-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HxYq8rLpKf1FWtpi9kFH/xkjo/jdhodFw/g5mga25dzlfXA7uFOx9xc8jQtIaYIy /eg4zIKGHc0Zbj93fi+1zg== 0000107815-96-000007.txt : 19960401 0000107815-96-000007.hdr.sgml : 19960401 ACCESSION NUMBER: 0000107815-96-000007 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960329 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: WISCONSIN ELECTRIC POWER CO CENTRAL INDEX KEY: 0000107815 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 390476280 STATE OF INCORPORATION: WI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-01245 FILM NUMBER: 96541063 BUSINESS ADDRESS: STREET 1: 231 W MICHIGAN ST STREET 2: PO BOX 2046 CITY: MILWAUKEE STATE: WI ZIP: 53201 BUSINESS PHONE: 4142212345 10-K405 1 WISCONSIN ELECTRIC POWER COMPANY 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-K X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) ----- OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 1995 Commission file number 1-1245 ------------ WISCONSIN ELECTRIC POWER COMPANY (Exact name of registrant as specified in its charter) Wisconsin 39-0476280 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 231 West Michigan Street, P.O. Box 2046, Milwaukee, Wisconsin 53201 (Address of principal executive offices) (Zip Code) (414) 221-2345 (Registrant's telephone number, including area code) ------------ Securities Registered Pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on which Registered ----------------------------------------- --------------------- None -- Securities Registered Pursuant to Section 12(g) of the Act: PREFERRED STOCK, 3.60% SERIES, $100 PAR VALUE SIX PER CENT. PREFERRED STOCK, $100 PAR VALUE (Title of Class) ---------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X ------- The aggregate market value of the voting stock of the Registrant held by non-affiliates is approximately $16,934,000 based on the reported last sale prices on March 1, 1996 or the average bid and asked prices of such securities on or prior to such date. ------------ Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date. Class Outstanding at March 1, 1996 ----- ---------------------------- COMMON STOCK, $10 PAR VALUE 33,289,327 Shares Documents Incorporated by Reference ----------------------------------- Portions of the Registrant's definitive Information Statement for its Annual Meeting of Stockholders to be held on May 21, 1996, are incorporated by reference into Part III hereof.
2 WISCONSIN ELECTRIC POWER COMPANY ("WE") FORM 10-K ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION FOR THE YEAR ENDED DECEMBER 31, 1995 ----------------------------------------------------------------- TABLE OF CONTENTS ----------------- ITEM PAGE PART I ------ 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . 28 4. Submission of Matters to a Vote of Security Holders. . . . . . . 32 Executive Officers of the Registrant . . . . . . . . . . . . . . 32 PART II ------- 5. Market for Registrant's Common Equity and Related Stockholder Matters . . . . . . . . . . . . . . . 34 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . 35 Electric Revenues, Kilowatt-Hour Sales and Customer Statistics . . . . . . . . . . . . . . . . . . . . . 36 Gas Revenues, Therms Delivered and Customer Statistics . . . . . 36 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . 37 8. Financial Statements and Supplementary Data. . . . . . . . . . . 56 Report of Independent Accountants . . . . . . . . . . . . . . . 80 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . 81 PART III -------- 10. Directors and Executive Officers of the Registrant . . . . . . 81 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . 81 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . . . . . . . 81 13. Certain Relationships and Related Transactions . . . . . . . . 81 PART IV ------- 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . 82 Consent of Independent Accountants . . . . . . . . . . . . . . 87 Wisconsin Energy Company Unaudited Pro Forma Combined Condensed Financial Information. . . . . . . . . . . 88 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . 95 -2- 3
DEFINITIONS Abbreviations and acronyms used in the text are defined below. Abbreviations and Acronyms Term -------------------------- ---- BTU.............................. British Thermal Units CO2.............................. Carbon Dioxide Concord.......................... Concord Generating Station CPCN............................. Certificate of Public Convenience and Necessity DNR.............................. Wisconsin Department of Natural Resources DOE.............................. U.S. Department of Energy DSM.............................. Demand Side Management Dth.............................. Dekatherm EMFs............................. Electromagnetic Fields EPA.............................. U.S. Environmental Protection Agency EWGs............................. Exempt Wholesale Generators FERC............................. Federal Energy Regulatory Commission GRI.............................. Gas Research Institute IPP.............................. Independent Power Producer ISFSI............................ Independent Spent Fuel Storage Installation LS Power......................... LSP-Whitewater L.P. MAPP............................. Mid-Continent Area Power Pool MDNR............................. Michigan Department of Natural Resources MDEQ............................. Michigan Department of Environmental Quality MGP.............................. Manufactured gas plant MPSC............................. Michigan Public Service Commission MWh.............................. Megawatt-hour NOX.............................. Nitrogen Oxide NRC.............................. U.S. Nuclear Regulatory Commission New NSP.......................... NSP (after reincorporation in Wisconsin and related changes) NSP.............................. Northern States Power Company, a Minnesota corporation NSP-WI........................... Northern States Power Company, a Wisconsin corporation Paris............................ Paris Generating Station PGA.............................. Purchased Gas Adjustment Point Beach...................... Point Beach Nuclear Plant Primergy......................... Primergy Corporation PRP ............................. Potentially Responsible Party PSCR............................. Power Supply Cost Recovery PSCW............................. Public Service Commission of Wisconsin PUHCA............................ Public Utility Holding Company Act of 1935 Repap............................ Repap Wisconsin, Inc. SEC.............................. Securities and Exchange Commission SO2.............................. Sulfur Dioxide Trust............................ Wisconsin Electric Fuel Trust (nuclear) UPPCO............................ Upper Peninsula Power Company USEC............................. U.S. Enrichment Corporation WE............................... Wisconsin Electric Power Company WEC or the Company............... Wisconsin Energy Corporation WEGO............................. WE Gas Operations WN............................... Wisconsin Natural Gas Company WSG.............................. Wisconsin Southern Gas Company, Inc. WPPI............................. Wisconsin Public Power Inc. SYSTEM WUMS............................. Wisconsin-Upper Michigan Systems Yellowcake....................... Uranium Concentrates - 3 -
4 PART I ITEM 1. BUSINESS Wisconsin Electric Power Company ("WE" or the "Company") is an operating public utility incorporated in the State of Wisconsin in 1896. Effective January 1, 1996, Wisconsin Energy Corporation ("WEC"), WE's parent company, merged its natural gas utility subsidiary, Wisconsin Natural Gas Company ("WN"), into WE to form a single combined utility subsidiary. Where applicable, references to WE include WN prior to the merger. Additional information concerning the merger may be found in Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - "RESULTS OF OPERATIONS - Mergers" and in Note B - "Mergers" in the NOTES TO FINANCIAL STATEMENTS in Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. WE's operations are conducted in three business segments, the primary operations of which are as follows: Business Segment Operations ---------------- ---------- Electric Operations WE generates, transmits, distributes and sells electric energy in a territory of approximately 12,000 square miles with a population estimated at over 2,200,000 in southeastern (including the Milwaukee area), east central and northern Wisconsin and in the Upper Peninsula of Michigan. Gas Operations The WE gas operations ("WEGO") purchases, distributes and sells natural gas to retail customers and transports customer-owned gas in three distinct service areas in Wisconsin: west and south of the City of Milwaukee, the Appleton area and the Prairie du Chien area. The gas service territory, which has an estimated population of over 1,100,000, is largely within WE's electric service area. Steam Operations WE distributes and sells steam supplied by WE's Valley Power Plant to space heating and processing customers in downtown and near southside areas of Milwaukee. For additional financial information about business segments, see Note L - "Information by Segments of Business" in the NOTES TO FINANCIAL STATEMENTS in Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. MERGER AGREEMENT WITH NORTHERN STATES POWER COMPANY ("NSP") On April 28, 1995, WEC and Northern States Power Company, a Minnesota corporation ("NSP") entered into an Agreement and Plan of Merger, which was amended and restated as of July 26, 1995 ("Merger Agreement"). The Merger Agreement provides for a strategic business combination involving WEC and NSP in a "merger-of-equals" transaction ("Transaction"). As a result, WEC will become a registered public utility holding company under the Public Utility Holding Company Act of 1935, as amended ("PUHCA"), and will change its name to - 4 - 5 ITEM 1. BUSINESS - Merger Agreement with NSP - (cont'd) Primergy Corporation ("Primergy"). The headquarters of Primergy will be in Minneapolis, Minnesota. The business of Primergy will consist of owning utilities and various non-utility subsidiaries. Primergy will be the parent company of WE (which will be renamed Wisconsin Energy Company), of NSP (which, for regulatory reasons, will reincorporate in Wisconsin ("New NSP")), and of the other subsidiaries of WEC and NSP. In connection with the Transaction, Northern States Power Company, a Wisconsin corporation ("NSP-WI"), currently a utility subsidiary of NSP, will be merged into Wisconsin Energy Company. Prior to the merger of NSP-WI into Wisconsin Energy Company, New NSP will acquire from NSP-WI certain gas utility assets. Wisconsin Energy Company and New NSP will operate as the principal subsidiaries of Primergy. The headquarters of the two utilities will remain in their current locations, Wisconsin Energy Company's in Milwaukee and New NSP's in Minneapolis. Based upon December 31, 1995 statistics, Wisconsin Energy Company and New NSP will serve a total of approximately 2,350,000 electric customers and 780,000 natural gas customers, and their combined service territory will include portions of Minnesota, Wisconsin, North Dakota, South Dakota and the Upper Peninsula of Michigan. Upon receipt of the necessary approval from the Federal Energy Regulatory Commission ("FERC") and on or after the effective time of the Transaction, Wisconsin Energy Company and New NSP will become parties to an Interchange Agreement, whereby costs of generating capacity and transmission are shared in a manner similar to an existing interchange agreement between NSP and NSP-WI. The integration of the Wisconsin Energy Company and New NSP generating capacity should increase the ability of these companies to meet demands for electricity within the service territories each serves. It is also anticipated that a single administrative and support system will be established following the Transaction. The non-utility operations of WEC are presently conducted through six active wholly-owned subsidiaries. The non-utility operations of NSP are conducted primarily through NRG Energy, Inc., Cenergy, Inc. and Eloigne Company. Following the Transaction, it is anticipated that New NSP will transfer its non-utility businesses to Primergy and that such non-utility businesses of New NSP, along with the non-utility businesses of WEC, will be conducted through one or more subsidiaries of Primergy that are not subsidiaries of Wisconsin Energy Company or New NSP. WEC is currently exempt from the registration and other requirements of PUHCA, other than from Section 9(a)(2) thereof, pursuant to an order of the Securities and Exchange Commission ("SEC"). SEC approval under PUHCA is required in connection with the Transaction. The PUHCA exemption under which WEC currently operates will not be available to Primergy after consummation of the Transaction. Accordingly, upon consummation of the Transaction, Primergy must register as a holding company. PUHCA imposes numerous restrictions on the operations of a registered holding company and its subsidiaries and affiliates. Subject to limited exceptions, SEC approval is required under PUHCA for a registered holding company or any of its subsidiaries to: (i) issue securities, (ii) acquire utility assets from a third person, (iii) acquire the stock of another public utility, (iv) amend its articles of incorporation or (v) acquire stock, extend credit, pay dividends, lend money or invest in any manner in any other businesses. SEC approval under PUHCA also will be required for certain proposed transactions - 5 - 6 ITEM 1. BUSINESS - Merger Agreement with NSP - (cont'd) relating to the Transaction. As part of the SEC approval process, PUHCA also limits the ability of registered holding companies to engage in non-utility ventures and regulates holding company system service companies and the rendering of services by holding company affiliates to the system's utilities. The SEC may require, as a condition to its approval of the Transaction, that WEC and NSP divest their gas utility properties and possibly certain non- utility ventures within a reasonable time after the Transaction is consummated. In a few cases, the SEC has allowed the retention of such properties or deferred the question of divestiture for a substantial period of time. In those cases in which divestiture has taken place, the SEC has usually allowed enough time to complete the divestiture so as to allow the applicant to avoid a "fire sale" of the divested assets. WEC and NSP believe strong policy reasons and prior SEC decisions exist which support their retaining their existing gas utility properties and non-utility ventures, or, alternatively, which support deferring the question of divestiture for a substantial period of time. Accordingly, WEC and NSP will request in their merger application with the SEC that WEC and NSP be allowed to retain, or in the alternative, that the question of divestiture be deferred with respect to, WEC's and NSP's existing gas utility properties and non-utility ventures. Also, regulatory authorities may require the restructuring of transmission system operations or administration. WEC currently cannot determine if such restructuring will be required. In addition, Wisconsin State law limits the total assets of non-utility affiliates of Primergy, which could affect the amount of non-utility operations. See Item 1. BUSINESS - "NON-UTILITY OPERATIONS" below. Subject to the qualifications expressed below, WEC and NSP believe that synergies from the Transaction will generate substantial cost savings to Primergy, which would not be available absent the Transaction. Preliminary estimates by the managements of WEC and NSP indicate that the Transaction could result in potential net cost savings (that is, after taking into account the costs incurred to achieve such savings) of approximately $2 billion during the ten-year period from 1997 through 2006 assuming that the Transaction is consummated at the beginning of 1997. Achieved savings in costs are expected to inure to the benefit of both shareholders and customers. The treatment of the benefits and cost savings will depend on the results of regulatory proceedings in the various jurisdictions in which WEC and NSP operate their businesses. The analyses employed in order to develop estimates of potential savings as a result of the Transaction were necessarily based upon various assumptions that involve judgements with respect to, among other things, future national and regional economic and competitive conditions, inflation rates, regulatory treatment, weather conditions, financial market conditions, future business decisions and other uncertainties, all of which are difficult to predict and many of which are beyond the control of WEC and NSP. Accordingly, while WEC and NSP believe that such assumptions are reasonable for purposes of the development of estimates of potential savings, there can be no assurance that such assumptions will approximate actual experience or that such savings will be realized. The parties have proposed certain utility rate reductions and rate freezes in connection with the Transaction. See Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - "RESULTS OF OPERATIONS - Mergers." On September 13, 1995, the stockholders of WEC and NSP voted to approve the merger. The Merger Agreement is subject to various conditions including - 6 - 7 ITEM 1. BUSINESS - Merger Agreement with NSP - (cont'd) approval by all applicable regulatory authorities. Subject to obtaining all requisite approvals, WEC and NSP anticipate completing the Transaction by January 1, 1997. The future operations and financial position of WE will be significantly affected by the Transaction. Unaudited pro forma combined condensed financial information for Wisconsin Energy Company at December 31, 1995 and for the twelve months then ended is included in this report following Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. Additional information may be found in Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - "RESULTS OF OPERATIONS - Mergers" and in Note B - "Mergers" in the NOTES TO FINANCIAL STATEMENTS in Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. ELECTRIC UTILITY OPERATIONS Electric energy sales by WE in 1995, to all classes of customers, totaled approximately 27.3 billion kilowatt-hours, a 1.4% increase over 1994. On July 31, 1995, WE reached a new all-time electric peak demand of 5,368 megawatts during a period of unusually hot and humid weather. The previous record peak demand prior to the summer of 1995 of 4,950 megawatts was set on June 14, 1994. Electric energy sales are impacted by seasonal factors and varying weather conditions from year-to-year. There were 955,616 electric customers at December 31, 1995, an increase of 1.1% since December 31, 1994. For further information by customer class, see "Electric Revenues, Kilowatt-Hour Sales and Customer Statistics" in Item 6. SELECTED FINANCIAL DATA. In 1995, WE's net generation amounted to approximately 26.7 billion kilowatt- hours. Generation was supplemented with approximately 2.3 billion kilowatt- hours purchased from neighboring utilities and, to a minor extent, from other sources. The dependable capability of WE's generating stations was 5,619 megawatts in August 1995 as more fully described in Item 2. PROPERTIES. Paris Generating Station: During 1995, WE placed in service four units of approximately 300 megawatts of capacity at its Paris Generating Station ("Paris"). This natural gas-fired combustion turbine facility, located near Union Grove, Wisconsin, is designed to meet peak demand requirements. Capital costs of the Paris facility will total approximately $105 million. For additional information, see Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - "LIQUIDITY AND CAPITAL RESOURCES - Investing Activities." The supply of natural gas to operate Paris and WE's Concord Generating Station ("Concord"), a natural gas-fired combustion turbine facility located near Watertown, Wisconsin, is delivered by the WEGO. See Item 1. BUSINESS - "SOURCES OF GENERATION - Natural Gas (for Electric Generation)" below. LS Power Generation Facility: In accordance with a PSCW order issued in November 1993, after completing a capacity-related competitive bidding process, WE signed a long-term agreement to purchase the electricity that would be generated from a 215 megawatt cogeneration facility planned to be constructed by an unaffiliated independent power producer ("IPP"), LSP- Whitewater L.P. ("LS Power"). The agreement is contingent upon the facility being completed and going into operation, which at this time is planned for - 7 - 8 ITEM 1. BUSINESS - Electric Utility Operations - (cont'd) mid-1997. For additional information, see Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - "LIQUIDITY AND CAPITAL RESOURCES - Capital Requirements 1996-2000." PSCW Advance Plan 7: In January 1994, WE filed with the PSCW its long-term load and supply plan as part of the Advance Plan 7 Docket. In the Advance Plan process, the regulated electric utilities located in Wisconsin file, for planning purposes, long-term forecasts of future resource requirements along with plans to meet those requirements, including the planned implementation of energy management and conservation programs ("demand-side savings"). In addition to specifying the expectations of conservation and load management programs, the plan filed with the PSCW indicated a need for additional peaking and intermediate load capacity during the 20-year planning period. WE does not anticipate needing additional base load generation until after 2010. The PSCW approved WE's Advance Plan 7 in December 1995. For additional information regarding Advance Plans, see Item 1. BUSINESS - "REGULATION" below and Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - "LIQUIDITY AND CAPITAL RESOURCES - Capital Requirements 1996-2000." In Advance Plan 7, WE estimated peak demand in the year 2005 to be about 5,270 megawatts excluding the requirements of the Wisconsin Public Power Inc. System ("WPPI"), WE's largest municipal power agency customer. This estimate assumes, among other things, moderate growth in the economy and normal weather. This estimate does not, however, reflect any potential modifications to the current regulatory environment. Investments in demand-side management ("DSM") programs have reduced and delayed the need to add new generating capacity but have not eliminated the need entirely. Purchases of power from other utilities and transmission system upgrades will also combine to help delay the need to install some new generating capacity in the future. WE plans to make continued expenditures for conservation-related programs during this period. For additional information about WPPI, see Item 1. BUSINESS - "Sales to Wholesale Customers" below. The addition of new generating units requires approval of the PSCW following a two-stage bidding process, which could influence whether WE would construct such facilities or purchase the required power. The United States Environmental Protection Agency ("EPA") and the Wisconsin Department of Natural Resources ("DNR") also must approve new generating units. All proposed generating facilities will meet or exceed the applicable federal and state environmental requirements. For further information regarding future capacity additions, see Item 1. BUSINESS - "REGULATION" below. For information regarding estimated costs of WE's construction program for the five years ending December 31, 2000, see Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - "LIQUIDITY AND CAPITAL RESOURCES - Capital Requirements 1996-2000." All estimates of construction expenditures exclude Allowance For Funds Used During Construction. For additional information regarding matters related to Allowance for Funds Used During Construction, see Note E - "Allowance for Funds Used During Construction" in the NOTES TO FINANCIAL STATEMENTS in Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Milwaukee County Power Plant: In December 1995, WE signed an agreement with Milwaukee County to purchase the Milwaukee County Power Plant located in Wauwatosa, Wisconsin. The 11 megawatt power plant provides steam, chilled water and electricity for the Milwaukee Regional Medical Center and several other large customers located on the Milwaukee County grounds. WE had - 8 - 9 ITEM 1. BUSINESS - Electric Utility Operations - (cont'd) previously obtained approval from the PSCW for the purchase of the electric generation and distribution facilities and acquired them in December 1995 with a capital expenditure of $7 million. As part of the agreement, WE will also acquire in 1996 the steam facilities and a non-utility affiliate of WEC will acquire the chilled water facilities from Milwaukee County. Purchase of the steam and chilled water portions of the plant is contingent upon PSCW approval to acquire the steam facilities and upon the five major customers signing ten- year steam and chilled water service agreements. See Item 1. BUSINESS - "STEAM UTILITY OPERATIONS" as well as Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - "LIQUIDITY AND CAPITAL RESOURCES - Capital Requirements 1996-2000." PSCW Electric Utility Investigation: The PSCW has conducted an investigation into the state of the electric utility industry in Wisconsin, particularly its institutional structure and regulatory regime, in order to evaluate what changes would be beneficial for Wisconsin. The PSCW stated that this investigation may result in profound and fundamental changes to the nature and regulation of the electric utility industry in Wisconsin. For additional information and related matters, see Item 