisconsin Energy stock by year-end.
To specifically link a portion of his compensation to the enhancement of
long-term stockholder value, Mr. Abdoo was awarded long-term incentive
compensation in 2001 in the form of stock options and restricted stock, as set
forth in the ''Long-Term Compensation Awards'' column of the Summary
Compensation Table.
Compliance With Tax Regulations Regarding Executive Compensation. Section
162(m) of the Internal Revenue Code limits tax deductions for executive
compensation to $1 million, unless certain requirements are met. It is the
Company's policy to take reasonable steps to obtain the corporate tax deduction
by qualifying for the exemptions from limitation on such deductibility under
Section 162(m) to the extent practicable.
Respectfully submitted to WEC's stockholders by the Compensation Committee of
the Board of Directors.
John F. Bergstrom, Committee Chair
John F. Ahearne
Willie D. Davis
12
EXECUTIVE OFFICERS' COMPENSATION
This table shows, for the last three fiscal years, compensation awarded to,
earned by or paid to WEC's Chief Executive Officer and each of WEC's other four
most highly-compensated executive officers.
Summary Compensation Table
Long-Term
Compensation
Annual Compensation Awards
----------------------------------------------------
Restricted Securities
Other Annual Stock Underlying All Other
Salary Bonus Compensation Awards/(1)/ Options Compensation/(2)/
Name and Principal Position Year ($) ($) ($) ($) (#) ($)
--------------------------------------------------------------------------------------------------------------
Richard A. Abdoo
Chairman of the Board, President 2001 707,500 563,948 11,811 163,120 300,000 66,875
and Chief Executive Officer 2000 657,500 723,168 16,954 148,500 100,000 30,632
1999 615,000 295,343 8,767 218,504 40,000 33,873
--------------------------------------------------------------------------------------------------------------
George E. Wardeberg
Vice Chairman of the Board 2001 636,750 456,798 2,416 146,808 270,000 89,918
(as of April 2000) 2000 394,667 434,084 0 0 100,000 0
--------------------------------------------------------------------------------------------------------------
Richard R. Grigg
Senior Vice President of WEC; 2001 440,000 350,719 4,128 122,340 131,535 98,545
President and Chief Operating 2000 400,000 367,446 3,723 111,375 75,000 23,932
Officer of Wisconsin Electric- 1999 340,000 261,180 4,413 109,252 20,000 18,083
Wisconsin Gas
--------------------------------------------------------------------------------------------------------------
Paul Donovan
Senior Vice President and Chief 2001 440,000 282,333 28,760 122,340 131,535 65,463
Financial Officer 2000 407,500 358,559 8,210 232,500 75,000 14,849
(as of August 1999) 1999 142,301 87,465 315 0 30,000 4,046
--------------------------------------------------------------------------------------------------------------
James C. Donnelly
President and Chief Executive 2001 400,000 80,000 0 61,170 113,130 51,085
Officer of WICOR Industries, Inc. 2000 236,667 163,083 0 0 0 9,867
(as of April 2000)
/(1)/ On February 7, 2001, restricted stock awards were granted to Messrs.
Abdoo, Wardeberg, Grigg, Donovan and Donnelly in the amounts of 8,000
shares, 7,200 shares, 6,000 shares, 6,000 shares, and 3,000 shares,
respectively, which are subject to forfeiture until vested. The dollar
values shown for these shares are based on the closing price of $20.39
per share on the grant date. The shares awarded to these individuals are
subject to a vesting schedule dependent upon the attainment of cumulative
earnings targets based on Company performance, with ultimate vesting
occurring at the end of ten years. However, earlier vesting may occur due
to termination of employment by death, disability, or normal retirement,
a change in control of the Company, or action by the Compensation
Committee. Dividends are paid on shares of restricted stock at the same
rate as on unrestricted shares and are used to acquire additional
restricted shares. As of December 31, 2001, the named executive officers
held the following number of shares of restricted stock, including
restricted dividends, with the following values (based on a closing price
of $22.56 on December 31, 2001): Mr. Abdoo-35,532 shares ($801,602), Mr.
Wardeberg-11,606 shares ($261,831), Mr. Grigg-21,469 shares ($484,341),
Mr. Donovan-19,136 shares ($431,708), and Mr. Donnelly-6,250 shares
($141,000).
/(2)/ All Other Compensation for 2001 for Messrs. Abdoo, Wardeberg, Grigg,
Donovan, and Donnelly, respectively, includes:
. employer matching of contributions by each named executive into the
401(k) plan in the amount of $5,100, $5,100, $4,550, $5,100, and $6,800,
respectively,
. ''make whole'' payments under the Executive Deferred Compensation Plan
with respect to matching in the 401(k) plan on deferred salary or salary
received but not otherwise eligible for matching in the amounts of
$50,457, $27,025, $51,431, $18,857, and $9,200, respectively; amounts
include prior period adjustments of $12,637 and $35,608 for Messrs.
Abdoo and Grigg, respectively, and
. the present value (treated as an interest free loan) of the current
year's non-term portion of the insurance premium paid by the Company
under a split-dollar life insurance program in the amounts of $11,318,
$57,793, $42,564, $41,506, and $35,085, respectively; the executive pays
the term insurance portion of the premium.
13
Option Grants in Last Fiscal Year
This table shows additional data regarding the options summarized above.
Grant
Date
Individual Grants/(1)/ Value
---------------------------------------------------------------------------
Percent of
Number of Total
Securities Options Grant
Underlying Granted to Exercise Date
Options Employees in or Base Present
Granted Fiscal Year Price Expiration Value/(2)/
Name (#) (%) ($/Share) Date ($)
---------------------------------------------------------------------------
Richard A. Abdoo 100,000 4.61 20.39 02/07/2011 474,000
200,000 9.22 21.73 05/01/2011 1,092,000
George E. Wardeberg 90,000 4.15 20.39 02/07/2011 426,600
180,000 8.30 21.73 05/01/2011 982,800
Richard R. Grigg 75,000 3.46 20.39 02/07/2011 355,500
56,535 2.61 21.73 05/01/2011 308,681
Paul Donovan 75,000 3.46 20.39 02/07/2011 355,500
56,535 2.61 21.73 05/01/2011 308,681
James C. Donnelly 25,000 1.15 20.39 02/07/2011 118,500
88,130 4.06 21.73 05/01/2011 481,189
/(1)/ Consists of incentive and non-qualified stock options to purchase shares
of WEC common stock granted pursuant to the 1993 Omnibus Stock Incentive
Plan, as amended, on February 7, 2001 and May 1, 2001. These options have
exercise prices equal to the fair market value of the WEC shares on the
date of grant and vest pro rata over a four year period beginning on the
first anniversary of the grant date with full vesting on the fourth
anniversary date. Upon a ''change in control'' of WEC, as defined in the
plan, or upon retirement, permanent total disability or death of the
option holder, these options shall become immediately exercisable. These
options were granted for a term of ten years, subject to earlier
termination in certain events related to termination of employment. In
the discretion of the Compensation Committee, the exercise price may be
paid by delivery or attestation of already-owned shares. Tax withholding
obligations related to exercise may be satisfied by withholding shares
otherwise deliverable upon exercise, subject to certain conditions.
Subject to the limitations of the 1993 Omnibus Stock Incentive Plan, as
amended, the Compensation Committee has the power with the participant's
consent to modify or waive the restrictions on vesting of these options,
to amend these options and to grant extensions or to accelerate these
options.
/(2)/ An option pricing model (developed by Black-Scholes) was used to
determine the options' present value as of the date of the grant. The
assumptions used in the Black-Scholes equation for options expiring
February 7, 2011 are: market price of stock: $20.39; exercise price of
option: $20.39; stock volatility: 23.43%; annualized risk-free interest
rate: 5.43%; exercise at the end of the 10-year option term; and dividend
yield: 3.92%. The assumptions for options expiring May 1, 2011 are:
market price of stock: $21.73; exercise price of option: $21.73; stock
volatility: 23.59%; annualized risk-free interest rate: 5.65%; exercise
at the end of the 10-year option term; and dividend yield: 3.68%. WEC's
use of this model should not be construed as an endorsement of its
accuracy. The ultimate value of the options, if any, will depend upon the
future value of the WEC common stock, which cannot be forecast with
reasonable accuracy, and on the optionee's investment decisions.
Aggregated Fiscal Year-End Option Values
No stock options were exercised by the named executive officers in 2001. This
table shows the number and value of exercisable and unexercisable options at
fiscal year-end. Value is calculated using the difference between the exercise
price and the year-end market price multiplied by the number of shares
underlying the option.
---------------------------------------------------------------------------------------------
Number of Securities Underlying Value of Unexercised In the Money
Unexercised Options at Fiscal Year-End Options at Fiscal Year-End
(#) ($)
-------------------------------------------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
--------------------------------------------------------------------------------------------
Richard A. Abdoo 198,498 405,002 64,772 577,328
George E. Wardeberg 549,930 336,666 4,682,536 344,700
Richard R. Grigg 94,748 202,787 48,579 355,420
Paul Donovan 33,750 202,785 48,581 355,418
James C. Donnelly 339,789 153,647 3,673,726 246,469
--------------------------------------------------------------------------------------------
14
EMPLOYMENT AND SEVERANCE ARRANGEMENTS
Pursuant to the merger agreement relating to WEC's acquisition of WICOR, on
June 27, 1999, WEC adopted severance policies that became effective on April
26, 2000, when the merger occurred, replacing WEC's previous severance policy.
The policies provide for severance benefits to designated executives and other
key employees if within two years after the merger they are discharged without
cause or resign with good reason. WEC has approved changes to the severance
policies to allow for a deferral opportunity for participants who may become
entitled to benefits and to continue the policies after the end of a two-year
period following the WICOR merger to provide for severance benefits in the
event of employment termination either in anticipation of or within a two-year
period following a change in control by reason of discharge without cause or
resign with good reason.
Under the current severance policies, participants have been designated into
one of four benefit levels. Of the individuals named in the Summary
Compensation Table, Mr. Donnelly is a Tier 1 participant. As such, he would be
entitled to severance benefits if he resigned within a six month period
following the first anniversary of a change in control, in addition to the
other circumstances described above with regard to change in control severance
arrangements. Messrs. Abdoo, Wardeberg, Grigg, and Donovan do not participate
in the severance policy, but each has a separate change in control and
severance agreement as described below.
Tier 1 benefits provide generally for lump sum severance payments equal to
three times the sum of the current base salary and the highest bonus in the
last three years (or the then current target bonus, if higher), a pension lump
sum for the equivalent of three years' worth of additional service and three
years' continuation of health and life insurance coverages. An overall limit is
placed on benefits to avoid federal excise taxes under the ''parachute
payment'' provisions of the tax law. In addition, Tier 1 participants were
provided the option to leave Company employment within a six month period
following the first anniversary of the merger. Mr. Donnelly did not elect to
trigger this benefit.
The Company has entered into agreements with each of Messrs. Abdoo, Grigg, and
Donovan providing for certain severance benefits if his employment is
terminated (i) by the Company other than for cause, death or disability in
anticipation of or following a change in control, (ii) by the executive for
good reason following such a change, (iii) by the executive within six months
after completing one year of service following a change in control, or (iv) in
the absence of a change in control, by the Company for any reason other than
cause, death or disability or by the executive for good reason. The agreements
provide for a lump sum severance payment equal to three times the sum of their
highest annual base salary in effect in the last three years and highest bonus
amount. The highest bonus amount would be calculated as the largest of the
current target bonus for the fiscal year in which employment termination
occurs, the highest bonus paid in either the last three fiscal years of the
Company prior to termination or the change in control, or an amount calculated
by multiplying the highest bonus percentage earned during either of such three
fiscal year periods times the highest yearly base salary rate in effect during
the three-year period ending prior to termination. The agreements also provide
for three years' continuation of health and certain other welfare benefit
coverages, eligibility for retiree health coverage thereafter, continuation of
the split-dollar life insurance program until the applicable policy becomes
paid up, a payment equal to the value of three additional years' of
participation in the applicable qualified and non-qualified retirement plans,
full vesting in all outstanding stock option and restricted stock awards,
certain financial planning services and other benefits and a "gross-up" payment
should any payments or benefits under the agreements trigger federal excise
taxes under the "parachute payment" provisions of the tax law. The agreements
also contain one-year non-compete provisions applicable on termination of
employment.
In connection with Mr. Donovan joining the Company, he was encouraged to
purchase a house in Wisconsin. In this regard, the Company has agreed to
repurchase, at Mr. Donovan's request within seven years of his leaving the
Company, his Wisconsin house at a price that would assure the after-tax
recovery of his investment in that house or its then fair market value,
whichever is greater.
As provided in the merger agreement with WICOR, WEC entered into an employment
agreement with Mr. Wardeberg pursuant to which Mr. Wardeberg serves as Vice
Chairman of the WEC Board of Directors for a two-year term. The agreement
provides for a base salary of not less than the greater of $580,000, or 90% of
the base salary then payable to the Chairman of the Board. The agreement also
provides for a bonus of not less than 90% of that payable to the Chairman, with
the total of base salary and bonus in no event to be less than $993,116.
Mr. Wardeberg's employment agreement also includes a special pension benefit
provision under WEC's Supplemental Executive Retirement Plan, calculated as if
Mr. Wardeberg had been employed by WEC since age 25, offset by any WICOR
pension benefits. Severance benefits are provided if his employment is
terminated by WEC other than for cause or by Mr. Wardeberg for good reason. The
agreement provides for a "gross-up" payment should any payments to Mr.
Wardeberg trigger federal excise taxes under the "parachute payment" provisions
of the tax law. Mr. Wardeberg has indicated that he will be retiring as Vice
Chairman of the Board in April 2002, but has indicated his willingness to
continue to serve as a director.
15
RETIREMENT PLANS
Wisconsin Electric maintains a defined benefit pension plan of the cash balance
type for most employees, including Messrs. Abdoo, Wardeberg, Grigg, and
Donovan. The plan bases a participant's defined benefit pension on the value of
a hypothetical account balance. For individuals participating in the plan as of
December 31, 1995, a starting account balance was created equal to the present
value of the benefit accrued as of December 31, 1994, under the plan benefit
formula prior to the change to a cash balance approach. That formula provided a
retirement income based on years of credited service and final average
compensation for the 36 highest consecutive months, with an adjustment to
reflect the Social Security integrated benefit. In addition, individuals
participating in the plan as of December 31, 1995 received a special one-time
transition credit amount equal to a specified percentage varying with age
multiplied by credited service and 1994 base pay.
The present value of the accrued benefit as of December 31, 1994, plus the
transition credit, was also credited with interest at a stated rate. For 1996
and thereafter, a participant receives annual credits to the account equal to
5% of base pay (including certain incentive payments, pre-tax deferrals and
other items), plus an interest credit on all prior accruals equal to 4% plus
75% of the annual time-weighted trust investment return for the year in excess
of 4%. Additionally, the cash balance plan provides that up to an additional 2%
of base pay may be earned based upon achievement of earnings targets.
The life annuity payable under the plan is determined by converting the
hypothetical account balance credits into annuity form.
Individuals who were participants in the plan on December 31, 1995 were
''grandfathered'' such that they will not receive any lower retirement benefit
than would have been provided under the prior formula, had it continued, if
their employment terminates on or before January 1, 2011.
Wisconsin Gas also maintains a defined benefit pension plan of the cash balance
type for most employees, including Mr. Donnelly. The cash balance formula,
effective in 1997, provides an annual accrual of 6% of salary and bonus, with a
guaranteed earnings rate of 4%. In its discretion, the Company may amend the
plan from year to year to grant a higher earnings rate for the applicable year.
In order to recognize the pre-1997 service and compensation of participants as
of January 1, 1997, the plan granted each such participant a special transition
credit. In addition, in order to protect such existing participants, the
revised pension plan guarantees that for employment through December 31, 2007,
the benefit accrual will not be less under the new cash balance formula than
under the pre-1997 final average earnings formula.
For the individuals listed in the Summary Compensation Table, estimated
benefits under both prior plan formulas are higher than under the applicable
cash balance plan formula. As a result, their benefits would currently be
determined by the prior plan benefit formula. The following tables show
estimated annual benefits payable in life annuity form on normal retirement for
persons in various compensation and years of service classifications during
2001, based on the continuation of the prior plan formulas for Wisconsin
Electric and Wisconsin Gas (including supplemental amounts providing additional
benefits described below in the ''Other Retirement Benefits'' section):
Pension Plan Table - Wisconsin Electric Plan
------------------------------------------------------------------------
Years of Service
-----------------------------------------------------------
Remuneration 15 20 25 30 35 40
------------------------------------------------------------------------
$ 300,000 74,963 99,950 124,938 149,925 164,106 178,288
500,000 126,713 168,950 211,188 253,425 277,356 301,288
700,000 178,463 237,950 297,438 356,925 390,606 424,288
900,000 230,213 306,950 383,688 460,425 503,856 547,288
------------------------------------------------------------------------
1,100,000 281,963 375,950 469,938 563,925 617,106 670,288
1,300,000 333,713 444,950 556,188 667,425 730,356 793,288
1,500,000 385,463 513,950 642,438 770,925 843,606 916,288
1,700,000 437,213 582,950 728,688 874,425 956,856 1,039,288
------------------------------------------------------------------------
16
Pension Plan Table - Wisconsin Gas Plan
----------------------------------------------------------------------
Years of Service
---------------------------------------------------------
Remuneration 15 20 25 30 35 40
----------------------------------------------------------------------
$ 300,000 87,700 117,000 133,900 138,400 142,900 147,400
500,000 147,100 196,200 224,500 232,000 239,500 247,000
700,000 206,500 275,400 315,100 325,600 336,100 346,600
900,000 265,900 354,600 405,700 419,200 432,700 446,200
----------------------------------------------------------------------
1,100,000 325,300 433,800 496,300 512,800 529,300 545,800
1,300,000 384,700 513,000 586,900 606,400 625,900 645,400
1,500,000 444,100 592,200 677,500 700,000 722,500 745,000
1,700,000 503,500 671,400 768,100 793,600 819,100 844,600
----------------------------------------------------------------------
The compensation for the individuals listed in the Summary Compensation Table
in the columns labeled ''Salary'' and ''Bonus'' is virtually equivalent to the
compensation considered for purposes of the retirement plans and the various
supplemental plans. Messrs. Abdoo, Wardeberg, Grigg, Donovan, and Donnelly
currently have or are considered to have 32, 41, 31, 29, and 14 credited years
of service, respectively.
Other Retirement Benefits. Designated officers of WEC and Wisconsin Electric,
including Messrs. Abdoo, Wardeberg, Grigg, and Donovan, participate in the
Supplemental Executive Retirement Plan (''SERP''). The SERP provides monthly
supplemental pension benefits to participants, which will be paid out of
unsecured corporate assets, or the grantor trust described below, as follows:
(i) an amount equal to the difference between the actual pension benefit
payable under the pension plan and what such pension benefit would be if
calculated without regard to any limitation imposed by the Internal Revenue
Code on pension benefits or covered compensation; and (ii) an amount calculated
so as to provide participants with a supplemental lifetime annuity, estimated
to amount to between 8% and 10% of final average compensation depending on
which pension payment option is selected. Except for a ''change in control'' of
WEC, as defined in the SERP, no payments are made until after the participant's
retirement or death.
Designated officers of Wisconsin Gas, including Mr. Donnelly, participate in
the Wisconsin Gas Company Supplemental Retirement Income Program. This plan
provides supplemental retirement benefits to take into account certain
compensation that is excluded under the applicable retirement plan and to
provide benefits that otherwise would have been accrued or payable, except for
the limitations of the Internal Revenue Code.
WEC has entered into agreements with Messrs. Abdoo, Wardeberg, and Donovan who
cannot accumulate by normal retirement age the maximum number of years of
credited service under the pension plan formula in effect immediately before
the change to the cash balance formula, as described below:
. According to Mr. Abdoo's agreement, Mr. Abdoo at retirement will receive
supplemental retirement payments which will make his total retirement
benefits at age 58 or older substantially the same as those payable to
employees who are age 60 or older, who are in the same compensation
bracket and who became plan participants at the age of 25, offset by the
value of any qualified or non-qualified defined benefit pension plans of
prior employers.
. According to Mr. Wardeberg's agreement, Mr. Wardeberg at retirement will
receive supplemental retirement payments which will make his total
retirement benefits at age 65 or older substantially the same as those
payable to employees who are in the same compensation bracket and who
became plan participants at age 25, offset by the value of any qualified
or non-qualified defined benefit pension plans of WICOR.
. According to Mr. Donovan's agreement, Mr. Donovan at retirement will
receive supplemental retirement payments which will make his total
retirement benefits at age 55 or older substantially the same as those
payable to employees who are in the same compensation bracket and who
became plan participants at the age of 25, offset by the value of social
security benefits and modified by early retirement reduction factors
Messrs. Wardeberg and Donovan have been granted life insurance benefits in lieu
of certain post-retirement benefits under the SERP. An independent review has
verified that based on certain assumptions, both exchanges are cost neutral to
the Company.
The WEC Amended Non-Qualified Trust, a grantor trust, has been established to
fund certain non-qualified benefits, including the SERP, the Executive Deferred
Compensation Plan and the agreements with the named executive officers. The
plans and
17
agreements provide for optional lump sum payments and, in the instance of a
change in control, and absent a deferral election, mandatory lump sum payments
without regard to whether the executive's employment has terminated. In each
case, the interest rate benchmark formula for calculating the lump sum amount
is the five-year U.S. Treasury Note yield as of the last business day of the
month prior to date of payment.
WEC COMMON STOCK OWNERSHIP
Directors, Nominees and Executive Officers. The following table lists the
beneficial ownership of WEC common stock of each director, nominee, named
executive officer, and all of the directors and executive officers as a group
as of February 22, 2002. In general, "beneficial ownership" includes those
shares a director or executive officer has the power to vote or transfer, and
stock options that are exercisable currently or within 60 days of February 22,
2002. Included are shares owned by each individual's spouse, minor children or
any other relative sharing the same residence, as well as shares held in a
fiduciary capacity or held in WEC's Stock Plus and 401(k) plans. None of these
persons beneficially owns more than 1% of the outstanding common stock.
Shares Beneficially Owned/(1)/
----------------------------------------------------
Option Shares
Shares Exercisable Within
Name Owned /(2)/ /(3)/ 60 Days Total
----------------------------------------------------------------------------------
Richard A. Abdoo 67,565/(4)/ 248,498 316,063
John F. Ahearne 3,463 8,333 11,796
John F. Bergstrom 3,000 8,333 11,333
Barbara L. Bowles 2,468 8,333 10,801
----------------------------------------------------------------------------------
Robert A. Cornog 5,534 8,333 13,867
Willie D. Davis 9,141 18,234/(5)/ 27,375
James C. Donnelly 59,854/(4)/ 338,948/(5)/ 398,802
Paul Donovan 56,174/(4)/ 71,250 127,424
----------------------------------------------------------------------------------
Richard R. Grigg 27,542/(4)/ 132,248 159,790
Frederick P. Stratton, Jr. 8,600 8,333 16,933
George E. Wardeberg 25,034/(4)/ 572,430/(5)/ 597,464
----------------------------------------------------------------------------------
All above-named individuals
and other executive officers
as a group (14 persons) 308,831/(4)/ 1,553,851/(5)/ 1,862,682/(6)/
/(1)/ Information on beneficially-owned shares is based on data furnished by
the specified persons and is determined in accordance with Rule 13d-3
under the Securities Exchange Act of 1934, as required for purposes of
this proxy statement. It is not necessarily to be construed as an
admission of beneficial ownership for other purposes.
/(2)/ Certain WEC directors and executive officers also hold share units in the
WEC phantom common stock account under WEC's deferred compensation plans
as indicated: Mr. Abdoo (18,843), Mr. Bergstrom (6,092), Mr. Cornog
(9,886), Mr. Davis (7,792), Mr. Donnelly (417), Mr. Donovan (8,064), Mr.
Grigg (3,177), Mr. Stratton (7,726), Mr. Wardeberg (1,250), and all
directors and executive officers as a group (65,785). Share units are
intended to reflect the performance of Wisconsin Energy common stock and
are payable in cash. While these units do not represent a right to
acquire WEC common stock, have no voting rights and are not included in
the number of shares reflected in the "Shares Owned" column in the table
above, we have listed them in this footnote because they represent an
additional economic interest of the directors and executive officers tied
to the performance of WEC common stock.
/(3)/ Except as described below, each individual has sole voting and investment
power as to all shares listed for such individual, except the following
individuals have shared voting and/or investment power as indicated: Mr.
Abdoo (10,107), Mr. Cornog (150), Mr. Donovan (25,000), Mr. Stratton
(4,600), Mr. Wardeberg (3,608) and all directors and executive officers
as a group (43,465).
/(4)/ Includes shares of restricted stock over which the holders have sole
voting but no investment power: Mr. Abdoo (35,532), Mr. Donnelly (6,250),
Mr. Donovan (19,136), Mr. Grigg (21,469), Mr. Wardeberg (11,606), all
nonemployee directors (0), and all directors and executive officers as a
group (124,895). Shares listed for Mr. Wardeberg and Mr. Donnelly include
restricted stock granted by WICOR which were converted to outstanding WEC
restricted stock on the effective date of the acquisition of WICOR.
/(5)/ Option shares listed include options granted by WICOR which were
converted to WEC stock options on the effective date of the acquisition
of WICOR.
/(6)/ Represents 1.60% of total WEC common stock outstanding on February 22,
2002.
18
Owners of More than 5%. The following table shows stockholders who reported
beneficial ownership of more than 5% of WEC common stock, based on the
information they have reported.
---------------------------------------------------------------------------------------------
Voting Dispositive Total
Authority Authority Shares Percent of
--------------------------------------Beneficially WEC
Name and Address Sole Shared Sole Shared Owned Common Stock
---------------------------------------------------------------------------------------------
AXA Financial, Inc.
1290 Avenue of the Americas
New York, NY 10104 6,605,817 1,099,401 11,005,010 18,000 11,023,010 9.5%
---------------------------------------------------------------------------------------------
Dodge & Cox
One Sansome St., 35th Floor
San Francisco, CA 94104 7,361,635 90,000 7,879,985 0 7,879,985 6.8%
---------------------------------------------------------------------------------------------
AXA Financial is a parent holding company; Dodge & Cox is a registered
investment adviser.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the corporation's
officers, directors, and persons owning more than ten percent of WEC's common
stock to file reports of ownership and changes in ownership of equity and
derivative securities of WEC with the Securities and Exchange Commission and
the New York Stock Exchange. To the Company's knowledge, based on information
provided by the reporting persons, all applicable reporting requirements for
fiscal year 2001 were complied with in a timely manner, except for a Form 4
filing involving one transaction made on behalf of Mr. Paul Donovan, Wisconsin
Energy Senior Vice President and Chief Financial Officer, which was filed late.
2003 ANNUAL MEETING
The Nominating and Board Affairs Committee and WEC Board have approved director
candidate selection criteria which are designed to provide the Board with a
diversity of experience to allow it to effectively meet the many challenges WEC
faces in today's changing environment. Stockholders wishing to propose director
candidates for consideration and recommendation by the Nominating and Board
Affairs Committee for election at the 2003 Annual Meeting must submit the
name(s) and qualifications of any proposed candidate(s) to WEC's Corporate
Secretary at the Company's principal executive offices, 231 West Michigan
Street, P.O. Box 2949, Milwaukee, Wisconsin 53201, not later than November 15,
2002. The Bylaws state that directors shall be stockholders of WEC.
Stockholders who intend to have a proposal considered for inclusion in the
Company's proxy materials for presentation at the 2003 Annual Meeting of
Stockholders must submit the proposal to the Company no later than November 20,
2002. Stockholders who intend to present a proposal at the 2003 Annual Meeting
of Stockholders without inclusion of such proposal in the Company's proxy
materials, or who propose to nominate a person for election as a director at
the meeting, are required to provide notice of such proposal to the Company at
least 70 days and not more than 100 days prior to the scheduled date of the
2003 Annual Meeting.
19
PERFORMANCE GRAPH
The following graph shows a comparison of the cumulative total return, assuming
reinvestment of dividends, over five years had $100 been invested at the close
of business on December 31, 1996 in each of (i) WEC common stock, (ii) the
Standard & Poor's (''S&P'') 500 Index, and (iii) the Edison Electric Institute
Index of Investor-Owned Utilities (''EEI Index'').
FIVE-YEAR CUMULATIVE RETURN CHART
[CHART]
Wisconsin Energy S&P 500 EEI Index
---------------- ------- ---------
12/31/96 $100 $100 $100
12/31/97 114 133 127
12/31/98 129 171 145
12/31/99 86 206 118
12/31/00 106 188 175
12/31/01 110 166 160
Value of Investment at Year-End
----------------------------------------------------------------------------------------------
12/31/1996 12/31/1997 12/31/1998 12/31/1999 12/31/2000 12/31/2001
----------------------------------------------------------------------------------------------
Wisconsin Energy Corporation $100 $114 $129 $ 86 $106 $110
S&P 500 $100 $133 $171 $206 $188 $166
EEI Index $100 $127 $145 $118 $175 $160
----------------------------------------------------------------------------------------------
AVAILABILITY OF FORM 10-K
A copy (without exhibits) of WEC's Annual Report on Form 10-K for the fiscal
year ended December 31, 2001, as filed with the Securities and Exchange
Commission, is available without charge to any stockholder of record or
beneficial owner of WEC common stock by writing to the Corporate Secretary,
Kristine Rappe, at the Company's principal executive offices, 231 West Michigan
Street, P. O. Box 2949, Milwaukee, Wisconsin 53201. In lieu of providing all
stockholders with an Annual Report, the WEC consolidated financial statements
and certain other information found in the Form 10-K is provided in Appendix B
to this proxy statement.