1. BUSINESS - "REGULATION" below and Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - "RESULTS OF OPERATIONS - Rates and Regulatory Matters." Wisconsin Electric Revitalization: In response to increasing competitive pressures in the markets for electricity and natural gas, WE implemented a revitalization process to increase efficiencies and improve customer service by reengineering and restructuring the organization. The new structures consolidated many business functions and simplified work processes. Due to productivity improvements from the Revitalization program, staffing levels at WE have been reduced during 1994 and 1995; 403 employees retired under an early retirement option and 726 employees enrolled in severance packages. See Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - "RESULTS OF OPERATIONS - Wisconsin Electric Revitalization" and Note K - "Benefits Other Than Pensions" in the NOTES TO FINANCIAL STATEMENTS in Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA. SOURCES OF GENERATION The table below indicates sources of energy generation by WE for the year ended December 31: ============================================================================== 1993 1994 1995 1996* ------ ------ ------ ------ Coal 67.0% 69.0% 70.3% 71.9% Nuclear 30.8 29.0 26.9 25.2 Hydro-electric 1.7 1.4 1.6 1.5 Natural Gas 0.4 0.5 1.1 1.3 Oil 0.1 0.1 0.1 0.1 ------ ------ ------ ------ TOTAL 100.0% 100.0% 100.0% 100.0% ============================================================================== * Estimated assuming that there are no unforeseen contingencies such as unscheduled maintenance or repairs. See Item 1. BUSINESS - "SOURCES OF GENERATION - Nuclear" and Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - "RESULTS OF OPERATIONS - Capital Requirements 1996-2000" for discussion of matters related to Point Beach Nuclear Plant. - 9 - 10 ITEM 1. BUSINESS - Sources of Generation - (cont'd) WE's average total fuel costs per million BTU's by fuel type for the year ended December 31 are shown below: ============================================================================== 1993 1994 1995 ------ ------ ------ Coal $ 1.26 $ 1.26 $ 1.28 Nuclear 0.39 0.39 0.43 Natural Gas 3.02 2.54 2.21 Oil 4.94 4.33 5.32 ============================================================================== Coal WE diversifies its coal sources by purchasing from Northern Appalachia, the Southern Powder River Basin (Wyoming) and the Raton Basin (New Mexico) mining districts for the power plants in Wisconsin, and from the Uinta Region (Colorado), central Appalachia and western mines for the Presque Isle Power Plant in Michigan. Approximately 75% of WE's 1996 coal requirements are expected to be delivered by WE-owned unit trains. The unit trains will transport coal for the Oak Creek and Pleasant Prairie Power Plants from Pennsylvania, New Mexico and Wyoming mines. Coal from Pennsylvania mines is also transported via rail to Lake Erie transfer docks and delivered to the Valley and Port Washington Power Plants by lake vessels. Montana coal for Presque Isle is transported via rail to Superior, Wisconsin, placed in dock storage and reloaded into lake vessels for plant delivery. The Presque Isle central Appalachian origin and Colorado origin coal is shipped via rail to Lake Erie and Lake Michigan (Chicago) coal transfer docks, respectively, for lake vessel delivery to the plant. WE's 1996 coal requirements, projected to be 10.0 million tons, are 97% under contract. WE does not anticipate any problem in procuring its remaining 1996 requirements through short-term or spot purchases and inventory adjustments. Pleasant Prairie Power Plant: All of the estimated 1996 coal requirements at this plant are presently covered by three long-term contracts. Oak Creek Power Plant: All of the estimated 1996 coal requirements for this plant are covered by one long-term contract and two short-term contracts. A significant coal cost decrease is anticipated with the blending of lower cost Wyoming sub-bituminous coal with bituminous coals. Presque Isle Power Plant: This plant has six generating units designed to burn bituminous coal and three other units designed to burn sub-bituminous coal. The units burning sub-bituminous coal are supplied by one long-term contract and two medium-term contracts, the annual volumes of which are anticipated to be adequate to cover coal requirements through 1996. Bituminous coal is generally purchased through one-year contracts from central Appalachia and under a five-year contract for the Colorado origin coal. Edgewater 5 Generating Unit: Coal for this unit, in which WE has a 25% interest, is purchased by Wisconsin Power and Light Company, a non-affiliated utility, which is the majority owner of the facility. Valley and Port Washington Power Plants: These plants are both supplied through a long-term contract that, in combination with coal supplied to WE's other Wisconsin plants, allows the plants to meet the requirements of the - 10 - 11 ITEM 1. BUSINESS - Sources of Generation - (cont'd) Wisconsin acid rain law. In the event of further air quality emission requirements affecting these plants, the contract can be terminated without liability. The periods and annual tonnage amounts for WE's principal coal contracts are as follows: ============================================================================== Contract Period Annual Tonnage --------------- -------------- Nov. 1987 to Dec. 1997 500,000(A) Jan. 1980 to Dec. 2006 2,000,000 Jul. 1983 to Dec. 2002 1,000,000 Apr. 1990 to Nov. 1996 375,000(B) Jan. 1992 to Dec. 2005 2,200,000 Oct. 1992 to Sep. 2007 800,000 Sep. 1994 to Aug. 1999 500,000 ============================================================================== (A) The contract can be extended if the total volume has not been purchased by the respective termination dates. (B) Annual volume can be increased to meet requirements for the Port Washington and Valley Power Plants above the 375,000 ton volume indicated herein. For information regarding emission restrictions, see Item 1. BUSINESS - "ENVIRONMENTAL COMPLIANCE" below. Nuclear WE purchases uranium concentrates ("yellowcake") and contracts for its conversion, enrichment and fabrication. WE maintains title to the nuclear fuel until the fabricated fuel assemblies are delivered to the Point Beach Nuclear Plant ("Point Beach"), whereupon it is sold to and leased back from the Wisconsin Electric Fuel Trust ("Trust"). See Note F - "Nuclear Operations" in the NOTES TO FINANCIAL STATEMENTS in Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Uranium Requirements: WE requires approximately 450,000 pounds of yellowcake annually for its two units at Point Beach. Uranium requirements through 1997 will be provided from a combination of existing contracts with Malapai Resources Company (of Arizona); Energy Resources of Australia, Ltd.; and Nukem Inc. (U.S.). WE may exercise flexibilities in these contracts and purchase certain quantities of uranium on the spot-market, should market conditions prove favorable. WE believes that adequate supplies of uranium concentrates will be available to satisfy current and future operating requirements. Under a contract with Nuexco Trading Corporation, WE was to receive 200,000 pounds of uranium concentrates on specified delivery dates in 1995 at conversion facilities in the United States or Canada in exchange for the transfer to Nuexco of an identical quantity of concentrates held by WE at the conversion facilities of Comurhex in France. However, Nuexco is in default under the contract and has filed for bankruptcy law protection. Upon completion of review of various options available for use of the concentrates located at Comurhex, WE decided to sell this material. A sales contract was executed between WE and a uranium broker in December 1995. - 11 - 12 ITEM 1. BUSINESS - Sources of Generation - (cont'd) Conversion: WE has a conversion contract with the Cameco Corporation, to provide for up to 100 percent of conversion requirements for the Point Beach reactors from 1996 through 1999. Cameco is a Canadian based corporation located in Saskatoon, Saskatchewan, and is a major producer of uranium concentrates. Enrichment: WE currently has a Utility Services Contract with the United States Department of Energy ("DOE") for 70% of the enrichment services required for the operation of both of the Point Beach units. The contract can provide enrichment services for the entire operating life of each unit. For a discussion of litigation involving the Utility Services Contract, see Item 3. LEGAL PROCEEDINGS - "OTHER LITIGATION - Uranium Enrichment Charges". Responsibility for administering this contract and for enrichment services was transferred from the DOE to U.S. Enrichment Corporation ("USEC") under the Energy Policy Act of 1992. In March 1992, WE entered into an agreement with Global Nuclear Services and Supply Limited, an international supplier of enrichment services, for the remaining 30% of enrichment service requirements. Fabrication: Fabrication of fuel assemblies from enriched uranium for Point Beach is covered under a contract with Westinghouse Electric Corporation for the balance of the plant's current operating license. During 1995, an agreement was reached between WE and Westinghouse to supply WE with a new fuel design beginning in the fall 1997. The new fuel design is expected to provide additional safety margin, cost savings and reduce the number of discharged spent fuel assemblies over the remaining operating license. Spent Fuel Storage and Disposal: WE currently has the capability to store certain amounts of spent nuclear fuel at Point Beach. Previous modifications to the storage facilities at Point Beach had made it possible to accommodate all spent fuel expected to be discharged from the reactors through 1995 while maintaining the capability for one full core off-load. In accordance with the provisions of the Nuclear Waste Policy Act of 1982, which requires the DOE to provide for the disposal of spent fuel from all U.S. nuclear plants, WE entered into a disposal contract providing for deliveries of spent fuel to the DOE for ultimate disposal commencing in January 1998. It is anticipated that the DOE will be unable to accept spent fuel by the 1998 timeframe as contracted. In November of 1991, WE filed an application with the PSCW for authority to construct and operate an Independent Spent Fuel Storage Installation ("ISFSI"). The ISFSI provides interim dry cask storage until the DOE begins to remove spent fuel from Point Beach in 1998 in accordance with the terms of the contract it has with WE. Public hearings on the proposed project were held during October 1994. On February 13, 1995, WE received a Certificate of Authority from the PSCW to construct and operate the ISFSI for 12 storage casks, which will handle the storage requirements until 1998. Should the DOE be unable to begin taking ownership of and removing the spent fuel in 1998, WE will need to construct additional casks and will seek PSCW approval to do so. Construction of the ISFSI was completed in June 1995 and the first cask, containing 24 spent fuel assemblies, was loaded and moved to the ISFSI during December 1995. Transfer of additional spent fuel to the ISFSI has been temporarily suspended by WE pending further action by the PSCW as described below. In March 1995 separate petitions were filed by intervenors in Dane County Circuit Court and Fond du Lac County Circuit Court. The two petitions were ultimately combined into one petition in Dane County Circuit Court ("Court"). The Dane County petition sought reversal of the order and a remand to the PSCW - 12 - 13 ITEM 1. BUSINESS - Sources of Generation - (cont'd) directing it to deny WE's request for authorization to construct the dry cask facility, or in the alternative, to correct the alleged errors in the PSCW's order. On December 22, 1995, the Court issued a decision vacating and remanding the February 1995 order of the PSCW, stating that the Environmental Impact Statement prepared by the PSCW for this project was inadequate in two respects. First, it did not adequately analyze the environmental impacts from storage of spent fuel for a sufficient duration; second, it did not sufficiently evaluate the alternative of employing a combination of renewable energy sources and conservation in lieu of continued operation of Point Beach beyond 1998. The Court also held that the PSCW failed to make the findings of fact and conclusions of law, based on the record, demonstrating that it properly considered the priorities of conservation, renewable and other energy sources over nuclear sources to the extent cost effective, technically feasible and environmentally sound. The PSCW issued two Supplemental Environmental Impact Statements which address the deficiencies found by the Court and held related hearings in February and March 1996. See Item 1. BUSINESS - "SOURCES OF GENERATION - Point Beach Unit 2 Steam Generators" below for related discussion and cross-references to additional information in this report. Point Beach Nuclear Plant: Point Beach provided 26.9% of WE's net generation in 1995. The plant has two generating units which had a combined dependable capability of 973 megawatts in August 1995 and which together constituted 17.3% of WE's dependable generating capability. As a result of degradation of some of the tubes within the Unit 2 steam generators, the power level of Unit 2 has been administratively reduced by 10% to provide operating reliability until the steam generators can be replaced, which is expected to occur in the fall of 1996. See Item 1. BUSINESS - "SOURCES OF GENERATION - Point Beach Unit 2 Steam Generators" below. The United States Nuclear Regulatory Commission ("NRC") licenses for Point Beach Units 1 and 2 expire October 5, 2010 and March 8, 2013, respectively. The NRC has, at various times, directed that certain inspections, modifications and changes in operating practices be made at all nuclear plants. At Point Beach, such inspections have been made and necessary changes to equipment and in operating practices have either been completed or are expected to be completed within the time schedules permitted by the NRC or within approved extensions thereof. Good performance of Point Beach was recognized by the Institute of Nuclear Power Operations ("INPO") with the awarding of an INPO 1 rating to Point Beach in November 1995. WE has initiated certain plant betterment projects at Point Beach that are judged to be appropriate and beneficial. Construction is progressing on the addition of two safety-related emergency diesel powered electrical generators with installation to be completed in 1996. Point Beach Unit 2 Steam Generators: On October 1, 1992, WE filed an application with the PSCW for the replacement of the Unit 2 steam generators, which would allow for the unit's operation until the expiration of its operating license in 2013. This project is estimated to cost $96 million. (In 1984 WE replaced the Unit 1 steam generators.) In an Interim Order dated February 13, 1995, the PSCW deferred the decision on the steam generator replacements until after the refueling outage in September 1995. The PSCW directed WE to make suitable arrangements with the fabricator of the new steam generators to allow the fabrication, delivery and replacement to proceed promptly if authorized by the PSCW as a result of further investigation. The reasonable costs of such arrangements to maintain a place in line with the - 13 - 14 ITEM 1. BUSINESS - Sources of Generation - (cont'd) fabricator will be afforded rate recovery. Work on the Unit 2 replacement steam generators has continued such that delivery in July of 1996 can occur in order to meet the schedule requirements for a fall 1996 replacement. In early February 1996, the PSCW conducted hearings on a Supplemental Environmental Impact Statement concerning the Unit 2 steam generator replacement and the need for such replacement taking into account the information gained from inspections conducted during the fall 1995 refueling and maintenance outage. WE anticipates that the PSCW will issue a combined final order on replacement of the Unit 2 steam generators and the remanded dry cask storage matters discussed above in May 1996. Failure by the PSCW to approve the steam generator replacements and resolve the remanded issues could jeopardize the continued operation of Point Beach and materially affect WE's financial position and results of operations due to the need to replace the lost generating capacity. WE would likely seek regulatory relief to minimize such impact. For additional information, see Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - "LIQUIDITY AND CAPITAL RESOURCES - Capital Requirements 1996-2000" and Note F - "Nuclear Operations" in the NOTES TO FINANCIAL STATEMENTS in Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Decommissioning Fund: Pursuant to a 1985 PSCW order, amended in 1994, WE provides for costs associated with the eventual decommissioning of Point Beach through the use of an external trust fund. Payments to this fund, together with investment earnings, brought the balance in the trust fund on December 31, 1995 to approximately $275 million. For additional information regarding decommissioning see Note F - "Nuclear Operations" in the NOTES TO FINANCIAL STATEMENTS in Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Nuclear Plant Insurance: For information regarding matters pertaining to nuclear plant insurance, see Note F - "Nuclear Operations" in the NOTES TO FINANCIAL STATEMENTS in Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Hydroelectric WE has various licenses from the FERC for its hydroelectric generating facilities that expire during the period 1998 to 2004. In February 1996, WE filed a final application for its largest hydro facility, Big Quinnesec Falls, which has a license expiring in 1998. During 1995, FERC issued 30 and 40 year licenses to the Pine and Brule Hydroelectric projects, respectively. The Draft Environmental Impact Statement for the White Rapids and Chalk Hill Hydroelectric Projects was published by FERC in November 1995. These two projects continue to operate under annual licenses. The three hydro facilities, Oconto Falls, Sturgeon and Weyauwega, with a total of 2.5 megawatts installed capacity, that WE decided not to relicense in 1993 are still being operated by WE under annual licenses until FERC determines their disposition. WE continues to consult with the U.S. Fish and Wildlife Service, DNR, Michigan Department of Natural Resources ("MDNR"; now the Michigan Department of Environmental Quality ("MDEQ")) and the National Park Service in conjunction with the licensing process. Hydroelectric facilities provided approximately 1.6% of WE's total energy generation in 1995. Natural Gas (for Electric Generation) Concord, Paris and the Oak Creek combustion turbine use natural gas as their primary fuel, with Number 2 fuel oil as backup. Natural gas for Concord and the Oak Creek gas turbines is purchased directly from the WEGO at tariff - 14 - 15 ITEM 1. BUSINESS - Sources of Generation - (cont'd) rates. Gas for Paris is purchased on the spot market - from gas marketers and/or producers - and delivered on the WEGO local distribution system. A balancing and storage agreement with ANR Pipeline facilitates the variable gas usage pattern of Paris. Natural gas for boiler ignition and flame stabilization purposes for the Pleasant Prairie, Oak Creek, and Valley Power Plants is purchased under an agency agreement with a gas marketing company. The agent purchases natural gas and arranges for interstate pipeline transportation to the local gas distribution utility. The local gas distribution utilities then transport WE's gas to each plant under interruptible tariffs. WEGO is the distribution utility for Pleasant Prairie and Oak Creek. Wisconsin Gas Company, a non- affiliated company, is the distribution utility for the Valley Power Plant. Oil Fuel oil is used for the combustion turbines at Point Beach, Germantown and Port Washington Power Plants. It is also used for boiler ignition and flame stabilization at the Presque Isle Power Plant and as backup for ignition for Pleasant Prairie and as a backup fuel for the natural gas fired gas turbines, as discussed above. Fuel oil requirements are purchased under partnering agreements with suppliers that assist WE with inventory tracking and oil market price trends. Interconnections with Other Utilities WE's system is interconnected at various locations with the systems of Madison Gas and Electric Company, Wisconsin Power and Light Company, Wisconsin Public Service Corporation, Commonwealth Edison Company ("Commonwealth Edison"), NSP and Upper Peninsula Power Company ("UPPCO"). These interconnections provide for interchange of power to assure system reliability as well as facilitating access to generating capacity and the transfer of energy for economic purposes. WE is a member of Wisconsin-Upper Michigan Systems ("WUMS"), a coordinating group which includes four other electric companies in Wisconsin and Upper Michigan. WUMS, in turn, is a member of Mid-America Interconnected Network ("MAIN"), which is one of nine regional members of the North American Electric Reliability Council. Membership in these groups permits better utilization of reserve generating capacity and coordination of long-range system planning and day-to-day operations. In March 1994, WE executed a transmission service agreement with Commonwealth Edison that allows WE to purchase energy from southern Illinois and Indiana suppliers, using the Commonwealth Edison transmission system to import such energy into Wisconsin. A transmission service agreement has been executed to allow WE to reserve capacity and import energy from members of the Mid-Continent Area Power Pool ("MAPP"), a group consisting of electric utilities generally located west of Wisconsin including NSP. Considerable non-firm energy is expected to be purchased from MAPP members over the next several years. In February 1996, WE and five other Midwest utilities announced that they had agreed to pursue the development of an independent organization, the Midwest Independent System Operator ("ISO"), which would be responsible for ensuring - 15 - 16 ITEM 1. BUSINESS - Sources of Generation - (cont'd) nondiscriminatory open transmission access and the planning and security of the combined bulk transmission systems of the utilities. In addition to WE, the utilities signing a memorandum of understanding are American Electric Power Co., Centerior Energy Corp., Cinergy Corp., Detroit Edison Co. and Northern Indiana Public Service Co.. The other transmission owners of the East Central Area Reliability Council ("ECAR") and MAIN will be invited to participate in the development of the Midwest ISO. Plans for the Midwest ISO are expected to be filed with the FERC in late 1996 and would be implemented in stages after approval. Sales to Wholesale Customers WE currently provides wholesale electric energy to five municipally owned systems, three rural cooperatives, two municipal joint action agencies and one isolated system of an investor-owned utility in Wisconsin, Illinois, and the Upper Peninsula of Michigan under rates approved by the FERC. Sales to these wholesale customers accounted for 5.0% of total kilowatt-hour sales in 1995. Under two agreements, service is being provided subject to a seven-year notice of cancellation from the Wisconsin Public Power Inc. System ("WPPI"). WE also has an eight-year power supply agreement with the Badger Power Marketing Authority ("BPMA"). Sales to the BPMA and WPPI combined are expected to account for approximately one half of the wholesale sales for 1996. Service to UPPCO, under a 65 megawatt agreement which expires on December 31, 1997, accounted for 20% of 1995 wholesale sales. In October 1993, UPPCO announced that it had reached an agreement in principle with NSP to purchase up to 90 megawatts of base-load electric energy beginning in 1998. WE expects to apply the 65 megawatts of capacity toward the electric energy needs of new customers and toward the overall increase in system supply needs anticipated by 1998. During 1995, sales to wholesale customers declined 5.6% from 1994, largely the result of reductions in sales to WPPI. WPPI has been reducing its purchases from WE subsequent to acquiring generation capacity in 1990. Sales to WPPI during 1993, 1994 and 1995 were approximately 944,000 megawatt-hours ("Mwh"), 725,000 Mwh and 627,000 Mwh, respectively. Further reductions are expected as WPPI installs additional capacity. These sales reductions are not expected to have a significant effect on future earnings. Under the provisions of a long- term agreement, WE will continue to provide transmission services to WPPI. WE's existing FERC tariffs also provide for transmission service to its wholesale customers. During 1995, WE had nine customers taking transmission service. For further information see Item 1. BUSINESS - "REGULATION" below. In October 1992, the Energy Policy Act was signed into law. Passage of this law has removed encumbrances and facilitates the entry of power producers and power marketers into the already competitive bulk power market. Notable among its provisions are the creation of a new class of energy producer called Exempt Wholesale Generators ("EWGs"), who are exempt from the requirements of PUHCA, and the rights that the Energy Policy Act provides them and utilities to request a FERC order directing the provision of transmission service if denied transmission access from utilities. The transmission aspects of this law are expected to have little impact on WE since it has had open access transmission tariffs on file with the FERC since 1980. During 1995, WE reached