20
APPENDIX A
WISCONSIN ENERGY CORPORATION
AUDIT AND OVERSIGHT COMMITTEE OF THE BOARD OF DIRECTORS
CHARTER
Approved: January 25, 2002
PURPOSE
The principal purpose of the Audit and Oversight Committee (Committee) is to
assist the Board of Directors in carrying out its oversight responsibility of
the Company's financial reporting and internal controls.
COMPOSITION
The Committee shall consist of three or more non-employee directors who are
periodically appointed by the Board. Each member of the Committee shall be free
from any relationships that, in the opinion of the Board, would interfere with,
or would give the appearance of interfering with, the exercise of independent
judgment as a Committee member. This requirement is in accordance with the
standard used by the New York Stock Exchange in determining independence of
directors on Audit Committees. Each member shall be financially literate and at
least one of the Committee members must have accounting or related financial
management expertise, as the Board of Directors interprets such qualifications
in its business judgement. One of the directors shall be appointed Chair for a
term to be determined by the Board and shall preside over the meetings of the
Committee. In the event the Committee Chair is unable to serve as Chair for a
specific meeting, he/she shall designate one of the Committee members to
preside.
AUTHORITY AND RESPONSIBILITIES
The Committee shall have unrestricted access to the independent public
accountant, Company personnel and documentation pertinent to the scope of its
duties and responsibilities.
The duties and responsibilities of the Committee shall be to:
. Evaluate the services of the independent public accounting firm, or
other independent public accountants under consideration, and recommend
to the Board of Directors a firm to be engaged for the coming year. The
Committee shall have the ultimate authority and responsibility to
evaluate and, where appropriate, replace the independent auditor. The
independent auditor is ultimately accountable to the Board of Directors
and the Committee.
. Review and approve proposed audit and non-audit services for the year,
and any additional audit or non-audit services subsequently proposed, to
assure that such services will not affect the independence of the public
accountant.
. Prior to the start of the annual audit, approve the audit plan and
estimated fees for the examination following the independent public
accountant's presentation of the audit plan and objectives of the audit.
. After the annual audit, review the financial statements and other
related financial information to be included in Company's Annual Report
on Form 10-K with appropriate Company management and the independent
public accountant. Review with the independent public accountant its
report to the Committee regarding the audit and its opinion to be issued
on the financial statements. Recommend to the Board any action
considered necessary, including that audited financials be included in
the 10-K.
. Prior to the filing of the Company's Quarterly Report on Form 10-Q,
review the interim financial statements to be included in the 10-Q with
management and the independent public accountant. The Committee Chair
may represent the entire Committee for purposes of this review.
. Review with the independent public accountant its report(s) to
management containing comments and recommendations regarding internal
accounting and financial controls and the adequacies of these controls.
Review management's response(s) and recommend to the Board any action
considered necessary.
A-1
. Meet at least annually with the internal auditor to review Internal
Audit's independence, coordination with the independent public
accountant, staffing, audit scope, significant audit results,
management's responsiveness to recommendations, evaluation of internal
control systems, and other relevant matters.
. Review with the independent public accountant, at least annually, recent
accounting, tax, and financial reporting developments and auditing
standards.
. Recommend to the Board special audits or studies the Committee considers
necessary or advisable. Review the reports issued for such special
audits or studies and recommend to the Board any action considered
necessary.
. Ensure that the independent public accountant submits, at least on an
annual basis, to the Committee a formal written statement delineating
all relationships between the auditor and the Company consistent with
Independence Standards Board Standard No. 1. Engage in a dialogue with
the independent public accountant with respect to any disclosed
relationships or services that may impact the objectivity and
independence of the outside auditor. Recommend that the Board of
Directors take appropriate action, when necessary, to ensure the
independence of the independent public accountant.
. Discuss with the independent public accountant the matters to be
discussed by Statement on Auditing Standards No. 61 relating to the
conduct of the audit.
. Prepare the report required by the rules of the Securities and Exchange
Commission to be included in the Company's annual proxy statement.
. Review the Committee Charter annually and make any recommendations to
the Board as to any changes in duties that it believes are desirable.
. Review any reports submitted regarding compliance with the Company's
Code of Business Conduct.
. Review and provide oversight of:
. Litigation matters, to ensure appropriate management and supervision
is being afforded significant actual and potential litigation and
insurance claims,
. Environmental compliance matters, including review of the Company's
regulatory and civil litigation exposure concerning environmental
contamination and/or toxic torts and to ensure that appropriate
management attention is being given to such matters.
The Committee shall have direct access to and meet as needed with the
officer in charge of each function, without management present, as
appropriate. The officers shall report all significant matters to the
Committee.
. Assume such other duties as the Board may from time to time delegate.
The Committee shall be notified promptly by the Chief Executive Officer or
internal auditor or independent public accountant of the discovery of
fraudulent, questionable or illegal events which could have a material impact
on the financial statements or reputation of the Company.
The Committee shall provide all significant findings to the Board.
MEETINGS
The Committee shall meet not less than twice per year. As deemed necessary by
the Committee, meetings shall be attended by Company personnel. Both the
internal auditor and the independent public accountant may meet alone with the
Committee and have authority and are expected to contact it on any matters
requiring its attention.
A-2
APPENDIX B
WISCONSIN ENERGY CORPORATION
2001 ANNUAL FINANCIAL STATEMENTS
and
REVIEW of OPERATIONS
SELECTED FINANCIAL AND OPERATING DATA
-------------------------------------
WISCONSIN ENERGY CORPORATION
CONSOLIDATED SELECTED FINANCIAL AND STATISTICAL DATA
Financial 2001 2000 (a) 1999 1998 1997
--------- ---------- ---------- ---------- ---------- ---------
Year Ended December 31
Net income (Millions)................................................. $ 219.0 $ 154.2 $ 209.0 $ 188.1 $ 60.7
Earnings per share of common stock
Basic.............................................................. $ 1.87 $ 1.28 $ 1.79 $ 1.65 $ 0.54
Diluted............................................................ $ 1.86 $ 1.27 $ 1.79 $ 1.65 $ 0.54
Dividends per share of common stock................................... $ 0.80 $ 1.37 $ 1.56 $ 1.555 $ 1.535
Operating revenues (Millions)
Utility energy..................................................... $ 2,964.8 $ 2,556.7 $ 2,050.2 $ 1,980.0 $ 1,789.6
Non-utility energy................................................. 337.3 372.8 193.2 34.1 7.0
Manufacturing...................................................... 585.1 382.2 -- -- --
Other.............................................................. 41.3 51.0 29.2 25.3 10.3
---------- ---------- ---------- ---------- ---------
Total operating revenues........................................ $ 3,928.5 $ 3,362.7 $ 2,272.6 $ 2,039.4 $ 1,806.9
========== ========== ========== ========== =========
Manufacturing operating revenues (Millions)
Domestic........................................................... $ 444.9 $ 294.1 -- -- --
International...................................................... 140.2 88.1 -- -- --
---------- ---------- ---------- ---------- ---------
Total manufacturing operating revenues.......................... $ 585.1 $ 382.2 -- -- --
========== ========== ========== ========== =========
At December 31 (Millions)
Total assets.......................................................... $ 8,328.7 $ 8,406.1 $ 6,061.8 $ 5,185.6 $ 4,881.6
Long-term debt and mandatorily redeemable trust preferred securities.. $ 3,437.3 $ 2,932.7 $ 2,334.6 $ 1,749.0 $ 1,532.4
Utility Energy Statistics
-------------------------
Electric
Megawatt-hours sold (Thousands)....................................... 31,062.6 32,042.4 31,257.1 29,940.4 27,671.8
Customers (End of year)............................................... 1,066,275 1,048,711 1,027,785 1,010,318 978,835
Gas
Therms delivered (Millions)........................................... 1,997.2 1,621.5 944.1 922.8 980.7
Customers (End of year)............................................... 966,817 952,177 398,508 388,478 376,732
Non-Utility Energy Statistics
-----------------------------
Independent Power Production
Electric megawatt-hour sales (Thousands).............................. 4,428.2 3,213.2 2,417.2 -- --
Energy Marketing, Trading & Services
Electric megawatt-hour sales (Thousands).............................. 457.6 2,091.2 1,598.1 723.7 --
Gas therm sales (Millions)............................................ 100.3 187.6 -- -- --
================================================================================
CONSOLIDATED SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
(Millions of Dollars,
Except Per Share Amounts) (b)
---------------------------------
March June
----------------- ---------------
Three Months Ended 2001 2000 2001 2000 (a)
------------------ -------- -------- ------ --------
Total operating revenues.......... $1,355.0 $628.0 $859.2 $ 757.0
Operating income.................. 183.8 119.2 103.7 102.1
Net income........................ 87.8 50.6 46.1 30.1
Earnings per share of common stock
Basic.......................... $ 0.74 $ 0.42 $ 0.39 $ 0.25
Diluted........................ $ 0.74 $ 0.42 $ 0.39 $ 0.25
September December
----------------- ---------------
Three Months Ended 2001 2000 (a) 2001 2000 (a)
------------------ -------- -------- ------ --------
Total operating revenues.......... $ 822.0 $853.8 $892.3 $1,123.9
Operating income.................. 150.5 134.7 166.9 88.9
Net income........................ 47.9 44.6 37.2 28.9
Earnings per share of common stock
Basic.......................... $ 0.41 $ 0.37 $ 0.33 $ 0.24
Diluted........................ $ 0.41 $ 0.36 $ 0.31 $ 0.24
================================================================================
(a) Includes WICOR, Inc. and its subsidiaries subsequent to their acquisition
on April 26, 2000.
(b) Quarterly results of operations are not directly comparable because of
seasonal and other factors. See Management's Discussion and Analysis of
Financial Condition and Results of Operations.
B-2
WISCONSIN ENERGY CORPORATION
CONSOLIDATED SELECTED UTILITY OPERATING DATA
2001 2000 (a) 1999 1998 1997
Year Ended December 31 ---------- ---------- ---------- ---------- ---------
Electric Utility
----------------
Operating Revenues (Millions)
Residential..................... $ 654.5 $ 606.7 $ 584.3 $ 576.2 $ 487.2
Small Commercial/Industrial..... 592.9 550.0 524.9 496.2 430.2
Large Commercial/Industrial..... 479.7 472.8 459.4 455.3 402.7
Other--Retail/Municipal......... 70.6 64.7 56.7 54.7 55.2
Resale--Utilities............... 56.8 79.1 74.7 60.9 24.6
Other Operating Revenues........ 12.9 24.5 22.1 20.3 12.2
---------- ---------- ---------- ---------- ---------
Total Operating Revenues..... $ 1,867.4 $ 1,797.8 $ 1,722.1 $ 1,663.6 $ 1,412.1
========== ========== ========== ========== =========
Megawatt-hour Sales (Thousands)
Residential..................... 7,773.4 7,633.2 7,503.1 7,405.0 6,863.6
Small Commercial/Industrial..... 8,595.4 8,524.7 8,257.7 7,746.2 7,433.1
Large Commercial/Industrial..... 11,177.6 11,824.0 11,542.8 11,523.3 11,021.5
Other--Retail/Municipal......... 1,828.6 1,755.8 1,531.4 1,409.3 1,412.6
Resale--Utilities............... 1,687.6 2,304.7 2,422.1 1,856.6 941.0
---------- ---------- ---------- ---------- ---------
Total Sales.................. 31,062.6 32,042.4 31,257.1 29,940.4 27,671.8
========== ========== ========== ========== =========
Number of Customers (Average)
Residential..................... 950,271 934,494 915,713 904,703 876,776
Small Commercial/Industrial..... 103,908 101,665 99,209 97,858 93,259
Large Commercial/Industrial..... 710 716 720 724 714
Other........................... 2,363 2,327 1,978 1,899 1,844
---------- ---------- ---------- ---------- ---------
Total Customers.............. 1,057,252 1,039,202 1,017,620 1,005,184 972,593
========== ========== ========== ========== =========
Gas Utility
-----------
Operating Revenues (Millions)
Residential..................... $ 645.9 $ 450.2 $ 193.8 $ 176.5 $ 222.0
Commercial/Industrial........... 313.4 225.2 95.1 87.9 113.6
Interruptible................... 17.0 13.7 5.3 7.1 9.0
---------- ---------- ---------- ---------- ---------
Total Retail Gas Sales....... 976.3 689.1 294.2 271.5 344.6
Transported Customer-Owned Gas.. 36.7 31.3 14.6 12.0 13.4
Transported--Interdepartmental.. 1.2 1.5 1.8 2.5 3.1
Other Operating Revenues........ 60.3 14.4 (3.8) 9.9 (5.9)
---------- ---------- ---------- ---------- ---------
Total Operating Revenues..... $ 1,074.5 $ 736.3 $ 306.8 $ 295.9 $ 355.2
========== ========== ========== ========== =========
Therms Delivered (Millions)
Residential..................... 756.3 569.0 329.0 289.5 347.9
Commercial/Industrial........... 427.7 336.5 195.3 182.0 211.5
Interruptible................... 25.8 24.9 16.3 23.3 24.5
---------- ---------- ---------- ---------- ---------
Total Retail Gas Sales....... 1,209.8 930.4 540.6 494.8 583.9
Transported Customer-Owned Gas.. 762.4 650.1 347.9 349.4 387.2
Transported--Interdepartmental.. 25.0 41.0 55.6 78.6 9.6
---------- ---------- ---------- ---------- ---------
Total Therms Delivered....... 1,997.2 1,621.5 944.1 922.8 980.7
========== ========== ========== ========== =========
Number of Customers (Average)
Residential..................... 875,339 697,570 360,084 347,747 339,002
Commercial/Industrial........... 79,503 62,626 32,594 31,586 30,594
Interruptible................... 82 72 89 146 170
Transported Customer-Owned Gas.. 4,463 3,247 328 271 254
Transported--Interdepartmental.. 5 6 6 6 7
---------- ---------- ---------- ---------- ---------
Total Customers.............. 959,392 763,521 393,101 379,756 370,027
========== ========== ========== ========== =========
Degree Days (b)
---------------
Heating (6,821 Normal)............. 6,338 6,716 6,318 5,848 7,101
Cooling (685 Normal)............... 711 566 753 800 407
--------
(a) Includes Wisconsin Gas subsequent to the acquisition of WICOR, Inc. on
April 26, 2000. Average gas customers are weighted for the eight months
when Wisconsin Gas was a part of Wisconsin Energy.
(b) As measured at Mitchell International Airport in Milwaukee, Wisconsin.
Normal degree days are based upon a twenty-year moving average.
B-3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CORPORATE DEVELOPMENTS
INTRODUCTION
Wisconsin Energy Corporation is a diversified holding company with subsidiaries
primarily in a utility energy segment, a non-utility energy segment and a
manufacturing segment. Unless qualified by their context, when used in this
document the terms "Wisconsin Energy" or the "Company" refer to the holding
company and all of its subsidiaries.
The utility energy segment, comprised of Wisconsin Electric Power Company
("Wisconsin Electric") Wisconsin Gas Company ("Wisconsin Gas") and Edison Sault
Electric Company ("Edison Sault"), is engaged primarily in the business of
generating electricity and distributing electricity and natural gas in
Wisconsin and the Upper Peninsula of Michigan. The non-utility energy segment,
primarily comprised of Wisvest Corporation ("Wisvest") and W.E. Power, LLC
("W.E. Power"), is principally engaged in independent electric power
development and production. The manufacturing segment consists of companies
which manufacture pumps as well as fluid processing and pump filtration
equipment. In addition, Wisconsin Energy has several other subsidiaries, the
primary two of which are engaged in the development and marketing of recycling
technologies ("Minergy") and in the development of, and investment in real
estate ("Wispark").
Acquisition of WICOR, Inc.: On April 26, 2000, Wisconsin Energy acquired WICOR,
Inc. ("WICOR"). WICOR is the parent of Wisconsin Gas, the largest natural gas
distribution utility in Wisconsin, and of WICOR Industries, Inc. ("WICOR
Industries"), an intermediate holding company which owns several manufacturers
of pumps as well as fluid processing and pump filtration equipment. This
business combination was accounted for as a purchase and, therefore, is
reflected prospectively in Wisconsin Energy's consolidated financial statements
from and after the date of the acquisition.
Cautionary Factors: A number of forward-looking statements are included in this
document. When used, the terms "anticipate," "believe," "estimate," "expect,"
"forecast," "objective," "plan," "possible," "potential," "project" and similar
expressions are intended to identify forward-looking statements.
Forward-looking statements are subject to certain risks, uncertainties and
assumptions which could cause actual results to differ materially from those
that are described, including the factors mentioned throughout this document
and below in "Factors Affecting Results, Liquidity and Capital Resources."
CORPORATE STRATEGY
Business Opportunities
The Company seeks to increase shareholder value by leveraging on the core
competencies within its business segments. Wisconsin Energy's key corporate
strategy is Power the Future which was announced in September 2000. This
strategy is designed to increase the electric generating capacity in the state
of Wisconsin while maintaining a fuel diverse, reasonably priced electric
supply. It also is designed to improve the delivery of energy within the
Company's distribution systems to meet increasing customer demands. The Power
the Future strategy, which is discussed further below, is expected to have a
significant impact on the Company's utility and non-utility energy segments.
Utility Energy Segment: This segment is realizing operating efficiencies
through the combination of Wisconsin Electric and Wisconsin Gas. These
operating efficiencies should increase customer satisfaction and reduce
operating costs. In connection with the Power the Future strategy, over the
next decade, this segment is planning to invest approximately $2.7 billion to
improve the existing energy distribution system and approximately $1.3 billion
to upgrade existing electric generating assets. This segment also plans to
invest approximately $100 million over the next three years to improve the
availability of natural gas supplies to the state of Wisconsin.
Non-Utility Energy Segment: Subject to approval of the Public Service
Commission of Wisconsin ("PSCW"), this segment will primarily focus on
improving the supply of electric generation in Wisconsin. W.E. Power, LLC has
been formed to own and construct the new generation assets under the Power the
Future strategy. The majority of Wisvest's assets are being divested in order
to direct the capital and management attention to Power the Future.
B-4
Manufacturing Segment: This segment continues to build on the strong name
recognition and customer relationships that were developed under WICOR. This
segment intends to continue its growth through international expansion,
acquiring value-adding businesses, capturing cost efficiencies, implementing
operating process improvements, and increasing sales through new product
introductions and expanded market share.
Power the Future Strategy: In late February 2001, Wisconsin Energy announced
enhancements to a 10-year, $7 billion strategy, originally proposed in
September 2000, to improve the supply and reliability of electricity in
Wisconsin. This Power the Future strategy is intended to meet the growing
demand for electricity and ensure a diverse fuel mix while keeping electricity
prices reasonable. According to a report issued in June 2001, by the Wisconsin
Governor's Office, demand for electricity in the state of Wisconsin is
currently expected to outstrip supply by 7,220 megawatts by the year 2016.
Power the Future would add new coal and natural gas capacity to the state's
power portfolio and would allow Wisconsin Electric to roughly maintain its
current fuel mix.
As part of its Power the Future strategy, Wisconsin Energy plans to make the
following investments over the next decade:
. Approximately $3 billion in 2,800 megawatts of new natural gas-based and
coal-based generating capacity;
. Approximately $1.3 billion in upgrades to existing electric generating
assets; and
. Approximately $2.7 billion in new and existing energy distribution system
assets.
In November 2001, Wisconsin Energy created a new non-utility energy subsidiary,
W.E. Power, LLC, that would construct and own the new generating capacity.
Under the enhanced Power the Future strategy, Wisconsin Electric, subject to
PSCW approval, would lease each new facility and would operate and maintain the
new plants as part of 20 to 25-year lease agreements. At the end of the leases,
Wisconsin Electric would have the right to acquire the plants outright at
market value or, depending on tax considerations at that time, the subsidiary
could choose to extend the lease. Smaller investor-owned or municipal
utilities, cooperatives and power marketing associations would have the
opportunity to participate in the project, including expanding or extending
wholesale power purchases from Wisconsin Electric as a result of the additional
electric generating capacity included in the proposal.
Implementation of the Power the Future strategy is subject to a number of
regulatory approvals. In late February 2001, Wisconsin Energy made preliminary
filings for its enhanced Power the Future proposal with the PSCW. Subsequently,
the state legislature amended several laws, making changes which are critical
to the implementation of Power the Future. On October 16, 2001, the PSCW issued
a declaratory ruling finding, among other things, that it was prudent to
proceed with Power the Future and for the Company to incur the associated
pre-certification expenses. However, individual expenses are subject to review
and must be approved by the PSCW in order to be recovered. The PSCW also ruled
that such expenses fall within the reliability "carve-out" provisions contained
in the PSCW's order approving the merger of WICOR and Wisconsin Energy,
allowing the Company to seek recovery of such expenses. Wisconsin Energy
anticipates obtaining the capital necessary to finance and execute this
strategy from a combination of internal and external sources.
For further information concerning the Power the Future strategy, see "Factors
Affecting Results, Liquidity and Capital Resources" below.
Divestiture of Non-Core Assets
The Power the Future strategy led to a decision to divest non-core businesses.
These non-core businesses primarily include non-utility generation assets
located outside of the Midwest and a substantial amount of Wispark's real
estate portfolio. During 2000 and 2001, the Company has received total proceeds
of almost $700 million from the divestiture of non-core assets.
Utility Energy Segment: During 2000, Wisconsin Electric and Edison Sault agreed
to join American Transmission Company LLC ("ATC") by transferring their
electric utility transmission assets to ATC in exchange for equity interests in
the new company. Transfer of these electric transmission assets, with a net
book value of approximately $254.9 million, became effective on January 1,
2001. During 2001, ATC issued debt and distributed $119.8 million of cash back
to Wisconsin Electric and Edison Sault as a partial return of their original
equity contribution. Joining ATC is consistent with the Federal Energy
Regulatory Commission's Order No. 2000, designed to foster competition,
efficiency and reliability in the electric industry.
B-5
The Company anticipates that the transfer of its electric transmission assets
to ATC will be earnings neutral subject to approval of transmission cost rate
recovery requests made with the PSCW and the Michigan Public Service Commission
("MPSC") during 2001. However, the asset transfer has changed where
transmission-related activities are reflected on the income statement. Prior to
the asset transfer, transmission-related costs were reflected in Other
Operation and Maintenance expense, Depreciation expense and Financing Costs
(for interest expense). Following transfer of the transmission assets, the
Company reports fees paid to ATC for electric transmission service in Other
Operation and Maintenance expense and recognizes an equity interest in ATC's
reported earnings in Other Income (Deductions), Equity in Earnings of
Unconsolidated Affiliates. See "Utility Rates and Regulatory Matters" below for
information related to recovery of the Company's transmission costs.
Non-Utility Energy Segment: During the second quarter of 2001, the Company
sold FieldTech, Inc. and Wisvest's interest in Blythe Energy, LLC, an
independent power production project in the state of California, in separate
transactions. Wisconsin Energy realized after-tax gains of approximately $16.5
million or $0.14 per diluted share as a result of the sales of FieldTech and
Blythe.
During April 2001, the operations of WICOR Energy Services Company were merged
into Kaztex Energy Management, Inc., an unconsolidated affiliate of Wisconsin
Energy. During the fourth quarter of 2001, the operations of Griffin Energy
Marketing, L.L.C., a division of Wisvest, were halted, ending electric
marketing activities by the non-utility energy segment. Griffin's activities
had been winding down during 2001 as it closed out previously negotiated
transactions.
B-6
RESULTS OF OPERATIONS
CONSOLIDATED EARNINGS
The Company's adjusted earnings for the year ended December 31, 2001 were $2.04
per share, an increase of $0.53 per share when compared to 2000 adjusted
earnings. This increase reflected higher revenues and improved electric margins
within the utility energy segment, improved earnings from Wisvest, stable
manufacturing earnings in a soft economy, and the favorable impact of the
Company's share repurchase program. Including non-recurring gains and charges
and the impacts of Statement of Financial Accounting Standards ("SFAS") No.
133, Accounting for Derivative Instruments and Hedging Activities, reported
earnings for 2001 were $1.86 per share, or a $0.59 per share increase when
compared to reported earnings for 2000.
The following table compares Wisconsin Energy's diluted earnings per share by
business segment for 2001 and 1999 with similar information for 2000 on an
actual and pro forma basis.
Pro forma Actual
Diluted Earnings Per Share 2001 2000(a) 2000 1999
-------------------------- ------ --------- ------ ------
Utility Energy Segment................. $ 2.38 $ 2.00 $ 1.82 $ 1.94
Non-Utility Energy Segment............. 0.12 -- 0.01 0.02
Manufacturing Segment.................. 0.25 0.24 0.18 --
Other and Merger-related Costs(b)...... (0.71) (0.73) (0.50) (0.08)
------ ------ ------ ------
Adjusted Earnings................... 2.04 1.51 1.51 1.88
Gains/(Losses) on Investments, Net(c).. (0.07) 0.45 0.45 --
Non-Recurring Charges(d)............... -- (0.69) (0.69) (0.09)
SFAS 133 Charges, Net(e)............... (0.11) -- -- --
------ ------ ------ ------
Net Earnings........................ $ 1.86 $ 1.27 $ 1.27 $ 1.79
--------
(a) Pro forma assumes that the WICOR acquisition had occurred on January 1,
2000 and includes estimated merger-related costs from January through April
2000.
(b) Includes the holding company, other non-utility companies and
merger-related costs. Merger-related costs in 2001 and 2000 include
primarily goodwill amortization expense and interest expense net of tax
related to the WICOR merger.
(c) During 2001, the net loss on investments consists of $0.14 per share of
gains on the sale of the Company's interests in Blythe and FieldTech offset
by a $0.21 per share write-down of non-utility assets. During 2000, the
gain on investments consists of a $0.45 per share gain on the sale of the
Company's interests in SkyGen Energy Holdings, LLC ("SkyGen").
(d) During 2000, non-recurring charges consist of $0.33 per share related to
severance and employee benefits, $0.26 per share related to the valuation
of non-core investments, and a $0.10 per share contribution to the
Wisconsin Energy Foundation. During 1999, non-recurring charges consist of
a $0.09 per share charge for settlement of litigation.
(e) Includes $0.09 per share cumulative effect of a change in accounting
principle related to the adoption of SFAS 133 offset by $0.20 per share of
SFAS 133 charges.
An analysis of contributions to earnings by segment follows.
UTILITY ENERGY SEGMENT CONTRIBUTION TO EARNINGS
Utility net earnings during 2001 increased by $114.4 million to $274.4 million
compared to reported 2000 earnings. The primary causes for the growth in
utility earnings were $90.0 million attributable to price increases to cover
higher fuel, purchased power and other operating costs from the electric
business, a $24.5 million increase attributable to Wisconsin Gas operations as
a result of the seasonality of the gas heating business, the timing of the
acquisition of Wisconsin Gas as part of the acquisition of WICOR in April 2000
and $10.5 million of interest income accrued on the deposit tendered in the
Giddings & Lewis, Inc./City of West Allis lawsuit.
Utility net earnings during 2001 increased by $100.0 million when compared to
2000 pro forma earnings. The primary causes for this increase were $65.8
million attributable to higher electric utility gross margins and $10.5 million
of interest income accrued on the deposit in the Giddings & Lewis, Inc./City of
West Allis lawsuit offset partially by a decrease of $15.6 million of gas
utility gross margins.
B-7
Utility net earnings during 2000 decreased by $56.0 million when compared to
1999 reflecting $45.9 million of non-recurring charges primarily associated
with the WICOR merger, increased fuel and purchased power costs at Wisconsin
Electric and cooler than normal summer weather.
The following table summarizes the utility energy segment's earnings during
2001 and 1999 with similar information for 2000 on an actual and pro forma
basis.
Pro forma Actual
Utility Energy Segment 2001 2000 (a) 2000 (b) 1999
---------------------- -------- --------- -------- --------
(Millions of Dollars)
Operating Revenues
Electric Utility..................... $1,867.4 $1,797.8 $1,797.8 $1,722.1
Gas Utility.......................... 1,074.5 952.3 736.3 306.8
Other Utility........................ 22.9 22.9 22.6 21.3
-------- -------- -------- --------
Total Operating Revenues................ 2,964.8 2,773.0 2,556.7 2,050.2
Fuel and Purchased Power................ 517.3 513.5 513.5 458.9
Cost of Gas Sold........................ 751.6 613.8 486.7 174.0
-------- -------- -------- --------
Gross Margin......................... 1,695.9 1,645.7 1,556.5 1,417.3
Other Operating Expenses
Other Operation and Maintenance...... 765.5 741.6 705.2 656.6
Depreciation, Decommissioning and
Amortization....................... 308.6 309.7 297.5 237.2
Property and Revenue Taxes........... 75.4 71.1 70.9 68.3
-------- -------- -------- --------
Operating Income................. 546.4 523.3 482.9 455.2
Other Income............................ 38.8 6.3 7.1 12.5
Financing Costs......................... 127.4 133.9 129.5 115.5
-------- -------- -------- --------
Adjusted Income Before Income Taxes.. 457.8 395.7 360.5 352.2
Income Taxes............................ 177.3 153.5 140.3 125.4
-------- -------- -------- --------
Adjusted Earnings Before WICOR Merger
Costs................................. 280.5 242.2 220.2 226.8
WICOR Merger Costs, After Tax(c)........ 4.9 21.8 14.3 --
-------- -------- -------- --------
Adjusted Earnings(d)................. $ 275.6 $ 220.4 $ 205.9 $ 226.8
======== ======== ======== ========
Net Earnings......................... $ 274.4 $ 174.4 $ 160.0 $ 216.0
======== ======== ======== ========
--------
(a) Includes Wisconsin Gas as if it had been part of Wisconsin Energy since
January 1, 2000.
(b) Wisconsin Energy's financial statements reflect the operations of Wisconsin
Gas subsequent to the WICOR merger on April 26, 2000.
(c) Merger-related costs represent WICOR acquisition purchase accounting
entries, primarily goodwill amortization and interest expense.
(d) During 2001, adjusted earnings exclude a net loss on investments of $1.2
million. During 2000, adjusted earnings exclude $45.9 million of net
non-recurring charges primarily associated with the WICOR merger. During
1999, adjusted earnings exclude a net one-time charge of $10.8 million
related to the settlement of litigation.