agreement on new contracts of five or ten years in length with four wholesale customers accounting for a total of 61.4 MW. Each - 16 - 17 ITEM 1. BUSINESS - Sources of Generation - (cont'd) contract contained substantial discounts from previous rates. UPPCO, a fifth 8 MW wholesale customer, opted to obtain power supplies from another utility for its Iron River System. Two other wholesale customers, accounting for a total of 18 MW, have not yet made decisions on their choice of power supply. WE is actively pursuing wholesale customers who are currently supplied by other utilities. In December 1995, WEC and NSP entered into a settlement agreement with certain municipal Wisconsin intervenors that ended the latters' participation in the FERC and state proceedings with respect to the Transaction. The settlement agreement, which provides for certain rate reductions on power sales and transmission services, is pending FERC action. See Item 1. BUSINESS - "MERGER AGREEMENT WITH NORTHERN STATES POWER COMPANY" above for additional information about the Merger Agreement with NSP. The electric utility industry continues to become increasingly competitive. Some municipal utilities are approaching competing utilities in a search for lower energy prices. Additionally, some large industrial customers are seeking regulatory changes that could permit retail wheeling to allow them to seek proposals for energy from alternate suppliers. IPPs are also exploring cogeneration projects which would provide process steam to customers in WE's service territory and sell electricity to WE. Consequently, electric wholesale and large retail customers of WE or other non-affiliated utilities may determine, from time to time, to switch energy suppliers, purchase interests in existing power plants or build new generating capacity, either directly or through joint ventures with third parties. The advent of EWGs can be expected to accelerate this practice. For additional information, see Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - "LIQUIDITY AND CAPITAL RESOURCES - Capital Requirements 1996- 2000." GAS UTILITY OPERATIONS Effective January 1, 1996, WEC merged its natural gas utility subsidiary, Wisconsin Natural Gas Company ("WN"), into WE to form a single combined utility subsidiary. In 1995, WE and WN obtained approval of the merger by the PSCW as well as consent of the Michigan Public Service Commission ("MPSC") for WE to assume WN's liabilities. The merger, approved by the stockholders of WE in December 1994, is expected to improve customer service and reduce future operating costs. Where applicable, references to WE include WN prior to the merger. Effective January 1, 1994, Wisconsin Southern Gas Company, Inc. ("WSG") was acquired by WEC through a statutory merger of WSG into WN. WE continues to use the acquired facilities of WSG for the distribution and transportation of natural gas. For additional information, see Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - "RESULTS OF OPERATIONS - Mergers." Total gas therms delivered by WE, including customer-owned gas transported, increased 9.3% in 1995 compared to 1994, reflecting primarily colder winter weather during 1995, which increased heating load, and warmer summer weather during 1995, which increased deliveries to electric peak generation stations. During 1995, approximately 6% of total deliveries were on interruptible rates. WE's maximum daily send-out in 1995 was 630,823 Dths. A dekatherm ("Dth") is - 17 - 18 ITEM 1. BUSINESS - Gas Utility Operations - (cont'd) equivalent to ten therms or one million British Thermal Units ("BTU"). Sales of gas fluctuate with the heating cycle of the year and are also impacted by varying weather conditions from year-to-year. The WEGO has entered into more than 45 gas service contracts for supply, pipeline capacity, underground storage and balancing services. Contracts vary in term from less than one year to ten years. Gas supply contracts contain pricing options that allow pricing at market rates or the ability to fix future prices for varying terms which the WEGO can exercise to manage the risk of substantial market price fluctuations. The gas from these contracts is used to meet customer requirements on a daily basis and to fill storage during the warm months to be withdrawn from storage during the heating season in order to meet system gas demands. The use of storage increases the load factor of supply contracts and allows the WEGO to take advantage of seasonal price differentials. The WEGO has eight firm gas storage agreements that allow daily withdrawals of 313,608 Dths and an annual capacity of 23 million Dths. The initial terms of these contracts vary with the last one expiring in October 2003. This storage effectively replaces storage used by the pipeline companies to provide gas sales service to the WEGO in the pre-FERC Order 636 environment. Gas stored at these facilities is purchased by the WEGO from a number of suppliers. The WEGO has 12 transportation contracts, the last of which expires in 2003, that it uses to meet daily customer requirements and to inject and withdraw from gas storage. In each case, subject to certain provisions, the WEGO can extend the terms of these contracts at the time the agreements would otherwise expire. The WEGO also has three contracts for salt dome storage that provide gas supply backup in the event of well freeze-off or other loss of supply. The WEGO transports gas for its customers who purchase gas directly from other suppliers. Transported gas accounted for approximately 32% of total therms delivered during 1995, 30% during 1994 and 31% during 1993. There were 357,030 natural gas customers at December 31, 1995, an increase of approximately 2.9% since December 31, 1994. For further information by customer class, see "Gas Revenues, Therms Delivered and Customer Statistics" in Item 6. SELECTED FINANCIAL DATA. The WEGO delivers natural gas to WE's Concord and Paris Combustion Turbine Power Plants. Deliveries to these peaking power plants are at rates approved by the PSCW. See Item 1. BUSINESS - "SOURCES OF GENERATION - Natural Gas (for Electric Generation)" above. In 1995, the PSCW issued WE a certificate for construction of a gas pipeline to provide gas transportation service to LS Power's proposed Whitewater cogeneration facility. For additional information, see Item 1. BUSINESS - "ELECTRIC UTILITY OPERATIONS" above. SALES TO LARGE CUSTOMERS WE provides utility service to a diversified base of industrial customers. Major industries served by the electric operations include the iron ore mining industry, the paper industry, the machinery production industry, the foundry industry and the food products industry. The Empire and Tilden iron ore - 18 - 19 ITEM 1. BUSINESS - Sales to Large Customers - (cont'd) mines, the two largest electric customers of WE, accounted for 4.5% and 3.9%, respectively, of total electric kilowatt-hour sales in 1995. Sales to the mines were 0.5% lower in 1995 compared to 1994. In January 1996, new power purchase agreements were executed with both mines which extend the term of the agreements by five years, through December 31, 2002. See Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - "RESULTS OF OPERATIONS - Electric Revenues, Gross Margins and Sales." Major industries served by the WEGO include the paper industry, the food products industry and the fabricated metal products industry. During 1995, WE's electric operations was the largest gas customer using 2.4% of total therm deliveries. No single retail customer of the gas utility accounted for more than 2.1% of total gas therms sold and transported in 1995. STEAM UTILITY OPERATIONS WE operates a district steam system in Downtown Milwaukee and the near southside of Downtown Milwaukee. Steam is used by 473 customers for processing, space heating, domestic hot water and humidification. Annual sales of steam fluctuate from year to year based on system growth and variations in normalized weather conditions. Steam is supplied to the system from WE's Valley Power Plant, a coal-fired cogeneration facility. The steam system consists of approximately 30 miles of both high pressure and low pressure steam piping, 3.8 miles of walkable tunnels and other pressure regulating equipment. Steam sales in 1995 were 2.53 billion pounds of steam as compared to 2.39 billion pounds sold in 1994, an increase of 5.8%. Milwaukee County Power Plant: WE has entered into an agreement with Milwaukee County to acquire in 1996 the steam production and distribution facilities of the Milwaukee County Power Plant located on the Milwaukee County Grounds in Wauwatosa, Wisconsin. WE plans to integrate these facilities into its current steam utility operations. This acquisition is contingent upon approval of the PSCW and upon the five major customers signing ten-year steam service agreements. See Item 1. BUSINESS - "ELECTRIC UTILITY OPERATIONS" above and Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - "LIQUIDITY AND CAPITAL RESOURCES - Capital Requirements 1996-2000." REGULATION WE is subject to the regulation of the PSCW as to retail electric, gas and steam rates in Wisconsin, standards of service, issuance of securities, construction of new facilities, transactions with affiliates, levels of short- term debt obligations, billing practices and various other matters. WE is also subject to the regulation of the MPSC as to the various matters associated with retail electric service in Michigan as noted above except as to issuance of securities, construction of certain new facilities, levels of short-term debt obligations and advance approval of transactions with affiliates. WE, with respect to hydro-electric facilities, wholesale power service, electric transmission, gas transportation and accounting, is subject to FERC regulation. Operation and construction relating to WE's Point Beach facilities are subject to regulation by the NRC. WE's operations are also subject to regulations of the EPA, the DNR and the MDEQ. The PSCW is authorized to direct expenditures for promoting conservation if it determines that the programs are in the public interest. Rate orders have - 19 - 20 ITEM 1. BUSINESS - Regulation - (cont'd) consistently included provisions for substantial conservation programs initiated by WE. For additional information, see Note A - "Summary of Significant Accounting Policies" in the NOTES TO FINANCIAL STATEMENTS in Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. WE is subject to a power plant siting law in Wisconsin which requires that electric utilities file updated long-term forecasts and plans (called "Advance Plans") for the location, size and type of future large generating plants and high voltage transmission lines about every two years for PSCW approval after public hearings. Generally, the law provides that the PSCW may not authorize the construction of any large generating plants or high voltage transmission lines unless they are in substantial compliance with the most recently approved plan. The law also prohibits WE from acquiring any interest in land for such plants or transmission lines by condemnation until construction authorization has been received. Advance Plan orders are based on a review of the utilities' long-term planning options. However, separate project-specific PSCW approval is required for the construction of generating facilities and transmission lines. WE employs a least-cost integrated planning process, which examines a full range of supply and demand side options to meet its customers' electric needs, such as the renovation of existing power plants, promotion of cost-effective conservation and load management options, development of renewable energy sources, purchased power and construction of new company-owned generation facilities. For additional information regarding Advance Plans, see Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - "LIQUIDITY AND CAPITAL RESOURCES - Capital Requirements 1996-2000." In 1994, the PSCW ordered the state's utilities to competitively bid all new generation needs in excess of 12 megawatts to be built in Wisconsin. The two- stage process established by the PSCW consists of: (1) an all-parties (including utilities) bidding procedure for fossil-fueled and renewable generation projects and (2) the conventional Certificate of Public Convenience and Necessity ("CPCN") procedure for the winner or winners. For additional information regarding the CPCN process, see Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - "LIQUIDITY AND CAPITAL RESOURCES - Capital Requirements 1996-2000." In 1992, the PSCW ordered that utilities should include a cost of $15 per ton of carbon dioxide ("CO2") when comparing resource planning options (both supply and demand-side) to account for the economic risk of future greenhouse gas regulation. Appeals through 1993 and 1994 did not substantially change the order. Recent supply and DSM plans included the greenhouse gas adder. There are only minor differences in supply and DSM plans prepared with and without the greenhouse gas adder. PSCW Electric Utility Industry Investigation: The PSCW has conducted an investigation into the state of the electric utility industry in Wisconsin, particularly its institutional structure and regulatory regime, in order to evaluate what changes would be beneficial for Wisconsin. In early 1995, the PSCW formed an Electric Advisory Committee (the "Committee") comprised of representatives from the utility, independent power and merchant businesses as well as environmental and consumer advocates. The Committee met throughout the year and discussed all aspects of the business to determine where the introduction of competition would benefit consumers. The PSCW used the input - 20 - 21 ITEM 1. BUSINESS - Regulation - (cont'd) from the Committee to develop their proposal for restructuring of the industry. The PSCW's proposal would permit all consumers to choose their electricity provider as well as a competitive generation business. The transmission and distribution portions of the business would remain regulated. Several work groups and studies were recommended in the proposal to resolve various issues that will allow for full retail competition by the year 2001. WE will work throughout 1996 participating in these work groups and studies. The restructuring envisioned in the proposal is similar to WE's view of industry restructuring where all electric utility functions are separated into two major categories - natural monopolies and competitive entities. The natural monopolies are functions where a single entity can provide the lowest cost (the transmission and distribution functions). The competitive entities are functions where competition can provide the lowest cost (the generation and energy merchant functions). In WE's model, the re-regulated natural monopolies are the transmission and distribution functions. Re-regulation of these entities would involve some form of price cap and performance-standard operation rules. In the new structure, the FERC would regulate the transmission systems through a regional transmission group to ensure open access, comparable pricing, comparable service and adequate cost recovery. The PSCW would regulate the distribution function for reasonable price, reliability, public safety and customer satisfaction. The competitive entities in the WE model are the generation, customer service and energy merchant functions. In the restructured electric utility industry, utilities would unbundle costs into the individual components of generation, transmission, distribution and service. PSCW Natural Gas Utility Industry Investigation: The PSCW continued a generic investigation of the natural gas industry in Wisconsin and addressed the extent to which traditional regulation should be replaced with a different approach. In conjunction with this generic investigation, the PSCW staff is reviewing the use of the current purchased gas adjustment ("PGA") mechanism which is designed to pass on to gas customers increases or decreases in the cost of natural gas purchased for resale. A separate docket has been established to review the PGA. WE is participating in these PSCW investigations. For additional information regarding the PSCW electric and gas utility industry investigations, see Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - "RESULTS OF OPERATIONS - Rates and Regulatory Matters." RATE MATTERS See Item 3. LEGAL PROCEEDINGS - "RATE MATTERS" and Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - "RESULTS OF OPERATIONS - Rates and Regulatory Matters" for a discussion of rate matters, including recent rate changes and a discussion of the tariffs and procedures with respect to recovery of changes in the costs of fuel, purchased power and gas purchased for resale. - 21 - 22 ITEM 1. BUSINESS - (cont'd) ENERGY EFFICIENCY Utility involvement in energy efficiency is an area in which there may be significant changes in the future as a result of the PSCW electric utility industry investigation mentioned earlier. There was general agreement on the Committee to begin to move responsibility for energy efficiency away from utilities and toward competitive market forces. WE has begun to move in this direction by reducing the areas in which it provides direct customer rebates. For industrial and commercial electric and natural gas customers, WE continues to provide energy evaluations identifying cost-effective customer saving opportunities, as well as below market rate financing for the purchase of energy efficiency equipment. In 1995, WE hired a contractor to obtain energy efficiency among smaller customers, in part to help develop the market for energy efficiency among these customers. The contractor offers incentives for electric and natural gas customers to encourage the purchase of energy efficient equipment and the removal of older inefficient appliances from the system. Efficient use of energy is not limited to reduced consumption. Time-of-use rates for certain electric customers promote the shifting of electricity usage to those times when electric generating facilities are not fully utilized. Interruptible and curtailable rates, along with an energy cooperative-managed load curtailment program, are offered to certain industrial customers to control peak demand. Direct load control of central air conditioners is available to most residential customers. ENVIRONMENTAL COMPLIANCE Compliance with federal, state and local environmental protection requirements resulted in capital expenditures by WEC's utility subsidiary of approximately $31 million in 1995. Expenditures incurred during 1995 included costs associated with the replacement of the precipitators at Valley Power Plant, the construction of the ISFSI at Point Beach and the installation of pollution abatement facilities at WE's power plants, as well as the installation of underground distribution lines and environmental studies associated with power plants. Such expenditures are budgeted at approximately $15 million for 1996. Operation, maintenance and depreciation expenses of WE's fly ash removal equipment and other environmental protection systems are estimated to have been $41 million in 1995. Other environmental costs, primarily for environmental studies, amounted to $200,000 in 1995. Solid Waste Landfills WE provides for the disposal of non-ash related solid wastes and hazardous wastes through licensed independent contractors, but federal statutory provisions impose joint and several liability on the generators of waste for certain cleanup costs. Remediation-related activity pertaining to specific sites is discussed below. Muskego Sanitary Landfill: In 1992, WE was informed by the EPA that it was included in a group of approximately 50 potentially responsible parties ("PRPs") against which the EPA will issue orders requiring that the PRPs clean up the Muskego Sanitary Landfill (located in Southeastern Waukesha County, Wisconsin). On January 14, 1993, WE notified EPA that it was proceeding, with other PRPs, to comply with the order. The first step toward remediation has - 22 - 23 ITEM 1. BUSINESS - Environmental Compliance - (cont'd) been identified, with the WE portion of the $16.8 million effort identified as $115,000 (paid in 1994). Remedial actions for the second step (Groundwater Operable Unit Remedy) are being evaluated, with EPA recommending a limited pump and treat option, estimated to cost $7.4 million. Costs will be allocated among the PRPs based on their waste contribution to the site. WE has been identified as one of the small waste contributors required to contribute to the groundwater cleanup. Maxey Flats Nuclear Disposal Site: In 1986, WE was advised by EPA that it is one of a number of PRPs for cleanup at this low-level radioactive waste site located in Morehead, Kentucky. The amount of waste contributed by WE was significantly less than one percent of the total. Under the terms of a consent decree agreed to by all parties, WE was to pay the amount of $164,000 (minus a small credit for an amount previously paid) as its share of the settlement fund for site cleanup costs. This settlement was to be completed in 1995, but has been held up by a lawsuit filed by the unions concerning the amount of work on the cleanup to be done by union labor. The potential impact on WE would be a limited increase in the settlement if additional labor costs result from the lawsuit. Manistique River/Harbor Area: WE received a request for information or PRP letter from EPA on March 12, 1993. The letter states that the river/harbor has PCB contamination. EPA has requested information regarding company PCB and oil filled equipment management in the Manistique River drainage basin. WE responded to this request on April 22, 1993. An additional information request from EPA was responded to on January 4, 1995. WE has no reason to believe that it is responsible in total or in part for the PCB contamination in the Manistique River/harbor area. WE has learned through newspaper articles that the EPA announced a preliminary plan to dredge most of the PCB- contaminated sediments, with only limited capping along the breakwater. The two identified PRPs, Manistique Papers and Edison Sault Electric Company, have advocated installation of a permanent cap. Kenosha Iron and Metal: WE received a request for information or PRP letter from EPA on December 9, 1994. The letter requested information regarding any involvement WE's Pleasant Prairie Power Plant may have had with this operation in Kenosha, Wisconsin. A response to EPA was sent December 29, 1994, indicating that WE had no reason to believe that the power plant or WE did any business with Kenosha Iron and Metal. No response from EPA has been received since this response. Marina Cliffs Barrel Dump Site: WE received a special notice letter and information request on March 25, 1994 from the DNR. The letter described a release of hazardous substances at a former barrel reclamation facility and landfill site, located in the City of South Milwaukee, Wisconsin, and requested information on any business dealings WE may have had with this former operation. This request for information was responded to on April 26, 1994. An additional request for information or PRP letter, was received on March 24, 1995. This request was responded to by WE in April 1995. Since that time a number of follow-up contacts have been made with EPA. WE has no reason to believe that it is responsible for the contamination problems at this site. While WE continues to believe it has no responsibility at this site, the EPA, which has undertaken remediation activities at the site, has refused to offer WE a buyout option. As a result, WE has joined a group of PRPs who will fund the cleanup. No known cleanup schedule has been set or remediation costs identified. - 23 - 24 ITEM 1. BUSINESS - Environmental Compliance - (cont'd) ETSM Property: Iron cyanide bearing wastes were found both on property owned by WE (ETSM facility), located in the City of West Allis, Wisconsin, and adjacent landowners. The wastes were removed and properly disposed, with WE's share of the cleanup at about $100,000. Adjacent landowners believe WE to be the source of the material; however, records do not support that allegation. WE has received a notice sent by one of the property owners, of its intent to sue WE under the Resource Conservation and Recovery Act of 1976. City of West Allis: The City of West Allis, Wisconsin discovered iron cyanide bearing wastes on a parcel of property owned by the city at 113th St. and Greenfield Ave. The source of the waste is believed to be process waste hauled to the site from a former manufactured gas plant. The City of West Allis alleges that WE was the source of this material and is pursuing action against WE to remediate the site. This matter is pending. There is no reason to believe that WE nor WN was the source of or involved in the disposal of the iron cyanide bearing wastes on this property. Lenz Oil: A request for information or PRP letter was received from EPA on March 25, 1994. WSG was identified as the PRP because of used oil sent to the Lenz Oil facility located in Lemont, Illinois. WSG was acquired by WEC on January 1, 1994. A response was filed with EPA. No known cleanup schedule has been set or remediation costs identified. Boundary Road Landfill: WE was contacted by Waste Management, Inc. ("WMI") in October 1995 requesting voluntary participation in the cleanup of its former landfill. The landfill, formerly known as the Lauer Landfill, is a Superfund site located in the Village of Menomonee Falls, Wisconsin. WMI is alleging that waste from some of WE's service centers was disposed of at this site and is now contributing to the environmental problems at the site. WE met with WMI on February 12, 1996 to discuss the situation. No known cleanup schedule has been set or remediation costs identified. This matter is pending. Lake Geneva Service Center: The property, in Lake Geneva, Wisconsin, was acquired as part of the acquisition of WSG. A groundwater problem was identified by WSG reportedly caused by past disposal practices. In 1995, the extent of contamination was defined, and a remediation system was designed and installed. Approximately $200,000 was spent in 1995. Remaining remediation costs are estimated to be approximately $150,000. Ash Landfills WE aggressively seeks environmentally acceptable, beneficial uses of its combustion byproducts. However, ash materials have been, and to some degree, continue to be disposed of in company-owned, licensed landfills. Some early designed and constructed landfills may allow the release of low levels of constituents resulting in the need for various levels of remediation. Where WE has become aware of these conditions, efforts have been expended to define the nature and extent of any release, and work has been performed to address these conditions. These costs are included in the environmental operating and maintenance costs for WE. Sites currently undergoing remediation include: Presque Isle Landfill: WE entered into a consent order with the MDNR (now the MDEQ) regarding conditions existing at an ash landfill site acquired by WE when it purchased the Presque Isle Power Plant in 1988. WE's groundwater monitoring program at the site detected elevated levels of certain substances at the oldest portion of the landfill. WE has reconstructed, closed and capped the landfill to prevent further leachate from entering the groundwater - 24 - 25 ITEM 1. BUSINESS - Environmental Compliance - (cont'd) at an approximate cost of $2.6 million. A Remedial Action Plan was submitted to the MDEQ in 1995 that includes limited groundwater monitoring to further document the improvement in groundwater quality that has occurred at the site. The cost to implement the Remedial Action Plan is estimated to not exceed $100,000. Highway 59 Landfill: In 1989, a sulfate plume was detected in the groundwater beneath a WE-owned former ash landfill located in the Town of Waukesha, Wisconsin. After notifying the DNR, WE initiated a five-year expanded monitoring program. In response to a request from the DNR, WE prepared an environmental contamination assessment of the landfill and submitted the report to the DNR in July 1995. WE believes that any remediation plan developed, approved and implemented for this site would not have a material adverse effect on its financial condition. Manufactured Gas Sites WE's natural gas business unit is investigating the remediation of a number of former manufactured gas plant ("MGP") sites. Operation at these MGP sites ceased over 40 years ago. Limited remediation activities occurred at a number of these sites during the 1980's, with removal of waste materials known to be present at the time. In 1995, WE presented a plan to investigate and further remediate sites to the DNR. During 1995, WE conducted site investigations at four MGP sites and partial remediation activities were conducted at one site. Approximately $1.6 million has been spent through December 31, 1995 for such activities. Remediation costs to be incurred through the year 2000 have been estimated to be $12 million, but the total costs are uncertain pending results of further site specific investigations and the selection of site specific remedial actions. In its September 11, 1995 letter order, the PSCW allowed WE to defer MGP site remediation costs with final rate treatment of such costs to be determined in future rate cases. As of December 31, 1995, WE has recorded an accrued liability of $1.6 million for MGP site remediation and a related deferred regulatory asset of $3.2 million. WE expects to accrue additional MGP site remediation liabilities during 1996 as site specific investigations are completed and site specific remedial actions are identified. WE will seek rate recovery of these costs and does not anticipate that there will be a material adverse effect on its net income or financial condition. Air Quality - Acid Rain Legislation In 1986, the Wisconsin Legislature passed legislation establishing new sulfur dioxide ("SO2") limitations applicable to Wisconsin's five major electric utilities, including WE. The law requires each of the five major electric utilities to meet a 1.20 lb SO2 per million BTU corporate average annual emission rate limit beginning in 1993. Prior to 1993, Wisconsin law limited the total annual SO2 emissions from the five major electric utilities to 500,000 tons per year. During 1995, approximately 177,000 tons of SO2 were emitted by such utilities, equivalent to an annual average emission rate of 0.88 lbs SO2 per million BTU. WE's compliance plan to meet the SO2 limitations under Wisconsin's acid rain law includes the increased use of low-sulfur coal at certain power plant units. Some changes to existing power plant equipment were made to accommodate the use of low-sulfur coals. The 1990 amendments to the Federal Clean Air Act mandate significant nationwide reductions in air emissions. Most significant to the country's - 25 - 26 ITEM 1. BUSINESS - Environmental Compliance - (cont'd) electric utility companies are the "acid rain" provisions of the amendments which are scheduled to limit SO2 and nitrogen oxide ("NOX") emissions in phases. Phase I became effective in 1995 and Phase II will take effect in 2000. Phase I requirements had minimal impact on the Company because of actions taken to meet the above-mentioned Wisconsin acid rain law. Phase II requirements, together with separate ozone nonattainment provisions of the Clean Air Act which may call for additional NOX reductions, however, will necessitate the implementation of a compliance strategy which is not expected to materially impact rates. Since a portion of the regulations that have been issued by the EPA are not complete or are not yet final, the rate impact is subject to change and will be reevaluated as needed. For additional information regarding the impact of the Clean Air Act Amendments, including estimates of the cost of compliance, see Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - "LIQUIDITY AND CAPITAL RESOURCES - Environmental Issues." OTHER WE is authorized to provide electric and gas service in designated territories in the state of Wisconsin, as established by indeterminate permits, certificates of public convenience and necessity, or boundary agreements with other utilities. WE provides electric service in certain territories in the state of Michigan pursuant to franchises granted by municipalities. Research and development expenditures of WE amounted to $6,427,000 in 1995, $8,063,000 in 1994 and $8,629,000 in 1993. Such expenditures were primarily for improvement of service and abatement of air and water pollution. Research and development activities include work done by employees, consultants and contractors, plus sponsorship of research by industry associations. In addition to the foregoing amounts, the WEGO paid $1,033,000 in 1995, $766,000 in 1994 and $1,300,000 in 1993 for support of the Gas Research Institute ("GRI"). The GRI surcharge, currently assessed on all gas deliveries, is calculated on pipeline utilization. At December 31, 1995, WE employed 4,492 persons, of which 95 were part-time. - 26 - 27 ITEM 2. PROPERTIES WE owns the following generating stations with 1995 capabilities as indicated: ============================================================================== Dependable No. of Capability In Generating Megawatts (1) Units at ----------------------- December August December Name Fuel 1995 1995 1995 - ---- ---- ---------- ------- -------- Steam Plants: Point Beach Nuclear 2 973 947 Oak Creek Coal 4 1,135 1,141 Presque Isle (2) Coal 9 612 612 Pleasant Prairie Coal 2 1,200 1,210 Port Washington Coal 4 322 324 Valley Coal 2 267 227 Edgewater (3) Coal 1 98 98 -- ----- ----- TOTAL STEAM 24 4,607 4,559 Hydro Plants (16 in number) 38 75 75 Germantown Combustion Turbines Oil 4 212 252 Concord Combustion Turbines Gas/Oil 4 332 376 Paris Combustion Turbines (4) Gas/Oil 4 332 376 Other Combustion Turbines & Diesel Gas/Oil 4 61 74 -- ----- ----- TOTAL SYSTEM 78 5,619 5,712 ============================================================================== (1) Dependable capability is the net power output under average operating conditions with equipment in an average state of repair as of a given month in a given year. Changing seasonal conditions are responsible for the different capabilities reported for the winter and summer periods in the above table. The values were established by test and may change slightly from year to year. (2) UPPCO, a non-affiliated utility, staffs and operates the Presque Isle Power Plant under an operating agreement with WE which extends through December 31, 1997. (3) WE has a 25% interest in Edgewater 5 Generating Unit, which is operated by Wisconsin Power and Light Company, a non-affiliated utility. (4) During the second quarter of 1995, four units, or approximately 360 megawatts of additional peaking combustion turbine generation capacity, were placed in service at WE's Paris Generating Station. At December 31, 1995, the electric transmission and distribution system had 2,761 miles of transmission circuits, of which 639 miles were operating at 345 kilovolts, 123 miles at 230 kilovolts, 1,605 miles at 138 kilovolts, and 394 miles at voltage levels less than 138 kilovolts. At December 31, 1995, WE was operating 23,004 pole miles of overhead distribution lines and 14,428 miles of - 27 - 28 ITEM 2. PROPERTIES - (cont'd) underground distribution cable, as well as 360 distribution substations and 222,294 line transformers. As of December 31, 1995, the gas distribution system includes approximately 7,040 miles of mains connected at 18 gate stations to the pipeline transmission systems of ANR Pipeline Company, Natural Gas Pipeline Company of America and Northern Natural Pipeline Company. WE has a liquefied natural gas storage plant which converts and stores in liquefied form natural gas received during periods of low consumption. The liquefied natural gas storage plant has a send-out capability of 70,000 Dths per day. WE also has propane tanks for peaking purposes. These tanks will provide approximately 7,000 Dths of supply to the system. WE owns various office buildings and service centers throughout its service area. The principal properties of WE are owned in fee except that the major portion of electric transmission and distribution lines and steam distribution mains and gas distribution mains and services are located, for the most part, on or in streets and highways and on land owned by others. Substantially all utility property is subject to first mortgage liens. ITEM 3. LEGAL PROCEEDINGS ENVIRONMENTAL MATTERS WE is subject to federal, state and certain local laws and regulations governing the environmental aspects of its operations. WE believes that, with immaterial exceptions, its existing facilities are in compliance with applicable environmental requirements. Stephenson Building: On September 21, 1994, Crown Life Insurance Company sued WE in the United States District Court for the Eastern District of Wisconsin, seeking contribution and damages from WE under various federal and state claims for the unspecified costs of removing asbestos from boilers and piping in a building in downtown Milwaukee owned by Crown Life. WE sold that equipment and piping to a former building owner in 1970. WE is defending this lawsuit. See Item 1. BUSINESS - "ENVIRONMENTAL COMPLIANCE" for a discussion of matters related to certain solid waste and ash landfills and manufactured gas plant sites. RATE MATTERS Wisconsin Retail Jurisdiction Fuel Cost Adjustment Procedure: WE's electric retail rates in Wisconsin do not contain an automatic fuel adjustment clause, but can be adjusted by the PSCW if actual cumulative fuel and purchased power costs, when compared to the costs projected in the retail electric rate proceeding, deviate from a prescribed range and are expected to continue to be above or below the authorized annual range of 3%. WE steam rates also contain a provision to adjust rates to reflect varying fuel costs for all customers except for a large volume contract representing approximately 13% of steam sales in 1995. WE believes that it has the ability to maintain low fuel costs through efficient management of its power supply system and fuel procurement practices. Therefore, WE has proposed, in its 1997 Test Year filing with the PSCW, the elimination of the retail electric fuel cost adjustment procedure. - 28 - 29 ITEM 3. LEGAL PROCEEDINGS - Rate Matters - (cont'd) 1995 Fuel Cost Adjustment: Effective August 4, 1994, the PSCW authorized WE to reduce Wisconsin retail electric rates, through the use of a fuel adjustment credit, to reflect lower fuel and purchased power expenses. The adjustment reduced Wisconsin retail electric revenue by approximately $16.7 million through December 31, 1995. Effective January 1, 1996, the fuel adjustment credit was removed from Wisconsin retail electric rates. Under WE's proposal in the 1997 Test Year filing to eliminate the fuel cost adjustment credit, the level of fuel expense currently included in rates will continue until rates are revised by the PSCW in a rate case. Purchased Gas Adjustment Tariffs: Sales of natural gas are subject to adjustment tariffs designed to pass on to gas customers increases or decreases in the cost of natural gas purchased for resale. For additional information, see Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - "RESULTS OF OPERATIONS - Rates and Regulatory Matters." 1995 Test Year: In 1993 the PSCW discontinued the practice of conducting annual rate case proceedings, replacing it with a new schedule which calls for future biennial rate cases. As a result, no electric, gas or steam filings were made with respect to the 1995 test year. 1996 Test Year: On May 1, 1995, WE filed with the PSCW required data related to the 1996 test year. This was an abbreviated filing since no increase in rates was requested. At the PSCW's open meeting on August 21, 1995, the PSCW determined that Wisconsin retail rates for 1996 should be decreased from existing levels. In a letter order dated September 11, 1995, the PSCW directed WE to implement rate decreases for Wisconsin retail electric, gas and steam customers of $33.383 million or 2.75%, $8.298 million or 2.6% and $0.790 million or 5.1%, respectively, on an annualized basis effective January 1, 1996. The decrease is based upon a regulatory return on common equity of 11.3%, down from 12.3% authorized since 1993. 1997 Test Year: On January 16, 1996, WE filed specific financial data with the PSCW related to the 1997 test year showing an $82.2 million revenue deficiency for its utility operations. The dollar impacts and percentage increases requested for Wisconsin retail electric, gas and steam customers are $77.0 million or 6.2%, $4.3 million or 1.4% and $0.9 million or 6.4%, respectively, on an annualized basis. On March 15, 1996, WE filed testimony and exhibits with the PSCW related to the 1997 test year. The PSCW had determined that it required a special full review of WE's rates for the 1997 test year in connection with consideration of the application for approval of the proposed merger of WEC and NSP. For additional information regarding the merger of WEC and NSP, see Item 1. BUSINESS - "MERGER AGREEMENT WITH NORTHERN STATES POWER COMPANY", Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - "RESULTS OF OPERATIONS - Mergers" and Note B - "Mergers" in the NOTES TO FINANCIAL STATEMENTS in Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Wholesale Electric Jurisdiction Fuel and Purchased Power Adjustment Tariffs: Some customers served under WE's wholesale rates are subject to an automatic fuel adjustment provision to reflect varying fuel and purchased power costs. Wholesale sales to municipals and cooperatives represented approximately 5% of total electric sales in 1995. - 29 - 30 ITEM 3. LEGAL PROCEEDINGS - Rate Matters - (cont'd) Michigan Retail Electric Jurisdiction 1996 Test Year: Effective January 1, 1996, the MPSC authorized an annualized rate decrease of $1.13 million or 3.3% for WE's non-mine retail electric customers. Excluding sales to the two mine customers, which are separately regulated by the MPSC, retail electric sales in Michigan account for approximately 2% of WE's total kilowatt-hour sales. Power Supply Cost Recovery Clause: In the past, rates were adjusted to reflect varying fuel and purchased power costs through a power supply cost recovery ("PSCR") clause in WE's tariffs. Such PSCR clause provided for, among other things, an annual filing of a PSCR plan and, after notice and an opportunity for hearing, the development of PSCR factors to be applied to customers' bills during the period covered by the PSCR plan to allow WE to recover its costs of fuel and purchased power transactions, as estimated in its annual filing. The amounts so collected were subject to a reconciliation proceeding conducted by the MPSC at the end of the period covered by the plan for recovery of any undercollections of actual costs or for refund or credit of any amounts in excess of its actual costs in such period. On November 30, 1994, the MPSC approved the proposed PSCR credit factor of $.00535 per kilowatt-hour for the year 1995. Effective December 15, 1995, the MPSC authorized suspension of the PSCR clause for a five-year period. The existing PSCR credit factor of $.00535 per kilowatt-hour was rolled into the energy rate. FERC Order 636 Transition Costs As a result of the FERC's Order 636, pipeline companies are no longer in the merchant business and are billing transition costs, such as Gas Supply Realignment and stranded capacity costs, to their customers. Due to the netting of refunds against liabilities in 1995, the net remaining transition costs to be billed to WE are currently estimated to be $2.0 million. This estimate includes the amount attributable to WSG, which was merged into WN effective January 1, 1994. The PSCW is allowing local gas distribution companies to pass these costs on to their customers through the purchased gas adjustment mechanism. For additional information see Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - "RESULTS OF OPERATIONS - Rates and Regulatory Matters." Stray Voltage In March 1996, technical hearings were concluded in a PSCW proceeding to further evaluate the results of stray voltage research that has been completed since 1989 and to update, if necessary, PSCW policies regarding stray voltage that were included in a 1989 PSCW order. WE expects the PSCW to issue an updated order on stray voltage in April 1996 but does not anticipate that it will have a significant impact on WE's financial position or results of operations. OTHER LITIGATION Spent Fuel Storage and Disposal: See Item 1. BUSINESS - "SOURCES OF GENERATION - Nuclear" for information concerning the PSCW's approval of WE's application to utilize dry cask storage for spent nuclear fuel generated at Point Beach Nuclear Plant and pending legal proceedings with respect to the PSCW's decision. - 30 - 31 ITEM 3. LEGAL PROCEEDINGS - Other Litigation - (cont'd) Pittsburg & Midway Case: In a matter brought before the FERC, in July 1993, WE filed an initial brief supporting its right to retain coal reclamation costs collected through the wholesale fuel adjustment clause in 1986 that it believes were prudently incurred in a settlement with the Pittsburg & Midway Coal Mining Company. Of the total costs involved, the portion recovered through the wholesale fuel clause amounts to approximately $750,000. This filing was made in response to a FERC audit staff determination that WE should have applied for a waiver of the FERC's fuel clause regulations in order to attempt to pass through the wholesale portion of the settlement costs. On December 13, 1995, the administrative law judge issued an initial decision that WE was required to refund the portion of such costs collected from its wholesale customers. The administrative law judge's initial decision found in favor of WE with respect to the prudence of the administration of the coal contracts. The matter is pending before the full commission. In November 1993, the FERC rejected WE's request to be allowed to recover, in wholesale rates in the future, the amount which may have to be refunded to customers in the event of an unfavorable ruling in the pending fuel adjustment clause proceeding concerning the Pittsburg & Midway reclamation charges. In January 1994, WE filed an appeal with the U.S. Court of Appeals for the District of Columbia Circuit regarding this rejection. The matter is pending. Electromagnetic Fields: Claims are being made or threatened with increasing frequency against electric utilities across the country for bodily injury, disease or other damages allegedly caused or aggravated by exposure to electromagnetic fields ("EMFs") associated with electric transmission and distribution lines. Results of scientific studies conducted to date do not establish the existence of a causal connection between EMFs and any adverse health effects. WE believes that its facilities are constructed and operated in accordance with all applicable legal requirements and standards. WE does not believe that any claims thus far made or threatened against it in connection with EMFs will result in any substantial liability on the part of WE. Uranium Enrichment Charges: On February 9, 1995, WE and ten other utilities filed an action against the USEC in the U.S. Court of Federal Claims challenging the final decision of the USEC contracting officer in November 1994 which denied claims of the utilities for damages by reason of overcharges for uranium enrichment services provided under Utility Services Contracts between July 1, 1993 and September 30, 1994. The damages sought by WE total $3.3 million. The matter is pending. Personal Injury Suit: On October 1, 1994, a jury returned a $2.85 million verdict against WN, which was merged into WE effective January 1, 1996, in a case in the Circuit Court for Milwaukee County, involving a gas pipe fire which injured the plaintiff. On December 23, 1994, WN resolved the litigation between itself and plaintiff with a payment of $2.55 million to plaintiff, of which $550,000 was covered by WN's general liability insurer. The contract with the construction company that installed the gas pipe provides for indemnification of WN. On September 8, 1995, WN commenced an action for such indemnification in Milwaukee County Circuit Court against the construction company and its insurers. The matter is pending. - 31 - 32 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of WE's security holders during the fourth quarter of the fiscal year covered by this report. EXECUTIVE OFFICERS OF THE REGISTRANT The names, ages at December 31, 1995 and positions of the executive officers of WE are listed below along with their business experience during the past five years. All officers are appointed for one year terms or until their respective successors are duly chosen. There are no family relationships among these officers, nor is there any agreement or understanding between any officer and any other person pursuant to which the officer was selected. Current Position(s) and Business Experience Name and Age During Past Five Years - ---------------------- ---------------------- Richard A. Abdoo, 51 Chairman of the Board, President and Chief Executive Officer of WEC since 1991; Executive Vice President, 1990 to 1991; Director of WEC since 1988. Chairman of the Board and Chief Executive Officer of WE since 1990; Director of WE since 1989. Chairman of the Board and Chief Executive Officer of WN, a former subsidiary of WEC that was merged into WE on January 1, 1996, from 1990 through 1995; Director of WN from 1989 through 1995. Richard R. Grigg, Jr., 47 Vice President of WEC since January 1995; Director of WEC since May 1995. President and Chief Operating Officer of WE since January 1995; Group Executive and Vice President, June to December 1994; Vice President, 1990 to June 1994; Director of WE since 1994. President and Chief Operating Officer of WN during 1995; Director of WN during 1995. David K. Porter, 52 Senior Vice President of WE since 1989; Director of WE since 1989. Vice President of WN from 1989 through 1995; Director of WN from 1988 through 1995. Calvin H. Baker, 52 Treasurer and Chief Financial Officer of WEC since March 1996. Chief Financial Officer of WE since March 1996; Vice President-Finance of WE since 1994; Vice President-Marketing, 1992 through 1993; Vice President-Finance 1991 to 1992. Senior Vice President, Financial Services Corporation of New York City (provider of direct loan programs and industrial development projects in New York City), 1989 to 1991. - 32 - 33 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Executive Officers of the Registrant - (cont'd) Current Position(s) and Business Experience Name and Age During Past Five Years - ---------------------- ---------------------- Ann Marie Brady, 43 Secretary of WEC since March 1996; Assistant Secretary of WEC from 1989 to March 1996. Vice President-External Affairs of WE since March 1996; Secretary of WE since 1994; Assistant Secretary, 1989 through 1993. Secretary of WN, 1993 through 1995; Assistant Secretary, 1989 through 1993. Francis Brzezinski, 44 Vice President of WEC since 1990. Vice President-Business Development of WE since 1994. President and Chief Operating Officer of Wispark Corp., Wisvest Corp., and Witech Corp. since 1990. Charles T. Govin, Jr., 49 Vice President - Gas Operations of WE since January 1996. Vice President of WN, September 1994 to December 1995; General Manager of WN during 1994 and 1995; Director of Administrative Services of WN, 1991 to 1993; Director of WN, June to December 1995. Anne K. Klisurich, 48 Controller of WEC since June 1995; Accounting Manager of WEC, 1987 to 1994. Controller of WE since 1994. Controller of WN from 1994 through 1995. Kristine M. Krause, 41 Vice President - Fossil Operations of WE since 1994; Manager of Valley Power Plant and Steam Services, 1992 to 1994; Manager of Technical & Administrative Services, 1991 to 1992; General Superintendent - Technical Services & Control, 1990 to 1991. Robert E. Link, 44 Vice President - Nuclear Power of WE since 1992; Vice President - Marketing, 1991 to 1992; Assistant Vice President - Marketing, 1990 to 1991. Kristine A. Rappe, 39 Vice President - Customer Services (formerly Sales, Service and Marketing) of WE since 1994; Regional Manager of Customer Operations - Fox Valley Region, 1991 to 1994; Assistant Regional Manager of Customer Operations - Fox Valley Region during 1991; Manager - Marketing Department, 1990 to 1991. - 33 - 34 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The amount of cash dividends declared on WE's Common Stock during the two most recent fiscal years are set forth below. Dividends were paid to WE's sole common stockholder, WEC. ============================================================================== Quarter Total Dividend * - ------------------------------------------------------------------------------ 1994 1 $ 36,325,000 2 $ 38,208,667 3 $ 38,208,667 4 $ 38,208,667 - ------------------------------------------------------------------------------ 1995 1 $ 38,208,667 2 $ 40,455,444 3 $ 40,455,444 4 $ 40,455,444 ============================================================================== * Includes dividends paid by WN in 1994 and 1995. - 34 - 35 ITEM 6. SELECTED FINANCIAL DATA