Electric Utility Revenues, Gross Margins and Sales
During 2001, Wisconsin Energy's total electric utility operating revenues
increased by $69.6 million or 3.9% compared with 2000. Wisconsin Energy
attributes this growth mostly to incremental rate increases in effect during
2001 related to higher fuel, purchased power and other operating costs. For
additional information concerning these rate increases, see "Factors Affecting
Results, Liquidity and Capital Resources" below. Higher electric cooling load
during the summer of 2001 caused by a return to normal summer weather also
contributed to the growth in electric operating revenues. These revenue
increases were partially offset by a reduction in total electric sales during
2001 due in large part to a softening economy in the region. Purchased power
expenses increased by $20.3 million or 11.2% during 2001 primarily as a result
of higher natural gas prices and, to a lesser extent, as a result of higher
demand costs during 2001 associated with purchased power contracts. A $16.5
million or 5.1% decline in fuel costs during 2001, primarily driven by a change
in the Company's electric supply mix to lower cost nuclear generation and by an
overall reduction in demand for electric energy during 2001, resulted in a net
increase in fuel and purchased power expenses of $3.8
B-8
million or 0.7% when compared with 2000. Due to the 3.9% increase in operating
revenues partially offset by the slightly higher fuel and purchased power
costs, electric gross margin (total electric utility operating revenues less
fuel and purchased power expenses) grew by $65.8 million or 5.1% during 2001
when compared with 2000.
During 2000, Wisconsin Energy's total electric utility operating revenues
increased by $75.7 million or 4.4% compared with 1999 primarily due to higher
electric energy sales during 2000 and to electric rate increases at Wisconsin
Electric that became effective in early April 2000 and on August 30, 2000,
respectively. For additional information concerning these rate increases, see
"Factors Affecting Results, Liquidity and Capital Resources" below. Fuel and
purchased power expenses increased by $54.5 million or 12.0% during 2000
reflecting increased generation and significantly higher natural gas prices.
Purchased power expenses also grew due to higher demand costs during 2000
associated with purchased power contracts. To a certain extent, Wisconsin
Energy was able to limit the increase in fuel and purchased power costs during
2000 by changing its electric supply mix away from higher cost natural
gas-fired generation and power purchases to lower cost nuclear and coal-fired
generation.
The following table compares Wisconsin Energy's electric utility operating
revenues and its gross margin during 2001 with similar information for 2000 and
1999.
Electric Revenues and Gross Margin Megawatt-Hour Sales
---------------------------------- --------------------------
Electric Utility Operations 2001 2000 1999 2001 2000 1999
--------------------------- -------- -------- -------- -------- -------- --------
(Millions of Dollars) (Thousands)
Operating Revenues
Residential......................... $ 654.5 $ 606.7 $ 584.3 7,773.4 7,633.2 7,503.1
Small Commercial/Industrial......... 592.9 550.0 524.9 8,595.4 8,524.7 8,257.7
Large Commercial/Industrial......... 479.7 472.8 459.4 11,177.6 11,824.0 11,542.8
Other-Retail/Municipal.............. 70.6 64.7 56.7 1,828.6 1,755.8 1,531.4
Resale-Utilities.................... 56.8 79.1 74.7 1,687.6 2,304.7 2,422.1
Other Operating Revenues............ 12.9 24.5 22.1 -- -- --
-------- -------- -------- -------- -------- --------
Total Operating Revenues............... 1,867.4 1,797.8 1,722.1 31,062.6 32,042.4 31,257.1
Fuel and Purchased Power
Fuel................................ 315.0 331.5 299.1
Purchased Power..................... 202.3 182.0 153.7
-------- -------- --------
Total Fuel and Purchased Power......... 517.3 513.5 452.8
-------- -------- --------
Gross Margin........................... $1,350.1 $1,284.3 $1,269.3
Weather--Degree Days(a)
Heating (6,821 Normal).............. 6,338 6,716 6,318
Cooling (685 Normal)................ 711 566 753
--------
(a) As measured at Mitchell International Airport in Milwaukee, Wisconsin.
Normal degree days are based upon a twenty-year moving average.
During 2001, total electric sales fell by 3.1% compared with 2000, reflecting a
softening economy that has especially affected large commercial and industrial
customers such as Wisconsin Electric's largest retail customers, two iron ore
mines. Sales to these mines decreased by 17.7% during 2001, with one of the
mines currently idle pending a production decision by its owners. Excluding the
two mines, total electric sales decreased 1.8% during 2001 and sales to the
remaining large commercial/industrial customers decreased by 2.3% when compared
with 2000. Due to warmer weather during the summer of 2001, a 1.8% increase in
sales to residential customers, who are more weather sensitive and contribute
higher margins than other customer classes, partially offset the effects of the
soft economy on electric sales during 2001. As measured by cooling degree days,
2001 was 25.6% warmer than 2000 and 3.8% warmer than normal. Sales for resale
to other utilities, the Resale-Utilities customer class, declined 26.8% during
2001 primarily as a result of a reduced demand for wholesale power.
During 2000, total electric energy sales increased by 2.5% compared with 1999,
mostly reflecting growth in the average number of residential, small
commercial/industrial and other retail/municipal customers and a 13.1% increase
in sales to the iron ore mines noted above. Excluding these mines, total
electric sales increased by 1.7% and sales to the remaining large
commercial/industrial customers were unchanged between the comparative periods.
Growth in the average number of customers partially offset the effects of
cooler weather during the 2000 cooling season on total electric energy sales
and on operating revenues. As measured by cooling degree days, 2000 was 24.8%
cooler than 1999 and 17.4% cooler than normal.
B-9
Gas Utility Revenues, Gross Margins and Therm Deliveries
The following table compares Wisconsin Energy's gas utility operating revenues
and its gross margin (total gas utility operating revenues less cost of gas
sold) during 2001 and 1999 with similar information for 2000 on an actual and
pro forma basis.
Pro forma Actual
Gas Utility Operations 2001 2000(a) 2000(b) 1999
---------------------- ---- --------- ------- ----
(Millions of Dollars)
Gas Operating Revenues $1,074.5 $952.3 $736.3 $306.8
Cost of Gas Sold...... 751.6 613.8 486.7 174.0
------------- ----------- ----------- -----------
Gross Margin.......... $ 322.9 $338.5 $249.6 $132.8
--------
(a) Wisconsin Energy's gas utility information reflects the operations of
Wisconsin Gas subsequent to the WICOR merger on April 26, 2000. For further
information concerning gas utility operations during the comparative
periods, see "Pro Forma Gas Utility Gross Margins and Therm Deliveries"
below.
(b) Wisconsin Energy's financial statements reflect the operations of Wisconsin
Gas subsequent to the WICOR merger on April 26, 2000.
During 2001, Wisconsin Energy's gas operating revenues increased by $122.2
million or 12.8% when compared with 2000 pro forma revenues. This increase
reflected a $137.8 million increase due to increases in the cost of gas sold
offset in part by warmer weather which reduced volumes sold.
During 2000, Wisconsin Energy's total gas utility operating revenues increased
by $429.5 million or 140.0% compared with the same period during 1999. Gross
margin on gas utility operating revenues increased by $116.8 million or 88.0%.
Of these changes, $336.7 million of the increase in total gas utility operating
revenues and $109.3 million of the increase in gross margin were attributable
to the addition of Wisconsin Gas to the Company in April 2000.
Pro Forma Gas Utility Gross Margin and Therm Deliveries
The following table compares pro forma gas utility gross margin and therm
deliveries during 2001, 2000 and 1999 as if Wisconsin Gas had been part of
Wisconsin Energy since January 1, 1999. Gross margin is a better performance
indicator than revenues because changes in the cost of gas sold flow through to
revenue under gas cost recovery mechanisms that do not impact gross margin.
Gross Margin Therm Deliveries
Pro Forma ---------------------- -----------------------
Gas Utility Operations 2001 2000(a) 1999(a) 2001 2000(a) 1999(a)
---------------------- ------ ------- ------- ------- ------- -------
(Millions of Dollars) Millions
Customer Class
Residential........................... $209.0 $216.0 $207.0 756.3 803.8 769.4
Commercial/Industrial................. 62.3 64.4 61.6 427.7 462.1 445.8
Interruptible......................... 2.0 2.5 3.9 25.8 35.2 45.3
------ ------ ------ ------- ------- -------
Total Retail Gas Gross Margin..... 273.3 282.9 272.5 1,209.8 1,301.1 1,260.5
Transported Gas....................... 41.4 47.0 41.2 787.4 897.1 903.7
Other Operating....................... 8.2 8.6 8.1 -- -- --
------ ------ ------ ------- ------- -------
Total Operating Gross Margin...... $322.9 $338.5 $321.8 1,997.2 2,198.2 2,164.2
Weather--Degree Days (b)
Heating (6,821 Normal)................ 6,338 6,716 6,318
--------
(a) Information for the years 2000 and 1999 include Wisconsin Gas as if it had
been part of Wisconsin Energy since January 1, 1999.
(b) As measured at Mitchell International Airport in Milwaukee, Wisconsin.
Normal degree days are based upon a twenty-year moving average.
Gas margins totaled $322.9 million in 2001, or a $15.6 million decline from
2000 pro forma amounts. This decline was directly related to warmer winter
weather which reduced the heating load. Total therm deliveries of natural gas
decreased by 9.1% during 2001, but varied within customer classes. Volume
deliveries for the residential and commercial/industrial customer classes
decreased by 5.9% and 7.4%, respectively, reflecting warmer weather.
Residential and commercial customers are more weather
B-10
sensitive and contribute higher margins per therm than other customers.
Transportation volumes were 12.2% lower than the prior year reflecting fuel
switching to lower-cost fuel options and a softening economy.
Other Utility Segment Items
Other Operation and Maintenance Expenses: Other operation and maintenance
expenses increased by $23.9 million during 2001 when compared with 2000 pro
forma amounts. The most significant change in other operation and maintenance
expenses between the comparative periods resulted from $44.9 million of higher
electric transmission expenses caused by a change in how electric transmission
costs are recorded as a result of the transfer of Wisconsin Electric's and
Edison Sault's electric transmission assets to ATC on January 1, 2001.
Partially offsetting this was a reduction in costs as a result of the WICOR
merger, which led to the consolidation of common operating and support areas.
The most significant change in other operation and maintenance expenses between
2000 and 1999 resulted from $52.7 million of non-recurring charges during 2000
at Wisconsin Electric associated with the WICOR merger including severance,
benefits and other items. Increased other operation and maintenance expenses
during 2000, excluding Wisconsin Gas, were also attributable to $14.8 million
of higher non-fuel fossil generation expenses and $9.0 million of higher
electric distribution expenses offset in part by an $8.8 million decline in
nuclear non-fuel expenses and a $9.9 million decline in customer service
expenses.
Depreciation, Decommissioning and Amortization Expenses: Depreciation,
decommissioning and amortization expenses were $1.1 million lower during 2001
compared with 2000 pro forma. The transfer of electric transmission assets to
the ATC resulted in a reduction in depreciation expense, which was partially
offset by increased capital asset additions for electric generation and for
electric and gas distribution systems.
Excluding Wisconsin Gas, depreciation, decommissioning and amortization
expenses were $39.0 million higher during 2000 compared with 1999. Pursuant to
a 1998 rate order for the 1998/1999 test year, Wisconsin Electric was
amortizing pre-1991 contributions in aid of construction. This amortization,
which was completed as of December 31, 1999, had the effect of reducing
depreciation expense by $22.8 million in 2000 compared to 1999. Higher average
depreciable property during 2000 also contributed to an increase in
depreciation expense.
B-11
NON-UTILITY ENERGY SEGMENT CONTRIBUTION TO EARNINGS
As part of its ongoing efforts to divest non-core assets, the Company
significantly reduced certain of Wisvest's operations during 2001. The Company
is evaluating bids to sell two fossil-fueled power plants in the state of
Connecticut owned by Wisvest- Connecticut, LLC, a wholly-owned subsidiary of
Wisvest. The ultimate timing, proceeds and any gain or loss as a result of the
asset sale is dependent upon many factors, including, but not limited to the
independent power markets, forward electric price curves, the ability of
independent power producers to obtain financing and general economic
conditions. The following table compares the non-utility energy segment's
earnings during 2001 and 1999 with similar actual and pro forma information for
2000. In addition, the table summarizes electric megawatt-hour sales by
Wisvest-Connecticut's power plants as well as electric and natural gas sales
from non-utility energy marketing, trading and services operations during the
comparative periods.
Pro forma Actual
Non-Utility Energy Segment 2001 2000 (a) 20000 (b) 1999 (c)
-------------------------- -------- --------- -------- --------
(Millions of Dollars, Except Statistics)
Operating Revenues
Independent Power Production.............. $ 213.8 $ 149.5 $ 149.5 $ 101.1
Energy Marketing, Trading & Services...... 97.9 220.0 194.2 74.5
Other..................................... 25.6 33.1 29.1 17.6
-------- -------- -------- --------
Total Operating Revenues..................... 337.3 402.6 372.8 193.2
Fuel and Purchased Power..................... 142.8 168.6 168.6 129.2
Cost of Gas Sold............................. 72.2 133.5 108.0 --
Cost of Goods Sold........................... 6.8 8.2 8.2 --
-------- -------- -------- --------
Gross Margin.............................. 115.5 92.3 88.0 64.0
Other Operating Expenses..................... 79.3 86.3 81.7 44.3
-------- -------- -------- --------
Operating Income.......................... 36.2 6.0 6.3 19.7
Other Income................................. 5.6 24.0 24.0 6.8
Financing Costs.............................. 17.2 30.0 29.8 21.8
-------- -------- -------- --------
Adjusted Income Before Income Taxes....... 24.6 -- 0.5 4.7
Income Tax Expense/ (Benefit)................ 9.8 (0.5) (0.4) 2.0
-------- -------- -------- --------
Adjusted Earnings (d)..................... $ 14.8 $ 0.5 $ 0.9 $ 2.7
======== ======== ======== ========
Net Earnings.............................. $ 18.7 $ 39.0 $ 39.4 $ 2.7
======== ======== ======== ========
Statistics
Independent Power Production
Electric Megawatt-Hour Sales (Thousands).. 4,428.2 3,213.2 3,213.2 2,417.2
Energy Marketing, Trading & Services
Electric Megawatt-Hour Sales (e) (Thousands) 457.6 2,091.2 2,091.2 1,598.1
Gas Therm Sales (b) (Millions)..............
-------- 100.3 267.0 187.6 --
(a) Includes the operations of the WICOR subsidiaries as if they had been part
of Wisconsin Energy since January 1, 2000.
(b) Reflect the operations of WICOR Energy Services and FieldTech, subsidiaries
of WICOR, subsequent to the merger on April 26, 2000. During April 2001,
the operations of WICOR Energy Services were merged into an unconsolidated
affiliate of Wisconsin Energy, ending direct gas marketing activities by
the non-utility energy segment. In May 2001, FieldTech was sold to an
unrelated third party.
(c) Includes the operations of Wisvest-Connecticut subsequent to their
acquisition in April 1999.
(d) Adjusted earnings during 2001 exclude $16.5 million of net gains on the
sale of assets partially offset by $12.6 million of net charges related to
SFAS 133. Adjusted earnings during 2000 exclude $54.6 million of net gains
on the sale of assets partially offset by $16.1 million of net
non-recurring charges relating to severance costs associated with the
divestiture of non-core businesses and to write-downs associated with
certain investments.
(e) During the fourth quarter of 2001, the operations of Griffin Energy
Marketing, L.L.C., a division of Wisvest, were halted, ending electric
marketing activities by the non-utility energy segment. Griffin's
activities wound down throughout 2001 as it closed out previously
negotiated transactions.
During 2001, adjusted earnings of the non-utility energy segment grew by $13.9
million when compared with 2000 on an actual basis or by $14.3 million when
compared with 2000 on a pro forma basis. Adjusted earnings during 2001 exclude
$16.5 million of net gains on the sale of assets offset in part by net charges
of $12.6 million as a result of the adoption of SFAS 133 on January 1,
B-12
2001 and subsequent valuation charges from applying SFAS 133 during the year.
Adjusted earnings during 2000 exclude $54.6 million of net gains on the sale of
assets offset in part by $16.1 million of after-tax non-recurring charges
during the fourth quarter of 2000 relating to severance costs associated with
the divestiture of non-core businesses and for write-downs associated with
certain investments.
Adjusted earnings increased during 2001 primarily due to improved operating
results from Wisvest-Connecticut's two power plants offset in part by start up
costs associated with W.E. Power, LLC. Beginning in the fourth quarter of 2000,
the Wisvest-Connecticut assets are accounted for as assets held for sale. Under
this accounting, no depreciation expense of long-lived assets is reported. This
change in accounting benefited the non-utility energy segment by approximately
$0.05 per share when compared to 2000.
During 2001, both of Wisvest-Connecticut's plants operated for the full year.
During 2000, one of Wisvest-Connecticut's plants experienced an extended outage
which increased purchased power and maintenance costs. During 1999, the Company
did not operate Wisvest-Connecticut's two plants until April, when the plants
were originally acquired.
MANUFACTURING SEGMENT CONTRIBUTION TO EARNINGS
During 2001, the manufacturing segment contributed $29.1 million to earnings
before merger costs, which was slightly better than the prior year pro forma
amounts. Including merger costs, net income was $9.7 million, or $1.7 million
better than 2000 pro forma amounts. Prior to the WICOR acquisition, Wisconsin
Energy did not have a manufacturing segment. The following table summarizes the
manufacturing segment's earnings during 2001 with similar information for 2000
on an actual and pro forma basis.
Pro forma Actual
Manufacturing Segment 2001 2000 (a) 2000 (b)
--------------------- ------ --------- --------
(Millions of Dollars)
Operating Revenues.............................
Domestic.................................... $444.9 $433.9 $294.1
International............................... 140.2 141.3 88.1
------ ------ ------
Total Operating Revenues....................... 585.1 575.2 382.2
Cost of Goods Sold............................. 423.6 414.1 270.8
------ ------ ------
Gross Margin................................ 161.5 161.1 111.4
Other Operating Expenses....................... 107.2 106.8 71.0
------ ------ ------
Operating Income............................ 54.3 54.3 40.4
Other Income (Deductions)...................... 0.3 (0.5) (0.8)
Financing Costs................................ 7.1 6.9 4.3
------ ------ ------
Adjusted Income Before Income Taxes......... 47.5 46.9 35.3
Income Taxes................................... 18.4 18.0 13.8
------ ------ ------
Adjusted Earnings Before WICOR merger costs. 29.1 28.9 21.5
WICOR merger costs, after tax (c).............. 19.4 20.9 14.0
------ ------ ------
Net Earnings................................ $ 9.7 $ 8.0 $ 7.5
====== ====== ======
--------
(a) Includes operations of the manufacturing segment as if it had been part of
Wisconsin Energy since January 1, 2000.
(b) Wisconsin Energy's financial statements reflect operations of the
manufacturing segment subsequent to the WICOR merger on April 26, 2000.
(c) Merger-related costs represent WICOR acquisition purchase accounting
entries, primarily goodwill amortization and interest expense.
Operating revenues were up by $9.9 million during 2001 as compared to pro forma
operating revenues in 2000 primarily due to acquisitions, offset partially by
the effects of a decline in the economy on base-business sales and unfavorable
foreign currency translations. The manufacturing segment's modest decline
reflects the steadiness and diversification of the markets it serves. For the
year, operating income of $54.3 million was essentially flat compared with 2000
on a pro forma basis. In spite of additional operations due to the
acquisitions, other operating expenses increased slightly reflecting aggressive
cost reduction initiatives implemented early in the year. The manufacturing
segment's results for 2000 were impacted by a series of expenses associated
with the defense of intellectual property rights, development of a new beverage
dispensing technology and the integration of an acquisition.
B-13
CONSOLIDATED OTHER INCOME AND DEDUCTIONS
During 2001, the Company incurred $73.0 million of charges, which are recorded
as "Other" in Other Income and Deductions. These charges primarily represented
$38.5 million of SFAS 133 charges related to the decline in oil prices and
$37.6 million in write-downs in the Witech venture capital portfolio. During
2000, the Company incurred $39.3 million of charges which are recorded in
"Other" in Other Income and Deductions. These charges primarily represented
write-downs of non-core assets.
CONSOLIDATED FINANCING COSTS
During 2001, total financing costs were $246.6 million, up slightly from 2000
amounts but mitigated by the decline in short-term interest rates in 2001.
During 2000, financing costs were $244.8 million, or $94.3 million higher than
1999. The 2000 financing costs were influenced by the April 2000 acquisition of
WICOR, which resulted in almost $1.5 billion of additional debt for the Company.
CONSOLIDATED INCOME TAXES
The Company's consolidated effective income tax rate was 41.9%, 44.9%, and
34.7% for the three years ending December 31, 2001, respectively. The 2001
effective income tax rate reflects the amortization of the WICOR goodwill which
is not deductible for income tax purposes. The 2000 effective income tax rate
includes the amortization of WICOR goodwill for eight months, as well as the
impact of unrealized capital losses. The 1999 effective income tax rate does
not include WICOR goodwill amortization, and it includes a regulatory
adjustment for the accounting for contributions in aid of construction which
reduced the effective tax rate by 2.5%.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
The following table summarizes Wisconsin Energy's cash flows during 2001, 2000
and 1999:
Wisconsin Energy Corporation 2001 2000 (a) 1999
---------------------------- ------- --------- -------
(Millions of Dollars)
Cash Provided by (Used in)
Operating Activities.... $555.8 $ 461.0 $306.9
Investing Activities.... ($464.3) ($1,520.5) ($888.8)
Financing Activities.... ($ 85.0) $1,026.5 $638.8
--------
(a) Includes the operations of the WICOR subsidiaries subsequent to the merger
on April 26, 2000.
Operating Activities
During 2001, cash flow from operations increased to $555.8 million, or a $94.8
million improvement over 2000. This increase was primarily attributable to
increased operating income and higher non-cash charges. During 2000, cash flow
from operations increased by $154.1 million over 1999 due primarily to
increased non-cash charges and a $110 million payment made in 1999 related to
litigation. This payment was returned to the Company with interest in early
2002.
Investing Activities
During 2001, the Company spent $672.5 million on capital expenditures, which
was a $61.5 million increase over 2000. The largest increase in capital
expenditures came within the utility energy segment for electric and gas
distribution assets. During 2001, the Company's manufacturing segment also made
acquisitions totaling $35.7 million. In 2000, the Company completed the WICOR
acquisition at a purchase price of $1.2 billion, as well as a small
manufacturing acquisition. These acquisitions were initially financed with
short-term commercial paper.
In 2001, the Company continued its strategy of divesting non-core assets.
During 2001, the Company received proceeds from asset divestitures of $294.4
million related to the transfer of electric transmission assets to ATC and the
successful sale of the Wisvest Blythe project and FieldTech. During 2000, the
Company received proceeds from asset sales of approximately $408.4 million
which primarily reflects the sale of Wisvest's investment in SkyGen, an
independent power producer. The SkyGen sale resulted in a gain of $0.45 per
share in 2000.
B-14
Financing Activities
In September 2000, the Company initiated a share repurchase program. Under the
program, the Company repurchased and retired 10.9 million shares through
December 31, 2001 at a cost of $234.5 million. It is expected that this program
will continue during 2002. In September 2000, the Company also announced a
reduction in the quarterly dividend from $0.39 per share to $0.20 per share.
This action reduced the dividends paid in 2001 as compared to 2000 and also
reduced the proceeds from the issuance of common stock under the dividend
reinvestment program.
During 2001, the Company refinanced approximately $1.3 billion of commercial
paper through the issuance of intermediate-term senior notes. In January 2002,
the Company redeemed $100 million of 8 3/8% long-term debt and $3.4 million of
9 1/8% long-term debt. These redemptions were financed with short-term
commercial paper bearing rates of approximately 2%. The 2002 redemptions are
expected to have an initial cost of $0.03 per share associated with the
redemption premium; however, it is expected that the current short-term rates
will result in reduced interest costs during 2002.
CAPITAL RESOURCES AND REQUIREMENTS
As Wisconsin Energy continues to implement its strategy of leveraging on the
core competencies of its business segments and building financial strength,
Wisconsin Energy expects to continue to divest of non-core assets, invest in
core assets, buy back common stock and pay down debt.
Capital Resources
The Company anticipates meeting its capital requirements during 2002 primarily
through internally generated funds and net proceeds as a result of asset sales.
Beyond 2002, Wisconsin Energy anticipates meeting its capital requirements
through internally generated funds supplemented, when required, through the
issuance of debt securities.
The Company has access to the capital markets and has been able to generate
funds internally and externally to meet its capital requirements. Wisconsin
Energy's ability to attract the necessary financial capital at reasonable terms
is critical to the Company's overall strategic plan. Wisconsin Energy believes
that it has adequate capacity to fund its operations for the foreseeable future
through its borrowing arrangements and internally generated cash.
On December 31, 2001, Wisconsin Energy had $945 million of total available
unused short-term borrowing capacity on a consolidated basis under existing
commercial paper programs and other short-term borrowing arrangements. On that
date, Wisconsin Energy had $1.7 billion of available unused lines of bank
credit on a consolidated basis to support its outstanding commercial paper
program and other short-term borrowing arrangements.
The following table shows Wisconsin Energy's consolidated capitalization
structure at December 31:
Capitalization Structure 2001 2000
------------------------ --------------- ---------------
(Millions of Dollars)
Common Equity................................ $2,056.1 31.4% $2,016.8 31.4%
Preferred Stock.............................. 30.4 0.5% 30.4 0.5%
Trust Preferred Securities................... 200.0 3.0% 200.0 3.1%
Long-Term Debt (including current maturities) 3,721.6 56.7% 2,788.1 43.4%
Short-Term Debt.............................. 550.4 8.4% 1,386.1 21.6%
-------- ------ -------- ------
Total................................. $6,558.5 100.0% $6,421.4 100.0%
As described in "Note A--Summary of Significant Accounting Policies" in the
Notes to Consolidated Financial Statements, certain restrictions exist on the
ability of Wisconsin Energy's subsidiaries to transfer funds to Wisconsin
Energy. The Company does not expect these restrictions to have any material
effect on its operations or ability to meet its cash obligations.
Access to capital markets at a reasonable cost is determined in large part by
credit quality. The following table summarizes the current ratings of the debt
securities of Wisconsin Energy and its subsidiaries by Standard & Poors
Corporation ("S&P"), Moody's Investors Service ("Moody's") and Fitch.
Commercial paper of WICOR Industries is unrated.
B-15
S&P Moody's Fitch
---- ------- -----
Wisconsin Energy
Commercial Paper................. A-2 P-1 F1
Unsecured Senior Debt............ A- A2 A+
Wisconsin Electric
Commercial Paper................. A-1 P-1 F1+
Secured Senior Debt.............. A Aa2 AA
Unsecured Debt................... A- Aa3 AA-
Preferred Stock.................. BBB+ A2 AA-
Wisconsin Gas
Commercial Paper................. A-1 P-1 F1+
Unsecured Senior Debt............ A Aa2 AA-
Wisconsin Energy Capital Corporation
Unsecured Debt................... A- A2 A+
WEC Capital Trust I
Trust Preferred Securities....... BBB A3 A
S&P's and Moody's current outlook for Wisconsin Energy and its subsidiaries is
stable while Fitch currently maintains a negative outlook for Wisconsin Energy
Corporation and for Wisconsin Energy Capital Corporation. Fitch's outlook for
Wisconsin Electric and Wisconsin Gas is currently stable.
Wisconsin Energy believes these security ratings should provide a significant
degree of flexibility in obtaining funds on competitive terms. However, these
security ratings reflect the views of the rating agencies. An explanation of
the significance of these ratings may be obtained from each rating agency. Such
ratings are not a recommendation to buy, sell or hold securities, but rather an
indication of creditworthiness. Any rating can be revised upward or downward or
withdrawn at any time by a rating agency if it decides that the circumstances
warrant the change. Each rating should be evaluated independently of any other
rating.
Capital Requirements
Total capital expenditures, excluding the purchase of nuclear fuel, are
currently estimated to be $661 million during 2002 attributable to the
following operating segments:
Estimated Actual
Capital Expenditures 2002 2001
-------------------- --------- ------
(Millions of Dollars)
Utility Energy...... $466 $428.7
Non-Utility Energy
Power the Future. 44 6.1
Other............ 23 121.6
Manufacturing....... 20 27.1
Other............... 108 89.0
---- ------
Total........ $661 $672.5
==== ======
Due to changing environmental and other regulations such as air quality
standards or electric reliability initiatives that impact the Company's utility
energy segments, future long-term capital requirements may vary from recent
capital requirements. The utility energy segment currently expects capital
expenditures, excluding the purchase of nuclear fuel and expenditures for new
generating capacity contained in the Power the Future strategy described below,
to be between $400 million and $500 million per year during the next five years.
Capital requirements over the next decade for Power the Future include
approximately $3.0 billion to construct 2,800 megawatts of new natural
gas-based and coal-based generating capacity, approximately $1.3 billion to
upgrade existing electric generating assets and approximately $2.7 billion for
energy distribution system upgrades.
B-16
The capital required to support the $3.0 billion of new generation over the
next 10 years is expected to come from a combination of internal and external
sources. With the dividend reduction that began in 2001, the Company is
expected to retain almost $90 million per year of additional cash flows, which
will provide substantial funding for new generation. The Company is also
divesting non-utility assets which will provide additional cash. Subject to
PSCW approval, the new generating plants will be constructed by W.E. Power, a
non-utility subsidiary, and leased to the utility under 20-25 year lease
agreements. It is expected that the utility will recover the lease payments in
its utility rates. It is anticipated that the utility will need external
financing as the plants are constructed, but the cash flows from the lease
payments, the asset divestitures and the additional cash retained within the
Company as a result of the dividend reduction are expected to eliminate the
need for additional equity financing.