WISCONSIN ELECTRIC POWER COMPANY *** SELECTED FINANCIAL DATA =============================================================================================== Year Ended December 31 1995 1994 1993** 1992** 1991** - ---------------------- ---------- ---------- ---------- ---------- ---------- (Thousands of Dollars) Earnings available for common stockholder $ 239,465 $ 180,403* $ 187,703 $ 170,034 $ 188,554 Operating revenues Electric $1,437,480 $1,403,562 $1,347,844 $1,298,723 $1,292,809 Gas 318,262 324,349 331,301 283,699 273,803 Steam 14,742 14,281 14,090 13,093 12,986 ---------- ---------- ---------- ---------- ---------- Total operating revenues $1,770,484 $1,742,192 $1,693,235 $1,595,515 $1,579,598 ========== ========== ========== ========== ========== Total assets $4,318,924 $4,202,193 $4,078,973 $3,623,838 $3,366,063 Long-term debt and preferred stock- redemption required $1,325,169 $1,257,776 $1,274,476 $1,280,012 $1,171,017 - ----------------------------------------------------------------------------------------------- Sales and Customers Electric Megawatt-hours sold 27,283,869 26,911,363 25,685,436 24,747,581 25,016,247 Customers (End of year) 955,616 944,855 932,285 919,466 907,871 Gas Therms delivered (Thousands) 886,729 811,219 809,348 772,036 767,071 Customers (End of year) 357,030 347,080 336,571 327,247 317,891 Steam Pounds sold (Millions) 2,532 2,395 2,376 2,284 2,282 Customers (End of year) 473 471 459 472 468 =============================================================================================== QUARTERLY FINANCIAL DATA =============================================================================================== (Thousands of Dollars) - ----------------------------------------------------------------------------------------------- March June Three Months Ended 1995 1994 1995 1994 - ------------------ --------- --------- --------- --------- Total operating revenues $ 471,122 $ 509,681 $ 405,093 $ 400,340 Operating income 84,572 43,436* 72,848 63,854 Earnings available for common stockholder 62,121 22,712* 51,249 42,885 - ----------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------- September December Three Months Ended 1995 1994 1995 1994 - ------------------ --------- --------- --------- --------- Total operating revenues $ 426,413 $ 400,512 $ 467,856 $ 431,659 Operating income 80,704 71,248 90,897 84,735 Earnings available for common stockholder 58,679 50,796 67,416 64,010 =============================================================================================== 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. Earnings and dividends per share are not provided as all of WE's common stock is held by WEC. * Includes nonrecurring $73.9 million charge in 1994 ($45 million net of tax) related to WE's Revitalization program. ** Restated to reflect the merger of Wisconsin Southern Gas Company, Inc. ("WSG") into Wisconsin Natural Gas Company ("WN") effective on January 1, 1994. *** Where applicable, prior year financial and statistical information has been restated to include WN at historical values. - 35 -
36
Electric Revenues, Kilowatt-Hour Sales and Customer Statistics Year Ended December 31 1995 1994 1993 1992 1991 - ---------------------- ---------- ---------- ---------- ---------- ---------- Operating Revenues ($000) Residential $ 507,416 $ 484,627 $ 472,903 $ 441,240 $ 444,542 Small commercial and industrial 423,039 406,043 386,736 372,213 363,906 Large commercial and industrial 401,794 398,179 380,482 381,083 372,768 Other retail 13,505 13,750 13,975 15,245 15,368 Resale - municipals 55,813 55,508 57,039 62,787 71,382 ---------- ---------- ---------- ---------- ---------- Total retail and municipals 1,401,567 1,358,107 1,311,135 1,272,568 1,267,966 Resale - public utilities 24,811 31,295 25,879 18,080 18,476 ---------- ---------- ---------- ---------- ---------- Total revenue from sales 1,426,378 1,389,402 1,337,014 1,290,648 1,286,442 Other operating revenue 11,102 14,160 10,830 8,075 6,367 ---------- ---------- ---------- ---------- ---------- Total Operating Revenues $1,437,480 $1,403,562 $1,347,844 $1,298,723 $1,292,809 ========== ========== ========== ========== ========== Kilowatt-hour Sales (Millions) Residential 7,043 6,670 6,551 6,230 6,567 Small commercial and industrial 7,047 6,699 6,358 6,155 6,153 Large commercial and industrial 10,640 10,472 9,771 9,702 9,462 Other retail 182 189 196 217 226 Resale - municipals 1,369 1,415 1,580 1,779 1,935 ---------- ---------- ---------- ---------- ---------- Total retail and municipals 26,281 25,445 24,456 24,083 24,343 Resale - public utilities 1,003 1,466 1,229 665 673 ---------- ---------- ---------- ---------- ---------- Total Sales 27,284 26,911 25,685 24,748 25,016 ========== ========== ========== ========== ========== Number of Customers - Average Residential 857,924 846,745 835,685 824,544 814,078 Small commercial and industrial 90,386 88,765 87,351 85,990 84,540 Large commercial and industrial 679 674 675 670 664 Other 1,821 1,811 1,831 1,945 1,980 ---------- ---------- ---------- ---------- ---------- Total 950,810 937,995 925,542 913,149 901,262 ========== ========== ========== ========== ========== Gas Revenues, Therms Delivered and Customer Statistics Year Ended December 31 1995 1994 1993** 1992** 1991** - ---------------------- ---------- ---------- ---------- ---------- ---------- Operating Revenues ($000) Residential $ 194,226 $ 200,824 $ 199,509 $ 175,824 $ 170,827 Commercial and Industrial 94,482 102,496 102,425 82,853 77,031 Interruptible and other 12,763 15,338 12,858 9,406 9,959 ---------- ---------- ---------- ---------- ---------- Total revenues from sales 301,471 318,658 314,792 268,083 257,817 Other operating revenue 16,791 5,691 16,509 15,616 15,986 ---------- ---------- ---------- ---------- ---------- Total Operating Revenues $ 318,262 $ 324,349 $ 331,301 $ 283,699 $ 273,803 ========== ========== ========== ========== ========== Therms Delivered (Thousands) Residential 345,140 323,913 322,444 309,968 308,980 Commercial and Industrial 207,358 199,206 202,549 183,588 176,707 Interruptible and other 50,646 47,467 34,608 24,710 26,442 ---------- ---------- ---------- ---------- ---------- Total Sales 603,144 570,586 559,601 518,266 512,129 Transportation of Customer Owned Gas 283,585 240,633 249,747 253,770 254,942 ---------- ---------- ---------- ---------- ---------- Total Delivered 886,729 811,219 809,348 772,036 767,071 ========== ========== ========== ========== ========== Number of Customers - Average Residential 321,643 311,288 302,355 293,437 284,728 Commercial and Industrial 29,287 28,506 27,871 27,291 26,536 Interruptible and other 361 340 356 376 404 ---------- ---------- ---------- ---------- ---------- Total 351,291 340,134 330,582 321,104 311,668 ========== ========== ========== ========== ========== Degree Days (Milwaukee) Heating (Normal 7,020) 6,825 6,431 6,775 6,723 6,416 Cooling (Normal 650) 953 877 651 364 1,056 ** Restated to reflect the merger of WSG into WN effective on January 1, 1994. - 36 -
37 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Effective January 1, 1996, Wisconsin Energy Corporation ("WEC"), Wisconsin Electric Power Company's ("WE" or the "Company") parent company, merged its natural gas utility subsidiary, Wisconsin Natural Gas Company ("WN"), into WE to form a single combined utility subsidiary. Where applicable, references to WE include WN prior to the merger and financial and statistical information has been restated to include WN at historical values. Additional information concerning the merger may be found below under "RESULTS OF OPERATIONS - Mergers" and in Note B - "Mergers" in the NOTES TO FINANCIAL STATEMENTS. As previously reported, WEC has entered into an agreement with Northern States Power Company, a Minnesota corporation ("NSP"), which provides for a strategic business combination involving the two companies in a "merger-of-equals" transaction. The future operations and financial position of WE will be significantly affected by the proposed merger. Consummation of the proposed merger is subject to a number of conditions, including obtaining all required regulatory approvals. Additional information concerning such agreement and proposed transaction may be found below under "RESULTS OF OPERATIONS - Mergers" and in Note B - "Mergers" in the NOTES TO FINANCIAL STATEMENTS (including unaudited pro forma financial information). RESULTS OF OPERATIONS Earnings 1995 Compared to 1994: Earnings Available for Common Stockholder ("Earnings") of WE increased to $239 million in 1995 compared to $180 million in 1994, an increase of 32.8%. Earnings during 1994 reflect a nonrecurring charge of approximately $73.9 million ($45 million net of tax) associated with the organizational restructuring program at WE. The 1994 nonrecurring charge primarily included the costs of early retirement and severance packages which were elements of a revitalization program ("Revitalization") designed to better position the Company in a changing energy marketplace. The Company has recovered the 1994 nonrecurring charge in avoided labor costs that would have been charged to Other Operations and Maintenance expense during 1994 and 1995. Excluding the Revitalization charge, 1995 Earnings were 6.2% greater than 1994 Earnings of $225 million. The increase in 1995 Earnings reflects 1.4% higher electric sales, 9.3% higher gas deliveries and a 3.1% decrease in Other Operation and Maintenance expenses. Electric sales grew primarily as a result of warmer summer weather during 1995. Gas deliveries increased due to increased deliveries to Interruptible and Transportation customers and to colder weather during the fourth quarter of 1995. Additional economic activity in WE's service area also contributed to the increase in electric sales and gas deliveries. The reduction in Other Operation and Maintenance expenses primarily reflects payroll-related savings and efficiencies gained through WE's Revitalization program. 1993 Through 1995: Earnings increased at a compound annual rate of 12.9% from $188 million in 1993 to $239 million in 1995. The increase in Earnings primarily resulted from corresponding growth in electric sales and therm deliveries and a decline in Other Operation and Maintenance expense. - 37 - 38 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (cont'd) Wisconsin Electric Revitalization In response to increasing competitive pressures in the markets for electricity and natural gas, WE implemented Revitalization in 1994 to increase efficiencies and improve customer service by reengineering and restructuring the organization. The new structure consolidated many business functions and simplified work processes. See Note K - "Benefits Other Than Pensions" in the NOTES TO FINANCIAL STATEMENTS. Mergers Wisconsin Natural Gas Company: As part of Revitalization, WEC has merged WN into WE. The merger, which was effective January 1, 1996, is expected to improve customer service and reduce operating costs. The accounting treatment for this merger was similar to that which would result from a pooling of interests. Accordingly, WE's prior year financial and statistical information has been restated to include WN at historical values. Wisconsin Southern Gas Company, Inc.: Effective January 1, 1994, WEC acquired Wisconsin Southern Gas Company, Inc. ("WSG") through a statutory merger of WSG into WN in which all of WSG's common stock was converted into common stock of WEC. WSG was a gas utility engaged in the purchase, distribution, transportation and sale of natural gas primarily in an area of southeastern Wisconsin which was contiguous to WN's service territory. WSG was merged into WN using the pooling of interests method of accounting. Accordingly, prior years' financial and statistical information was restated to include WSG at historical values. Northern States Power Company: On April 28, 1995, WEC and NSP entered into an Agreement and Plan of Merger, which was amended and restated as of July 26, 1995 ("Merger Agreement"). The Merger Agreement provides for a strategic business combination involving WEC and NSP in a "merger-of-equals" transaction ("Transaction"). As a result, WEC will become a registered public utility holding company under the Public Utility Holding Company Act of 1935, as amended ("PUHCA"), and will change its name to Primergy Corporation ("Primergy"). Primergy will be the parent company of WE (which will be renamed Wisconsin Energy Company), of NSP (which, for regulatory reasons, will reincorporate in Wisconsin ("New NSP")), and of the other subsidiaries of WEC and NSP. In connection with the Transaction, Northern States Power Company, a Wisconsin corporation ("NSP-WI"), currently a utility subsidiary of NSP, will be merged into Wisconsin Energy Company. Prior to the merger of NSP-WI into Wisconsin Energy Company, New NSP will acquire from NSP-WI certain gas utility assets. The Transaction is intended to be tax free for income tax purposes and to be accounted for as a pooling of interests. On September 13, 1995, stockholders of WEC and NSP voted to approve the Transaction. Under the provisions of the Merger Agreement, each share of WEC and NSP common stock will become 1.0 and 1.626 shares of Primergy common stock, respectively, following the proposed Transaction. As a result of the Transaction, the Company anticipates cost savings of approximately $2 billion over a ten year period, net of transaction costs and costs to achieve the savings of approximately $30 million and $122 million, respectively. WE and NSP have proposed, in their filings with the numerous state jurisdictions to which they are subject, a reduction of approximately 1.5% in retail electric rates beginning on or about January 1997 (assuming - 38 - 39 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (cont'd) Mergers - (cont'd) that the Transaction is then consummated) and a rate freeze through the year 2000, subject to certain exceptions regarding matters beyond WE's or NSP's control. For the same periods and subject to the same types of exceptions, WE and NSP-WI have proposed a $4.2 million reduction in retail gas rates on an annualized basis in Wisconsin and Michigan and a rate freeze through the year 2000. Similarly, NSP anticipates proposing in 1996 a 1.25% rate reduction for retail gas customers in North Dakota and four and two year rate freezes in North Dakota and Minnesota, respectively, effective following consummation of the Transaction. Subject to the same types of exceptions noted above, WE and NSP have agreed to a freeze in their electric wholesale rates for a four year period subsequent to the Transaction. In December 1995, WEC and NSP entered into a settlement agreement with certain municipal Wisconsin intervenors that ended the latters' participation in the FERC and state merger proceedings. The settlement agreement, which provides for certain rate reductions on power sales and transmission services, is pending FERC action. The state filings include a request for deferred accounting treatment and rate recovery of costs incurred associated with the Transaction. As of December 31, 1995, WEC has deferred $8.1 million of costs associated with the Transaction as a component of Deferred Charges and Other Assets-Other. The Merger Agreement is subject to various conditions including approval by all applicable regulatory authorities. In July 1995, WEC and NSP filed an application and supporting testimony with the FERC seeking approval of the Merger Agreement. In August 1995, WEC and NSP made similar filings with regulatory agencies in the states where WEC and NSP provide utility services and in which such filings are required. Applications for license amendments and approvals relating to the Merger Agreement were filed with the Nuclear Regulatory Commission ("NRC") in the fall of 1995. The FERC has put the merger application on an accelerated schedule, ordering the administrative law judge's initial decision by August 30, 1996 and briefs on exception by September 30, 1996. In March 1996, the Public Service Commission of Wisconsin ("PSCW") requested that the FERC broaden the scope of the merger application hearing to evaluate whether the proposed Transaction will impair effective state oversight of retail rates. The matter is pending. Not all of the regulatory agencies have established a timetable for their decision. During 1995, WEC and NSP received a ruling from the Internal Revenue Service indicating that the proposed successive merger transactions defined in the Merger Agreement would not prevent the treatment of the Transaction as a tax- free reorganization under applicable tax law if each transaction independently so qualified. In 1996, WEC and NSP will file an application with the Securities and Exchange Commission ("SEC") for authority to form Primergy under the requirements of PUHCA as well as required notifications with the Federal Trade Commission and the Department of Justice under the Hart-Scott- Rodino Antitrust Improvements Act of 1976, as amended. Subject to obtaining all requisite approvals, WEC and NSP anticipate completing the Transaction by January 1, 1997. The SEC may require, as a condition to its approval of the Transaction, that WEC and NSP divest their gas utility properties and possibly certain non- utility ventures within a reasonable time after the Transaction is consummated. In a few cases, the SEC has allowed the retention of such properties or deferred the question of divestiture for a substantial period of time. In those cases in which divestiture has taken place, the SEC has - 39 - 40 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (cont'd) Mergers - (cont'd) usually allowed enough time to complete the divestiture so as to allow the applicant to avoid a "fire sale" of the divested assets. WEC and NSP believe strong policy reasons and prior SEC decisions exist which support their retaining their existing gas utility properties and non-utility ventures, or, alternatively, which support deferring the question of divestiture for a substantial period of time; accordingly, WEC and NSP will request in their merger application with the SEC that WEC and NSP be allowed to retain, or, in the alternative, that the question of divestiture be deferred with respect to, WEC's and NSP's existing gas utility properties and non-utility ventures. Regulatory authorities may also require the restructuring of transmission system operations or administration. WEC and NSP currently cannot determine if such restructuring will be required. In addition, Wisconsin State law limits the total assets of non-utility affiliates of Primergy, which could affect the amount of non-regulated operations. Electric Revenues, Gross Margins and Sales 1995 Compared to 1994: Despite an annualized $16 million or 1.3% Wisconsin retail electric fuel adjustment rate decrease that became effective on August 4, 1994, total Electric Operating Revenues increased by 2.4% from $1,404 million in 1994 to $1,437 million in 1995 due to increased 1995 electric sales. The gross margin on Electric Operating Revenues (Electric Operating Revenues less Fuel and Purchased Power expenses) increased by 1.6% from $1,075 million in 1994 to $1,092 million in 1995. The gross margin grew because the increased electric sales were primarily to Residential and Small Commercial/Industrial customers who contribute higher margins to earnings than other customer classes. ============================================================================== Electric Gross Margin ($000) 1995 1994 % Change - ---------------------------- ---------- ---------- -------- Electric Operating Revenues $1,437,480 $1,403,562 2.4 Fuel & Purchased Power 345,387 328,485 5.1 ---------- ---------- Gross Margin $1,092,093 $1,075,077 1.6 ============================================================================== Total electric sales, detailed below by customer class, increased by 1.4% to approximately 27,284,000 megawatt-hours in 1995 compared to 26,911,000 megawatt-hours in 1994. Electric sales were positively impacted by substantially warmer summer weather conditions during 1995, resulting in increased use of electricity for air conditioning and other cooling purposes. As measured by cooling degree days, the 1995 cooling season (June through August) was 27.7% warmer than the same period in 1994. During the summer of 1995, WE experienced eight days of electric peak demands greater than the previous record which had been set in June 1994. The increase in electric sales also reflects colder winter weather during the fourth quarter of 1995 and a moderate increase in economic activity in WE's service area. - 40 - 41 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (cont'd) Electric Revenues, Gross Margins and Sales - (cont'd) ============================================================================== Electric Sales (Megawatt-hours) 1995 1994 % Change - ------------------------------- ---------- ---------- -------- Residential 7,042,691 6,670,081 5.6 Small Commercial/Industrial 7,047,277 6,699,073 5.2 Large Commercial/Industrial 10,639,782 10,471,869 1.6 Other 1,550,937 1,603,741 (3.3) ---------- ---------- Total Retail and Municipal 26,280,687 25,444,764 3.3 Resale-Utilities 1,003,182 1,466,599 (31.6) ---------- ---------- Total Sales 27,283,869 26,911,363 1.4 ============================================================================== The warmer 1995 summer weather increased sales primarily to Residential and Small Commercial/Industrial customers. These customers are more sensitive to weather variations than other customer classes. The average number of customers in the Residential and Small Commercial/Industrial customer classes grew by 1.3% and 1.8% or from 846,745 and 88,765, respectively, in 1994 to 857,924 and 90,386 in 1995. Electric energy sales to the Empire and Tilden iron ore mines, WE's two largest customers, decreased by 0.5% to 2,296,000 megawatt-hours in 1995 compared to 2,308,000 megawatt-hours in 1994. Excluding the mines, sales to Large Commercial/Industrial customers increased 2.2%. The 3.3% reduction in 1995 sales to the Other customer class is largely the result of reductions in sales to WPPI, WE's largest municipal power agency customer. WPPI has been reducing its purchases from WE subsequent to acquiring generating capacity in 1990, 1993 and 1996. Since that time, WPPI has expanded the use of its existing generating facilities and has installed additional capacity, further reducing its reliance on energy purchases from WE. These sales reductions did not have a significant effect on earnings. The market for electric wholesale customers (included in the Other customer class) is increasingly competitive. WE is in the process of renegotiating or has renegotiated long-term power sales contracts with most of its municipal wholesale customers. While WE anticipates retaining most of these customers over the long-term, WE expects that municipal wholesale revenues will begin to decline starting in 1996 as a result of lower margins included in the renegotiated contracts. WE is actively seeking to obtain new municipal wholesale customers to increase sales in this customer class. Resale of energy to other utilities declined 31.6% in 1995. This decline can in part be attributed to unplanned or longer than expected outages at two of WE's least cost generating facilities during 1995 and to increased retail customer load as a result of the warmer summer weather, both of which reduced the opportunity to sell electric energy to other utilities. Additionally, Upper Peninsula Power Company has permanently reduced the amount of energy that it is purchasing from WE for resale. These sales reductions did not have a significant effect on earnings. - 41 - 42 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (cont'd) Electric Revenues, Gross Margins and Sales - (cont'd) 1993 Through 1995: Total