Wisconsin Energy is a party to various financial instruments with off-balance
sheet risk as a part of its normal course of business, including financial
guarantees and letters of credit which support construction projects, commodity
contracts and other payment obligations. The Company's estimated maximum
exposure under such agreements is approximately $106 million as of December 31,
2001. However, the Company believes the likelihood is remote that material
payments will be required under these agreements.
The Company has the following contractual obligations and other commercial
commitments as of December 31, 2001:
Payments Due by Period
-----------------------------------------------
Contractual Obligations (a) Less than 1 yr 2-5 years After 5 years Total
--------------------------- -------------- --------- ------------- --------
(Millions of Dollars)
Long-Term Debt (b).......................... $456.9 $1,215.1 $1,880.6 $3,552.6
Capital Lease Obligations (c)............... 56.7 149.6 469.9 676.2
Operating Lease Obligations (d)............. 7.4 20.7 14.8 42.9
Unconditional Purchase Obligations (e)...... 9.6 38.4 -- 48.0
Other Long-Term Obligations (f)............. 348.1 609.5 357.0 1,314.6
------ -------- -------- --------
Total Contractual Cash Obligations....... $878.7 $2,033.3 $2,722.3 $5,634.3
====== ======== ======== ========
--------
(a) The amounts included in the table are calculated using current market
prices, forward curves and other estimates. Contracts with multiple unknown
variables have been omitted from the analysis.
(b) Principal payments on Long-Term Debt of Wisconsin Energy and affiliates
(excluding capital lease obligations).
(c) Capital Lease Obligations of Wisconsin Electric for nuclear fuel lease and
purchase power commitment.
(d) Operating Leases Obligations for equipment, vehicles and property for
Wisconsin Energy and affiliates.
(e) Unconditional Purchase Obligations for information technology and other
services for utility operations.
(f) Other Long-Term Obligations under various contracts of Wisconsin Energy and
affiliates for the procurement of fuel, power, gas supply and associated
transportation, primarily related to utility operations.
Obligations for utility operations by Wisconsin Energy's utility affiliates
have historically been included as part of the rate making process and
therefore generally recoverable from customers.
FACTORS AFFECTING RESULTS, LIQUIDITY AND CAPITAL RESOURCES
MARKET RISKS AND OTHER SIGNIFICANT RISKS
The Company is potentially exposed to market and other significant risks as a
result of the nature of its businesses and the environment in which those
businesses operate. Such risks, described in further detail below, include but
are not limited to: (1) Commodity price risks related to electric generation
fuel costs, the market price of electricity and the price of natural gas;
(2) Regulatory risk associated with the recovery of fuel and purchased power
costs of Wisconsin Electric; (3) Weather fluctuations; (4) Interest rate risks
associated with the Company's portfolio of short and long-term debt; (5)
Marketable securities return risk related to debt and equity investments held
in various trust funds; (6) Independent power project risks associated with the
divestiture of non-utility energy segment assets; (7) Foreign currency exchange
rate risks linked to purchases and sales within the manufacturing segment; (8)
Economic risks; and (9) Inflationary risks to future results of operations,
especially as they relate to expenses associated with employee medical health
plans and post retirement benefits.
Commodity Price Risk: In the normal course of business, the Company's utility
and non-utility power generation subsidiaries utilize contracts of various
duration for the forward sale and purchase of electricity. This is done to
effectively manage utilization
B-17
of their available generating capacity and energy during periods when available
power resources are expected to exceed the requirements of their obligations.
This practice may also include forward contracts for the purchase of power
during periods when the anticipated market price of electric energy is below
expected incremental power production costs. The Company manages its fuel and
gas supply costs through a portfolio of short and long-term procurement
contracts with various suppliers for the purchase of coal, uranium, natural gas
and fuel oil.
Wisconsin's retail electric fuel cost adjustment procedure mitigates some of
Wisconsin Electric's risk of electric fuel cost fluctuation. On a prospective
basis, if cumulative fuel and purchased power costs for electric utility
operations deviate from a prescribed range when compared to the costs projected
in the most recent retail rate proceeding, retail electric rates may be
adjusted, subject to risks associated with the regulatory approval process
noted below. The PSCW has authorized dollar for dollar recovery of natural gas
costs for the gas utility operations of Wisconsin Electric and Wisconsin Gas
through gas cost recovery mechanisms, which mitigates most of the risk of gas
cost variations. For additional information concerning the electric utility
fuel cost adjustment procedure and the natural gas utilities' gas cost recovery
mechanisms, see "Rates and Regulatory Matters" below.
At December 31, 2001, the majority of the commodity contracts in the
non-utility segment are at Wisvest Connecticut. Assuming a 10% price change for
fuel oil based upon forward market prices as of December 31, 2001, the Company
would record approximately a $12.4 million increase or decrease in pre-tax
income.
Regulatory Recovery Risk: The electric operations of Wisconsin Electric burn
natural gas in several of its peaker power plants or as a supplemental fuel at
several coal-fired plants, and the cost of purchased power is tied to the cost
of natural gas in many instances. Wisconsin Electric bears significant
regulatory risk for the recovery of such fuel and purchased power costs when
they are higher than the base rate established in its rate structure.
As noted above, the electric operations of Wisconsin Electric operate under a
fuel cost adjustment clause in the Wisconsin retail jurisdiction for fuel and
purchased power costs associated with the generation and delivery of
electricity. This clause establishes a base rate for fuel and purchased power,
and Wisconsin Electric assumes the risks and benefits of fuel cost variances
that are within 3% of the base rate. For 2001 and 2000, actual fuel and
purchased power costs at Wisconsin Electric exceeded base fuel rates by $0.1
million and $25.9 million, respectively. In 2001, the base fuel rates included
a fuel surcharge. For 1999, actual Wisconsin Electric fuel and purchased power
costs were $1.5 million less than base fuel rates.
Weather: The rates of Wisconsin Electric and Wisconsin Gas are set by the PSCW
based upon estimated temperatures which approximate 20-year averages. Wisconsin
Electric's electric revenues are sensitive to the summer cooling season, and to
some extent, to the winter heating season. The gas revenues of Wisconsin
Electric and Wisconsin Gas are sensitive to the winter heating season. A
summary of actual weather information in the utility segment's service
territory during 2001, 2000 and 1999, as measured by degree-days, may be found
above in "Results of Operations."
Temperature can also impact demand for electricity in regions where the Company
has invested in non-utility energy assets or projects.
Interest Rate Risk: The Company, including its affiliates, has various
short-term borrowing arrangements to provide working capital and general
corporate funds. Wisconsin Energy also has variable rate long-term debt
outstanding at December 31, 2001. Borrowing levels under such arrangements vary
from period to period depending upon capital investments and other factors.
Future short-term interest expense and payments will reflect both future
short-term interest rates and borrowing levels.
The Company performed an interest rate sensitivity analysis at December 31,
2001 of its outstanding portfolio of $550.4 million short-term debt with a
weighted average interest rate of 2.09% and $578.0 million of variable-rate
long-term debt with a weighted average interest rate of 2.97%. A one-percentage
point change in interest rates would cause the Company's annual interest
expense to increase or decrease by approximately $5.5 million before taxes from
short-term borrowings and $5.0 million before taxes from variable rate
long-term debt outstanding.
Marketable Securities Return Risk: The Company funds its pension, other
postretirement benefit and nuclear decommissioning obligations through various
trust funds, which in turn invest in debt and equity securities. Changes in the
market price of the assets in these trust funds can affect future pension,
other postretirement benefit and nuclear decommissioning expenses. Future
annuity payments to these trust funds can also be affected by changes in the
market price of trust fund assets. Wisconsin Energy expects that the risk of
expense and annuity payment variations as a result of changes in the market
price of trust fund assets would be mitigated in part through future rate
actions by the Company's various utility regulators. The Company is currently
operating under a PSCW ordered, qualified five-year rate freeze. For further
information, see "Rates and Regulatory Matters" below.
B-18
At December 31, 2001, the Company held the following total trust fund assets at
fair value, primarily consisting of publicly traded debt and equity security
investments.
Millions
Wisconsin Energy Corporation of Dollars
---------------------------- ----------
Pension trust funds...................... $1,062.7
Nuclear decommissioning trust fund....... $ 589.6
Other postretirement benefits trust funds $ 148.8
The Company manages its fiduciary oversight of the pension and other
postretirement plan trust fund investments through a Board-appointed Investment
Trust Policy Committee. Qualified external investment managers are engaged to
manage the investments. The Company conducts asset/liability studies
periodically through an outside investment advisor. The current study projects
long-term, annualized returns of approximately 9%.
Fiduciary oversight for the nuclear decommissioning trust fund investments is
also the responsibility of the Board-appointed Investment Trust Policy
Committee. Qualified external investment managers are also engaged to manage
these investments. An asset/liability study is periodically conducted by an
outside investment advisor, subject to additional constraints established by
the PSCW. The current study projects long-term, annualized returns of
approximately 9%. Current PSCW constraints allow a maximum allocation of 65%
equities. The allocation to equities is expected to be reduced as the date for
decommissioning Point Beach Nuclear Plant approaches in order to increase the
probability of sufficient liquidity at the time the funds will be needed.
Wisconsin Electric insures various property and outage risks through Nuclear
Electric Insurance Limited ("NEIL"). Annually, NEIL reviews its underwriting
and investment results and determines the feasibility of granting a
distribution to policyholders. Wisconsin Electric has received at least $9.0
million before taxes as its share of distributions in recent years. Adverse
loss experience, rising reinsurance costs, or impaired investment results at
NEIL could result in increased costs to Wisconsin Electric.
Independent Power Project ("IPP") Market Risk: Prior to the September 2000
Power the Future strategic announcement, the Company made significant
commitments to develop, build and own non-utility power plants. Subsequent to
September 2000, the Company made significant progress in exiting many of these
projects, which resulted in gains during 2001 and 2000. As of December 31,
2001, the Company had approximately $650 million of investments in non-utility
energy assets. In the fourth quarter of 2001, the IPP market experienced a
significant decline driven by several factors, including the softening economy,
the financial viability of energy companies with large IPP investments, lower
forward electric price curves and a significant tightening of credit to this
market. These factors may adversely impact the timing, proceeds and the gain or
loss on future sales of non-utility energy assets.
Foreign Currency Exchange Rate Risk: The Company manages foreign currency
market risks through the use of a variety of financial and derivative
instruments. The Company uses forward exchange contracts and other activities
to hedge the U.S. dollar value resulting from anticipated foreign currency
transactions. The notional amount of these contracts is not significant to the
Company.
The Company generally uses natural hedges to minimize exposures to the
revaluation of assets and liabilities denominated in foreign currencies. The
Company's net exposure at December 31, 2001 was immaterial.
Economic Risk. The Company is exposed to market risks in the regional Midwest
economy for the utility energy segment and worldwide economic trends for the
manufacturing segment. The Company uses diversification in its portfolio of
businesses to reduce its exposure to economic fluctuations.
Inflationary Risk: The Company continues to monitor the impact of inflation,
especially with respect to the rising costs of medical plans, in order to
minimize its effects in future years through pricing strategies, productivity
improvements and cost reductions. Except for continuance of an increasing trend
in the inflation of medical costs and the impacts on the Company's medical and
post retirement benefit plans, the Company has expectations of low-to-moderate
inflation. Wisconsin Energy does not believe the impact of general inflation
will have a material effect on its future results of operations.
B-19
For additional information concerning risk factors, including market risks, see
"Cautionary Factors" below.
RATES AND REGULATORY MATTERS
The Public Service Commission of Wisconsin regulates retail electric, natural
gas, steam and water rates in the state of Wisconsin, while the Federal Energy
Regulatory Commission regulates wholesale power, electric transmission and
interstate gas transportation service rates. The Michigan Public Service
Commission regulates retail electric rates in the state of Michigan.
Wisconsin Jurisdiction
WICOR Merger Order: As a condition of its March 2000 approval of the WICOR
acquisition, the PSCW ordered a qualified five-year freezing of rates for
Wisconsin Electric's electric, natural gas and steam utility services and for
natural gas rates at Wisconsin Gas that were in effect on January 1, 2001. The
Company may seek biennial rate reviews during the five-year rate restriction
period limited to "carve out" changes in revenue requirements as a result of:
. Governmental mandates;
. Abnormal levels of capital additions required to maintain or improve
reliable electric service; and
. Major gas lateral projects associated with approved natural gas pipeline
construction projects.
To the extent that natural gas rates and rules need to be modified during the
integration of the gas operations of Wisconsin Electric and Wisconsin Gas, the
Company's total gas revenue requirements are to remain revenue neutral under
the merger order. In its order, the PSCW found that electric fuel cost
adjustment procedures as well as gas cost recovery mechanisms would not be
subject to the five-year rate restriction period and that it was reasonable to
allow the Company to retain efficiency gains associated with the merger. A full
rate review will be required by the PSCW at the end of the five-year rate
restriction period.
Wisconsin Electric Power Company: The table below summarizes the anticipated
annualized revenue impact of recent rate changes, primarily in the Wisconsin
jurisdiction, authorized by regulatory commissions for Wisconsin Electric's
electric, natural gas and steam utilities.
Incremental
Annualized Authorized
Revenue Percent Return on
Increase Change Common Effective
Service--Wisconsin Electric (Decrease) in Rates Equity Date
--------------------------- ----------- -------- ---------- ---------
(Millions) (%) (%)
Retail gas (a)........... $ 3.6 0.9% 12.2% 12/20/01
Fuel electric, WI (b).... $20.9 1.4% -- 5/03/01
Fuel electric, WI (b).... $37.8 2.5% -- 2/09/01
Fuel electric, MI........ $ 1.0 2.4% -- 1/01/01
Retail electric, WI...... $27.5 1.8% 12.2% 1/01/01
Retail electric, WI (c).. $11.3 0.8% 12.2% 8/30/00
Retail gas (c)........... $(3.6) (0.9%) 12.2% 8/30/00
Retail electric, WI (c).. $25.2 1.7% 12.2% 4/11/00
Retail gas (c)........... $11.6 3.3% 12.2% 4/11/00
Fuel electric, WI........ $(7.8) (0.5%) -- 5/01/99
--------
(a) On 11/1/01 the Milwaukee County Circuit Court overturned the PSCW's 8/30/00
final order for natural gas rates and the PSCW reinstated the higher
4/11/00 interim gas rate order, effective 12/20/01.
(b) The 2/9/01 order was an interim order that was effective until the 5/3/01
final order was issued by the PSCW. The final 5/3/01 order superceded the
2/9/01 interim order.
(c) The 4/11/00 order was an interim order that was effective until the 8/30/00
final order was issued by the PSCW. The retail gas 8/30/00 final order was
amended in the 12/20/01 Order.
On March 23, 2000, the PSCW approved Wisconsin Electric's request for interim
price increases related to the 2000/2001 biennial period, authorizing a $25.2
million (1.7%) increase for electric operations and an $11.6 million (3.3%)
increase for gas operations. The interim increase, which was subject to
potential refund, became effective April 11, 2000. Rates in the interim order
were based upon a 12.2% return on common equity.
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On August 30, 2000, the PSCW issued its final order in the 2000/2001 pricing
proposal. The final order authorized a $36.5 million (2.5%) increase for
electric operations (or $11.3 million higher than authorized in the interim
order) as well as an $8 million (2.1%) increase for gas operations (or $3.6
million lower than authorized in the interim order). Wisconsin Electric
refunded to gas customers revenues that resulted from the difference in gas
rates between the interim and final orders. In its August 30, 2000 final order,
the PSCW authorized a second $27.5 million (1.8%) increase for electric
operations effective January 1, 2001. Rates in the final order were based upon
a 12.2% return on common equity.
On November 14, 2000, Wisconsin Electric filed a petition for judicial review
with the Milwaukee County Circuit Court challenging the PSCW's decision to
limit the final gas rate increase to $8.0 million rather than the $11.6 million
found reasonable for the interim increase. On November 1, 2001 the Milwaukee
County Circuit Court ruled in Wisconsin Electric's favor and remanded it back
to the PSCW for action. The PSCW did not challenge the courts decision and
authorized the Company to increase natural gas rates by $3.6 million effective
December 20, 2001.
In its final order related to the 2000/2001 biennial period, the PSCW
authorized recovery of revenue requirements for, among other things, electric
reliability and safety construction expenditures as well as for nitrogen oxide
("NO\\x\\") remediation expenditures. Revenue requirements for electric
reliability and safety construction expenditures are subject to refund at the
end of 2001 to the extent that actual expenditures are less than forecasted
expenditures included in the final order. In March 2000, the PSCW had
previously authorized all Wisconsin utilities to depreciate NO\\x\\ emission
reduction costs over an accelerated 10-year recovery period. Due to the
uncertainty regarding the level and timing of these expenditures, the PSCW, in
its final order, required Wisconsin Electric to establish escrow accounting for
revenue requirement components associated with NO\\x\\ expenditures. Wisconsin
Electric's actual NO\\x\\ remediation expenditures during the 2000/2001
biennial period resulted in an under-spent balance of approximately $8.0
million at the end of 2001 in the NO\\x\\ escrow account which will need to be
addressed in future rate making activities.
Electric Transmission Cost Recovery: In September 2001, Wisconsin Electric
requested that the PSCW approve $58.8 million of annual rate relief to recover
costs associated with the formation and operation of ATC, which was designed to
enhance access and increase electric system reliability and market efficiency.
Wisconsin Electric also is seeking to recover associated incremental
transmission costs of the Midwest Independent System Operator, the multi-state
organization that will monitor and control electric transmission throughout the
Midwest. These increased costs are due to the implementation of capital
improvement projects that are expected to increase transmission capacity and
reliability. The Company anticipates that cost recovery of the transmission
related costs under this request and similar requests in the Michigan
Jurisdiction will be earnings neutral subject to approval of these requests by
the PSCW and MPSC.
Wisconsin Gas Company: Wisconsin Gas rates were set within the framework of the
Productivity-based Alternative Ratemaking Mechanism, which was established in
1994 and expired on October 31, 2001. Under this mechanism, Wisconsin Gas has
the ability to raise or lower margin rates within a specified range on a
quarterly basis. Currently, Wisconsin Gas's rates recover $1.5 million per year
less than the maximum amount allowed by the PSCW's rate order. The
Productivity-based Alternative Ratemaking Mechanism has certain criteria that
allow it to be reopened at any time for significant deterioration in safety,
failures to meet conservation goals, significant changes in interest rates and
"extraordinary items." To date, none of the criteria has been triggered. In its
approval of the WICOR acquisition, the PSCW ordered that Wisconsin Gas' natural
gas rates remain under the Productivity-based Alternative Ratemaking Mechanism
for the program's duration and remain revenue neutral during the remainder of
the five-year rate restriction period noted above. Pursuant to that PSCW
directive, Wisconsin Gas rates remain at the same levels as were set prior to
the expiration of the Productivity-based Alternative Ratemaking Mechanism.
Fuel Cost Adjustment Procedure: As previously reported, Wisconsin Electric
operates under a fuel cost adjustment clause for fuel and purchased power costs
associated with the generation and delivery of electricity and purchase power
contracts. On December 8, 2000, Wisconsin Electric submitted an application
with the PSCW seeking a $51.4 million increase in rates on an expedited basis
to recover increased costs of fuel and purchased power in 2001. Wisconsin
Electric revised its projected power supply cost shortfall on January 10, 2001
to reflect updated natural gas cost projections for 2001. This update resulted
in a request for an additional $11.1 million in 2001, bringing the total
requested increase to $62.5 million. Hearings on this matter were held in
mid-January 2001. On February 9, 2001, the PSCW issued an interim order
authorizing a $37.8 million increase in rates for 2001 power supply costs.
Hearings on the final phase of the case were held in late March and early April
2001. The PSCW issued a final order on May 3, 2001, effective immediately,
authorizing a total increase in rates of $58.7 million (or an additional $20.9
million over the interim order). Under the fuel rules, Wisconsin Electric would
have to refund to customers any over recoveries of fuel costs as a result of
the surcharges authorized in 2001. During 2001, the Company did not over
recover fuel costs.
B-21
On June 4, 2001, two consumer advocacy groups petitioned the Dane County
Circuit Court for review of these decisions of the PSCW authorizing Wisconsin
Electric to add a surcharge to its electric rates to recover its expected 2001
power supply costs. The petitioners allege that the PSCW made various material
errors of law and procedure as a result of which the Court should set aside
both the interim and final orders and remand the case to the PSCW. The matter
is pending. Wisconsin Electric intends to vigorously defend the PSCW's orders
and believes the Court will affirm the PSCW's actions.
Gas Cost Recovery Mechanism: As a result of the acquisition of WICOR by
Wisconsin Energy, the PSCW required similar gas cost recovery mechanisms
("GCRM") for the gas operations of Wisconsin Electric and for Wisconsin Gas. In
recent years, Wisconsin Electric has operated under a modified
dollar-for-dollar GCRM, which included after the fact prudence reviews by the
PSCW, while the Wisconsin Gas GCRM included an incentive mechanism that
provides an opportunity for Wisconsin Gas to increase or decrease earnings
within certain limited ranges as a result of gas acquisition activities and
transportation costs. For both companies, the majority of gas costs are passed
through to customers under their existing gas cost recovery mechanisms.
In February 2001, the PSCW issued an order to Wisconsin Electric and to
Wisconsin Gas authorizing a similar GCRM for each company. These new GCRMs,
which were effective April 1, 2001, are similar to the existing GCRM at
Wisconsin Gas. Under the new GCRMs, gas costs will be passed directly to
customers through a purchased gas adjustment clause. However, both companies
will have the opportunity to increase or decrease earnings by up to
approximately 2.5% of their total annual gas costs based upon how closely
actual gas commodity and capacity costs compare to benchmarks established by
the PSCW. Recent changes in the benchmarks applied resulted in no increase in
current earnings under the GCRM in 2001 versus an increase in the earnings of
Wisconsin Gas of $3.0 million before tax in 2000.
Commodity Price Risk: The gas operations of Wisconsin Electric and Wisconsin
Gas have commodity risk management programs that have been approved by the
PSCW. These programs hedge the cost of natural gas and therefore changes in the
value of the financial instruments do not impact net income. These programs
allow the Company's gas utilities to utilize call and put option contracts to
reduce market risk associated with fluctuations in the price of natural gas
purchases and gas in storage. Under these programs, Wisconsin Gas and Wisconsin
Electric have the ability to hedge up to 50% of their planned flowing gas and
storage inventory volumes. The cost of applicable call and put option
contracts, as well as gains or losses realized under the contracts, do not
affect net income as they are fully recovered under the purchase gas adjustment
clauses of Wisconsin Gas and Wisconsin Electric gas cost recovery mechanisms.
In addition, under the Gas Cost Incentive Mechanism, Wisconsin Gas and
Wisconsin Electric use derivative financial instruments to manage the cost of
gas. The cost of these financial instruments, as well as any gains or losses on
the contracts, are subject to sharing under the incentive mechanisms.
Michigan Jurisdiction
Wisconsin Electric Power Company: In mid-November 2000, Wisconsin Electric
submitted an application with the Michigan Public Service Commission requesting
an electric retail rate increase of $3.7 million (9.4%) on an annualized basis.
Hearings on this rate relief request were completed in June of 2001. In
December of 2001, the MPSC issued an order reopening the case on a limited
basis to incorporate the rate effects of the transfer of Wisconsin Electric
transmission assets to American Transmission Company. Hearings are scheduled
for April 2002 with a Proposal for Decision expected around June 1, 2002.
Edison Sault Electric Company: In September 1995, the Michigan Public Service
Commission approved Edison Sault's application to implement price cap
regulation for its electric customers in the state of Michigan, capping base
rates at existing levels, rolling its existing fuel cost adjustment procedure
or Power Supply Cost Recovery ("PSCR") factor into base rates and suspending
its existing PSCR clause. Edison Sault is required to give thirty days notice
for rate decreases. The order authorizing Edison Sault's price cap represents a
temporary experimental regulatory mechanism and allows Edison Sault to file an
application seeking an increase in rates under extraordinary circumstances. On
October 2, 2000, Edison Sault filed a report with the Michigan Public Service
Commission addressing its experience under the price-cap mechanism. In
September of 2000, Edison Sault submitted an application to reinstate its PSCR
clause in January 2002 and to incorporate therein 2002 incremental ATC charges
and certain miscellaneous costs. On October 1, 2001, Edison Sault filed an
application with the MPSC to establish its PSCR factor for the year 2002. The
matter is pending. Any PSCR revenues collected during 2002 would be subject to
a true-up hearing.
Electric Transmission Cost Recovery: Consistent with the requests in Wisconsin
noted above, Wisconsin Electric and Edison Sault requested from the Michigan
Public Service Commission in September 2001 rate recovery of estimated 2002
transmission costs over 2001 levels in the amount of $0.3 million for Wisconsin
Electric and $0.6 million for Edison Sault for their operations in Michigan
through the Michigan Power Supply Cost Recovery mechanism. Both the requests
are pending.
B-22
ELECTRIC SYSTEM RELIABILITY
In response to customer demand for higher quality power as a result of modern
digital equipment, Wisconsin Energy is evaluating and updating its electric
distribution system as part of its enhanced Power the Future strategy. The
Company is taking some immediate steps to reduce the likelihood of outages by
upgrading substations and rebuilding lines to upgrade voltages and reliability.
These improvements, along with better technology for analysis of our existing
system, better resource management to speed restoration and improved customer
communication, are near-term efforts to enhance the Company's current electric
distribution infrastructure. In the long-term, Wisconsin Energy is initiating a
new distribution system design that is expected to consistently provide the
level of reliability needed for a digital economy, using new technology,
advanced communications and a two-way electricity flow. Implementation of the
Power the Future strategy is subject to a number of state and federal
regulatory approvals. For additional information, see "Corporate Developments"
above.
Wisconsin Electric had adequate capacity to meet all of its firm electric load
obligations during 2001. Public appeals for conservation were not required, nor
was there the need to interrupt or curtail service to non-firm customers who
participate in load management programs in exchange for discounted rates. All
of Wisconsin Electric's generating plants performed well during the hottest
periods of the summer and all power purchase commitments under firm contract
were received.
Wisconsin Electric expects to have adequate capacity to meet all of its firm
load obligations during 2002. However, extremely hot weather along with
unexpected equipment unavailability could require Wisconsin Electric to call
upon load management procedures during 2002 as it has in past years.
ENVIRONMENTAL MATTERS
Consistent with other companies in the energy industry, Wisconsin Energy faces
potentially significant ongoing environmental compliance and remediation
challenges related to current and past operations. Specific environmental
issues affecting the Company's utility and non-utility energy segments include
but are not limited to (1) air emissions such as carbon dioxide ("CO\\2\\"),
sulfur dioxide ("SO\\2\\"), nitrogen oxide ("NO\\x\\"), small particulates and
mercury, (2) disposal of combustion by-products such as fly ash, (3)
remediation of former manufactured gas plant sites, (4) disposal of used
nuclear fuel, and (5) the eventual decommissioning of nuclear power plants.
Wisconsin Energy is currently pursuing a proactive strategy to manage its
environmental issues including (1) substitution of new and cleaner generating
facilities for older facilities as part of the Power the Future strategy, (2)
development of additional sources of renewable electric energy supply, (3)
participation in regional initiatives to reduce the emissions of NO\\x\\ from
the Company's fossil fuel-fired generating facilities, (4) participation in
voluntary programs with the Wisconsin Department of Natural Resources to reduce
overall emissions, including mercury, from Wisconsin Electric's coal-fired
power plants, (5) recycling of ash from coal-fired generating units and (6) the
clean-up of former manufactured gas plant sites. For further information
concerning disposal of used nuclear fuel and nuclear power plant
decommissioning, see "Nuclear Operations" below and "Note F--Nuclear
Operations" in the Notes to Consolidated Financial Statements, respectively.
National Ambient Air Quality Standards: In July 1997, the United States
Environmental Protection Agency revised the National Ambient Air Quality
Standards for ozone and particulate matter. Although specific emission control
requirements are not yet defined and despite legal challenges to these
standards that will impact compliance requirements and timing, Wisconsin
Electric believes that the revised standards will likely require significant
reductions in SO\\2\\ and NO\\x\\ emissions from coal-fired generating
facilities. If these new standards withstand ongoing legal challenges,
Wisconsin Electric expects that reductions needed to achieve compliance with
the ozone attainment standards will be implemented in stages from 2004 through
2012, beginning with the ozone transport reductions described below. Reductions
associated with the new particulate matter standards are expected to be
implemented in stages after the year 2010 and extending to the year 2017.
Beyond the cost estimates identified below, Wisconsin Electric is currently
unable to estimate the impact of the revised air quality standards on its
future liquidity, financial condition or results of operation.
Ozone Non-Attainment Rulemaking: In October 1998, the United States
Environmental Protection Agency promulgated ozone transport rules to address
transport of NO\\x\\ and ozone into ozone non-attainment areas in the eastern
half of the United States. The rules would have required electric utilities in
22 eastern states and the District of Columbia, including the state of
Wisconsin, to significantly reduce NOx\\ emissions by May 1, 2003. A court
decision on these challenges was issued in March 2000 excluding the state of
Wisconsin but continuing to include southern Michigan as one of 19 states in a
region east of the Mississippi River that would remain subject to the October
1998 rules.
Independent of any court decisions, Wisconsin and some other states in the Lake
Michigan region have concluded rulemaking proceedings that require utilities,
including Wisconsin Electric, to reduce NO\\x \\emissions as part of separate,
existing 1-hour ozone
B-23
attainment demonstration rules required by the United States Environmental
Protection Agency for the Lake Michigan region's severe non-attainment areas.
In the meantime, ambient monitoring data from the past three years shows that
the Lake Michigan region is now in attainment with the 1-hour ozone standard.
The state of Wisconsin and other Lake Michigan region states are in the process
of submitting a redesignation (to attainment) plan to the United States
Environmental Protection Agency. This plan will continue to require the utility
NO\\x\\ reductions previously required when the area was in nonattainment. The
NO\\x\\ reductions will now be part of the maintenance and contingency plans
required by the redesignation plan.
Michigan's and Wisconsin's rules are both in effect. Wisconsin Electric
currently expects to incur total capital costs of $150 million to $200 million
and annual operation and maintenance costs of $6 million to $9 million during
the period 2001 through 2004 to comply with the Michigan and Wisconsin rules.
Wisconsin Electric believes that compliance with the NO\\x\\ emission
reductions requirements will substantially mitigate costs to comply with the
United States Environmental Protection Agency's July 1997 revisions to the
ozone National Ambient Air Quality Standards discussed above.
In January 2000, the PSCW approved Wisconsin Electric's comprehensive plan to
meet the Wisconsin regulations, permitting recovery in rates of NO\\x\\
emission reduction costs over an accelerated 10-year recovery period and
requiring that these costs be separately itemized on customer bills.
Mercury Emission Control Rulemaking: As required by the 1990 amendments to the
Federal Clean Air Act, the United States Environmental Protection Agency issued
a regulatory determination in December 2000 that utility mercury emissions
should be regulated. The United States Environmental Protection Agency will
develop draft rules within the next three years. In June 2001, the Wisconsin
Department of Natural Resources ("WDNR") independently developed draft mercury
emission control rules that would affect electric utilities in Wisconsin. The
draft rules call for 30%, 50% and 90% reductions in mercury air emissions over
5, 10 and 15 years, respectively. The draft rules also require offsets for new
mercury-emitting generating facilities. Wisconsin's draft rules were not
finalized before the end of 2001 and will likely be revised before being
finalized. The Company is currently unable to predict the ultimate rules that
will be developed and adopted by the United States Environmental Protection
Agency or the WDNR, nor is it able to predict the impacts, if any, that the
United States Environmental Protection Agency's and WDNR's mercury emission
control rulemakings might have on the operations of its existing or potential
coal-fired generating facilities.
Manufactured Gas Plant Sites: Wisconsin Electric and Wisconsin Gas are
voluntarily reviewing and addressing environmental conditions at a number of
former manufactured gas plant sites. For further information, see "Note
O--Commitments and Contingencies" in the Notes to Consolidated Financial
Statements.
Ash Landfill Sites: Wisconsin Electric aggressively seeks environmentally
acceptable, beneficial uses for its combustion byproducts. For further
information, see "Note O--Commitments and Contingencies" in the Notes to
Consolidated Financial Statements.
Manufacturing Segment: WICOR Industries, Inc. has provided reserves sufficient
to cover its estimated costs related to known contamination associated with its
manufacturing facilities.
EPA Information Requests: Wisconsin Electric and Wisvest-Connecticut LLC., a
wholly owned subsidiary of Wisvest, have each received requests for information
from the United States Environmental Protection Agency regional offices
pursuant to Section 114(a) of the Clean Air Act. For further information, see
"Note O--Commitments and Contingencies" in the Notes to Consolidated Financial
Statements.
LEGAL MATTERS
Giddings & Lewis Inc./City of West Allis Lawsuit: In July 1999, a jury issued a
verdict against Wisconsin Electric awarding the plaintiffs $4.5 million in
compensatory damages and $100 million in punitive damages in an action alleging
that Wisconsin Electric had deposited contaminated wastes at two sites in West
Allis, Wisconsin owned by the plaintiffs. In September 2001, the Wisconsin
Court of Appeals overturned the $100 million punitive damage award and remanded
the punitive damage claim back to the lower court for retrial. In January 2002,
the Wisconsin State Supreme Court denied the plaintiffs petition for review.
For further information, see "Note O--Commitments and Contingencies" in the
Notes to Consolidated Financial Statements.
Wisconsin International Electric Power Litigation: During 1999, Wisconsin
Electric and Wisconsin International Electric Power, Ltd. reached settlement of
litigation brought by Wisconsin International Electric Power against Wisconsin
Electric claiming that Wisconsin Electric had breached contractual duties
allegedly owed to the plaintiff relating to development of an electric
generating
B-24
plant at Subic Bay in the Philippines. While Wisconsin Electric does not
believe that it breached any contractual duties allegedly owed to the
plaintiff, Wisconsin Electric paid Wisconsin International Electric Power, Ltd.
$18.0 million ($10.8 million, or $0.09 per share for Wisconsin Energy, after
tax) in November 1999 to settle the case, and the plaintiff's claims were
dismissed with prejudice.
NUCLEAR OPERATIONS
Point Beach Nuclear Plant: Wisconsin Electric owns two 510-megawatt electric
generating units at Point Beach Nuclear Plant in Two Rivers, Wisconsin which
are operated by Nuclear Management Company, LLC ("NMC"), a joint venture of the
Company and affiliates of other unaffiliated utilities. During 2001, 2000, and
1999, Point Beach provided 25%, 23% and 22% of Wisconsin Electric's net
electric energy supply, respectively. The United States Nuclear Regulatory
Commission operating licenses for Point Beach expire in October 2010 for Unit 1
and in March 2013 for Unit 2.
In July 2000, Wisconsin Electric's senior management authorized the
commencement of initial design work for the power uprate of both units at Point
Beach. Subject to approval by the Wisconsin Energy Board of Directors and the
PSCW, the project may be completed by May 2008 and could add approximately 90
megawatts of electrical output to Point Beach.
Wisconsin Electric has formed an operating license renewal team which is
expected to complete a technical and economic evaluation of license renewal by
late 2002. Based upon the results of this evaluation and subject to approval by
executive management and by the Board of Directors of Wisconsin Energy in early
2003, Wisconsin Electric will determine whether to seek appropriate regulatory
approvals, including submittal of an application to the Nuclear Regulatory
Commission, in mid 2003 for an extension of the operating licenses for Point
Beach Nuclear Plant for a period of up to 20 years.
Used Nuclear Fuel Storage and Disposal: During 1995, Wisconsin Electric
completed construction of a facility at Point Beach for the temporary dry
storage of up to 48 canisters containing used nuclear fuel. During 2000,
Wisconsin Electric finished loading the last of twelve canisters originally
authorized by the PSCW. On March 13, 2001, the PSCW approved a May 2000
application for authority to load additional temporary used fuel dry storage
containers beyond the twelve that were originally authorized. The application
requested authorization for sufficient additional containers, at a cost of up
to approximately $46 million, to operate Point Beach Units 1 and 2 to the end
of their current operating licenses, but not to exceed the original 48-canister
capacity of the facility. NMC is under contract with a new vendor to supply the
next generation of used fuel dry storage containers for Point Beach.
Temporary storage alternatives at Point Beach are necessary until the United
States Department of Energy takes ownership of and permanently removes the used
fuel as mandated by the Nuclear Waste Policy Act of 1982, as amended in 1987
(the "Waste Act"). Effective January 31, 1998, the Department of Energy failed
to meet its contractual obligation to begin removing used fuel from Point
Beach, a responsibility for which Wisconsin Electric has paid a total of $177.6
million over the life of the plant. The Department of Energy has indicated that
it does not expect a permanent used fuel repository to be available any earlier
than 2010. It is not possible, at this time, to predict with certainty when the
Department of Energy will actually begin accepting used nuclear fuel.
On August 13, 2000, the United States Court of Appeals for the Federal Circuit
ruled in a lawsuit brought by Maine Yankee and Northern States Power Company
that the Department of Energy's failure to begin performance by January 31,
1998 constituted a breach in the Standard Contract, providing clear grounds for
filing complaints in the Court of Federal Claims. Consequently, Wisconsin
Electric filed a complaint on November 16, 2000 against the Department of
Energy in the Court of Federal Claims. The matter is pending. As of August
2000, Wisconsin Electric has incurred damages in excess of $35 million, which
it seeks to recover from the United States Department of Energy. Damages will
continue to accrue, and, accordingly, Wisconsin Electric expects to seek to
recover all of its damages in this lawsuit.
During 2000, President Clinton vetoed legislation that would have required the
United States Department of Energy to establish a temporary used fuel
repository in the state of Nevada until a permanent repository is available and
to begin taking ownership from utilities and removing used fuel as required by
the Waste Act. The Senate and the House failed to override the President's
veto. Wisconsin Electric is unable to predict whether similar legislation might
be reintroduced and passed during 2002 or President Bush's administration might
support and sign such legislation.
In January 2002, as required by the Nuclear Waste Policy Act, the Secretary of
Energy Spencer Abraham notified Nevada Governor Kenny Guinn and the Nevada
Legislature that he intended to recommend to President Bush that the Yucca
Mountain site is scientifically sound and suitable for development as the
nation's long-term geological repository for used nuclear fuel. On
B-25
February 14, 2002, Secretary Abraham provided the formal recommendation to
President Bush. In a February 2002, letter to Congress, President Bush
expressed his support for the development of the Yucca Mountain site. The
letter also affirmed the need for a permanent repository by supporting the need
for nuclear power and its cost competitiveness, as well as acknowledging that
successful completion of the repository program will redeem the clear Federal
legal obligation set forth in the Nuclear Waste Policy Act.
INDUSTRY RESTRUCTURING AND COMPETITION
Electric Utility Industry
Driven by a combination of market forces, regulatory and legislative
initiatives and technological changes, the nation's electric industry has
followed a trend in recent years towards restructuring and increased
competition. In the Midwest region, the state of Illinois passed legislation
that introduced retail electric choice for large customers in 1999 and
introduces choice for all retail customers by May 2002. As described in further
detail below, full retail electric choice was introduced in the state of
Michigan in January 2002. Congress continues to evaluate restructuring
proposals at the federal level. However, recent severe electric supply
constraints and a resulting rise in the cost of electricity in California has
revitalized public debate in Wisconsin concerning deregulation. Given the
current status of restructuring initiatives in regulatory jurisdictions where
the Company primarily does business, Wisconsin Energy cannot predict the
ultimate timing or impact of a restructured electric industry on its financial
position or results of operations.
Restructuring in Wisconsin: Due to many factors, including relatively
competitive electric rates charged by the state's electric utilities, Wisconsin
is proceeding with restructuring of the electric utility industry at a much
slower pace than many other states in the United States. Instead, the PSCW has
been focused in recent years on electric reliability infrastructure issues for
the state of Wisconsin such as:
. Improvements to existing and addition of new electric transmission lines
in the state;
. Addition of new generating capacity in the state;
. Modifications to the regulatory process to facilitate development of
merchant generating plants;
. Development of a regional independent electric transmission system
operator; and
. The previously described formation of a statewide transmission company,
American Transmission Company LLC, which became operational January 1,
2001.
The PSCW continues to maintain the position that the question of whether to
implement electric retail competition in Wisconsin should ultimately be decided
by the Wisconsin legislature. No such legislation has been introduced in
Wisconsin to date.
Restructuring in Michigan: In June 2000, the Governor of the state of Michigan
signed the "Customer Choice and Electric Reliability Act" into law empowering
the MPSC to implement electric retail access in Michigan. In effect, the new
law provides that all Michigan retail customers of investor-owned utilities
have the ability to choose their electric power producer after January 1, 2002.
The Michigan Retail Access law was characterized by Michigan Governor Engler as
"Choice for those who want it and protection for those who need it."
As of January 1, 2002, Michigan retail customers of Wisconsin Electric and
Edison Sault were allowed to remain with their regulated utility at regulated
rates or choose an alternative electric supplier to provide power supply
service. Wisconsin Electric and Edison Sault plan to maintain their generation
capacity and distribution assets and provide regulated service as they have in
the past. Wisconsin Electric and Edison Sault expect to continue providing
distribution and customer service functions regardless of the customer's power
supplier.
Power supply revenue in 2001 from Wisconsin Energy's eligible electric Michigan
retail choice customers was less than $40 million, or approximately 1.6% of
total utility operating revenue. Competition and customer switching to
alternative suppliers in the companies' service territories in Michigan has
started very slowly with little alternate supplier activity, reflecting the
small market area, the companies' competitive regulated power supply prices and
a lack of interest in general of the Upper Peninsula of Michigan as a market
for alternative electric suppliers.
B-26
Natural Gas Utility Industry
Restructuring in Wisconsin: The PSCW has instituted generic proceedings to
consider how its regulation of gas distribution utilities should change to
reflect the changing competitive environment in the natural gas industry. To
date, the PSCW has made a policy decision to deregulate the sale of natural gas
in customer segments with workably competitive market choices and has adopted
standards for transactions between a utility and its gas marketing affiliates.
However, work on deregulation of the gas distribution industry by the PSCW is
presently on hold. Currently, Wisconsin Electric and Wisconsin Gas are unable
to predict the impact of potential future deregulation on the Company's results
of operations or financial position.
ACCOUNTING DEVELOPMENTS
New Pronouncements: In June 2001, the Financial Accounting Standards Board
authorized issuance of Statement of Financial Accounting Standards No. 141,
Business Combinations ("SFAS 141"), and SFAS 142, Goodwill and Other Intangible
Assets. Both accounting pronouncements were effective beginning January 1,
2002, although both standards require that business combinations which occurred
after June 30, 2001 be accounted for using the new accounting standards. For
further information, see "Note A--Summary of Significant Accounting Policies"
in the Notes to Consolidated Financial Statements. In June 2001, the Financial
Accounting Standards Board also authorized issuance of SFAS 143, Accounting for
Asset Retirement Obligations. SFAS 143, which is effective for fiscal years
beginning after June 15, 2002, requiring entities to record the fair value of a
legal liability for an asset retirement obligation in the period in which it is
incurred. Upon adoption, the Company may be required to modify its accounting
for nuclear decommissioning. Wisconsin Energy has not yet completed the
evaluation of application of the SFAS 143 rules. The Company expects to adopt
SFAS 143 effective January 1, 2003.
In August 2001, the Financial Accounting Standards Board issued SFAS 144,
Accounting for the Impairment of Long-Lived Assets. SFAS 144, which is
effective for financial statements issued for fiscal years beginning after
December 15, 2001, requires entities to test long-lived assets (asset groups)
for recoverability whenever events or changes in circumstances indicate that
its carrying amount may not be recoverable. The Company adopted SFAS 144
effective January 1, 2002. Wisconsin Energy has not yet completed the
evaluation of application of the SFAS 144 rules.
SIGNIFICANT ACCOUNTING POLICIES
Regulatory Accounting: Wisconsin Energy's utility subsidiaries operate under
rates established by state and federal regulatory commissions which are
designed to recover the cost of service and provide a reasonable return to
investors. Developing competitive pressures in the utility industry may result
in future utility prices which are based upon factors other than the
traditional original cost of investment. In such a situation, continued
deferral of certain regulatory asset and liability amounts on the utilities'
books, as allowed under Statement of Financial Accounting Standards No. 71,
Accounting for the Effects of Certain Types of Regulation ("SFAS 71"), may no
longer be appropriate and the unamortized regulatory assets net of the
regulatory liabilities would be recorded as an extraordinary after-tax non-cash
charge to earnings. Such a charge could be material. The Company continually
reviews the applicability of SFAS 71 and has determined that it is currently
appropriate to continue following SFAS 71. At this time, the Company is unable
to predict whether any adjustments to regulatory assets and liabilities will
occur in the future. See "Note A--Summary of Significant Accounting Policies"
in the Notes to Consolidated Financial Statements for additional information.
Accounting for Derivative Instruments: SFAS 133, Accounting for Derivative
Instruments and Hedging Activities, is effective for fiscal years beginning
after June 15, 2000. The Company adopted this statement effective January 1,
2001, which resulted in a net SFAS 133 charge of $0.11 per share for 2001. For
further information, see "Note A--Summary of Significant Accounting Policies"
and "Note K--Derivative Instruments" in the Notes to Consolidated Financial
Statements.
CAUTIONARY FACTORS
This report and other documents or oral presentations contain or may contain
forward-looking statements made by or on behalf of Wisconsin Energy. Such
statements are based upon management's current expectations and are subject to
risks and uncertainties that could cause Wisconsin Energy's actual results to
differ materially from those contemplated in the statements. Readers are
cautioned not to place undue reliance on the forward-looking statements. When
used in written documents or oral presentations, the terms "anticipate,"
"believe," "estimate," "expect," "forecast," "objective," "plan," "possible,"
"potential," "project" and similar expressions are intended to identify
forward-looking statements. In addition to the assumptions and other factors
referred to specifically in connection with such statements, factors that could
cause Wisconsin Energy's actual results to differ materially from those
contemplated in any forward-looking statements include, among others, the
following:
B-27
. Factors affecting utility operations such as unusual weather conditions;
catastrophic weather-related or terrorism-related damage; availability of
electric generating facilities; unscheduled generation outages, or
unplanned maintenance or repairs; unanticipated changes in fossil fuel,
nuclear fuel, purchased power, gas supply or water supply costs or
availability due to higher demand, shortages, transportation problems or
other developments; nonperformance by electric energy or natural gas
suppliers under existing power purchase or gas supply contracts; nuclear
or environmental incidents; resolution of used nuclear fuel storage and
disposal issues; electric transmission or gas pipeline system constraints;
unanticipated organizational structure or key personnel changes;
collective bargaining agreements with union employees or work stoppages;
inflation rates; or demographic and economic factors affecting utility
service territories or operating environment.
. Regulatory factors such as unanticipated changes in rate-setting policies
or procedures; unanticipated changes in regulatory accounting policies and
practices; industry restructuring initiatives; transmission system
operation and/or administration initiatives; recovery of costs of previous
investments made under traditional regulation; required changes in
facilities or operations to reduce the risks or impacts of potential
terrorist activities; required approvals for new construction; changes in
the United States Nuclear Regulatory Commission's regulations related to
Point Beach Nuclear Plant; changes in the United States Environmental
Protection Agency's regulations as well as regulations from the Wisconsin
or Michigan Departments of Natural Resources or the state of Connecticut
related to emissions from fossil-fueled power plants such as carbon
dioxide, sulfur dioxide, nitrogen oxide, small particulates or mercury; or
the siting approval process for new generation and transmission facilities.
. The rapidly changing and increasingly competitive electric and gas utility
environment as market-based forces replace strict industry regulation and
other competitors enter the electric and gas markets resulting in
increased wholesale and retail competition.
. Consolidation of the industry as a result of the combination and
acquisition of utilities in the Midwest, nationally and globally.
. Restrictions imposed by various financing arrangements and regulatory
requirements on the ability of its subsidiaries to transfer funds to
Wisconsin Energy in the form of cash dividends, loans or advances.
. Changes in social attitudes regarding the utility and power industries.
. Customer business conditions including demand for their products or
services and supply of labor and material used in creating their products
and services.
. The cost and other effects of legal and administrative proceedings,
settlements, investigations and claims, and changes in those matters,
including the final outcome of the Giddings & Lewis, Inc./City of West
Allis lawsuit against Wisconsin Electric.
. Factors affecting the availability or cost of capital such as: changes in
interest rates; the Company's capitalization structure; market perceptions
of the utility industry, the Company or any of its subsidiaries; or
security ratings.
. Federal, state or local legislative factors such as changes in tax laws or
rates; changes in trade, monetary and fiscal policies, laws and
regulations; electric and gas industry restructuring initiatives; or
changes in environmental laws and regulations.
. Authoritative generally accepted accounting principle or policy changes,
such as issuance during the summer of 2001 of SFAS 141, Business
Combinations; SFAS 142, Goodwill and Other Intangible Assets; SFAS 143,
Accounting for Asset Retirement Obligations; and SFAS 144, Accounting for
the Impairment of Long-Lived Assets, from such standard setting bodies as
the Financial Accounting Standards Board and the Securities and Exchange
Commission.
. Unanticipated technological developments that result in competitive
disadvantages and create the potential for impairment of existing assets.
. Possible risks associated with non-utility diversification, such as:
general economic conditions; competition; operating risks; dependence upon
certain suppliers and customers; the cyclical nature of property values
that could affect real estate investments; unanticipated changes in
environmental or energy regulations; timely regulatory approval without
onerous conditions of potential acquisitions or divestitures; risks
associated with minority investments, where there is a limited ability to
control the development, management or operation of the project; and the
risk of higher interest costs associated with potentially reduced
securities ratings by independent rating agencies as a result of these and
other factors.
. Legislative or regulatory restrictions or caps on non-utility
acquisitions, investments or projects, including the state of Wisconsin's
amended public utility holding company law.
B-28
. Factors affecting foreign non-utility operations and investments,
including: foreign governmental actions; foreign economic and currency
risks; political instability; and unanticipated changes in foreign
environmental or energy regulations.
. Factors which impede execution of Wisconsin Energy's Power the Future
strategy announced in September 2000 and revised in February 2001,
including receipt of necessary state and federal regulatory approvals,
local opposition to siting of new generating facilities and obtaining the
investment capital from outside sources necessary to implement the
strategy.
. Unexpected difficulties or unanticipated effects of the qualified
five-year electric and gas rate freeze ordered by the PSCW as a condition
of approval of the WICOR merger.
. Other business or investment considerations that may be disclosed from
time to time in Wisconsin Energy's Securities and Exchange Commission
filings or in other publicly disseminated written documents.
Wisconsin Energy undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
B-29
WISCONSIN ENERGY CORPORATION
CONSOLIDATED INCOME STATEMENTS
Year Ended December 31
2001 2000 1999
-------- -------- --------
(Millions of Dollars, Except Per
Share Amounts)
Operating Revenues
Utility energy............................ $2,964.8 $2,556.7 $2,050.2
Non-utility energy........................ 337.3 372.8 193.2
Manufacturing............................. 585.1 382.2 --
Other..................................... 41.3 51.0 29.2
-------- -------- --------
Total Operating Revenues.............. 3,928.5 3,362.7 2,272.6
Operating Expenses
Fuel and purchased power.................. 660.1 682.1 588.1
Cost of gas sold.......................... 823.8 594.7 174.0
Cost of goods sold........................ 434.7 282.0 --
Other operation and maintenance........... 978.3 942.4 708.7
Depreciation, decommissioning and
amortization............................ 342.1 336.3 250.8
Property and revenue taxes................ 84.6 80.3 74.9
-------- -------- --------
Total Operating Expenses.............. 3,323.6 2,917.8 1,796.5
-------- -------- --------
Operating Income............................. 604.9 444.9 476.1
Other Income and Deductions
Interest income........................... 18.2 20.3 22.3
Allowance for other funds used during
construction............................ 1.9 2.6 3.8
Gains on asset sales...................... 27.5 98.7 6.1
Equity in earnings of unconsolidated
affiliates.............................. 26.0 (2.3) (3.8)
Other..................................... (73.0) (39.3) (33.9)
-------- -------- --------
Total Other Income and Deductions..... 0.6 80.0 (5.5)
Financing Costs
Interest expense.......................... 245.0 243.5 148.3
Allowance for borrowed funds used during
construction............................ (13.3) (13.6) (9.5)
Distributions on preferred securities of
subsidiary trust........................ 13.7 13.7 10.5
Preferred dividend requirement of
subsidiary.............................. 1.2 1.2 1.2
-------- -------- --------
Total Financing Costs................. 246.6 244.8 150.5
-------- -------- --------
Income Before Income Taxes and the
Cumulative Effect of Change in Accounting
Principle.................................. 358.9 280.1 320.1
Income Taxes................................. 150.4 125.9 111.1
-------- -------- --------
Income Before the Cumulative Effect of
Change in Accounting Principle............. 208.5 154.2 209.0
Cumulative Effect of Change in Accounting
Principle, Net of Tax...................... 10.5 -- --
-------- -------- --------
Net Income................................... $ 219.0 $ 154.2 $ 209.0
======== ======== ========
Earnings Per Share Before Change in
Accounting Principle
Basic..................................... $ 1.78 $ 1.28 $ 1.79
Diluted................................... $ 1.77 $ 1.27 $ 1.79
Earnings Per Share
Basic..................................... $ 1.87 $ 1.28 $ 1.79
Diluted................................... $ 1.86 $ 1.27 $ 1.79
Weighted Average Common Shares Outstanding
(Millions)
Basic..................................... 117.1 120.6 117.0
Diluted................................... 117.9 121.2 117.0
The accompanying Notes to Consolidated Financial Statements are an integral
part of these financial statements.
B-30
WISCONSIN ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31
2001 2000 1999
--------- --------- -------
(Millions of Dollars)
Operating Activities
Net income.................................................... $ 219.0 $ 154.2 $ 209.0
Reconciliation to cash
Depreciation, decommissioning and amortization............ 377.5 372.8 283.4
Nuclear fuel expense amortization......................... 32.3 27.4 25.8
Equity in earnings of unconsolidated affiliates........... (26.0) 2.3 3.8
Deferred income taxes, net................................ (7.8) 10.3 33.6
Investment tax credit, net................................ (5.0) (4.6) (4.3)
Allowance for other funds used during construction........ (1.9) (2.6) (3.8)
Gains on asset sales...................................... (27.5) (98.7) (6.1)
Change in--Accounts receivable and accrued revenues....... 187.5 (188.0) (56.3)
Inventories.................................... (38.7) (68.9) (6.8)
Other current assets........................... 62.4 22.1 (55.4)
Accounts payable............................... (119.2) 163.5 (13.4)
Other current liabilities...................... (128.9) 63.7 2.2
Other..................................................... 32.1 7.5 (104.8)
--------- --------- -------
Cash Provided by Operating Activities............................ 555.8 461.0 306.9
Investing Activities
Capital expenditures.......................................... (672.5) (611.0) (518.1)
Acquisitions, net of cash acquired............................ (35.7) (1,234.7) (276.8)
Proceeds from asset sales, net................................ 174.6 408.4 11.5
Cash distributions received from ATC.......................... 119.8 -- --
Allowance for borrowed funds used during construction......... (13.4) (13.6) (9.5)
Nuclear fuel.................................................. (9.9) (41.6) (18.6)
Nuclear decommissioning funding............................... (17.6) (17.6) (17.7)
Other......................................................... (9.6) (10.4) (59.6)
--------- --------- -------
Cash Used in Investing Activities................................ (464.3) (1,520.5) (888.8)
Financing Activities
Issuance of common stock...................................... 51.6 89.3 79.1
Repurchase of common stock.................................... (133.6) (100.8) --
Issuance of long-term debt.................................... 1,313.7 513.9 443.2
Retirement of long-term debt.................................. (98.2) (137.4) (115.5)
Issuance of mandatorily redeemable trust preferred securities. -- -- 193.7
Change in short-term debt..................................... (1,124.7) 826.8 220.6
Dividends paid on common stock................................ (93.8) (165.3) (182.3)
--------- --------- -------
Cash (Used in) Provided by Financing Activities.................. (85.0) 1,026.5 638.8
--------- --------- -------
Change in Cash and Cash Equivalents.............................. 6.5 (33.0) 56.9
Cash and Cash Equivalents at Beginning of Year................... 40.5 73.5 16.6
--------- --------- -------
Cash and Cash Equivalents at End of Year......................... $ 47.0 $ 40.5 $ 73.5
========= ========= =======
Supplemental Information--Cash Paid For
Interest (net of amount capitalized).......................... $ 233.1 $ 223.6 $ 156.1
Income taxes (net of refunds)................................. $ 166.8 $ 82.4 $ 114.9
The accompanying Notes to Consolidated Financial Statements are an integral
part of these financial statements.
B-31
WISCONSIN ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31
ASSETS
2001 2000
--------- ---------
(Millions of Dollars)
Property, Plant and Equipment
Utility energy................................................................. $ 7,075.3 $ 7,327.7
Non-utility energy............................................................. 21.5 21.7
Manufacturing.................................................................. 142.2 119.5
Other.......................................................................... 205.6 135.3
Accumulated depreciation....................................................... (3,826.4) (3,912.9)
--------- ---------
3,618.2 3,691.3
Construction work in progress.................................................. 380.2 246.3
Leased facilities, net......................................................... 116.0 121.7
Nuclear fuel, net.............................................................. 73.6 93.1
--------- ---------
Net Property, Plant and Equipment.......................................... 4,188.0 4,152.4
Investments
Nuclear decommissioning trust fund............................................. 589.6 613.3
Investment in ATC.............................................................. 146.5 --
Other.......................................................................... 128.7 166.0
--------- ---------
Total Investments.......................................................... 864.8 779.3
Current Assets
Cash and cash equivalents...................................................... 47.0 40.5
Accounts receivable, net of allowance for doubtful accounts of $48.0 and $36.0. 434.2 532.6
Other accounts receivable...................................................... 116.4 --
Accrued revenues............................................................... 178.6 269.8
Materials, supplies and inventories............................................ 431.0 381.7
Assets held for sale........................................................... 403.1 464.0
Prepayments.................................................................... 83.7 81.7
Deferred income taxes.......................................................... 8.7 73.4
Other.......................................................................... 12.2 19.9
--------- ---------
Total Current Assets....................................................... 1,714.9 1,863.6
Deferred Charges and Other Assets
Deferred regulatory assets..................................................... 324.9 276.8
Goodwill, net.................................................................. 832.1 826.9
Other.......................................................................... 404.0 507.1
--------- ---------
Total Deferred Charges and Other Assets.................................... 1,561.0 1,610.8
--------- ---------
Total Assets...................................................................... $ 8,328.7 $ 8,406.1
========= =========
The accompanying Notes to Consolidated Financial Statements are an integral
part of these financial statements.