Electric Operating Revenues increased at a compound annual growth rate of 3.3% or from approximately $1,348 million in 1993 to $1,437 million in 1995 due to increased electric sales. Total electric sales grew from 25,685,000 megawatt-hours in 1993 to 27,284,000 megawatt-hours in 1995, a compound annual increase of 3.1%. These increases reflect, among other things, more favorable weather conditions in 1995 and a moderate increase in economic activity in WE's service area. The gross margin on Electric Operating Revenues increased at a compound annual rate of 3.0% from approximately $1,030 million in 1993 to $1,092 million in 1995. This was due to increased electric sales to Residential and Small Commercial/Industrial customers who contribute higher margins to earnings than other customer classes. From 1993 through 1995, sales to Residential and Small Commercial/Industrial customers increased at compound annual rates of 3.7% and 5.3% or from 6,551,000 and 6,358,000 megawatt-hours, respectively, in 1993 to 7,043,000 and 7,047,000 megawatt-hours in 1995. This increase was due primarily to warm summer weather in 1994 and 1995. The average number of Residential and Small Commercial/Industrial customers has increased at compound annual rates of 1.3% and 1.7%, respectively, during this period. Large Commercial/Industrial sales increased from 9,771,000 megawatt-hours in 1993 to 10,640,000 megawatt-hours in 1995, a compound annual increase of 4.3% attributable in part to a five-week long mine strike during the third quarter of 1993 which reduced 1993 sales. WE's contracts with the mines require the payment of a demand charge regardless of power usage which partially offset the impact on 1993 revenues of lost sales. Sales to the mines represented 8.4%, 8.6% and 7.8% of total electric sales during 1995, 1994 and 1993, respectively. For the three year period ending with 1995, sales to the Other customer class declined from 1,776,000 megawatt-hours in 1993 to 1,551,000 megawatt-hours in 1995, a compound annual decrease of 6.6% resulting from the decreased sales to WPPI noted above. Sales for Resale to other utilities declined from 1,229,000 megawatt-hours in 1993 to 1,003,000 megawatt-hours in 1995, a compound annual decrease of 9.7% resulting from the decreased opportunity sales and the reduction in purchases by Upper Peninsula Power Company described above. In addition to the results of higher total electric sales, the compound annual increase in Electric Operating Revenues since 1993 includes the impacts of rate changes which were effective during 1993 and 1994 as shown below in "Rates and Regulatory Matters." Gas Revenues, Gross Margins and Sales 1995 Compared to 1994: Despite an increase in 1995 total gas deliveries, total Gas Operating Revenues decreased by 1.9% or from $324 million in 1994 to $318 million in 1995 as a result of a reduction in the cost of gas which is recovered through the purchased gas adjustment clause. The gross margin on Gas Operating Revenues (Gas Operating Revenues less Cost of Gas Sold) increased by 3.7% or from $125 million in 1994 to $129 million in 1995. The gross margin grew because of increased therm sales to Residential and Commercial customers who contribute higher margins to earnings than other customer classes. - 42 - 43 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (cont'd) Gas Revenues, Gross Margins and Sales - (cont'd) ============================================================================== Gas Gross Margin ($000) 1995 1994 % Change - ----------------------- ---------- ---------- -------- Gas Operating Revenues $ 318,262 $ 324,349 (1.9) Cost of Gas Sold 188,764 199,511 (5.4) ---------- ---------- Gross Margin $ 129,498 $ 124,838 3.7 ============================================================================== Total natural gas therms delivered, detailed below by customer class, increased by 9.3% or from 811,219 thousand therms in 1994 to 886,729 thousand therms in 1995, due in part to the effects of weather. Colder weather during the fourth quarter of 1995 contributed to net increased deliveries for the year. As measured by heating degree days, the fourth quarter was 43.1% colder than the same period in 1994. The increase in therms delivered also reflects the warmer summer weather conditions noted above, which increased therm deliveries to electric peak generating stations described below, and a moderate increase in economic activity in WE's service area. ============================================================================== Therms Delivered - Thousands 1995 1994 % Change - ---------------------------- ---------- ---------- -------- Residential 345,140 323,913 6.6 Commercial/Industrial 207,358 199,206 4.1 Interruptible 50,646 47,467 6.7 ---------- ---------- Total Sales 603,144 570,586 5.7 Transported Customer Owned Gas 283,585 240,633 17.8 ---------- ---------- Total Gas Delivered 886,729 811,219 9.3 ============================================================================== The colder fourth quarter of 1995 weather increased sales to Residential and Commercial customers. These customers are more sensitive to weather variations as a result of heating requirements than other customer classes. The average number of Residential and Commercial/Industrial customers increased by 3.3% and 2.7% or from 311,288 and 28,506, respectively, in 1994 to 321,643 and 29,287 in 1995. During 1995, therm deliveries to Interruptible and Transportation customers increased by 6.7% and 17.8%, respectively. WE attributes these increases in part to increased electric generation peaking requirements of its Concord ("Concord") and Paris ("Paris") Generating Stations, especially given the warmer weather during the summer of 1995. All of the gas fired generating units at Concord and Paris were in operation by the end of the second quarter of 1995 while only the generating units at Concord were in operation by the end of the second quarter of 1994. Deliveries to the Concord and Paris peaking power plants are at rates approved by the PSCW. WE transports gas for customers who purchase gas directly from other suppliers. Rates charged for transportation services are designed to recover the same margin as natural gas sold directly by WE. - 43 - 44 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (cont'd) Gas Revenues, Gross Margins and Sales - (cont'd) WE arranges for its own gas supply under contracts with terms of various lengths. Changes in the cost of natural gas purchased at market prices are passed through to customers via WE's purchased gas adjustment clause. 1993 Through 1995: While total Gas Operating Revenues decreased at a compound annual rate of 2.0% or from $331 million in 1993 to $318 million in 1995, the gross margin on Gas Operating Revenues increased at a compound annual rate of 5.1% or from $117 million in 1993 to $129 million in 1995. Total therms delivered increased from 809,348 thousand therms in 1993 to 886,729 thousand therms in 1995, or at a compound annual rate of 4.7%. Despite an annualized $9 million or 3.3% rate increase that became effective September 2, 1993 and the increased therm deliveries, Gas Operating Revenues declined due to a reduction in the cost of gas which is passed through to customers via the purchased gas adjustment clause. Gross margin grew as a result of increased therm sales to Residential and Commercial customers who contribute higher margins to earnings than other customer classes. Total therm deliveries increased in part due to favorable weather conditions and moderate economic growth in WE's service territory from 1993 through 1995. From 1993 through 1995, therm sales to Residential and Commercial/Industrial customers increased at compound annual rates of 3.5% and 1.2% or from 322,444 thousand and 202,549 thousand therms, respectively, in 1993 to 345,140 thousand and 207,358 thousand therms in 1995. The average number of Residential and Commercial/Industrial customers increased at compound annual rates of 3.1% and 2.5%, respectively, during this period. Therm deliveries to Interruptible and to Transportation customers increased at compound annual rates of 21.0% and 6.6% or from 34,608 thousand and 249,747 thousand therms, respectively, in 1993 to 50,646 thousand and 283,585 thousand therms in 1995. These gas deliveries increased in part due to the increased electric generation peaking requirements of Paris and Concord noted above. Therms of Transported Customer Owned Gas accounted for 32.0%, 29.7% and 30.9% of WE's total therms delivered during 1995, 1994 and 1993, respectively. Operating Expenses 1995 Compared to 1994: Excluding Depreciation expense, total operating taxes and the nonrecurring 1994 Revitalization charge, total Operating Expenses decreased 0.9% in 1995, reflecting a reduction of approximately $16 million or 3.1% in Other Operation and Maintenance expenses attributable to payroll- related savings and efficiencies gained through WE's Revitalization program. Such reductions were partially offset by higher costs related to increased generation, the availability of Paris and unscheduled or longer than expected outages at two of WE's most efficient power plants. Fuel expense increased by approximately $18 million or 6.2% while Purchased Power expense declined approximately $1 million or 1.9% in 1995. Fuel expense rose as a result of higher electric sales. Purchased Power expense fell as a result of decreased marginal generating costs at three of WE's fossil plants and the newly installed peaking capacity at Paris. Lower generating costs at the fossil plants were due to decreased per unit fuel costs and the benefits of Revitalization, allowing WE to substitute generation for power purchases. The addition of Paris in 1995 allowed WE to eliminate firm power purchase - 44 - 45 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (cont'd) Operating Expenses - (cont'd) contracts that contained fixed demand charges. The unscheduled or longer than expected outages in 1995 noted above, however, offset most of the decrease in Purchased Power expense as WE purchased nonfirm replacement energy on the spot market. Despite the increase in therm deliveries during 1995 noted above, Cost of Gas Sold decreased by approximately $11 million or 5.4% in 1995 as a result of a decrease in the average cost per therm sold. From 1994 to 1995, total operating taxes increased $41 million or 41.4% due to lower taxable income in 1994 caused by the nonrecurring Revitalization charge. Deferred Income Taxes - Net increased $22 million or 88.7% primarily due to tax matters related to the timing of payments made in connection with WE's Revitalization program. 1993 Through 1995: Since 1993, total Operating Expenses excluding Depreciation expense, total operating taxes and the nonrecurring 1994 Revitalization charge have decreased at a compound annual rate of 2.1% or from $1,088 million in 1993 to $1,042 million in 1995. Other Operation and Maintenance expenses decreased from $555 million in 1993 to approximately $508 million in 1995, a compound annual decrease of 4.4% largely due to the Revitalization related work force reductions and efficiency gains referred to above as well as to lower expenditures made in connection with power plant renovation work as certain major maintenance programs were completed in 1994. These decreases have been partially offset by expenses associated with the implementation of Revitalization and increases in conservation-related expenses associated with improving the efficiency of customers' energy usage. Fuel expense increased at a compound annual rate of 7.4% or from $263 million in 1993 to approximately $304 million in 1995, primarily due to increased electric sales. Purchased Power expense decreased at a compound annual rate of 12.7% or from $55 million in 1993 to approximately $42 million in 1995 due to the decreased marginal generating costs at three of WE's fossil plants noted above and to additional peak generating capacity placed in service at Concord and Paris in 1994 and 1995, respectively. A 6.1% compound annual decrease in the Cost of Gas Sold from $214 million in 1993 to approximately $189 million in 1995 is attributable to a decrease in the average cost per therm sold. Depreciation expense has increased at a compound annual rate of 4.9% from $167 million in 1993 to $184 million in 1995 as a result of higher depreciable plant balances. During this period, total operating income taxes and Deferred Income Taxes-Net have been affected by tax matters related to Revitalization as noted above and by a prior period reclassification between current and deferred income taxes. Other Items Other Interest Charges increased by $4 million between 1995 and 1994 and by approximately $4 million between 1994 and 1993, reflecting increased average short-term debt balances. New Pronouncements: In 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets ("FAS 121"). FAS 121 - 45 - 46 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (cont'd) Other Items - (cont'd) requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company will adopt FAS 121 prospectively in 1996. It is anticipated that adoption will not have a material effect on the Company's net income or financial position. In February 1996, FASB released for comment an exposure draft of a Proposed Statement of Financial Accounting Standards ("FAS"), Accounting for Certain Liabilities Related to Closure or Removal of Long-Lived Assets. The proposed FAS, if issued, would require WE to recognize as a liability the present value of the estimated future total costs associated with closure or removal of certain long-lived assets and to correspondingly capitalize those costs. The capitalized costs would be depreciated to expense over the useful life of the asset. The proposed statement would become effective in 1997. This proposed FAS would apply to decommissioning costs for Point Beach Nuclear Plant ("Point Beach") and would result in WE recording a decommissioning liability and corresponding asset as required by the pronouncement. Currently, nuclear decommissioning costs are accrued as depreciation expense over the expected service lives of the two units at Point Beach based on an external sinking fund method. Any changes in depreciation expense due to differing assumptions between the proposed FAS and those currently required by the PSCW are not expected to be material and would most likely be deferrable and recoverable in rates. For additional information on the costs of decommissioning Point Beach, see Note F - "Nuclear Operations" in the NOTES TO FINANCIAL STATEMENTS. Effects of Inflation: With expectations of low-to-moderate inflation, the Company does not believe the impact of inflation will have a material effect on its future results of operations. Electric Sales and Gas Deliveries Outlook Assuming moderate growth in the economy of its service territory and normal weather, WE presently anticipates total electric kilowatt-hour sales to grow at a compound annual rate of approximately 1.1% over the five-year period ending December 31, 2000. WE forecasts total therm deliveries of natural gas to grow at a compound annual rate of approximately 2.1% over the same five- year period. These forecasts are subject to a number of variables, including among others the economy, weather and the restructuring of the electric and gas utility industries, which may affect the actual growth in sales. These estimates do not reflect the operations of NSP, which will become a part of Primergy after consummation of the Transaction. See "RESULTS OF OPERATIONS - Mergers" above. Rates and Regulatory Matters The table below summarizes the projected annual revenue impact of recent rate changes authorized by regulatory commissions for the electric, natural gas and steam utilities of the Company based on the sales projections utilized by those commissions in setting rates. The PSCW regulates Wisconsin retail electric, steam and natural gas rates, while the FERC regulates wholesale power and electric transmission and gas transportation service rates. The Michigan Public Service Commission ("MPSC") regulates retail electric rates in Michigan. The PSCW has discontinued the practice of conducting annual rate case proceedings, replacing it with a new schedule which calls for future rate cases to be conducted once every two years. - 46 - 47 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (cont'd) Rates and Regulatory Matters - (cont'd) In support of its goal to become the lowest-cost energy provider in the region and in light of the operating cost reductions expected from the reengineering process discussed above, WE did not seek an increase in rates for 1994 or 1995. ============================================================================== Revenue Percent Increase Change in Effective Service (Decrease) Rates Date - ------------------------- ------------ --------- --------- (Thousands) Retail electric, WI $ (33,383) (2.8) 01/01/96 Retail electric, MI (1,128) (3.3) 01/01/96 Retail gas (8,298) (2.6) 01/01/96 Steam heating (790) (5.1) 01/01/96 Fuel electric, WI (16,179)* (1.3) 08/04/94 Fuel electric, WI (8,596)** (0.9) 11/05/93 Retail gas 9,172 3.3 09/02/93 Retail electric, MI 1,366 4.3 07/09/93 Wholesale electric 6,000 10.6 06/09/93 Retail electric, WI 26,655 2.3 02/17/93 Steam heating 505 3.5 02/17/93 ============================================================================== * The 8/4/94 fuel credit was eliminated 1/1/96 by PSCW Order. ** The 11/5/93 fuel credit was eliminated 1/1/94 by PSCW Order. Under the Wisconsin retail electric fuel cost adjustment procedure, retail electric rates may be adjusted, on a prospective basis, if cumulative fuel and purchased power costs, when compared to the costs projected in the retail electric rate proceeding, deviate from a prescribed range and are expected to continue to be above or below that range. WE believes that it has the ability to maintain low fuel costs through efficient management of its power supply system and fuel procurement practices. Therefore, WE has proposed the elimination of the retail electric fuel cost adjustment procedure in its 1997 Test Year filing with the PSCW. On December 15, 1995, the MPSC approved the suspension of the Power Supply Cost Recovery Clause (fuel adjustment procedure) for a five-year period for Michigan retail electric customers. In the case of natural gas costs, differences between the test year estimate and the actual cost of purchased gas are accounted for through a purchased gas adjustment clause. 1996 Test Year: In a letter order dated September 11, 1995, the PSCW directed WE to implement rate decreases for Wisconsin retail electric, gas and steam customers of $33.383 million or 2.75%, $8.298 million or 2.6% and $0.790 million or 5.1%, respectively, on an annualized basis effective January 1, 1996. The decrease is based on a regulatory return on common equity of 11.3%, down from 12.3% authorized since 1993. Also effective January 1, 1996, the MPSC authorized WE to implement a rate decrease for Michigan non-mine retail electric customers of $1.128 million or 3.3% on an annualized basis. 1997 Test Year: On January 16, 1996, WE filed specific financial data with the PSCW related to the 1997 test year showing an $82.2 million revenue - 47 - 48 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (cont'd) Rates and Regulatory Matters - (cont'd) deficiency for its utility operations. The dollar impacts and percentage increases requested for Wisconsin retail electric, gas and steam customers are $77.0 million or 6.2%, $4.3 million or 1.4% and $0.9 million or 6.4%, respectively, on an annualized basis. On March 15, 1996, WE filed testimony and exhibits with the PSCW related to the 1997 test year. The PSCW had determined that it required a special full review of WE's rates for the 1997 test year in connection with consideration of the application for approval of the proposed merger of WEC and NSP. Neither the 1996 nor 1997 Test Year changes reflect the proposed retail electric and gas rate reductions and freezes nor the wholesale rate reductions and freezes related to the proposed merger with NSP. See "RESULTS OF OPERATIONS - Mergers" above for a separate discussion of rate actions related to the proposed Transaction. PSCW Electric Utility Industry Investigation: The PSCW has conducted an investigation into the electric utility industry in Wisconsin, particularly its institutional structure and regulatory regime, in order to evaluate what changes would be beneficial for Wisconsin. The PSCW stated that this investigation may result in profound and fundamental changes to the nature and regulation of the electric utility industry in Wisconsin. In January 1995, the PSCW established an advisory committee, including WE, to examine all aspects of the electric utility industry and to suggest which functions should be performed in a competitive market. The PSCW decided on December 12, 1995 the general direction of utility regulation in Wisconsin. This proposed restructuring of the industry would permit all consumers to choose their electricity provider by the year 2001 and it would establish a competitive generation business. The transmission and distribution functions would remain regulated. In a February 22, 1996 Report to the Wisconsin Legislature, the PSCW identified a 32 step workplan that it would follow for Electric Utility Restructuring in Wisconsin. In the plan, the PSCW indicated that during 1996 it will begin activities on 12 of these steps, some of which would seek changes in applicable administrative rules under its jurisdiction, including affiliated interest standards and quality of service standards. The PSCW expects to present an electric utility restructuring proposal to the Wisconsin State Legislature in 1997. In its February 22, 1996 report, the PSCW stated that the implementation timetable for its plan is subject to change depending on the pace of resolution of the specific restructuring steps and on external events. PSCW Natural Gas Utility Industry Investigation: The PSCW also continued a generic investigation of the natural gas industry in Wisconsin and addressed the extent to which traditional regulation should be replaced with a different approach. In conjunction with this generic investigation, the PSCW staff is reviewing the use of the current purchased gas adjustment ("PGA") mechanism which is designed to pass on to gas customers increases or decreases in the cost of natural gas purchased for resale. A separate docket has been established to review the PGA. WE is participating in these PSCW investigations. In June 1995, WE filed with the PSCW a proposal to replace the current PGA mechanism with a new market-based pricing mechanism. The proposed gas pricing mechanism would link gas commodity prices to market indices and incorporate - 48 - 49 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (cont'd) Rates and Regulatory Matters - (cont'd) all other gas supply costs such as transportation and storage, under a price cap. The price cap would be designed to provide balanced financial incentives and risks for WE based upon performance standards, while ensuring a reliable gas supply for consumers. In July 1995, the PSCW decided to analyze and review this proposal as part of the generic docket established to review the PGA. The matter is pending. FERC Open Access Transmission NOPR: In March 1995, the FERC issued a Notice of Proposed Rulemaking ("NOPR") on Open Access Non-Discriminatory Transmission Services by Public Utilities. The NOPR's goal is to create a more competitive wholesale electric power market. In the proposed rulemaking, FERC would require all electric utilities that own or control transmission facilities to file non-discriminatory open access transmission tariffs available to wholesale sellers and buyers of electric energy, to take service under the tariffs for their own wholesale sales and purchases of electric energy and to provide utilities the opportunity to recover legitimate and verifiable stranded costs on the federal and state levels. WE advocates open access to transmission facilities as a necessary step in the competitive restructuring of the electric utility industry and does not believe that the issuance of a final rule by FERC will have a negative material impact on the Company's financial position or results of operations. WE expects FERC to finalize and issue its open access transmission rules in the second quarter of 1996. Regulatory Accounting: WE operates under electric utility rates which are subject to the approval of the PSCW, MPSC and FERC, and natural gas and steam utility rates that are subject to the approval of the PSCW (see "Rates and Regulatory Matters" above). Such rates are designed to recover the cost of service and provide a reasonable return to investors. Developing competitive pressures in the utility industry may result in future utility rates which are based upon factors other than the traditional original cost of investment. In such a situation, continued deferral of certain regulatory asset and liability amounts on the utility's books may no longer be appropriate as allowed under Statement of Financial Accounting Standards No. 71, Accounting for the Effects of Certain Types of Regulation. At this time, WE is unable to predict whether any adjustments to regulatory assets and liabilities will occur in the future. See Note A - "Summary of Significant Accounting Policies" in the NOTES TO FINANCIAL STATEMENTS. LIQUIDITY AND CAPITAL RESOURCES Investing Activities WE invested $1.035 billion in its businesses during the three years ended December 31, 1995. The investments made during this three-year period include construction expenditures for new or improved facilities totaling $855 million, purchases of nuclear fuel of approximately $70 million, net capitalized conservation expenditures of approximately $54 million and payments to an external trust for the eventual decommissioning of WE's Point Beach Nuclear Plant totaling $32 million. Paris Generating Station: During 1995, WE placed in service four units, or approximately 300 megawatts of capacity, at its Paris Generating Station. This natural gas-fired combustion turbine facility, located near Union Grove, - 49 - 50 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (cont'd) Investing Activities - (cont'd) Wisconsin, is designed to meet peak demand requirements. Capital expenditures of $10 million, $54 million and $28 million were made during 1995, 1994 and 1993, respectively, for construction of this facility. The capital costs of the Paris facility will total approximately $105 million. Concord Generating Station: During 1994, WE placed in service the last two units, or approximately 150 megawatts of capacity, at its Concord Generating Station. This four unit 300 megawatt natural gas-fired combustion turbine facility, located near Watertown, Wisconsin, is designed to meet peak demand requirements. The first two units were completed in 1993. Capital expenditures of $3 million, $6 million and $35 million were made during 1995, 1994 and 1993, respectively, for construction of this facility. The capital costs of the Concord facility will total approximately $107 million. Port Washington Power Plant Renovation: Additionally during 1994, WE completed the $107 million renovation project at its Port Washington Power Plant. The renovation work, which began in September 1991, included the installation of additional emission control equipment. Expenditures totaling $12 million and $36 million were made during 1994 and 1993, respectively. Cash Provided by Operating and Financing Activities During the three years ended December 31, 1995, cash provided by operating activities totaled $1.252 billion. During this period, internal sources of funds, after the payment of dividends to WEC, provided approximately 84% of the Company's capital requirements. Financing activities during the three-year period ended December 31, 1995 included the issuance of approximately $611 million of long-term debt, principally to refinance higher coupon debt and the purchase or redemption of approximately $71 million of preferred stock. No preferred stock was issued during this period. Additionally, during the three-year period ended December 31, 1995, the Company retired a total of $502 million of long-term debt and increased short-term debt by $28 million. Dividends on the Company's common stock were approximately $160 million, $151 million and $75 million during 1995, 1994 and 1993, respectively. In December 1995, WE issued $100 million of unsecured One Hundred Year 6 7/8% Debentures due 2095. Proceeds of the issue were added to WE's general funds and were applied to the repayment of short-term borrowings. In August 1995, WE called for optional redemption $98.35 million aggregate principal amount of fixed rate tax exempt bonds issued by three political jurisdictions on WE's behalf that were secured by issues of WE's First Mortgage Bonds with terms corresponding to the tax exempt bonds called for redemption. During September and October 1995, the three political jurisdictions issued $98.35 million aggregate principal amount of new tax exempt bonds on behalf of WE, collateralized by unsecured variable rate promissory notes issued by WE, maturing between March 1, 2006 and September 1, 2030, with terms corresponding to the respective issues of the refunding tax exempt bonds. The proceeds were used to finance the optional redemptions. The WE First Mortgage Bonds, which collateralized the redeemed tax exempt bonds, have been canceled. - 50 - 51 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (cont'd) Cash Provided by Operating and Financing Activities - (cont'd) During 1993, WE issued five new series of First Mortgage Bonds aggregating $350 million in principal amount, the proceeds of which were used to redeem $284.3 million principal amount of four outstanding series of First Mortgage Bonds and 626,500 shares of WE's 6.75% Series Preferred Stock. These refunding transactions are expected to result in significant savings over the lives of the new debt issues. Depending on market conditions and other factors, additional debt refundings may occur. The Merger Agreement, entered into by WEC and NSP, provides for restrictions on certain transactions by both the Company and NSP, including the issuance of debt and equity securities. While WE does not currently plan to enter into transactions that would not comply with these restrictions, circumstances may arise to make such transactions necessary. Under such circumstances, NSP would need to agree to consent to any such change in the Merger Agreement. Capital Structure The Company's capitalization at December 31 was as follows: ============================================================================== 1995 1994 ------ ------ Common Equity 52.1% 50.4% Preferred Stock 1.0 0.9 Long-Term Debt (including current maturities) 42.3 41.0 Short-Term Debt 4.6 7.7 ------ ------ 100.0% 100.0% ============================================================================== Compared to the utility industry in general, WE has maintained a relatively high ratio of common equity to total capitalization and low debt and preferred stock ratios. This conservative capital structure, along with strong bond ratings and internal cash generation has provided, and should continue to provide, the Company with access to the capital markets when necessary to finance the anticipated growth in the Company's utility business. WE currently has senior secured debt ratings of AA+ by Standard & Poor's Corporation ("S&P"), Duff & Phelps Inc. and Fitch Investors Service Inc. ("Fitch") and Aa2 by Moody's Investors Service ("Moody's"). Following announcement of the Transaction, on May 1, 1995 S&P reported that it was placing on CreditWatch with negative implications its AA+ senior secured debt and AA+ preferred stock ratings of WE. S&P stated that if the Transaction is completed, the likely credit rating for the senior secured debt of WE is expected to be AA or AA-. As part of its rating process, S&P intends to review the financial and operating plans of the merged utilities. Also on May 1, 1995, citing WE's continued operation as a separate utility subsidiary after the Transaction, its strength within its rating category and its strong capital structure, Moody's confirmed its Aa2 first mortgage bond rating of WE. On December 5, 1995, Fitch changed WE's credit trend from "stable" to "declining" based upon its analysis of cash flow trends versus its standards for an AA+ rating. At year-end 1995, WE had approximately $109 million of unused lines of bank credit and $20 million of cash and cash equivalents. - 51 - 52 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (cont'd) Capital Requirements 1996-2000 The estimated capital requirements for WE for the years 1996-2000 are outlined in the table below. Compared to the Company's Annual Report on Form 10-K for the year ended December 31, 1994, the table below no longer reflects conservation expenditures. Effective January 1, 1995, WE began expensing conservation expenditures currently. Through 1995, capitalized conservation investments were amortized to Operating Expense over a ten-year amortization period. Effective January 1, 1996, WE began amortizing the remaining capitalized conservation investment to operating expense over a five-year amortization period. The capital requirements table below does not reflect the impact of the proposed Transaction with NSP. See "RESULTS OF OPERATIONS - Mergers" above. ============================================================================== 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- (Millions of Dollars) Construction $228 $189 $181 $183 $215 Bond Maturities and Refinancings 30 166 61 93 2 Changes in Fuel Inventories 3 13 4 (5) 11 Decommissioning Trust Payments 31 33 35 38 40 ---- ---- ---- ---- ---- Total $292 $401 $281 $309 $268 ============================================================================== LS Power Generation Facility: In 1993, a competitive bidding process conducted by the PSCW resulted in the selection of a proposal submitted by an unaffiliated independent power producer, LSP-Whitewater L.P. ("LS Power"), to construct a generation facility to meet a portion of WE's anticipated increase in system supply needs. WE subsequently signed a long-term agreement to purchase electricity from the proposed facility. The agreement is contingent upon the facility being completed and placed into operation, which at this time is planned for mid-1997. PSCW Advance Plan 7: In January 1994, a coordinated state-wide plan for meeting future electricity needs of Wisconsin customers was filed with the PSCW in the Advance Plan 7 Docket. In the Advance Plan process, WE, in conjunction with the other regulated electric utilities located in Wisconsin, files long-term forecasts of resource requirements, such as the need for generation and transmission facilities, along with plans to meet those requirements, including the use of energy management and conservation. The PSCW approved WE's Advance Plan 7 filing in December 1995. In order to reliably meet its forecasted growth in demand, WE employs a least- cost integrated planning process which includes renovation of existing power plants, promotion of cost-effective conservation and load management options, development of renewable energy sources, purchases of power and construction of new company-owned generation facilities. - 52 - 53 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (cont'd) Capital Requirements 1996-2000 - (cont'd) Investments in demand-side management programs have reduced and delayed the need to add new generating capacity but have not eliminated the need entirely. Purchases of power from other utilities and transmission system upgrades will also combine to help delay the need to install some new generating capacity in the future. Finally, WE's Advance Plan 7 filing indicated a need for additional peaking capacity after the turn of the century, along with an anticipated need for additional intermediate-load capacity during the 2000 to 2010 time period. WE does not anticipate needing additional base load generation until after 2010. The addition of new generating units requires approval of the PSCW following a two-stage bidding process, which could influence whether WE would construct such facilities or purchase the required power. The United States Environmental Protection Agency and the Wisconsin Department of Natural Resources ("DNR") also must approve new generating units. All generating facilities proposed by WE will meet or exceed the applicable federal and state environmental requirements. Kimberly Cogeneration Facility: Prior to the 1993 selection of the LS Power generation facility by the PSCW, WE had proposed to construct its own 220 megawatt cogeneration facility in Kimberly, Wisconsin, which was intended to provide process steam to Repap Wisconsin, Inc. ("Repap") starting in mid-1994. In the PSCW Order, the WE project was selected as the second place conditional project if the LS Power project did not proceed. WE had made expenditures for the Kimberly facility of approximately $65.8 million associated with the procurement of three combustion turbines, one steam turbine and three heat recovery boilers in order to achieve the in-service dates as agreed to in a steam service contract with Repap. The Company is currently reviewing its options regarding its Kimberly Cogeneration Facility equipment (the "Equipment"). The Equipment is of a technology of natural gas-fired combined cycle generation equipment that is marketed worldwide. The Company is investigating opportunities to sell the Equipment or to use it in another power project and is currently evaluating potential sales opportunities and/or power projects involving the Equipment. At this time, the Company does not believe that disposition of the Equipment will have a material adverse effect on its financial condition. However, there is a possibility that WE may need to recognize an impairment of the Equipment in the future should the projects noted above not occur and should no other viable sales opportunities and/or power projects involving the Equipment be identified. Point Beach Unit 2 Steam Generators and Dry Cask Storage Facility: WE operates two 500 megawatt generating units at Point Beach. During 1995, Point Beach accounted for 26.9% of WE's net electric generation. The current operating licenses for the two units at Point Beach expire in 2010 and 2013 for Units 1 and 2, respectively. In October 1992, WE filed an application with the PSCW for replacement of the Point Beach Unit 2 steam generators. As a result of degradation of some of the tubes within the Unit 2 steam generators, the unit has been operating at approximately 90% of its capacity since its return to service after its annual - 53 - 54 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (cont'd) Capital Requirements 1996-2000 - (cont'd) refueling outage in the fall of 1995. In February 1995, the PSCW deferred a decision on the replacement of the steam generators in part to gather more information during the fall 1995 refueling outage. An evaluation of information gathered during this outage was included in a Supplemental Environmental Impact Statement ("SEIS") prepared by the PSCW that shows the replacement of the Unit 2 steam generators to be the most cost-effective option when compared to all credible alternatives. Considering the rate of tube degradation in the steam generators, there is a likelihood that WE would not be able to restart Unit 2 following the fall 1996 outage without replacement of the steam generators. In its SEIS, the PSCW estimates that failure to replace the Unit 2 steam generators would cost WE customers up to $494 million over the next 25 years to replace lost generation when compared to the current estimated cost of replacement of $96 million. In a related matter, WE received a Certificate of Authority from the PSCW in February 1995 to construct and operate an Independent Spent Fuel Storage Installation ("ISFSI"). The ISFSI will provide interim dry cask storage of spent fuel from Point Beach using a system that was certified by the NRC after a four-year technical review. Construction was completed in June 1995 with associated capital costs of $8.5 million. WE loaded the first cask with spent fuel in December 1995. On December 22, 1995, the Dane County Circuit Court ("Court") issued a decision vacating and remanding the February 1995 order of the PSCW on procedural grounds, stating that the Environmental Impact Statement prepared by the PSCW for this project was inadequate in two respects. Transfer of additional spent fuel to the ISFSI has been temporarily suspended by WE pending the PSCW's further action. The PSCW has issued two SEIS's which address steam generator issues and the inadequacies found by the Court with the original Environmental Impact Statement for the ISFSI project. The PSCW held related hearings on these matters in February and March 1996. WE anticipates that the PSCW will issue a combined final order on replacement of the Unit 2 steam generators and the remanded dry cask storage matters in May 1996. Failure by the PSCW to approve the steam generator replacement and resolve the remanded issues could jeopardize the continued operation of Point Beach and materially affect WE's financial position and results of operations. WE would likely seek regulatory relief to minimize the replacement power costs resulting from lost generating capacity. The ISFSI was necessary because the spent fuel pool inside the plant is nearly full. The dry storage facility will be used until the United States Department of Energy ("DOE") takes ownership of and removes the spent fuel. While WE as well as other operators of nuclear power facilities in the United States have a contract mandated by federal law that calls for the DOE to begin accepting fuel in 1998, the DOE is not in a position to meet its commitment. If this commitment is not met, WE will need to construct additional casks and will seek PSCW approval to do so. Milwaukee County Power Plant: In December 1995, WE signed an agreement with Milwaukee County to purchase the Milwaukee County Power Plant located in Wauwatosa, Wisconsin. The 11 megawatt power plant provides steam, chilled water and electricity for the Milwaukee Regional Medical Center and several other large customers located on the Milwaukee County grounds. WE had - 54 - 55 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (cont'd) Capital Requirements 1996-2000 - (cont'd) previously obtained approval from the PSCW for the purchase of the electric generation and distribution facilities and acquired them in December 1995 with a capital expenditure of $7 million. WE will integrate the electric facilities into its current electric utility operations. In February 1996, WE filed an application with the PSCW for a Certificate of Authority to acquire and place in operation the steam production and distribution facilities. Capital costs for the steam facilities will be $20 million. WE anticipates PSCW approval of the acquisition by mid-1996 and will integrate the steam facilities into its current steam utility operations. In conjunction with the steam facility acquisition anticipated in mid-1996, WEC will acquire and operate the chilled water facility as a non-regulated business. Purchase of the steam and chilled water portions of the plant is contingent upon PSCW approval to acquire the steam facilities and upon the five major customers signing ten-year steam and chilled water service agreements. Capital Resources During the five-year period ending December 31, 2000, WE expects internal sources of funds from operations, after dividends to WEC, to provide about 87% of the utility capital requirements. The remaining utility cash requirements are expected to be met through short-term borrowings and the issuance of intermediate or long-term debt. The specific form, amount and timing of debt securities which may be issued have not yet been determined and will depend, to a large extent, on market conditions and other factors. The anticipated capital resources during this period do not reflect the impact of the proposed merger with NSP. See "RESULTS OF OPERATIONS - Mergers" above. Environmental Issues Clean Air Act: The 1990 Amendments to the Clean Air Act mandate significant nation-wide reductions in SO2 and NOx emissions to address acid rain and ground level ozone control requirements. In 1994, WE completed the installation of continuous emission monitors at all of its facilities and installed low NOx burners on one boiler at its Oak Creek Power Plant and two boilers at its Valley Power Plant. These actions, along with the burning of low sulfur coal and the installation of low NOx burners on other boilers at Oak Creek and Valley Power Plants in early 1995, meet the requirements that became effective January 1, 1995. To date, approximately $45.3 million has been spent on compliance with the 1990 amendments to the Clean Air Act. WE elected to voluntarily bring the Valley and Port Washington Power Plants under jurisdiction of the NOx and SO2 requirements of the Clean Air Act amendments of 1990, five years earlier than mandated. This was possible because these units meet the more stringent phase II emissions standards today. WE projects a surplus of SO2 emission allowances and is seeking additional allowances available as a result of energy conservation programs. As an integral component of its least-cost plan, WE is active in SO2 allowance trading. Revenue from the sale of allowances is being used to offset future potential rate increases. - 55 - 56 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (cont'd) Environmental Issues - (cont'd) Additional fuel switching and the installation of NOx controls at various power plants will be required to meet the second phase of reduction requirements that become effective January 1, 2000. These costs, along with additional operating expenses, are not expected to exceed $40.3 million based on today's costs. Manufactured Gas Plant Sites: WE's natural gas business unit is investigating the remediation of a number of former manufactured gas plant ("MGP") sites. Operations at these MGP sites ceased over 40 years ago. Limited remediation activities occurred at a number of these sites during the 1980's, with removal of waste materials known to be present at that time. In 1995, WE presented a plan to investigate and further remediate sites to the DNR. During 1995, WE conducted site investigations at four sites and partial remediation activities were conducted at one site. Approximately $1.6 million has been spent through December 31, 1995 for such activities. Remediation costs to be incurred through the year 2000 have been estimated to be $12 million, but the total costs are uncertain pending the results of further site specific investigations and the selection of site specific remedial actions. In its September 11, 1995 letter order, the PSCW allowed WE to defer MGP site remediation costs with final rate treatment of such costs to be determined in future rate cases. As of December 31, 1995, WE has recorded an accrued liability of $1.6 million for MGP site remediation and a related deferred regulatory asset of $3.2 million. WE expects to accrue additional MGP site remediation liabilities during 1996 as site specific investigations are completed and site specific remedial actions are identified. WE will seek rate recovery for these costs and does not anticipate that there will be a material adverse effect on its net income or financial position. Ash Landfill Sites: WE aggressively seeks environmentally acceptable, beneficial uses of its combustion byproducts. However, ash materials have been, and to some degree, continue to be disposed in company-owned, licensed landfills. Some early designed and constructed landfills may allow the release of low levels of constituents resulting in the need for various levels of remediation. Where WE has become aware of these conditions, efforts have been expended to define the nature and extent of any release, and work has been performed to address these conditions. These costs are included in the environmental operating and maintenance costs of WE. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The "Consolidated Quarterly Financial Data" in SELECTED FINANCIAL DATA is incorporated herein by reference. - 56 - 57 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - (cont'd) WISCONSIN ELECTRIC POWER COMPANY INCOME STATEMENT Year Ended December 31
1995 1994 1993 ---------- ---------- ---------- (Thousands of Dollars) Operating Revenues Electric $1,437,480 $1,403,562 $1,347,844 Gas 318,262 324,349 331,301 Steam 14,742 14,281 14,090 ---------- ---------- ---------- Total Operating Revenues 1,770,484 1,742,192 1,693,235 Operating Expenses Fuel (Note F) 303,553 285,862 263,385 Purchased power 41,834 42,623 54,880 Cost of gas sold 188,764 199,511 214,132 Other operation expenses 395,242 399,011 399,135 Maintenance 112,400 124,602 156,085 Revitalization (Note K) - 73,900 - Depreciation (Note C) 183,876 177,614 167,066 Taxes other than income taxes 74,765 76,035 74,653 Federal income tax (Note D) 119,939 104,725 74,463 State income tax (Note D) 28,405 24,756 15,530 Deferred income taxes - net (Note D) (2,833) (25,095) 13,096 Investment tax credit - net (Note D) (4,482) (4,625) (4,626) ---------- ---------- ---------- Total Operating Expenses 1,441,463 1,478,919 1,427,799 Operating Income 329,021 263,273 265,436 Other Income and Deductions Interest income 12,850 11,715 13,753 Allowance for other funds used during construction (Note E) 3,650 4,985 8,457 Miscellaneous - net 5,677 10,727 9,568 Federal income tax (Note D) (535) (1,504) (1,832) State income tax (Note D) (370) (589) (832) ---------- ---------- ---------- Total Other Income and Deductions 21,272 25,334 29,114 Income Before Interest Charges 350,293 288,607 294,550 Interest Charges Long-term debt 99,727 102,059 103,262 Other interest 11,960 7,610 3,945 Allowance for borrowed funds used during construction (Note E) (2,062) (2,816) (4,737) ---------- ---------- ---------- Total Interest Charges 109,625 106,853 102,470 ---------- ---------- ---------- Net Income 240,668 181,754 192,080 Preferred Stock Dividend Requirement 1,203 1,351 4,377 ---------- ---------- ---------- Earnings Available for Common Stockholder $ 239,465 $ 180,403 $ 187,703 ========== ========== ========== Note: Earnings and dividends per share of common stock are not applicable because all of the company's common stock is owned by Wisconsin Energy Corporation. The notes are an integral part of the financial statements. - 57 -
58 WISCONSIN ELECTRIC POWER COMPANY STATEMENT OF CASH FLOWS Year Ended December 31