B-32
WISCONSIN ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31
CAPITALIZATION AND LIABILITIES
2001 2000
-------- --------
(Millions of Dollars)
Capitalization
Common equity........................................ $2,056.1 $2,016.8
Preferred stock of subsidiary........................ 30.4 30.4
Company-obligated mandatorily redeemable
preferred securities of subsidiary trust
holding solely debentures of the Company............. 200.0 200.0
Long-term debt....................................... 3,237.3 2,732.7
-------- --------
Total Capitalization............................. 5,523.8 4,979.9
Current Liabilities
Long-term debt due currently......................... 484.3 55.4
Short-term debt...................................... 550.4 1,386.1
Accounts payable..................................... 309.8 427.0
Payroll and vacation accrued......................... 75.1 68.2
Taxes accrued--income and other...................... 33.1 54.8
Interest accrued..................................... 39.0 26.0
Other................................................ 115.4 191.2
-------- --------
Total Current Liabilities........................ 1,607.1 2,208.7
Deferred Credits and Other Liabilities
Accumulated deferred income taxes.................... 547.2 587.1
Accumulated deferred investment tax credits.......... 75.8 80.8
Deferred regulatory liabilities...................... 328.1 321.0
Other................................................ 246.7 228.6
-------- --------
Total Deferred Credits and Other Liabilities..... 1,197.8 1,217.5
Commitments and Contingencies (Note O).................. -- --
-------- --------
Total Capitalization and Liabilities.................... $8,328.7 $8,406.1
======== ========
The accompanying Notes to Consolidated Financial Statements are an integral
part of these financial statements.
B-33
WISCONSIN ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CAPITALIZATION
December 31
2001 2000
-------- --------
(Millions of Dollars)
Common Equity (See Consolidated Statements of Common Equity)
Common stock--$.01 par value; authorized 325,000,000 shares; outstanding--115,420,724 and
118,645,341 shares.................................................................................. $ 1.2 $ 1.2
Other paid in capital................................................................................. 763.8 833.3
Retained earnings..................................................................................... 1,284.9 1,159.7
Accumulated other comprehensive income (loss)......................................................... (10.8) (2.9)
Unearned compensation--restricted stock award......................................................... (4.2) (3.9)
Stock options exercisable............................................................................. 21.2 29.4
-------- --------
Total Common Equity........................................................................ 2,056.1 2,016.8
Preferred Stock
Wisconsin Energy
$.01 par value; authorized 15,000,000 shares; none outstanding.................................... -- --
Wisconsin Electric
Six Per Cent. Preferred Stock--$100 par value; authorized 45,000 shares;
outstanding--44,498 shares...................................................................... 4.4 4.4
Serial preferred stock--
$100 par value; authorized 2,286,500 shares; 3.60% Series redeemable at $101 per share;
outstanding--260,000 shares.................................................................. 26.0 26.0
$25 par value; authorized 5,000,000 shares; none outstanding................................... -- --
Wisconsin Gas--Cumulative without par value; authorized 1,500,000 shares; none outstanding............ -- --
-------- --------
Total Preferred Stock...................................................................... 30.4 30.4
Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely
debentures of the Company, 6.85% due 2039.............................................................. 200.0 200.0
Long-Term Debt
First mortgage bonds
7 1/4% due 2004............................................................................ 140.0 140.0
7 1/8% due 2016............................................................................ 100.0 100.0
6.85% due 2021............................................................................. 9.0 9.0
7 3/4% due 2023............................................................................ 100.0 100.0
7.05% due 2024............................................................................. 60.0 60.0
9 1/8% due 2024 (Redeemed 2002)............................................................ 3.4 3.4
8 3/8% due 2026 (Redeemed 2002)............................................................ 100.0 100.0
7.70% due 2027............................................................................. 200.0 200.0
Debentures (unsecured)
6 5/8% due 2002............................................................................ 150.0 150.0
6 5/8% due 2006............................................................................ 200.0 200.0
9.47% due 2006............................................................................. 3.5 4.2
8 1/4% due 2022............................................................................ 25.0 25.0
6 1/2% due 2028............................................................................ 150.0 150.0
6 7/8% due 2095............................................................................ 100.0 100.0
6.60% due 2013............................................................................. 45.0 45.0
The accompanying Notes to Consolidated Financial Statements are an integral
part of these financial statements.
B-34
WISCONSIN ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CAPITALIZATION--(Cont'd)
December 31
2001 2000
-------- --------
(Millions of Dollars)
Long-Term Debt--(Cont'd)
Notes (secured, nonrecourse)
3.43% variable rate due 2002 (a)..................... $ 7.2 $ 21.2
Variable rate due 2003............................... -- 4.2
3.28% variable rate due 2005 (a)..................... 180.5 208.0
6.36% effective rate due 2006........................ 5.5 6.6
6.90% due 2006....................................... 1.1 --
4.00% variable rate due 2007 and 2009 (a)............ 4.1 5.0
Notes (unsecured)
6.40% due 2001....................................... -- 15.0
6.33% due 2002....................................... 12.0 12.0
6.66% due 2003....................................... 10.6 10.6
6 3/8% due 2005...................................... 65.0 65.0
6.85% due 2005....................................... 10.0 10.0
2.15% variable rate due 2006 (a)..................... 1.0 1.0
5.875% due 2006...................................... 550.0 --
6.36% effective rate due 2006........................ 6.0 7.2
7.00% to 8.00% due 2000-2008......................... 3.1 4.8
5.50% due 2008....................................... 300.0 --
6.21% due 2008....................................... 20.0 20.0
6.48% due 2008....................................... 25.4 25.4
5 1/2% due 2009...................................... 50.0 50.0
6.50% due 2011....................................... 450.0 --
6.51% due 2013....................................... 30.0 30.0
2.15% variable rate due 2015 (a)..................... 17.4 17.4
1.75% variable rate due 2016 (a)..................... 67.0 67.0
6.94% due 2028....................................... 50.0 50.0
2.15% variable rate due 2030 (a)..................... 80.0 80.0
Commercial paper supported by multiple-year bank lines............. 220.8 509.7
Obligations under capital leases................................... 211.4 215.5
Unamortized discount, net and other................................ (42.4) (34.1)
Long-term debt due currently....................................... (484.3) (55.4)
-------- --------
Total Long-Term Debt..................................... 3,237.3 2,732.7
-------- --------
Total Capitalization............................................... $5,523.8 $4,979.9
======== ========
--------
(a) Variable interest rate as of December 31, 2001.
The accompanying Notes to Consolidated Financial Statements are an integral
part of these financial statements.
B-35
WISCONSIN ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF COMMON EQUITY
Accumulated
Other Other Stock
Common Paid In Retained Comprehensive Unearned Options
Stock Capital Earnings Income (Loss) Compensation Exercisable Total
------ ------- -------- ------------- ------------ ----------- --------
(Millions of Dollars)
Balance--December 31, 1998................ $1.2 $ 759.2 $1,144.1 $ -- $(1.3) $ -- $1,903.2
Net income............................. 209.0 209.0
Common stock cash dividends $1.56
per share............................ (182.3) (182.3)
Sale of common stock................... 79.1 79.1
Restricted stock award................. (1.4) (1.4)
Amortization and forfeiture of
restricted stock..................... 0.2 0.2
---- ------- -------- ------ ----- ----- --------
Balance--December 31, 1999................ 1.2 838.3 1,170.8 -- (2.5) -- 2,007.8
Net Income............................. 154.2 154.2
Other comprehensive income
Foreign currency translation....... (0.7) (0.7)
Minimum pension liability.......... (2.2) (2.2)
---- ------- -------- ------ ----- ----- --------
Comprehensive Income............ -- -- 154.2 (2.9) -- -- 151.3
Common stock cash dividends $1.37
per share............................ (165.3) (165.3)
Sale of common stock................... 89.3 89.3
Repurchase of common stock............. (100.8) (100.8)
Restricted stock award................. (1.4) (1.4)
Conversion of WICOR restricted
stock awards......................... (1.2) (1.2)
Amortization and forfeiture of
restricted stock..................... 1.2 1.2
Conversion of WICOR stock options...... 35.9 35.9
Stock options exercised and other...... 5.6 (6.5) (0.9)
Tax benefit of stock options exercised. 0.9 0.9
---- ------- -------- ------ ----- ----- --------
Balance--December 31, 2000................ 1.2 833.3 1,159.7 (2.9) (3.9) 29.4 2,016.8
Net Income............................. 219.0 219.0
Other comprehensive income
Foreign currency translation....... (1.4) (1.4)
Unrealized hedging losses.......... (6.5) (6.5)
---- ------- -------- ------ ----- ----- --------
Comprehensive Income............ -- -- 219.0 (7.9) -- -- 211.1
Common stock cash dividends $0.80
per share............................ (93.8) (93.8)
Sale of common stock................... 51.6 51.6
Repurchase of common stock............. (133.6) (133.6)
Restricted stock awards................ (1.6) (1.6)
Amortization and forfeiture of
restricted stock..................... 1.3 1.3
Stock options exercised................ 8.2 (8.2) --
Tax benefit of stock options
exercised............................ 4.9 4.9
Other.................................. (0.6) (0.6)
---- ------- -------- ------ ----- ----- --------
Balance--December 31, 2001................ $1.2 $ 763.8 $1,284.9 $(10.8) $(4.2) $21.2 $2,056.1
==== ======= ======== ====== ===== ===== ========
The accompanying Notes to Consolidated Financial Statements are an integral
part of these financial statements.
B-36
WISCONSIN ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General: The consolidated financial statements include the accounts of
Wisconsin Energy Corporation ("Wisconsin Energy" or the "Company"), a
diversified holding company, as well as its principal subsidiaries in the
following operating segments:
. Utility Energy Segment--Consisting of Wisconsin Electric Power Company
("Wisconsin Electric"), Wisconsin Gas Company ("Wisconsin Gas") and Edison
Sault Electric Company ("Edison Sault"); engaged primarily in the
generation of electricity and the distribution of electricity and natural
gas;
. Non-Utility Energy Segment--Consisting primarily of Wisvest Corporation
("Wisvest") and W.E. Power LLC; engaged primarily in independent electric
power production; and
. Manufacturing Segment--Consisting of WICOR Industries, Inc., an
intermediary holding company, and its primary subsidiaries, Sta-Rite
Industries, Inc., SHURflo Pump Manufacturing Co. and Hypro Corporation;
engaged in the manufacture of pumps as well as fluid processing and pump
filtration equipment.
Other non-utility subsidiaries of Wisconsin Energy include primarily Minergy
Corp., which develops and markets recycling technology products, and Wispark
LLC ("Wispark"), which develops and invests in real estate. All significant
intercompany transactions and balances have been eliminated from the
consolidated financial statements.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of certain assets
and liabilities and disclosure of contingent assets and liabilities at the date
of financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Reclassifications: Certain prior year financial statement amounts have been
reclassified to conform to their current year presentation. These
reclassifications had no effect on net income or earnings per share.
Revenues: Energy revenues are recognized on the accrual basis and include
estimated amounts for service rendered but not billed. The manufacturing
segment recognizes revenue from product sales upon shipment. Based upon
experience, the manufacturing segment estimates and records provisions for
sales returns, allowances and original warranties in the period the sale is
reported.
Wisconsin Electric's rates include base amounts for estimated fuel and
purchased power costs. It can request recovery of fuel and purchased power
costs prospectively from retail electric customers in the Wisconsin
jurisdiction through its rate review process with the Public Service Commission
of Wisconsin ("PSCW") and in interim fuel cost hearings when such annualized
costs are more than 3% higher than the forecasted costs used to establish
rates. Wisconsin Electric's and Wisconsin Gas's retail gas rates include
monthly adjustments which permit the recovery or refund of actual purchased gas
costs.
Property and Depreciation: Utility property, plant and equipment is recorded at
cost. Cost includes material, labor and allowance for funds used during
construction. Additions to and significant replacements of property are charged
to property, plant and equipment at cost; minor items are charged to
maintenance expense. The cost of depreciable utility property, together with
removal cost less salvage value, is charged to accumulated depreciation when
property is retired.
Utility depreciation rates are certified by the state regulatory commissions
and include estimates for salvage value and removal costs. Depreciation as a
percent of average depreciable utility plant was 4.6% in 2001, 4.5% in 2000,
and 4.1% in 1999. Nuclear plant decommissioning costs are accrued and included
in depreciation expense (see Note F).
Other property, plant and equipment is recorded at cost. Cost includes
material, labor and capitalized interest. Additions to and significant
replacements of property are charged to property, plant and equipment at cost;
minor items are charged to maintenance expense. Upon retirement or sale of
other property and equipment, the cost and related accumulated depreciation are
removed from the accounts and any gain or loss is included in "Other Income and
Deductions--Gain on asset sales" in the Consolidated Income Statements.
B-37
Depreciation expense is accrued at straight line rates over the estimated
useful lives of the assets. For manufacturing property, depreciation expense is
primarily included in cost of goods sold.
Estimated useful lives are 3 to 10 years for manufacturing equipment, 3 to 15
years for other non-utility equipment and 30 to 40 years for non-utility
buildings.
Allowance For Funds Used During Construction: Allowance for funds used during
construction ("AFUDC") is included in Wisconsin Electric's and Wisconsin Gas's
utility plant accounts and represents the cost of borrowed funds used during
plant construction and a return on stockholders' capital used for construction
purposes. Allowance for borrowed funds also includes interest capitalized on
qualifying assets of non-utility subsidiaries. In the Consolidated Income
Statements, the cost of borrowed funds (before income taxes) is shown as an
offset to interest expense and the return on stockholders' capital is an item
of non-cash other income.
As approved by the PSCW, Wisconsin Electric capitalized AFUDC at the following
rates during the periods indicated:
. September 1, 2000--continuing... 10.18%
. June 1, 1998--August 31, 2000... 10.21%
Prior to August 31, 2000, based on PSCW authorization, Wisconsin Electric
accrued an allowance for funds used during construction on 50% of all
construction work in progress. In a rate order made dated August 30, 2000, the
PSCW authorized the Company to accrue an AFUDC on all electric utility nitrogen
oxide remediation construction work in progress at a rate of 10.18%, and
provided a full current return on electric safety and reliability construction
work in progress so that no AFUDC accrual is required on such projects. In
addition, the August PSCW order provided a current return on half of other
utility construction work in progress and authorized AFUDC accruals on the
remaining 50% of these projects.
As approved by the PSCW, Wisconsin Gas began to accrue AFUDC on its Guardian
natural gas pipeline lateral project on September 1, 2001 at a rate of 10.32%.
Prior to the Guardian project, Wisconsin Gas had not been authorized to accrue
AFUDC on construction work in progress in recent years.
Earnings Per Common Share: Basic earnings per common share have been computed
by dividing net earnings by the weighted average number of common shares
outstanding. Diluted earnings per share have been computed by dividing net
earnings by the weighted average number of common shares outstanding including
the potentially dilutive effects of stock options.
Materials, Supplies and Inventories: Inventory at December 31, 2001 and 2000
consists of:
Materials, Supplies and Inventories 2001 2000
----------------------------------- ------ ------
(Millions of Dollars)
Fossil Fuel...................................... $103.7 $ 78.2
Natural Gas in Storage........................... 107.1 92.1
Materials and Supplies........................... 89.0 89.0
Manufacturing.................................... 131.2 122.4
------ ------
Total......................................... $431.0 $381.7
====== ======
Substantially all fossil fuel, materials and supplies and natural gas in
storage inventories are priced using the weighted average method of accounting.
Approximately 83% of the manufacturing inventories in 2001 and 2000 were priced
using the last-in, first-out method (not in excess of the market), with the
remaining inventories priced using the first-in, first-out method. If the
first-in, first-out method of accounting had been used exclusively,
manufacturing inventories would have been $0.3 million and $0.4 million higher
at December 31, 2001 and 2000, respectively.
Goodwill and Long-Lived Assets: Goodwill represents the excess of acquisition
costs over the fair value of the net assets of acquired businesses and has been
amortized on a straight line basis over its estimated life, which was generally
40 years. Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards 142, Goodwill and Other Intangible Assets ("SFAS 142")
which eliminated the annual amortization of goodwill.
B-38
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, Business Combinations ("SFAS 141"), and
SFAS 142. Both accounting pronouncements were effective beginning January 1,
2002, although both standards require that business combinations which occurred
after June 30, 2001 be accounted for using the new accounting standards. Under
SFAS 141, all future business combinations must be accounted for using the
purchase method, thereby eliminating the pooling of interests method. Under
SFAS 142, goodwill is no longer amortized. However, goodwill along with other
intangibles will be subject to new fair value-based rules for measuring
impairment and resulting write-downs, if any, will be reflected as a change in
accounting principle at transition and in operating expense in subsequent
periods. The transition calls for an impairment test for intangible assets with
indefinite lives to be performed as of January 1, 2002 and for an impairment
test for goodwill to be finalized by the end of 2002.
Wisconsin Energy is in the process of evaluating the impact of the new
standards. Through December 31, 2001, the Company had amortized goodwill
expense. For the year 2002, the Company expects that implementation of SFAS 142
will increase net income by approximately $0.18 per share due to the
elimination of goodwill amortization. Wisconsin Energy has not yet completed
the evaluation of the application of the new impairment rules to the recorded
goodwill balance at December 31, 2001 and therefore has not yet determined the
effect of the implementation of that portion of SFAS 142.
Under SFAS 142, the Company will review the carrying value of goodwill for
impairment annually and whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. An impairment would be
determined based upon a comparison of the fair value of goodwill of each
"reporting unit" as defined by SFAS 142 to the carrying value. A writedown
would be reported in operating expense equal to the excess of the goodwill
carrying value over fair value.
Regulatory Accounting: The utility energy segment accounts for its regulated
operations in accordance with Statement of Financial Accounting Standards No.
71, Accounting for the Effects of Certain Types of Regulation. This statement
sets forth the application of generally accepted accounting principles to those
companies whose rates are determined by an independent third-party regulator.
The economic effects of regulation can result in regulated companies recording
costs that have been or are expected to be allowed in the ratemaking process in
a period different from the period in which the costs would be charged to
expense by an unregulated enterprise. When this occurs, costs are deferred as
assets in the balance sheet (regulatory assets) and recorded as expenses in the
periods when those same amounts are reflected in rates. Additionally,
regulators can impose liabilities upon a regulated company for amounts
previously collected from customers and for amounts that are expected to be
refunded to customers (regulatory liabilities).
Deferred regulatory assets and liabilities at December 31 consist of:
Deferred Regulatory Assets and Liabilities 2001 2000
------------------------------------------ ------ ------
(Millions of Dollars)
Deferred Regulatory Assets
Deferred income tax related.......... $144.4 $148.7
Environmental costs.................. 43.9 --
Other plant related.................. 39.0 30.6
Postretirement benefit costs......... 28.4 31.2
Deferred transmission costs.......... 22.3 --
Lightweight aggregate plant.......... 16.8 19.7
Department of Energy assessments..... 15.9 18.5
Deferred nuclear costs............... 4.7 8.3
Other................................ 9.5 19.8
------ ------
Total Deferred Regulatory Assets........ $324.9 $276.8
====== ======
Deferred Regulatory Liabilities
Benefit costs........................ $160.2 $173.1
Deferred income tax related.......... 132.3 135.7
NOx escrow........................... 8.6 --
Other................................ 27.0 12.2
------ ------
Total Deferred Regulatory Liabilities... $328.1 $321.0
====== ======
In connection with the WICOR acquisition, the Company recorded the Wisconsin
Gas pension and postretirement medical plans at fair value. Due to the
regulatory treatment of Wisconsin Gas, a regulatory liability was also recorded
and is being amortized over the average remaining service life of 15 years.
B-39
During 2000, Wisconsin Electric discontinued operation of its lightweight
aggregate plant at Oak Creek Power Plant. As authorized by the PSCW, Wisconsin
Electric transferred the associated remaining undepreciated plant balance of
$19.7 million on December 31, 2000 to a deferred regulatory asset account,
which is being amortized over the five year period ending December 31, 2005.
Derivative Financial Instruments: The Company has derivative physical and
financial instruments as defined by Statement of Financial Accounting Standards
No. 133 ("SFAS 133"), however use of financial instruments is limited and was
immaterial as of December 31, 2001 and 2000. For further information, see
Note K.
Statement of Cash Flows: Cash and cash equivalents include marketable debt
securities acquired three months or less from maturity.
Restrictions: Various financing arrangements and regulatory requirements impose
certain restrictions on the ability of the principal utility subsidiaries and
various financing arrangements impose restrictions on the ability of the
non-utility subsidiaries to transfer funds to Wisconsin Energy in the form of
cash dividends, loans or advances. Under Wisconsin law, Wisconsin Electric and
Wisconsin Gas are prohibited from loaning funds, either directly or indirectly,
to Wisconsin Energy. The Company does not believe that such restrictions will
materially affect its operations.
Assets Held for Sale: Property, equipment and goodwill related to businesses
held for sale are carried at the lower of cost or estimated fair value less
costs to sell. In accordance with the Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of ("SFAS 121"), the Company records an
impairment loss on its property held for sale whenever their carrying value
cannot be fully recovered through the estimated cash flows including net sale
proceeds. Effective December 31, 2000, the Company stopped depreciating assets
classified as held for sale, which for the year ended December 31, 2001
resulted in a reduction of depreciation expense of $0.05 per share. There was
no similar reduction in 2000 as assets were identified at December 31, 2000.
The amount of any impairment loss to be recognized would be the excess of the
asset's carrying value compared to the asset's estimated fair value.
Adjustments for an impairment loss for such assets are made in each period as
necessary to report these assets at the lower of carrying value or estimated
fair value less costs to sell.
The ultimate timing, proceeds and any gain or loss on the sale of assets is
dependent upon many factors, including, but not limited to, the independent
power markets, forward electric price curves, the ability of independent power
producers to obtain credit, the softening economy, the relative attractiveness
of real estate for investment purposes, and interest rates.
Investments: Investments of Witech Corporation, a wholly owned venture capital
company, are reported at fair value with changes in fair value reported
currently. Investments in other affiliated companies in which the Company does
not maintain control are accounted for using the equity method.
Stock Options: The Company applies Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25") and related interpretations
in accounting for its stock option plans and has adopted the disclosure-only
provisions of Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation ("FAS 123"). For further information, see Note G.
Nuclear Fuel Amortization: The Company leases nuclear fuel and amortizes it to
fuel expense for a period of 60 months or until the removal of the fuel from
the reactor, if earlier.
B--MERGERS AND ACQUISITIONS
Utility Energy Segment
WICOR, Inc.: On April 26, 2000, the Company acquired all of the outstanding
common stock of WICOR, Inc., a diversified utility holding company. The
purchase price included the payment of $1.2 billion of cash, the assumption of
stock options and restricted shares valued at $37.1 million and the payment of
$10.2 million in transaction costs. The Company also assumed approximately $267
million of existing WICOR debt. The cash purchase price of approximately $1.2
billion was funded with commercial paper borrowings. The acquisition was
accounted for as a purchase under Accounting Principles Board Opinion No. 16,
Business Combinations ("APB 16"), and accordingly, the operating results have
been included in the Company's consolidated results of operations from the date
of acquisition. In accordance with APB 16, the purchase price has been
allocated to assets
B-40
acquired and liabilities assumed based upon an estimate of fair value at the
date of acquisition while approximately $818 million was recorded as goodwill
that has been amortized through December 31, 2001 based upon a 40-year
estimated life. Portions of the purchase price were identified by independent
appraisers utilizing proven valuation procedures and techniques.
The following unaudited pro forma data summarize the results of operations for
the periods indicated as if the WICOR acquisition had been completed as of the
beginning of the periods presented.
Pro forma (a)
-----------------
Wisconsin Energy Corporation 2001 2000 1999
---------------------------- -------- -------- --------
(Millions of Dollars,
Except Per Share Amounts)
Total Operating Revenues.......... $3,928.5 $3,801.4 $3,282.8
Net Income........................ $ 219.0 $ 153.8 $ 190.5
Earnings Per Share
Basic.......................... $ 1.87 $ 1.28 $ 1.63
Diluted........................ $ 1.86 $ 1.27 $ 1.63
--------
(a) Pro forma assumes that the WICOR acquisition occurred on January 1, 1999
and includes estimated merger-related costs from January 1999 through April
2000.
Non-Utility Energy Segment
Wisvest-Connecticut, LLC: In April 1999, Wisvest-Connecticut, LLC, a wholly
owned subsidiary of Wisvest, acquired two fossil-fueled power plants in the
state of Connecticut for $276.8 million from The United Illuminating Company,
an unaffiliated investor-owned utility in New Haven, Connecticut. Pursuant to
the agreement, Wisvest-Connecticut, LLC purchased the Bridgeport Harbor
Station, which has an active generating capacity of 590 megawatts, as well as
the New Haven Harbor Station, which has an active generating capacity of 466
megawatts. Wisconsin Energy accounted for the transaction under the purchase
method of accounting. Related goodwill in the amount of $53.9 million, which
was being amortized over a 30-year estimated life, remains outstanding at
December 31, 2001. Due to the immaterial nature of the transaction, Wisconsin
Energy has not presented pro forma financial information. As discussed in Note
C, the Company has announced the anticipated sale of these two fossil-fueled
power plants.
Manufacturing Segment
In July 2001, the Company completed the acquisitions of Vico Products
Manufacturing Co., Inc., Ultra Jet Plastics and Ultra Jet Canada, leading
manufacturers of spa and jetted tub pumps and fittings. In August 2000, the
Company acquired a privately held manufacturer of fiber-wound pressure tanks
for the water treatment industry. The aggregate purchase price for these
transactions was approximately $36 million and $33 million respectively. They
were financed using corporate working capital and short-term borrowings. The
acquisitions were accounted for as purchases, and the acquired companies'
results of operations are included in the consolidated financial statements
from the acquisition date. The excess of the purchase price over the estimated
fair value of the net assets of the acquired companies is approximately $23
million and $22 million respectively, which is recorded as goodwill and other
intangibles. Due to the immaterial nature of the transactions, Wisconsin Energy
has not presented pro forma financial information.
C--ASSET SALES AND DIVESTITURES
During 2000, the Company's management announced a strategy, which, among other
things, identified the divestiture of non-core investments.
In October 2000, the Company closed on the sale of its interest in SkyGen
Energy Holdings, LLC., which resulted in cash proceeds totaling approximately
$332 million (including approximately $112 million for the repayment of certain
advances, short-term notes receivable and interest) and an after tax gain of
$54.6 million or $0.45 per share.
During the second quarter of 2001, the Company sold FieldTech, Inc. and
Wisvest's interest in Blythe Energy, LLC, an independent power production
project in the state of California, in separate transactions. Wisconsin Energy
realized after-tax gains of approximately $16.5 million or $0.14 per share as a
result of the sales of FieldTech and Blythe.
B-41
As of December 31, Wisconsin Energy held additional assets held for sale as
follows:
Assets Held For Sale December 31, 2001 December 31, 2000
-------------------- ----------------- -----------------
(Millions of Dollars)
Non-Utility Energy. $382.5 $331.8
Other--Real Estate. 20.6 132.2
------ ------
Total........... $403.1 $464.0
====== ======
Wisvest is reviewing bids to sell its Wisvest Connecticut assets in the context
of current independent power markets. In May 2000, Wisconsin Energy announced
that it planned to market and sell a significant portion of its portfolio of
non-utility real estate assets during the following two years. Proceeds from
these sales, and additional sales of real estate by Wispark, are being used
primarily to reduce debt.
Effective January 1, 2001, Wisconsin Electric and Edison Sault transferred
electric utility transmission system assets with a net book value of
approximately $254.9 million to American Transmission Company LLC ("ATC") in
exchange for an equity interest in this new company. No gain or loss was
recorded in this transaction. During 2001, ATC issued debt and distributed
$119.8 million of cash back to Wisconsin Electric and Edison Sault as a partial
return of the original equity contribution.
D--NON-RECURRING CHARGES
During the fourth quarter of 2000, the Company recorded one-time charges
totaling $0.69 per diluted share. Of this, $0.33 per share related to severance
and employee benefits and merger-related items. In connection with the WICOR
merger and the divestiture of non-core businesses, approximately 300 employees
received severance benefits under severance agreements and enhanced retirement
initiatives. The Company has paid all of the anticipated expenses except
approximately $5.8 million of severance benefits related to 130 employees as of
December 31, 2001. No other adjustments were made to the reserves. The Company
also recorded charges totaling $0.26 per share during the fourth quarter of
2000 related to the valuation of non-core investments. The Company reviewed its
non-core businesses and investments and determined that the expected future
cash flows on certain investments, including real estate, international waste
to energy projects and energy marketing companies would not exceed the
historical costs of those investments. In addition, the Company made a
contribution of $0.10 per share after tax to the Wisconsin Energy Foundation to
assist it in becoming self-funding.
During 1999, Wisconsin Electric reached agreement in the settlement of
litigation related to the development of an electric generating plant in the
Philippines at an after tax cost of $0.09 per diluted share.
E--INCOME TAXES
The Company follows the liability method in accounting for income taxes as
prescribed by Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes ("SFAS 109"). SFAS 109 requires the recording of deferred
assets and liabilities to recognize the expected future tax consequences of
events that have been reflected in the Company's financial statements or tax
returns and the adjustment of deferred tax balances to reflect tax rate
changes. Tax credits associated with regulated operations are deferred and
amortized over the life of the assets.
The following table is a summary of income tax expense for each of the years
ended December 31:
Income Tax Expense 2001 2000 1999
------------------ ------ ------ ------
(Millions of Dollars)
Current tax expense......... $163.2 $120.2 $ 81.8
Deferred income taxes, net.. (7.8) 10.3 33.6
Investment tax credit, net.. (5.0) (4.6) (4.3)
------ ------ ------
Total Income Tax Expense. $150.4 $125.9 $111.1
====== ====== ======
B-42
The provision for income taxes for each of the years ended December 31 differs
from the amount of income tax determined by applying the applicable U.S.
statutory federal income tax rate to income before income taxes and preferred
dividend as a result of the following:
2001 2000 1999
---------------- ---------------- ----------------
Effective Effective Effective
Income Tax Expense Amount Tax Rate Amount Tax Rate Amount Tax Rate
------------------ ------ --------- ------ --------- ------ ---------
(Millions of Dollars)
Expected tax at statutory federal tax rates........... $125.6 35.0% $ 98.5 35.0% $112.5 35.0%
State income taxes net of federal tax benefit......... 26.3 7.3% 20.7 7.4% 16.6 5.2%
Unrealized capital loss............................... -- -- 7.5 2.7% -- --
Investment tax credit restored........................ (5.0) (1.4%) (4.6) (1.6%) (4.6) (1.4%)
Amortization of goodwill.............................. 6.6 1.8% 4.2 1.5% -- --
Flowback of prior contributions in aid of construction -- -- -- -- (8.1) (2.5%)
Other, net............................................ (3.1) (0.8%) (0.4) (0.1%) (5.3) (1.6%)
------ ----- ------ ----- ------ -----
Total Income Tax Expense........................... $150.4 41.9% $125.9 44.9% $111.1 34.7%
====== ===== ====== ===== ====== =====
The components of SFAS 109 deferred income taxes classified as net current
assets and net long-term liabilities at December 31 are as follows:
Current Assets Long-Term
(Liabilities) Liabilities (Assets)
-------------- -------------------
Deferred Income Taxes 2001 2000 2001 2000
--------------------- ------ ----- ------ ------
(Millions of Dollars)
Property-related.................. $ -- $ -- $673.9 $671.9
Construction advances............. -- -- (70.9) (66.5)
Decommissioning trust............. -- -- (55.0) (52.9)
Contested liability payment....... (44.5) -- -- 43.8
Recoverable gas costs............. (0.4) 18.1 -- --
Uncollectible account expense..... 11.7 18.0 -- --
Employee benefits and compensation 16.7 15.7 1.2 4.1
Asset impairment charge........... 10.8 10.8 -- --
Other............................. 14.4 10.8 (2.0) (13.3)
------ ----- ------ ------
Total Deferred Income Taxes.... $ 8.7 $73.4 $547.2 $587.1
====== ===== ====== ======
Wisconsin Electric, Wisconsin Gas and Edison Sault have also recorded deferred
regulatory assets and liabilities representing the future expected impact of
deferred taxes on utility revenues (see Note A). As of December 31, 2001, the
Company had not recorded $12.0 million of tax benefits related to state and
capital loss carryforwards, due to the uncertainty of the ability to benefit
from these losses in the future.
F--NUCLEAR OPERATIONS
Point Beach Nuclear Plant: Wisconsin Electric owns two 510-megawatt electric
generating units at Point Beach Nuclear Plant ("Point Beach") in Two Rivers,
Wisconsin. Point Beach is operated by Nuclear Management Company, a company
that, as of December 31, 2001, provides services to nine nuclear generating
units in the Midwest. Nuclear Management Company is owned by the Company and
the affiliates of four other unaffiliated investor-owned utilities in the
region. Wisconsin Electric currently expects the two units at Point Beach to
operate to the end of their operating licenses, which expire in October 2010
for Unit 1 and in March 2013 for Unit 2.
Nuclear Insurance: The Price-Anderson Act as amended and extended to August 1,
2002, currently limits the total public liability for damages arising from a
nuclear incident at a nuclear power plant to approximately $9.5 billion, of
which $200 million is covered by liability insurance purchased from private
sources. The remaining $9.3 billion is covered by an industry retrospective
loss sharing plan whereby in the event of a nuclear incident resulting in
damages exceeding the private insurance coverage, each owner of a nuclear plant
would be assessed a deferred premium of up to $88.1 million per reactor
(Wisconsin Electric owns two) with a limit of $10 million per reactor within
one calendar year. As the owner of Point Beach, Wisconsin Electric would be
obligated to pay its proportionate share of any such assessment.
B-43
Wisconsin Electric, through its membership in Nuclear Electric Insurance
Limited ("NEIL"), carries decontamination, property damage and decommissioning
shortfall insurance covering losses of up to $1.5 billion at Point Beach. Under
policies issued by NEIL, the insured member is liable for a retrospective
premium adjustment in the event of catastrophic losses exceeding the full
financial resources of NEIL. Wisconsin Electric's maximum retrospective
liability under its policies is $12.4 million.
Wisconsin Electric also maintains insurance with NEIL covering business
interruption and extra expenses during any prolonged accidental outage at Point
Beach, where such outage is caused by accidental property damage from
radioactive contamination or other risks of direct physical loss. Wisconsin
Electric's maximum retrospective liability under this policy is $8.6 million.
It should not be assumed that, in the event of a major nuclear incident, any
insurance or statutory limitation of liability would protect Wisconsin Electric
from material adverse impact.
Nuclear Decommissioning: Nuclear decommissioning costs are included in
depreciation expense under an external sinking fund method as these costs are
recovered through rates over the expected service lives of the generating
units. Decommissioning expenses of $17.6 million during 2001 and 2000, and
$17.7 million during 1999 were accrued under this method.
Decommissioning costs collected through rates are deposited into the nuclear
decommissioning trust fund and also included in accumulated depreciation. As a
result, these funds do not add to the cash flows available for general
corporate purposes. Earnings on the fund balance accumulate in the nuclear
decommissioning trust fund and in accumulated depreciation.
It is expected that the annual payments to the nuclear decommissioning trust
fund along with related earnings will provide sufficient funds at the time of
decommissioning. Wisconsin Electric believes it is probable that any shortfall
in funding would be recoverable in utility rates.
The estimated cost to decommission the plant in 2001 dollars is $621 million
based upon a site specific decommissioning cost study completed in 1998, and
includes additional costs from prior estimates for work management by an
independent decommissioning general contractor. Assuming plant shutdown at the
expiration of the current operating licenses, prompt dismantlement and annual
escalation of costs at specific inflation factors established by the PSCW, it
is projected that approximately $1.9 billion will be spent over a thirty-three
year period, beginning in 2010, to decommission the plant.
Following is a summary at December 31 of the Nuclear Decommissioning Trust Fund
balance, stated at fair value, which is equal to the accrued decommissioning
liability balance included in accumulated depreciation.
Nuclear Decommissioning Trust Fund 2001 2000
---------------------------------- ------ ------
(Millions of
Dollars)
Total funding and realized net earnings $434.8 $408.1
Unrealized gains, net.................. 154.8 205.2
------ ------
Total............................... $589.6 $613.3
====== ======
As required by Statement of Financial Accounting Standards No. 115, Accounting
for Certain Investments in Debt and Equity Securities, Wisconsin Electric's
debt and equity security investments in the Nuclear Decommissioning Trust Fund
are classified as available for sale. Gains and losses on the fund were
determined on the basis of specific identification; net unrealized holding
gains on the fund were recorded as part of the fund and as part of accumulated
depreciation.
Decontamination and Decommissioning Fund: The Energy Policy Act of 1992
established a Uranium Enrichment Decontamination and Decommissioning Fund ("D&D
Fund") for the United States Department of Energy's nuclear fuel enrichment
facilities. Deposits to the D&D Fund are derived in part from special
assessments on utilities using enrichment services. As of December 31, 2001,
Wisconsin Electric has recorded its remaining estimated liability equal to
projected special assessments of$15.9 million. A deferred regulatory asset is
detailed in Note A. The deferred regulatory asset will be amortized to nuclear
fuel expense and included in utility rates over the next six years ending in
2007.
G--COMMON EQUITY
During 2000, the Board of Directors approved a common stock repurchase plan
which authorized the Company to purchase up to $400 million of its shares of
common stock in the open market over the following 24 months. Through December
31, 2001 Wisconsin Energy purchased approximately 10.9 million shares of common
stock for $234.5 million. The Company is currently retiring the stock that is
purchased.
B-44
Wisconsin Energy issued approximately 2.7 million and 4.7 million new shares of
common stock during 2001 and 2000, respectively. These shares were primarily
issued through employee benefit plans and the dividend reinvestment plan
proceeds totaled approximately $51.6 million during 2001 and $89.3 million
during 2000.
In September 2000, the Board of Directors authorized a quarterly cash dividend
on its common stock, payable December 1, 2000, of $0.20 per share ($0.80 on an
annualized basis), which was reduced from prior quarterly dividends paid during
2000 of $0.39 per common share (or $1.56 on an annualized basis).
Stock Option Plans and Restricted Stock: The 1993 Omnibus Stock Incentive Plan
("OSIP"), as approved by stockholders in 1994 and amended by the Board of
Directors in 1998 and again amended in 2001,which amendments were approved by
stockholders at the 2001 annual meeting, enables the Company to provide a
long-term incentive, through equity interests in Wisconsin Energy, to outside
directors, selected officers and key employees of the Company and its
subsidiaries. In May 2001, the OSIP was amended to increase the number of
shares reserved for issuance from 4.0 million to 20.0 million and to extend the
expiration date to 2011.
The OSIP provides for the granting of stock options, stock appreciation rights,
stock awards and performance units during the ten-year extension of the plan.
Awards may be paid in common stock, cash or a combination thereof. No stock
appreciation rights have been granted to date.
In addition, the table below reflects the Company's assumption of former WICOR
options to purchase shares of WICOR common stock, which were converted into
options to purchase shares of the Company's common stock on the same terms and
conditions as were applicable under such WICOR options.
The exercise price of a stock option under the OSIP is to be no less than 100%
of the common stock's fair market value on the grant date and options may not
be exercised within six months of the grant date except in the event of a
change in control. The following is a summary of the Company's stock options
issued through December 31, 2001.
2001 2000 1999
------------------------- ------------------------- ------------------------
Weighted- Weighted- Weighted-
Number of Average Number of Average Number of Average
Stock Options Options Exercise Price Options Exercise Price Options Exercise Price
------------- --------- -------------- --------- -------------- --------- --------------
Outstanding at January 1....... 6,216,835 $17.81 1,234,700 $28.11 858,700 $28.53
Granted..................... 2,168,825 $20.94 1,198,211 $19.95 376,000 $27.14
Conversion of WICOR options. -- -- 4,571,345 $13.71 -- --
Exercised................... (990,136) $13.36 (735,948) $12.49 -- --
Forfeited................... (260,061) $23.81 (51,473) $25.86 -- --
--------- --------- ---------
Outstanding at December 31..... 7,135,463 $19.16 6,216,835 $17.81 1,234,700 $28.11
========= ========= =========
Exercisable at December 31..... 3,724,398 $17.45 4,647,406 $16.08 369,763 $28.99
========= ========= =========
At December 31, 2001, 2,831,190 converted WICOR options are outstanding. An
additional 445,850 of the outstanding options have "cliff vesting" terms and
are exercisable four years after the grant date, while 3,758,423 of the options
vest on a straight-line "graded" basis over a four-year period from the grant
date and 100,000 of the options vest on a straight-line "graded" basis over a
three-year period from the grant date. All outstanding options, including the
converted WICOR options, expire no later than eleven years from the date of
grant.
The following table summarizes information about stock options outstanding at
December 31, 2001:
Options Outstanding Options Exercisable
------------------------------- -------------------
Average Average
Range of Exercise Exercise
Exercise Prices Number Price Life (years) Number Price
--------------- --------- -------- ------------ --------- --------
$6.79 to $16.10 2,230,415 $12.64 5.2 2,230,415 $12.64
$19.22 to $21.98 3,769,198 $20.48 8.8 629,805 $20.07
$22.69 to $30.88 1,135,850 $27.61 6.0 864,178 $27.97
--------- ---------
7,135,463 $19.16 6.8 3,724,398 $17.45
========= =========
B-45
The Company applies APB 25 and related interpretations in accounting for its
stock option plans and has adopted the disclosure-only provisions of SFAS 123.
The fair value of options at date of grant was estimated using the
Black-Scholes option-pricing model with the following weighted average
assumptions:
2001 2000 1999
----- ----- -----
Risk free interest rate............................... 5.5% 6.4% 6.7%
Dividend yield........................................ 3.8% 4.0% 5.7%
Expected volatility................................... 23.5% 21.0% 13.2%
Expected life (years)................................. 10 10 10
Pro forma weighted average fair value of the Company's
stock options granted............................... $5.04 $4.73 $3.05
Had compensation cost for the Company's 2001, 2000 and 1999 grants for
stock-based compensation plans been determined consistent with SFAS 123, the
Company's net income and diluted earnings per share would have been reduced to
the pro forma amounts indicated below:
2001 2000 1999
------ ------ ------
(Millions of Dollars,
Except Per Share Amounts)
Net Income
As reported.................................... $219.0 $154.2 $209.0
Pro forma...................................... $216.2 $153.0 $208.6
Diluted Earnings Per Common Share
As reported.................................... $1.86 $1.27 $1.79
Pro forma...................................... $1.83 $1.26 $1.78
The Company has granted restricted shares of common stock to certain key
employees. The following restricted stock activity occurred during 2001, 2000
and 1999:
2001 2000 1999
---------------------- ---------------------- ----------------------
Weighted- Weighted- Weighted-
Number of Average Number of Average Number of Average
Restricted Shares Shares Market Price Shares Market Price Shares Market Price
----------------- --------- ------------ --------- ------------ --------- ------------
Outstanding at January 1......... 204,941 103,250 55,750
Granted....................... 77,650 $20.39 64,750 $21.12 51,500 $27.41
WICOR restricted shares
converted................... -- -- 57,745 $20.73 -- --
Released / Forfeited.......... (38,650) $22.54 (20,804) $25.01 (4,000) $28.32
------- ------- -------
Outstanding at December 31....... 243,941 204,941 103,250
======= ======= =======
Recipients of the restricted shares, who have the right to vote the shares and
to receive dividends, are not required to provide consideration to the Company
other than rendering service. Forfeiture provisions on the restricted stock
expire 10 years after award grant subject to an accelerated expiration schedule
based on the achievement of certain financial performance goals.
Under the provisions of APB 25, the market value of the restricted stock awards
on the date of grant is recorded as a separate unearned compensation component
of common stock equity and is then charged to expense over the vesting period
of the awards. Adjustments are also made to expense for achievement of
performance goals. Restricted stock compensation charged to expense during
2001, 2000 and 1999 was immaterial.
H--TRUST PREFERRED SECURITIES
In March 1999, WEC Capital Trust I, a Delaware business trust of which
Wisconsin Energy owns all of the outstanding common securities, issued $200
million of 6.85% trust preferred securities to the public. The sole asset of
WEC Capital Trust I is $206 million of 6.85% junior subordinated debentures
issued by Wisconsin Energy and due March 31, 2039. The terms and interest
payments on these debentures correspond to the terms and distributions on the
trust preferred securities. Wisconsin Energy used the proceeds from the sale of
its junior subordinated debentures to fund a capital contribution of
approximately $105 million to Wisvest-Connecticut, LLC for the acquisition in
mid-April 1999 of two fossil-fueled power plants (see Note B) and for repayment
of short-term borrowings. WEC Capital Trust I has been consolidated into
Wisconsin Energy's financial statements.
B-46
For tax purposes, Wisconsin Energy is allowed to deduct an amount equal to the
distributions on the trust preferred securities. Wisconsin Energy may elect to
defer interest payments on the debentures for up to 20 consecutive quarters,
causing corresponding distributions on the trust preferred securities to also
be deferred. In case of a deferral, interest and distributions will continue to
accrue, along with quarterly compounding interest on the deferred amounts.
Wisconsin Energy may redeem all or a portion of the debentures after March 25,
2004, requiring an equal amount of trust preferred securities to be redeemed at
face value plus accrued and unpaid distributions. Wisconsin Energy has entered
into a limited guarantee of payment of distributions, redemption payments and
payments in liquidation with respect to the trust preferred securities. This
guarantee, when considered together with Wisconsin Energy's obligations under
the related debentures and indenture and the applicable declaration of trust,
provide a full and unconditional guarantee by Wisconsin Energy of amounts due
on the outstanding trust preferred securities.
I--LONG-TERM DEBT
First Mortgage Bonds, Debentures and Notes: At December 31, 2001, the
maturities and sinking fund requirements through 2006 for the aggregate amount
of long-term debt outstanding (excluding obligations under capital leases) were:
(Millions of Dollars)
2002...... $ 456.9
2003...... 235.5
2004...... 143.8
2005...... 80.0
2006...... 755.8
Thereafter 1,880.6
--------
Total.. $3,552.6
========
Sinking fund requirements for the years 2002 through 2006, included in the
preceding table, are $15.0 million. Also included in the preceding table is
commercial paper in the amount of $220.7 million which is supported by bank
back-up credit facilities that expire in 2003. Substantially all of Wisconsin
Electric's utility plant is subject to a first mortgage lien.
Long-term debt premium or discount and expense of issuance are amortized by the
straight line method, over the lives of the debt issues and included as
interest expense.
In January 2002, the Company redeemed $100 million of 8 3/8% first mortgage
bonds due 2026 and $3.4 million of 9 1/8% first mortgage bonds due 2024. Early
redemption of this long-term debt was financed through the issuance of
short-term commercial paper.
In November 2001, Wisconsin Energy issued $300 million of intermediate-term
unsecured senior debt securities in the form of 5.50% Senior Notes due December
1, 2008. Proceeds from this debt issue were added to the Company's general
funds and were used to repay commercial paper borrowings.
In March 2001, Wisconsin Energy issued $1 billion of intermediate-term
unsecured senior debt securities consisting of $550 million of 5.875% Senior
Notes due April 1, 2006 and $450 million of 6.50% Senior Notes due April 1,
2011. Proceeds from these debt issues were added to the Company's general funds
and were used to repay commercial paper borrowings related primarily to the
WICOR acquisition.
In April 1999, Wisvest-Connecticut, LLC issued $210 million of nonrecourse
variable rate notes, $180.5 million of which remains outstanding as of December
31, 2001. Proceeds were used to help finance the acquisition of two
fossil-fueled power plants and for related working capital. These notes, due
December 31, 2005, are secured by the acquired assets. Associated with issuance
of this debt, Wisvest-Connecticut, LLC has entered into an interest rate swap
agreement to exchange fixed rate payment obligations for variable rate receipt
rights without exchanging the underlying notional amounts. This agreement,
which expires on December 31, 2005, serves to convert variable rate debt under
Wisvest-Connecticut, LLC's nonrecourse notes to fixed rate debt to reduce the
impact of interest rate fluctuations. The variable rate is based upon a
three-month LIBOR rate and the fixed rated is 5.99%. At year-end 2001,
three-month LIBOR was 1.98%. The notional amounts parallel a portion of the
underlying debt levels and are used to measure interest to be paid or received
and do not represent an exposure to credit loss. The notional amount of
Wisvest-Connecticut, LLC's interest rate swaps was $69.9 million at December
31, 2001. This notional amount decreases on a quarterly
B-47
basis over the remaining term of the agreement. The difference between the
amounts paid and received under the interest rate swap is accrued as interest
rates change and is recorded as an adjustment to interest expense over the life
of the hedged agreement. Wisvest-Connecticut, LLC is exposed to credit loss in
the event of nonperformance by the other party to the interest rate swap.
However, it does not anticipate any losses from this agreement, which is with a
major financial institution. The Company plans to terminate the interest rate
swap and retire the nonrecourse variable rate notes with the anticipated sale
of Wisvest-Connecticut, LLC's power plants (see Note C).
Obligations Under Capital Leases: In 1997, Wisconsin Electric entered into a
25 year power purchase contract with an unaffiliated independent power
producer. The contract, for 236 megawatts of firm capacity from a gas-fired
cogeneration facility, includes no minimum energy requirements. When the
contract expires in 2022, Wisconsin Electric may, at its option and with proper
notice, renew for another ten years or purchase the generating facility at fair
value or allow the contract to expire. Wisconsin Electric treats this contract
as a capital lease. The leased facility and corresponding obligation under
capital lease were recorded at the estimated fair value of the plant's electric
generating facilities. The leased facility is being amortized on a straight
line basis over the original 25-year term of the contract.
The long-term power purchase contract is treated as an operating lease for
rate-making purposes and the minimum lease payments are recorded as purchased
power expense on the Consolidated Income Statements. Such payments totaled
$21.5 million, $21.0 million and $20.4 million during 2001, 2000 and 1999,
respectively. As a result, the difference between the minimum lease payments
and the sum of the imputed interest and amortization costs under capital lease
accounting are recorded as a deferred regulatory asset (see Note A). Due to the
timing of the minimum lease payments, Wisconsin Electric expects the regulatory
asset to increase to approximately $78.5 million by the year 2009 and the total
obligation under capital lease to increase to $160.2 million by the year 2005
before each is reduced over the remaining life of the contract.
Wisconsin Electric has a nuclear fuel leasing arrangement with Wisconsin
Electric Fuel Trust ("Trust") which is treated as a capital lease. The nuclear
fuel is leased and amortized to fuel expense for a period of 60 months or until
the removal of the fuel from the reactor, if earlier. Lease payments include
charges for the cost of fuel burned, financing costs and management fees. In
the event Wisconsin Electric or the Trust terminates the lease, the Trust would
recover its unamortized cost of nuclear fuel from Wisconsin Electric. Under the
lease terms, Wisconsin Electric is in effect the ultimate guarantor of the
Trust's commercial paper and line of credit borrowings financing the investment
in nuclear fuel. Interest expense on the nuclear fuel lease, included in fuel
expense, was $3.3 million, $3.9 million and $3.5 million during 2001, 2000 and
1999, respectively.
Following is a summary of Wisconsin Electric's capitalized leased facilities
and nuclear fuel at December 31.
Capital Lease Assets 2001 2000
-------------------- ------ ------
(Millions of Dollars)
Leased Facilities
Long-term purchase power commitment. $140.3 $140.3
Accumulated amortization............ (24.3) (18.6)
------ ------
Total Leased Facilities................ $116.0 $121.7
====== ======
Nuclear Fuel
Under capital lease................. $127.5 $121.4
Accumulated amortization............ (80.0) (63.1)
In process/stock.................... 26.1 34.8
------ ------
Total Nuclear Fuel..................... $ 73.6 $ 93.1
====== ======
B-48
Future minimum lease payments under the capital leases and the present value of
the net minimum lease payments as of December 31, 2001 are as follows:
Purchase Power Nuclear
Capital Lease Obligations Commitment Fuel Lease Total
------------------------- -------------- ---------- -------
(Millions of Dollars)
2002.................................................. $ 26.9 $ 29.8 $ 56.7
2003.................................................. 28.0 16.1 44.1
2004.................................................. 29.0 9.0 38.0
2005.................................................. 30.1 5.1 35.2
2006.................................................. 31.2 1.1 32.3
Later Years........................................... 469.9 -- 469.9
------- ------ -------
Total Minimum Lease Payments.......................... 615.1 61.1 676.2
Less: Estimated Executory Costs....................... (127.7) -- (127.7)
------- ------ -------
Net Minimum Lease Payments............................ 487.4 61.1 548.5
Less: Interest........................................ (332.4) (4.7) (337.1)
------- ------ -------
Present Value of Net Minimum Lease Payments........... 155.0 56.4 211.4
Less: Due Currently................................... -- (27.4) (27.4)
------- ------ -------
$ 155.0 $ 29.0 $ 184.0
======= ====== =======
J--SHORT-TERM DEBT
Short-term notes payable balances and their corresponding weighted-average
interest rates at December 31 consist of:
2001 2000
--------------------- ----------------------
Short-Term Debt Balance Interest Rate Balance Interest Rate
--------------- ------- ------------- -------- -------------
(Millions of Dollars)
Banks
Domestic subsidiaries................................... $ 50.0 1.90% $ 57.9 6.77%
Foreign subsidiaries.................................... 12.1 3.93% 10.6 5.39%
Commercial paper........................................... 709.0 2.08% 1,627.3 6.61%
Medium-term notes due in less than one year................ -- -- 200.0 6.74%
Commercial paper classified as long-term debt (Note I)..... (220.7) 2.13% (509.7) 6.64%
------- --------
$ 550.4 2.09% $1,386.1 6.67%
======= ========
On December 31, 2001, Wisconsin Energy had $945 million of total available
unused short-term borrowing capacity on a consolidated basis under existing
commercial paper programs and other short-term borrowing arrangements. On that
date, Wisconsin Energy had $1.7 billion of available unused lines of bank
credit on a consolidated basis to support its outstanding commercial paper
program and other short-term borrowing arrangements.
K--DERIVATIVE INSTRUMENTS
Effective January 1, 2001 the Company adopted SFAS 133, which requires that
every derivative instrument be recorded on the balance sheet as an asset or
liability measured at its fair value and that changes in the derivative's fair
value be recognized currently in earnings unless specific hedge accounting
criteria are met.
As of the date of adoption January 2001, SFAS 133 required that the difference
between the fair value of derivative instruments recorded on the balance sheet
and the previous carrying amount of those derivatives be reported in Net Income
or Accumulated Other Comprehensive Income, as appropriate, as a cumulative
effect of a change in accounting principle. The adoption of SFAS 133 by
Wisconsin Energy resulted in an increase in net income of $10.5 million or
$0.09 per share reported as a cumulative effect of a change in accounting
principle. This transition adjustment is related to fuel oil contracts utilized
by Wisvest-Connecticut LLC, a wholly-owned subsidiary of Wisvest, to mitigate
the commodity risk associated with generation costs. These contracts are
B-49
defined as derivatives under SFAS 133 and do not qualify or were not designated
for hedge accounting treatment. Subsequent to the transition adjustment, the
Company recorded during 2001 a non-cash, after tax charge of $22.4 million or $
0.20 per share to reflect the decline in the value of these contracts resulting
from the decline in fuel oil prices. Net SFAS 133 charges for 2001 were $0.11
per share.
Wisconsin Energy has a limited number of other financial and physical commodity
contracts that are defined as derivatives under SFAS 133 and that qualify for
cash flow hedge accounting. These cash flow hedging instruments are comprised
of electric forward contracts which are used to manage the supply of and demand
for electricity and gas futures and basis swap contracts utilized by Wisconsin
Gas to manage the cost of gas. With the adoption of SFAS 133 on January 1,
2001, the fair market values of these derivative instruments have been recorded
as assets and liabilities on the balance sheet and as a cumulative effect of a
change in accounting principle in Accumulated Other Comprehensive Income in
accordance with the transition provisions of SFAS 133. The impact of this
transition as of January 1, 2001 was a $2.1 million reduction in Accumulated
Other Comprehensive Income which was reclassified into earnings during 2001.
Future changes in the fair market values of these cash flow hedging
instruments, to the extent that the hedges are effective at mitigating the
underlying commodity risk, will be recorded in Accumulated Other Comprehensive
Income. At the date the underlying transaction occurs, the amounts in
Accumulated Other Comprehensive Income will be reported in earnings. The
ineffective portion of the derivative's change in fair value will be recognized
in earnings immediately. In the case of Wisconsin Gas, the ineffective portion
is recorded as a regulatory asset or liability as these transactions are part
of the purchased gas adjustment clause.
For the year ended December 31, 2001, the amount of hedge ineffectiveness was
immaterial. Wisconsin Energy did not exclude any components of derivative gains
or losses from the assessment of hedge effectiveness. As of December 31, 2001,
the maximum length of time over which Wisconsin Energy is hedging its exposure
to the variability in future cash flows of forecasted transactions is three
months, and Wisconsin Energy estimates that after-tax gains of $0.4 million
will be reclassified from Accumulated Other Comprehensive Income into earnings
during the first quarter of 2002 as the hedged transactions affect earnings.
Near the end of the first quarter of 2001, Wisconsin Energy settled several
treasury lock agreements entered into earlier in the quarter to mitigate
interest rate risk associated with the anticipated issuance of $1 billion of
intermediate-term unsecured senior notes in March 2001. Because these
agreements qualified for cash flow hedge accounting treatment under SFAS 133,
the payment made upon settlement of these agreements is deferred in Accumulated
Other Comprehensive Income and will be amortized as an increase to interest
expense over the same period in which the interest cost on the debt issuance is
recognized in income. Through December 31, 2001, $0.5 million was reclassified
to interest expense. Wisconsin Energy estimates that during the next twelve
months, $0.7 million will be reclassified from Accumulated Other Comprehensive
Income as a reduction in earnings.
The Financial Accounting Standards Board continues to develop interpretative
guidance for SFAS 133 which may impact Wisconsin Energy's application of the
standard in the future.
L--FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount and estimated fair value of certain of Wisconsin Energy's
recorded financial instruments at December 31 are as follows:
2001 2000
----------------- -----------------
Carrying Fair Carrying Fair
Financial Instruments Amount Value Amount Value
--------------------- -------- -------- -------- --------
(Millions of Dollars)
Nuclear decommissioning trust fund...... $ 589.6 $ 589.6 $ 613.3 $ 613.3
Preferred stock--no redemption required. $ 30.4 $ 16.7 $ 30.4 $ 15.4
Trust preferred securities.............. $ 200.0 $ 189.6 $ 200.0 $ 185.5
Long-term debt including current portion $3,552.6 $3,605.9 $2,607.4 $2,553.2
The carrying value of cash and cash equivalents, net accounts receivable,
accounts payable and short-term borrowings approximates fair value due to the
short maturities of these instruments. The nuclear decommissioning trust fund
is carried at fair value as reported by the trustee (see Note F). The fair
values of Wisconsin Energy's preferred stock and trust preferred securities
B-50
(see Note H) are estimated based upon the quoted market value for the same or
similar issues. The fair value of Wisconsin Energy's long-term debt, including
the current portion of long-term debt but excluding capitalized leases, is
estimated based upon quoted market value for the same or similar issues or upon
the quoted market prices of U.S. Treasury issues having a similar term to
maturity, adjusted for the issuing company's bond rating and the present value
of future cash flows.
M--BENEFITS
Pensions and Other Postretirement Benefits: The Company provides defined
benefit pension and other postretirement benefit plans to employees. The status
of these plans, including a reconciliation of benefit obligations, a
reconciliation of plan assets and the funded status of the plans follows.
Other Postretirement
Pension Benefits Benefits
------------------ -------------------
Status of Benefit Plans 2001 2000 2001 2000
----------------------- -------- -------- ------- ------
(Millions of Dollars)
Change in Benefit Obligation
Benefit Obligation at January 1........... $ 998.5 $ 780.7 $ 244.7 $195.5
Service cost.......................... 23.9 17.7 6.8 4.7
Interest cost......................... 73.7 67.2 18.7 18.0
Plan participants' contributions...... -- -- 6.0 5.3
Plan amendments....................... 0.2 4.6 -- (29.7)
Actuarial loss........................ 20.5 31.5 25.5 6.1
Acquisitions.......................... -- 162.6 -- 62.8
Special termination benefits.......... -- 1.7 -- --
Benefits paid......................... (81.0) (67.5) (21.8) (18.0)
-------- -------- ------- ------
Benefit Obligation at December 31......... $1,035.8 $ 998.5 $ 279.9 $244.7
Change in Plan Assets
Fair Value at January 1................... $1,224.8 $ 944.9 $ 149.8 $ 83.9
Actual return on plan assets.......... (83.4) (6.4) (0.9) (4.4)
Employer contributions................ 2.3 2.0 15.7 11.1
Plan participants' contributions...... -- -- 6.0 5.3
Acquisitions.......................... -- 351.8 -- 71.9
Benefits paid......................... (81.0) (67.5) (21.8) (18.0)
-------- -------- ------- ------
Fair Value at December 31................. $1,062.7 $1,224.8 $ 148.8 $149.8
-------- -------- ------- ------
Funded Status of Plans
Funded status at December 31.............. $ 26.9 $ 226.3 $(131.1) $(94.9)
Unrecognized
Net actuarial loss (gain)............. 142.2 (61.0) 63.6 25.8
Prior service cost.................... 27.3 30.0 0.3 0.3
Net transition (asset) obligation..... (6.9) (9.1) 17.4 18.9
-------- -------- ------- ------
Net Asset (Accrued Benefit Cost)............. $ 189.5 $ 186.2 $ (49.8) $(49.9)
======== ======== ======= ======
B-51
The components of net periodic pension and other postretirement benefit costs
as well as the weighted-average assumptions used in accounting for the plans
include the following:
Other
Pension Benefits Postretirement Benefits
------------------------------------- --------------------------------------
Benefit Plan Cost Components 2001 2000 1999 2001 2000 1999
---------------------------- ----------- ----------- ----------- ----------- ----------- ------------
(Millions of Dollars)
Net Periodic Benefit Cost
Service cost.......................... $ 23.9 $ 17.7 $ 16.3 $ 6.8 $ 4.7 $ 3.3
Interest cost......................... 73.7 67.2 51.1 18.7 18.0 12.5
Expected return on plan assets........ (105.0) (89.0) (64.3) (13.0) (11.3) (5.8)
Amortization of:
Transition obligation (asset)..... (2.3) (2.3) (2.2) 1.6 4.6 4.6
Prior service cost................ 3.5 3.9 3.1 0.1 0.1 0.2
Actuarial loss (gain)............. 1.1 0.6 0.7 1.5 (0.2) 0.2
Terminations/curtailment.......... -- 1.2 -- -- 8.8 --
----------- ----------- ----------- ----------- ----------- ------------
Net Periodic Benefit Cost................ $ (5.1) $ (0.7) $ 4.7 $ 15.7 $ 24.7 $ 15.0
=========== =========== =========== =========== =========== ============
Weighted-Average Assumptions
at December 31 (%)
Discount rate......................... 7.25 7.5 7.5 7.25 7.5 7.5
Expected return on plan assets........ 9.0 9.0 9.0 9.0 9.0 9.0
Rate of compensation increase......... 4.0 to 5.0 3.0 to 5.0 3.0 to 5.0 4.0 to 5.0 3.0 to 5.0 4.75 to 5.0
Pension Plans: Pension plan assets, the majority of which are equity
securities, are held by pension trusts. Other pension plan assets include
corporate and government bonds and real estate. In the opinion of the Company,
current pension trust assets and amounts which are expected to be paid to the
trusts in the future will be adequate to meet pension payment obligations to
current and future retirees. This table represents both qualified and
non-qualified pension plan obligations.
The Company recorded the net pension and postretirement assets and obligations
of Wisconsin Gas at fair value at the date of the WICOR, Inc. acquisition.
Wisconsin Gas has recorded a regulatory liability for the difference between
the amounts recorded at the acquisition date and the prior carrying amounts to
reflect the anticipated rate treatment of these amounts. The regulatory
liability will be amortized and will reduce pension and postretirement expense
over a 15 year period.
Open window benefits were offered in 2000 to certain participants in the
Wisconsin Electric Retirement Account Plan and Wisconsin Gas Pension Plan for
Non-Union Employees. This benefit enhancement resulted in a one-time FAS 88
cost of $1.2 million.
Other Postretirement Benefits Plans: The Company uses Employees' Benefit Trusts
to fund a major portion of other postretirement benefits. The majority of the
trusts' assets are mutual funds or commingled indexed funds.
Effective January 1, 1992, postretirement benefit costs have been calculated in
accordance with FAS 106, Employers' Accounting for Postretirement Benefits
Other Than Pensions, and are recoverable from the utility customers of
Wisconsin Electric, Wisconsin Gas and Edison Sault. Wisconsin Gas and Edison
Sault have recorded deferred regulatory assets, which are being amortized over
a twenty-year period effective January 1, 1992, for the cumulative difference
between the amounts funded and FAS 106 postretirement expenses through January
1, 1992.
In 2000, the benefit attribution period was modified for the Wisconsin Electric
Postretirement medical plans to equal the 10 years of service following the
later of age at hire or age 45. This change resulted in a "negative" plan
amendment and a "plan curtailment".
The assumed health care cost trend rate for 2002 is at 10% for all plan
participants decreasing gradually to 5% in 2007 and thereafter. Assumed health
care cost trend rates have a significant effect on the amounts reported for
health care plans. A one-percentage-point change in assumed health care cost
trend rates would have the following effects:
1% Increase 1% Decrease
----------- -----------
(Millions of Dollars)
Effect on
Postretirement benefit obligation.. $18.5 $(17.1)
Total of service and interest cost
components....................... $ 2.3 $ (2.0)
B-52
Savings Plans: Certain operating subsidiaries of the Company sponsor savings
plans which allow employees to contribute a portion of their pretax and/or
after tax income in accordance with plan-specified guidelines. Matching
contributions under these plans charged to expense amounted to $11.5 million,
$11.2 million and $9.1 million during 2001, 2000 and 1999, respectively.
N--SEGMENT REPORTING
Wisconsin Energy Corporation is a diversified holding company with subsidiaries
in utility and non-utility businesses. Wisconsin Energy's reportable operating
segments include a utility energy segment, a non-utility energy segment and a
manufacturing segment. Wisconsin Energy has organized its reportable operating
segments based in part upon the regulatory environment in which its utility
subsidiaries operate. In addition, the segments are managed separately because
each business requires different technology and marketing strategies. The
accounting policies of the reportable operating segments are the same as those
described in Note A.
The utility energy segment primarily includes Wisconsin Energy's electric and
natural gas utility operations. The electric utility operation engages in the
generation, transmission, distribution and sale of electric energy in
southeastern (including Metropolitan Milwaukee), east central and northern
Wisconsin and in the Upper Peninsula of Michigan. The natural gas utility
operation is responsible for the purchase, distribution and sale of natural gas
to retail customers and the transportation of customer-owned natural gas
throughout Wisconsin. The non-utility energy segment derives its revenues
primarily from independent power production activities. The manufacturing
segment is responsible for the manufacturing of pumps and processing equipment
used to pump, control, transfer, hold and filter water and other fluids.
Summarized financial information concerning Wisconsin Energy's reportable
operating segments for each of the years ended December 31, 2001, 2000 and 1999
is shown in the following table. Information between the three years is not
comparable due to the addition of the operating results of the WICOR
subsidiaries at the end of April 2000 and the allocation of merger-related
costs (principally goodwill amortization and interest expense) to the operating
segments. Substantially all long-lived assets and operations of the Company are
domestic.
B-53
Reportable Operating Segments
- ---------------------------------- Other (a),
Energy Corporate &
------------------- Reconciling Total
Year Ended Utility Non-Utility Manufacturing Eliminations (b) Consolidated
---------- -------- ----------- ------------- ---------------- ------------
(Millions of Dollars)
December 31, 2001
Operating Revenues (b)........................ $2,964.8 $337.3 $585.1 $ 41.3 $3,928.5
Depreciation, Decommissioning and
Amortization................................ $ 320.1 $ 1.7 $ 13.0 $ 7.3 $ 342.1
Operating Income (Loss)....................... $ 534.9 $ 36.2 $ 41.1 $ (7.3) $ 604.9
Equity in Earnings (Losses) of Unconsolidated
Affiliates.................................. $ 23.4 $ 3.3 -- $ (0.7) $ 26.0
Cumulative Effect of Change in Accounting
Principle, Net.............................. -- $ 10.5 -- -- $ 10.5
Net Income (Loss)............................. $ 274.4 $ 18.7 $ 9.7 $(83.8) $ 219.0
Capital Expenditures (c)...................... $ 428.7 $127.7 $ 27.1 $ 89.0 $ 672.5
Total Assets.................................. $6,423.9 $649.0 $907.9 $347.9 $8,328.7
December 31, 2000
Operating Revenues (b)........................ $2,556.7 $372.8 $382.2 $ 51.0 $3,362.7
Depreciation, Decommissioning and
Amortization................................ $ 308.5 $ 10.9 $ 5.6 $ 11.3 $ 336.3
Operating Income (Loss)....................... $ 419.1 $ 1.8 $ 32.5 $ (8.5) $ 444.9
Equity in Earnings (Losses) of Unconsolidated
Affiliates.................................. -- $ 0.4 -- $ (2.7) $ (2.3)
Net Income (Loss)............................. $ 160.0 $ 39.4 $ 7.5 $(52.7) $ 154.2
Capital Expenditures (c)...................... $ 400.0 $107.7 $ 20.3 $ 83.0 $ 611.0
Total Assets.................................. $6,526.5 $597.9 $850.2 $431.5 $8,406.1
December 31, 1999
Operating Revenues (b)........................ $2,050.2 $193.2 $ -- $ 29.2 $2,272.6
Depreciation, Decommissioning and
Amortization................................ $ 237.2 $ 7.0 -- $ 6.6 $ 250.8
Operating Income.............................. $ 455.2 $ 19.7 -- $ 1.2 $ 476.1
Equity in Earnings (Losses) of Unconsolidated
Affiliates.................................. -- $ (2.0) -- $ (1.8) $ (3.8)
Net Income (Loss)............................. $ 216.0 $ 2.7 -- $ (9.7) $ 209.0
Capital Expenditures (c)...................... $ 356.7 $ 43.0 -- $118.4 $ 518.1
Total Assets.................................. $4,975.3 $640.9 -- $445.6 $6,061.8
--------
(a) Other includes all other non-utility activities, primarily non-utility real
estate investment and development by Wispark and non-utility investment in
recycling technology by Minergy as well as interest on corporate debt.
(b) Intersegment revenues are not material. An elimination is included in
Operating Revenues of $3.9 million and $1.9 million for 2001 and 2000,
respectively.
(c) Excludes acquisitions.
O--COMMITMENTS AND CONTINGENCIES
Capital Expenditures: Certain commitments have been made in connection with
2002 capital expenditures. During 2002, total capital expenditures are
estimated to be approximately $661 million of which approximately $466 million,
excluding the purchase of nuclear fuel, is attributable to the utility energy
segment, $67 million is attributable to the non-utility energy segment, $20
million is attributable to the manufacturing segment, and $108 million is
attributable to other.
Giddings & Lewis, Inc./City of West Allis Lawsuit: As previously reported, in
July 1999, a Milwaukee County Circuit Court jury issued a verdict against
Wisconsin Electric awarding the plaintiffs, Giddings & Lewis Inc., Kearney &
Trecker Corporation (now a part of Giddings & Lewis), and the City of West
Allis, $4.5 million in compensatory damages and $100 million in punitive
damages in an action alleging that Wisconsin Electric had deposited
contaminated wastes at two sites in West Allis, Wisconsin
B-54
owned by the plaintiffs. In April 2000, the Circuit Court Judge imposed
sanctions against Wisconsin Electric related to representations made by
Wisconsin Electric during trial that Wisconsin Electric had no insurance
coverage for the punitive damage award. Wisconsin Electric appealed the
judgment entered on the jury's verdict with respect to the punitive damages, as
well as the Judge's ruling on the sanctions matter. Wisconsin Electric did not
reflect any charges to expense for the punitive damage award or sanctions
because management, based in part on the advice of counsel, believed it would
prevail on appeal.
On September 5, 2001, the Wisconsin Court of Appeals, District 1, reversed the
$100 million punitive damage judgment award rendered by the trial court in its
entirety and ordered a new trial on the issue of punitive damages only and
reversed the sanctions order in its entirety. In January 2002, the Wisconsin
State Supreme Court denied the plaintiffs petition for review and sent the case
back to the trial court for the new trial on the issue of punitive damages. The
Company expects that a new trial will be held on the issue of punitive damages
in 2003. This matter is still pending final resolution and therefore the final
financial impact, if any, is not known at this time.
In December 1999, in order to stop the post-judgment accrual of interest at 12%
during the pendency of the appeal, Wisconsin Electric tendered a contested
liability payment of $110 million to the Milwaukee County Clerk of Circuit
Court, representing the $104.5 million verdict and $5.5 million of accrued
interest. (The payment was recorded in "Deferred Charges and Other Assets--
Other" on the 2000 balance sheet. It has been classified along with interest
due as "Other Accounts Receivable" on the 2001 balance sheet.) Under Wisconsin
law, the Appellate Court decision makes the plaintiffs liable to Wisconsin
Electric for the $100 million of punitive damages plus accrued interest
originally tendered in December 1999 plus accrued interest subsequent to
December 1999. During 2001, the Company recorded interest income of $10.5
million based on the Appellate Court decision.
On August 21, 2000 and September 29, 2000, two shareholders who had made prior
demands upon Wisconsin Energy Corporation and Wisconsin Electric Power Company
to initiate a shareholder derivative suit against certain officers, directors,
employees and agents as a result of the City of West Allis/Giddings & Lewis
litigation, filed suits on behalf of Wisconsin Energy Corporation shareholders
in Milwaukee County Circuit Court. A special committee of independent directors
of Wisconsin Energy Corporation determined after investigation that a
derivative proceeding was not in the Company's best interests. The Company
agreed to mediation of the matter which resulted in an acceptable proposal to
settle the cases. The Court granted preliminary approval of the settlement
agreement on October 29, 2001 and authorized the sending of notice of the
settlement to the shareholders. A final hearing on approval of the settlement
agreement was held on January 25, 2002 at which time the Court gave final
approval to the settlement and dismissed the cases. The settlement did not have
a significant impact on financial position or results of operations.
Environmental Matters: The Company periodically reviews its exposure for
remediation costs as evidence becomes available indicating that its remediation
liability has changed. Given current information, including the following,
management believes that future costs in excess of the amounts accrued and/or
disclosed on all presently known and quantifiable environmental contingencies
will not be material to the Company's financial position or results of
operations.
During 2000, the Company expanded a voluntary program of comprehensive
environmental remediation planning for former manufactured gas plant sites and
coal-ash disposal sites. Wisconsin Electric has performed a preliminary
assessment of twenty-one sites, including eleven of the manufactured gas plant
sites discussed below, and expects to discuss these sites with the Wisconsin
Department of Natural Resources as necessary. At this time, the Company cannot
estimate future remediation costs associated with these sites beyond those
described below.
Manufactured Gas Plant Sites: The Company is investigating the remediation of
thirteen former manufactured gas plant sites that were previously used by
Wisconsin Electric and Wisconsin Gas. Based on this preliminary investigation,
the Company estimates that the future costs for detailed site investigation and
future remediation costs may range from $25-$45 million over the next ten
years. This estimate is dependent upon several variables including, among other
things, the extent of remediation, changes in technology and changes in
regulation. As of December 31, 2001, the Company has established reserves of
$28.8 million related to future remediation costs.
The PSCW has allowed Wisconsin utilities, including Wisconsin Electric and
Wisconsin Gas, to defer the costs spent on the remediation of manufactured gas
plant sites, and has allowed for such costs to be recovered in rates over five
years. As such, the Company has recorded a regulatory asset for remediation
costs it has spent to date and accrued.
Ash Landfill Sites: Wisconsin Electric aggressively seeks environmentally
acceptable, beneficial uses for its combustion by-products. However, such
coal-ash by-products have been, and to some degree, continue to be disposed in
company-owned, licensed landfills. Some early designed and constructed
landfills may allow the release of low levels of constituents resulting in the
need for
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various levels of monitoring or adjusting. Where Wisconsin Electric has become
aware of these conditions, efforts have been expended to define the nature and
extent of any release, and work has been performed to address these conditions.
The costs of these efforts are included in the fuel costs of Wisconsin
Electric. During 2001, the Company incurred $1.2 million in coal-ash
remediation expenses and incurred $2.9 million in 2000.
As a result of the Cooperative Agreement, an innovative regulatory agreement
signed with the Wisconsin Department of Natural Resources in February 2001, the
Company is now able to recover fly ash from it's landfills and mix it with coal
for combustion at Pleasant Prairie Power Plant. In this way, the carbon left in
the ash is recovered as "ash fuel" and the resulting fly ash produced is a high
value product sold as replacement for cement.
Manufacturing Segment: The Company's manufacturing subsidiaries are involved in
various environmental matters, including matters in which the subsidiaries or
alleged predecessors have been named as potentially responsible parties under
the Comprehensive Environmental Response Compensation and Liability Act. The
Company has established reserves for all of these environmental contingencies
of which management is currently aware.
Information Requests: Wisconsin Electric and Wisvest-Connecticut, a wholly
owned subsidiary of Wisvest, have each received requests for information from
the United States Environmental Protection Agency ("U.S. EPA") regional offices
pursuant to Section 114(a) of the Clean Air Act. These requests seek
information relating to operations of each Company's power plants. Both
Wisconsin Electric and Wisvest-Connecticut have submitted information
responsive to these requests. These information requests are similar to those
issued by U.S. EPA to numerous electric utility companies over the past two
years. The companies will continue to cooperate with the U.S. EPA on these
matters. At this time, Wisconsin Energy cannot predict whether U.S. EPA will
allege past violations that might subject the companies to fines or penalties.
B-56
[LOGO] Andersen
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Wisconsin Energy Corporation:
We have audited the accompanying consolidated balance sheet and consolidated
statement of capitalization of Wisconsin Energy Corporation and its
subsidiaries as of December 31, 2001, and the related consolidated statements
of income, common equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Wisconsin Energy
Corporation and its subsidiaries as of December 31, 2001, and the results of
their operations and their cash flows for the year then ended in conformity
with accounting principles generally accepted in the United States.
As described in Note K, on January 1, 2001, the Company adopted Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities."
/s/ Arthur Andersen LLP
-----------------------
Arthur Andersen LLP
Milwaukee, Wisconsin
February 5, 2002
B-57
[LOGO] PRICEWATERHOUSECOOPERS
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and the Stockholders of Wisconsin Energy Corporation
In our opinion, the consolidated balance sheet and statement of capitalization
as of December 31, 2000 and the related consolidated statements of income, of
common equity and of cash flows for each of the two years in the period ended
December 31, 2000 present fairly, in all material respects, the financial
position, results of operations and cash flows of Wisconsin Energy Corporation
and its subsidiaries at December 31, 2000 and for each of the two years in the
period ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
/s/ PricewaterhouseCoopers LLP
------------------------------
PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
February 6, 2001
B-58
MARKET FOR REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
--------------------------------------
NUMBER OF COMMON STOCKHOLDERS
As of December 31, 2001, based upon the number of Wisconsin Energy Corporation
stockholder accounts (including accounts in Wisconsin Energy's dividend
reinvestment and stock purchase plan), there were 68,253 registered
stockholders.
COMMON STOCK LISTING AND TRADING
Wisconsin Energy Corporation common stock is listed on the New York Stock
Exchange. The ticker symbol is WEC. Daily trading prices and volume can be
found in the "NYSE Composite" section of most major newspapers, usually
abbreviated as WI Engy.
DIVIDENDS AND COMMON STOCK PRICES
Common Stock Dividends of Wisconsin Energy: Cash dividends on Wisconsin
Energy's common stock, as declared by the board of directors, are normally paid
on or about the first day of March, June, September and December. Wisconsin
Energy reviews its dividend policy on a regular basis. Subject to any
regulatory restrictions or other limitations on the payment of dividends,
future dividends will be at the discretion of the board of directors and will
depend upon, among other factors, earnings, financial condition and other
requirements.
In September 2000, the board of directors authorized a quarterly cash dividend
on its common stock, payable December 1, 2000, of $0.20 per share ($0.80 on an
annualized basis), which was reduced from prior quarterly dividends paid during
2000 of $0.39 per share (or $1.56 on an annualized basis).
Range of Wisconsin Energy Common Stock Prices and Dividends:
2001 2000
---------------------- ----------------------
Quarter High Low Dividend High Low Dividend
------- ------ ------ -------- ------ ------ --------
First.. $22.56 $19.13 $0.20 $21.19 $16.81 $0.39
Second. 24.04 20.10 0.20 22.94 19.81 0.39
Third.. 24.62 20.81 0.20 23.56 18.94 0.39
Fourth. 23.70 20.50 0.20 23.00 17.88 0.20
----- -----
Year... $24.62 $19.13 $0.80 $23.56 $16.81 $1.37
===== =====
BUSINESS OF THE COMPANY
-----------------------
Wisconsin Energy Corporation was incorporated in the state of Wisconsin in 1981
and became a diversified holding company in 1986. Wisconsin Energy conducts its
operations primarily in three operating segments: a utility energy segment, a
non-utility energy segment and a manufacturing segment. Wisconsin Energy's
primary subsidiaries are Wisconsin Electric Power Company, an electric, gas and
steam utility, Wisconsin Gas Company, a gas and water utility and WICOR
Industries, Inc., an intermediary holding company whose subsidiaries
manufacture pumps, water treatment products and fluid handling equipment.
Utility Energy Segment: The utility energy segment consists of Wisconsin
Electric Power Company, which serves over 1,000,000 electric customers in
Wisconsin and the Upper Peninsula of Michigan, over 400,000 gas customers in
Wisconsin and about 450 steam customers in metro Milwaukee, Wisconsin;
Wisconsin Gas Company, which serves over 550,000 gas customers in Wisconsin and
about 2,800 water customers in suburban Milwaukee, Wisconsin; and Edison Sault
Electric Company, an electric utility which serves approximately 22,000
customers in the Upper Peninsula of Michigan. On January 1, 2001, Wisconsin
Electric and Edison Sault, together with unaffiliated Wisconsin utilities,
transferred their electric transmission assets to American Transmission Company
LLC in return for a proportionate ownership interest in this new company.
Non-Utility Energy Segment: The non-utility energy segment consists of Wisvest
Corporation, which primarily develops, owns and operates electric generating
facilities; and W.E. Power, LLC, a new non-utility energy subsidiary formed in
November 2001
B-59
which, subject to approval by the Public Service Commission of Wisconsin, would
construct and own 2,800 megawatts of new generating capacity in Wisconsin under
the Company's Power the Future strategy and would lease these facilities back
to Wisconsin Electric as part of 20-25 year lease agreements. The majority of
Wisvest's assets are being divested in order to direct the capital and
management attention to Power the Future.
Manufacturing Segment: The manufacturing segment consists of WICOR Industries,
Inc., an intermediary holding company, and its three primary subsidiaries:
Sta-Rite Industries, Inc., SHURflo Pump Manufacturing Co. and Hypro
Corporation, which are manufacturers of pumps, water treatment products and
fluid handling equipment.
Other: Other non-utility operating subsidiaries of Wisconsin Energy include
primarily Minergy Corp., which develops and markets recycling technologies; and
Wispark LLC., which develops and invests in real estate. Wisconsin Energy
Corporation is in the process of selling a significant portion of its portfolio
of non-utility real estate assets.
Wisconsin Gas, WICOR Industries, Sta-Rite, SHURflo and Hypro were acquired by
Wisconsin Energy as a result of the Company's acquisition of WICOR, Inc., on
April 26, 2000.
For additional financial information about Wisconsin Energy's operating
segments, see "Note N --Segment Reporting" in the Notes to Consolidated
Financial Statements.
B-60
DIRECTORS AND EXECUTIVE OFFICERS
--------------------------------
DIRECTORS
The information under "Item 1: Election of Directors-Terms Expiring in Year
2005" in Wisconsin Energy's definitive proxy statement dated March 20, 2002,
attached hereto, is incorporated herein by reference.
EXECUTIVE OFFICERS
The figures in parenthesis indicate age and years of service with Wisconsin
Energy as of December 31, 2001.
Richard A. Abdoo (57; 26) Chairman of the Board, President and Chief Executive
Officer of Wisconsin Energy. Chairman of the Board and
Chief Executive Officer of Wisconsin Electric.
Chairman of the Board of Wisconsin Gas.
Charles R. Cole (55; 2) Senior Vice President of Wisconsin Electric.
Stephen P. Dickson (41; 1) Controller of Wisconsin Energy, Wisconsin Electric and
Wisconsin Gas.
James C. Donnelly (56; 1) Vice President of WICOR. President and Chief
Executive Officer of WICOR Industries, Inc.
Paul Donovan (54; 2) Senior Vice President and Chief Financial Officer of
Wisconsin Energy, Wisconsin Electric and Wisconsin
Gas.
Richard R. Grigg (53; 31) Senior Vice President of Wisconsin Energy. President
and Chief Operating Officer of Wisconsin Electric and
Wisconsin Gas.
Larry Salustro (54; 4) Senior Vice President and General Counsel of Wisconsin
Energy, Wisconsin Electric and Wisconsin Gas.
George E. Wardeberg (66; 1) Vice Chairman of the Board of Wisconsin
Energy,Wisconsin Electric and Wisconsin Gas.
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Printed on
recycled
paper
3420-PS-02
231 W. Michigan Street, P.O. Box 2949, Milwaukee, WI 53201
www.WisconsinEnergy.com
2K204-1294-SM-RD-160M
[Logo of Wisconsin Energy Corporation]
Vote your Proxy by any one of the following methods!
---
----------------- ----------------
Vote by Telephone Vote by Internet
----------------- ----------------
Your vote is important! Your vote is important!
Call Toll-free anytime on a Touch-Tone Phone: Log on anytime to:
1-877-779-8683 www.WisconsinEnergy.com
Follow these four easy steps: Follow these four easy steps:
----------------------------- -----------------------------
1. Read the Proxy Statement and Proxy Card 1. Read the Proxy Statement and Proxy Card
2. Call the Toll-free number 2. Go to the Internet site
1-877-779-8683 www.WisconsinEnergy.com
3. Enter your 14-digit Voter Control Number 3. Enter your 14-digit Voter Control Number
located on your Proxy Card above your name located on your Proxy Card above your name
4. Follow the recorded instructions 4. Follow the instructions provided
Electronic distribution of proxy materials saves time, postage and printing
costs, and is environmentally friendly. To sign up for electronic distribution
of proxy materials in the future, log on to www.WisconsinEnergy.com
Do not return your Proxy Card if you are voting by Telephone or Internet.
Please see the reverse side of this card if you plan to attend the Annual
Meeting.
------------
Vote by Mail
------------
To vote by mail, detach and return the proxy card below.
--------------------------------------------------------------------------------
[X] Please mark boxes as in this example.
The Board of Directors recommends a vote FOR Item 1.
FOR WITHHELD
ALL NOMINEES FROM ALL
1. Elect
(01) Richard A. Abdoo, [_] [_]
(02) John F. Ahearne, and
(03) George E. Wardeberg
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To withhold vote from any individual nominee, write nominee's name(s) above.
The Board of Directors recommends a vote AGAINST Item 2.
FOR AGAINST ABSTAIN
2. Vote on a stockholder proposal to declassify the Board [_] [_] [_]
Where no voting instructions are given, the shares represented by this proxy
will be voted "FOR" Item 1 and "AGAINST" Item 2. See reverse side for more
information.
Check this box only if you plan to attend the Annual Meeting in person:
Yes, I plan to attend the Annual Meeting [_]
-----------------------------------------------------------------
Please sign exactly as name(s) appears hereon. Joint owners should each sign
personally. When signing as executor, administrator, corporation officer,
attorney, agent, trustee, guardian, or in other representative capacity, please
state your full title as such.
Wisconsin Energy Corporation
Annual Meeting of Stockholders
Thursday, May 2, 2002
10:00 a.m. Central Time
[Map of Location of Meeting]
U.S. Cellular Arena
500 West Kilbourn Avenue
Milwaukee, WI 53203
The map to the right shows the location
of our 2002 Annual Meeting of Stockholders.
Please Bring this card with you to the meeting.
Name:
-------------------------------
------------------------------------
Address:
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------------------------------------
WISCONSIN ENERGY CORPORATION
PROXY/VOTING INSTRUCTIONS FOR ANNUAL MEETING OF STOCKHOLDERS
May 2, 2002
--------------------------------------------------------------------------------
This PROXY is solicited by the Board of Directors for use at the Annual Meeting
of Stockholders on May 2, 2002. Your shares of stock will be voted as you
specify. If no choice is specified, your proxy will be voted "for" Item 1,
"against" Item 2, and in the discretion of the proxy holder on any other matter
which may properly come before the Annual Meeting of Stockholders and all
adjournments or postponements of the meeting.
By signing this PROXY, you revoke all prior proxies and appoint Richard R. Grigg
and Kristine Rappe, or either of them, as proxies, with the power to appoint
substitutes, to vote your shares on the matters shown below and on any other
matters which may come before the Annual Meeting of Stockholders and all
adjournments of the meeting.
1. Elect Richard A. Abdoo, John F. Ahearne, and George E. Wardeberg as
directors
2. Vote on a Stockholder Proposal to declassify the Board as described in the
Proxy Statement, if presented at the meeting
If you hold shares in Wisconsin Energy Corporation's Stock Plus Investment Plan
or a 401(k) plan under the Wisconsin Energy Corporation Master Trust, this proxy
constitutes voting instructions for any shares so held by the undersigned.
SEE REVERSE SIDE. We encourage you to vote by telephone or the Internet.
However, if you wish to vote by mail, just complete, sign and date the reverse
side of this card; if you wish to vote in accordance with the Board of
Directors' recommendations, you need not mark any voting boxes.
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SEE REVERSE
SIDE
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