1995 1994 1993 -------- -------- -------- (Thousands of Dollars) Operating Activities Net income $240,668 $181,754 $192,080 Reconciliation to cash Depreciation 183,876 177,614 167,066 Revitalization - net (5,404) 43,860 - Nuclear fuel expense - amortization 22,324 21,437 21,366 Conservation expense - amortization 21,870 20,910 15,254 Debt premium, discount & expense - amortization 12,652 14,368 13,617 Deferred income taxes - net (2,833) (25,095) 13,096 Investment tax credit - net (4,482) (4,625) (4,626) Allowance for other funds used during construction (3,650) (4,985) (8,457) Change in - Accounts receivable (32,639) 7,684 (17,952) Inventories 5,233 11,455 (11,186) Accounts payable 16,650 (20,683) 7,864 Other current assets (4,068) (9,878) 1,039 Other current liabilities 17,097 9,980 19,273 Other (29,204) (13,123) (5,606) -------- -------- -------- Cash Provided by Operating Activities 438,090 410,673 402,828 Investing Activities Construction expenditures (248,867) (271,448) (334,932) Allowance for borrowed funds used during construction (2,062) (2,816) (4,737) Nuclear fuel (23,454) (26,351) (20,016) Nuclear decommissioning trust (10,861) (10,138) (11,371) Conservation investments - net 2,130 (20,823) (35,252) Other (4,511) (10,205) 612 -------- -------- -------- Cash Used in Investing Activities (287,625) (341,781) (405,696) Financing Activities Sale of long-term debt 217,453 32,474 361,049 Retirement of long-term debt (134,172) (35,069) (332,862) Change in short-term debt (91,811) 49,294 71,004 Stockholder capital contribution 30,000 30,000 10,000 Retirement of preferred stock - (5,250) (65,504) Dividends on stock - common (159,576) (150,951) (74,771) - preferred (1,203) (1,381) (4,729) Other - - 135 -------- -------- -------- Cash Used in Financing Activities (139,309) (80,883) (35,678) -------- -------- -------- Change in Cash and Cash Equivalents $ 11,156 $(11,991) $(38,546) ======== ======== ======== Supplemental information disclosures Cash Paid For Interest (net of amount capitalized) $ 99,352 $ 93,383 $ 85,299 Income taxes 149,224 148,552 101,216 The notes are an integral part of the financial statements. - 58 -
59 WISCONSIN ELECTRIC POWER COMPANY BALANCE SHEET December 31 ASSETS
1995 1994 ---------- ---------- (Thousands of Dollars) Utility Plant Electric $4,531,404 $4,304,925 Gas 489,739 467,732 Steam 40,078 40,103 ---------- ---------- 5,061,221 4,812,760 Accumulated provision for depreciation (2,288,080) (2,134,469) ---------- ---------- 2,773,141 2,678,291 Construction work in progress 78,153 205,835 Nuclear fuel - net (Note F) 59,260 56,606 ---------- ---------- Net Utility Plant 2,910,554 2,940,732 Other Property and Investments Nuclear decommissioning trust fund (Note F) 275,125 226,805 Conservation investments 115,523 138,489 Other 36,979 32,974 ---------- ---------- Total Other Property and Investments 427,627 398,268 Current Assets Cash and cash equivalents 19,550 8,394 Accounts receivable, net of allowance for doubtful accounts - $13,400 and $12,078 144,476 111,837 Accrued utility revenues 140,201 128,107 Fossil fuel (at average cost) 83,366 88,587 Materials and supplies (at average cost) 70,347 70,359 Prepayments 55,147 61,160 Other assets 4,637 6,650 ---------- ---------- Total Current Assets 517,724 475,094 Deferred Charges and Other Assets Accumulated deferred income taxes (Note D) 136,581 137,931 Deferred regulatory assets (Note A) 193,757 197,103 Other 132,681 53,065 ---------- ---------- Total Deferred Charges and Other Assets 463,019 388,099 ---------- ---------- Total Assets $4,318,924 $4,202,193 ========== ========== The notes are an integral part of the financial statements. - 59 -
60 WISCONSIN ELECTRIC POWER COMPANY BALANCE SHEET December 31 CAPITALIZATION and LIABILITIES
1995 1994 ---------- ---------- (Thousands of Dollars) Capitalization (See Capitalization Statement) Common stock equity $1,696,565 $1,586,676 Preferred stock 30,451 30,451 Long-term debt (Note H) 1,325,169 1,257,776 ---------- ---------- Total Capitalization 3,052,185 2,874,903 Current Liabilities Long-term debt due currently (Note H) 51,419 32,136 Notes payable (Note I) 150,694 242,505 Accounts payable 107,115 90,465 Payroll and vacation accrued 26,699 26,507 Taxes accrued - income and other 18,378 20,589 Interest accrued 21,617 23,254 Other 48,762 28,009 ---------- ---------- Total Current Liabilities 424,684 463,465 Deferred Credits and Other Liabilities Accumulated deferred income taxes (Note D) 479,828 472,746 Accumulated deferred investment tax credits 89,672 94,154 Deferred regulatory liabilities (Note A) 167,483 171,599 Other 105,072 125,326 ---------- ---------- Total Deferred Credits and Other Liabilities 842,055 863,825 Commitments and Contingencies (Note N) ---------- ---------- Total Capitalization and Liabilities $4,318,924 $4,202,193 ========== ========== The notes are an integral part of the financial statements. - 60 -
61 WISCONSIN ELECTRIC POWER COMPANY CAPITALIZATION STATEMENT December 31
1995 1994 ---------- ---------- (Thousands of Dollars) Common Stock Equity (See Common Stock Equity Statement) Common stock - $10 par value; authorized 65,000,000 shares; outstanding - 33,289,327 shares $ 332,893 $ 332,893 Other paid in capital 280,689 250,689 Retained earnings 1,082,983 1,003,094 ---------- ---------- Total Common Stock Equity 1,696,565 1,586,676 Preferred Stock - Cumulative Six Per Cent. Preferred Stock - $100 par value; authorized 45,000 shares; outstanding - 44,508 shares 4,451 4,451 Serial preferred stock - $100 par value; authorized 2,286,500 and 2,360,000 shares; outstanding - 3.60% Series - 260,000 shares 26,000 26,000 ---------- ---------- Total Preferred Stock (Note G) 30,451 30,451 Long-Term Debt First mortgage bonds Series Due ------ --- 5-5/8% 1995 - 10,000 4-1/2% 1996 30,000 30,000 5-7/8% 1997 130,000 130,000 6-5/8% 1997 10,000 10,000 5-1/8% 1998 60,000 60,000 6.10 % 1999-2008 - 25,000 6.25 % 1999-2008 - 1,000 6-1/2% 1999 40,000 40,000 6-5/8% 1999 51,000 51,000 6.45 % 2004 - 12,000 7-1/4% 2004 140,000 140,000 6.45 % 2006 - 4,000 6.50 % 2007-2009 - 10,000 9-3/4% 2015 - 46,350 7-1/8% 2016 100,000 100,000 6.85 % 2021 9,000 9,000 7-3/4% 2023 100,000 100,000 7.05 % 2024 60,000 60,000 9-1/8% 2024 3,443 3,443 8-3/8% 2026 100,000 100,000 7.70 % 2027 200,000 200,000 ---------- ---------- 1,033,443 1,141,793 Debentures (unsecured) 6-1/8% 1997 25,000 25,000 10-1/4% 1998 - 2,290 9.47% 2006 7,000 7,000 8-1/4% 2022 25,000 25,000 6-7/8% 2095 100,000 - Notes (unsecured) Variable rate due 2006 1,000 - Variable rate due 2015 17,350 - Variable rate due 2016 67,000 67,000 Variable rate due 2030 80,000 - Obligations under capital lease (Note F) 43,924 43,696 Unamortized discount - net (23,129) (21,867) Long-term debt due currently (51,419) (32,136) ---------- ---------- Total Long-Term Debt (Note H) 1,325,169 1,257,776 ---------- ---------- Total Capitalization $3,052,185 $2,874,903 ========== ========== The notes are an integral part of the financial statements. - 61 -
62 WISCONSIN ELECTRIC POWER COMPANY COMMON STOCK EQUITY STATEMENT
- -------------------------------------------------- ---------------------------------------------------------- Common Stock Common Stock Other Paid Retained Shares $10 Par Value In Capital Earnings Total - -------------------------------------------------- ---------------------------------------------------------- (Thousands of Dollars) Balance - December 31, 1992 33,289,327 $332,893 $213,409 $ 861,092 $1,407,394 Net income 192,080 192,080 Cash dividends Common stock (74,771) (74,771) Preferred stock (4,729) (4,729) Purchase of preferred stock (Note G) (2,854) (2,854) Stockholder capital contribution 10,000 10,000 Other 134 245 379 - -------------------------------------------------- ---------------------------------------------------------- Balance - December 31, 1993 33,289,327 332,893 220,689 973,917 1,527,499 Net income 181,754 181,754 Cash dividends Common stock (150,951) (150,951) Preferred stock (1,381) (1,381) Stockholder capital contribution 30,000 30,000 Other (245) (245) - -------------------------------------------------- ---------------------------------------------------------- Balance - December 31, 1994 33,289,327 332,893 250,689 1,003,094 1,586,676 Net income 240,668 240,668 Cash dividends Common stock (159,576) (159,576) Preferred stock (1,203) (1,203) Stockholder capital contribution 30,000 30,000 - -------------------------------------------------- ---------------------------------------------------------- Balance - December 31, 1995 33,289,327 $332,893 $280,689 $1,082,983 $1,696,565 ================================================== ========================================================== The notes are an integral part of the financial statements. - 62 -
63 WISCONSIN ELECTRIC POWER COMPANY NOTES TO FINANCIAL STATEMENTS A - Summary of Significant Accounting Policies General: The accounting records of Wisconsin Electric Power Company ("WE" or the "Company") are kept as prescribed by the Federal Energy Regulatory Commission ("FERC"), modified for requirements of the Public Service Commission of Wisconsin ("PSCW"). The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenues: Utility revenues are recognized on the accrual basis and include estimated amounts for service rendered but not billed. Fuel: The cost of fuel is expensed in the period consumed. Property: Property is recorded at cost. Additions to and significant replacements of utility property are charged to utility plant at cost; minor items are charged to maintenance expense. Cost includes material, labor and allowance for funds used during construction (see Note E). The cost of depreciable utility property, together with removal cost less salvage, is charged to accumulated provision for depreciation when property is retired. Deferred Regulatory Assets and Liabilities: Pursuant to Statement of Financial Accounting Standards No. 71, Accounting for the Effects of Certain Types of Regulation, WE capitalizes, as deferred regulatory assets, incurred costs which are expected to be recovered in future utility rates. WE also records, as deferred regulatory liabilities, the current recovery in utility rates of costs which are expected to be paid in the future. A significant portion of WE's deferred regulatory assets and liabilities relate to the amounts recorded due to the adoption of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes ("FAS 109"). (See Note D.) Statement of Cash Flows: Cash and cash equivalents include marketable debt securities acquired three months or less from maturity. Conservation Investments: WE directs a variety of demand-side management programs to help foster energy conservation by its customers. As authorized by the PSCW, WE capitalized certain conservation program costs prior to 1995. Utility rates approved by the PSCW provide for a current return on these conservation investments. Through 1995, conservation investments were charged to operating expense over a ten-year amortization period. Beginning in 1996, the capitalized conservation balance will be charged to operating expense on a straight line basis over a five-year amortization period. New Pronouncements: In 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets ("FAS 121"). FAS 121 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances - 63 - 64 NOTES TO FINANCIAL STATEMENTS - (cont'd) A - Summary of Significant Accounting Policies - (cont'd) indicate that the carrying amount of an asset may not be recoverable. The Company will adopt FAS 121 prospectively in 1996. It is anticipated that adoption will not have a material effect on net income or financial position. B - Mergers Wisconsin Natural Gas Company: Effective January 1, 1996, Wisconsin Energy Corporation ("WEC"), WE's parent company, merged its natural gas utility subsidiary, Wisconsin Natural Gas Company ("WN") into WE. The accounting treatment for this merger was similar to that which would result from a pooling of interests. The Company's prior years' financial information has been restated to include WN at historical values. Where applicable, references to WE include WN prior to their merger. Wisconsin Southern Gas Company, Inc.: Effective January 1, 1994, WEC acquired all of the outstanding common stock of Wisconsin Southern Gas Company, Inc. ("WSG") through a statutory merger of WSG into WN in which all of WSG's common stock was converted into common stock of WEC. WSG was a gas utility engaged in the purchase, distribution, transportation and sale of natural gas primarily in a section of southeastern Wisconsin which was contiguous to WN's service territory. WSG was merged into WN using the pooling of interests method of accounting. Accordingly, prior years' financial and statistical information was restated to include WSG at historical values. Northern States Power Company: On April 28, 1995, WEC and Northern States Power Company, a Minnesota corporation ("NSP"), entered into an Agreement and Plan of Merger, which was amended and restated as of July 26, 1995 ("Merger Agreement"). The Merger Agreement provides for a strategic business combination involving WEC and NSP in a "merger-of-equals" transaction ("Transaction"). As a result, WEC will become a registered public utility holding company under the Public Utility Holding Company Act of 1935, as amended, and will change its name to Primergy Corporation ("Primergy"). Primergy will be the parent company of WE (which will be renamed Wisconsin Energy Company), of NSP (which, for regulatory reasons, will reincorporate in Wisconsin ("New NSP")), and of the other subsidiaries of WEC and NSP. The Transaction is intended to be tax-free for income tax purposes and to be accounted for as a pooling of interests. On September 13, 1995, stockholders of WEC and NSP voted to approve the Transaction. The Merger Agreement is subject to various conditions, including the approval of various regulatory agencies. Subject to obtaining all requisite approvals, WEC and NSP anticipate completing the Transaction by January 1, 1997. In connection with the Transaction, Northern States Power Company, a Wisconsin corporation ("NSP-WI"), currently a subsidiary of NSP, will be merged into Wisconsin Energy Company. Prior to the merger of NSP-WI into Wisconsin Energy Company, New NSP will acquire from NSP-WI certain gas utility assets in LaCrosse and Hudson, Wisconsin with a net historical cost at December 31, 1995 of approximately $19.3 million. The following summarized Wisconsin Energy Company unaudited pro forma financial information combines historical balance sheet and income statement information of WE and NSP-WI to give effect to the Transaction, including the transfer of the gas assets from NSP-WI to New NSP, and should be read in - 64 - 65 NOTES TO FINANCIAL STATEMENTS - (cont'd) B - Mergers - (cont'd) conjunction with the historical financial statements and related notes thereto of WE and NSP-WI. The unaudited pro forma income statement information does not reflect adjustments for 1995 revenues of $28.9 million and related expenses associated with the transfer of the gas assets from NSP-WI to New NSP. A $136.6 million pro forma adjustment has been made to conform the presentation of noncurrent deferred income taxes in the summarized unaudited pro forma combined balance sheet information as a net liability. The allocation between WEC and NSP and their customers of the estimated cost savings resulting from the Transaction, net of costs incurred to achieve such savings, will be subject to regulatory review and approval. None of the estimated cost savings, the costs to achieve such savings, nor transaction costs are reflected in the unaudited pro forma financial information. All other financial statement presentation and accounting policy differences are immaterial and have not been adjusted in the unaudited pro forma financial information. The unaudited pro forma balance sheet information gives effect to the Transaction as if it had occurred at December 31, 1995. The unaudited pro forma income statement information gives effect to the Transaction as if it had occurred at January 1, 1995. The following information is not necessarily indicative of the financial position or operating results that would have occurred had the Transaction been consummated on the date or at the beginning of the period for which the Transaction is being given effect nor is it necessarily indicative of future operating results or financial position. ============================================================================== Wisconsin Energy Company: * Unaudited WE NSP-WI Pro Forma (As Reported) (As Reported) Combined** ------------- ------------- ------------- (Millions of Dollars) As of December 31, 1995: Utility plant-net $ 2,911 $ 652 $ 3,544 Current assets 518 86 620 Other assets 890 53 807 ----------- ----------- ----------- Total Assets $ 4,319 $ 791 $ 4,971 =========== =========== =========== Common stockholder's equity $ 1,697 $ 318 $ 2,015 Preferred stock and premium 30 - 30 Long-term debt 1,325 214 1,539 ----------- ----------- ----------- Total Capitalization 3,052 532 3,584 Current liabilities 425 102 527 Other liabilities 842 157 860 ----------- ----------- ----------- Total Equity & Liabilities $ 4,319 $ 791 $ 4,971 =========== =========== =========== ============================================================================== - 65 - 66 NOTES TO FINANCIAL STATEMENTS - (cont'd) B - Mergers - (cont'd) ============================================================================== Wisconsin Energy Company: * Unaudited (cont'd) WE NSP-WI Pro Forma (As Reported) (As Reported) Combined** ------------- ------------- ------------- (Millions of Dollars) For the Year Ended December 31, 1995: Utility Operating Revenues $ 1,770 $ 459 $ 2,229 Utility Operating Income $ 329 $ 56 $ 385 Net Income, after Preferred Dividend Requirements $ 239 $ 39 $ 278 ============================================================================== * In connection with the Merger Agreement, WE will be renamed Wisconsin Energy Company. ** Includes a pro forma adjustment for the transfer of selected gas assets from NSP-WI to New NSP and a $136.6 million pro forma adjustment to conform the presentation of noncurrent deferred taxes as a net liability. Note: Earnings per share of common stock are not applicable because all of the Wisconsin Energy Company common stock will be owned by Primergy. C - Depreciation Depreciation expense is accrued at straight line rates over the estimated useful lives of the assets. These rates are certified by the PSCW and include estimates for salvage and removal costs. Depreciation as a percent of average depreciable utility plant was 3.8% in 1995 and 3.9% in 1994 and 1993. Nuclear plant decommissioning is accrued as depreciation expense (see Note F). D - Income Taxes Comprehensive interperiod income tax allocation is used for federal and state temporary differences. The federal investment tax credit is accounted for on the deferred basis and is reflected in income ratably over the life of the related property. Following is a summary of income tax expense and a reconciliation of total income tax expense with the tax expected at the federal statutory rate: ============================================================================== 1995 1994 1993 -------- -------- -------- (Thousands of Dollars) Current tax expense $149,249 $131,574 $ 92,657 Investment tax credit-net (4,482) (4,625) (4,626) Deferred tax expense (2,833) (25,095) 13,096 -------- -------- -------- Total Tax Expense $141,934 $101,854 $101,127 ======== ======== ======== ============================================================================== - 66 - 67 NOTES TO FINANCIAL STATEMENTS - (cont'd) D - Income Taxes - (cont'd) ============================================================================== 1995 1994 1993 -------- -------- -------- (Thousands of Dollars) Income Before Income Taxes and Preferred Dividend $382,602 $283,608 $293,207 ======== ======== ======== Expected tax at federal statutory rate $133,911 $ 99,263 $102,622 State income tax net of federal tax reduction 18,943 14,087 12,078 Investment tax credit restored (4,482) (4,625) (5,241) Other (no item over 5% of expected tax) (6,438) (6,871) (8,332) -------- -------- -------- Total Tax Expense $141,934 $101,854 $101,127 ======== ======== ======== ============================================================================== FAS 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. Following is a summary of deferred income taxes under FAS 109: ============================================================================== December 31 1995 1994 -------- -------- (Thousands of Dollars) Deferred Income Tax Assets Decommissioning trust $ 43,759 $ 42,685 Construction advances 43,052 40,839 Other 49,770 54,407 -------- -------- Total Deferred Income Tax Assets $136,581 $137,931 ======== ======== Deferred Income Tax Liabilities Property related $445,878 $428,044 Conservation investments 25,775 27,564 Other 8,175 17,138 -------- -------- Total Deferred Income Tax Liabilities $479,828 $472,746 ======== ======== ============================================================================== - 67 - 68 NOTES TO FINANCIAL STATEMENTS - (cont'd) D - Income Taxes - (cont'd) WE also has recorded the following deferred regulatory assets and liabilities representing the future expected impact of deferred taxes on utility revenues: ============================================================================== December 31 1995 1994 -------- -------- (Thousands of Dollars) Deferred Regulatory Assets $155,944 $158,912 Deferred Regulatory Liabilities 163,676 171,599 ============================================================================== E - Allowance for Funds Used During Construction ("AFUDC") AFUDC is included in utility plant accounts and represents the cost of borrowed funds used during plant construction and a return on stockholders' capital used for construction purposes. On the income statement, the cost of borrowed funds (before income taxes) is a reduction of interest expense and the return on stockholders' capital is an item of noncash other income. Utility rates approved by the PSCW provide for a current return on investment for selected long-term projects included in construction work in progress ("CWIP"). AFUDC was capitalized on the remaining CWIP at a rate of 10.83% in 1995, 1994 and 1993, as approved by the PSCW. F - Nuclear Operations Point Beach Nuclear Plant: WE operates two 500 megawatt generating units at its Point Beach Nuclear Plant ("Point Beach"). During 1995, Point Beach accounted for 26.9% of WE's net electric generation. The current operating licenses for the two units at Point Beach expire in 2010 and 2013 for Units 1 and 2, respectively. WE has filed an application with the PSCW for replacement of the Point Beach Unit 2 steam generators. As a result of degradation of some of the tubes within the Unit 2 steam generators, the unit has been operating at approximately 90% of its capacity since its return to service after its annual refueling outage in the fall of 1995. Considering the rate of tube degradation in the steam generators, there is a likelihood that WE would not be able to restart Unit 2 following the fall 1996 outage without replacement of the steam generators. In a related matter, WE completed construction of an Independent Spent Fuel Storage Installation ("ISFSI") in June 1995. The ISFSI will provide interim dry cask storage of spent fuel from Point Beach, which is necessary because the spent fuel pool inside the plant is nearly full. WE loaded the first cask with spent fuel in December 1995. On December 22, 1995, the Dane County Circuit Court ("Court") issued a decision vacating and remanding the February 1995 PSCW approval of the ISFSI on procedural grounds, stating that the - 68 - 69 NOTES TO FINANCIAL STATEMENTS - (cont'd) F - Nuclear Operations - (cont'd) Environmental Impact Statement prepared by the PSCW for this project was inadequate in two respects. Transfer of additional spent fuel to the ISFSI has been temporarily suspended by WE pending the PSCW's further action. The PSCW has issued two Supplemental Environmental Impact Statements which address steam generator issues and the inadequacies found by the Court with the original Environmental Impact Statement for the ISFSI project. The PSCW held related hearings on these matters in February and March 1996. WE anticipates that the PSCW will issue a combined final order on the replacement of the Unit 2 steam generators and the remanded dry cask storage matters in May 1996. Failure by the PSCW to approve steam generator replacement and resolve the remanded issues could jeopardize the continued operation of Point Beach and materially affect WE's financial position and results of operations. WE would likely seek regulatory relief to minimize the replacement power costs resulting from lost generating capacity. Nuclear Fuel: WE has a nuclear fuel leasing arrangement with Wisconsin Electric Fuel Trust ("Trust"), which is treated as a capital lease. The nuclear fuel is leased for a period of 60 months or until the removal of the fuel from the reactor, if earlier. Lease payments include charges for the cost of fuel burned, financing costs and a management fee. In the event WE or the Trust terminates the lease, the Trust would recover its unamortized cost of nuclear fuel from WE. Under the lease terms, WE is in effect the ultimate guarantor of the Trust's commercial paper and line of credit borrowings financing the investment in nuclear fuel. Provided below is a summary of nuclear fuel investment at December 31 and interest expense for the respective years on the nuclear fuel lease: ============================================================================== 1995 1994 1993 -------- -------- -------- (Thousands of Dollars) Nuclear Fuel Under capital lease $ 89,840 $ 89,705 Accumulated provision for amortization (50,532) (50,983) In process/stock 19,952 17,884 -------- -------- Total Nuclear Fuel $ 59,260 $ 56,606 ======== ======== Interest Expense on Nuclear Fuel Lease $ 2,401 $ 1,896 $ 1,697 ============================================================================== - 69 - 70 NOTES TO FINANCIAL STATEMENTS - (cont'd) F - Nuclear Operations - (cont'd) The future minimum lease payments under the capital lease and the present value of the net minimum lease payments as of December 31, 1995 are as follows: ============================================================================ (Thousands of Dollars) 1996 $ 22,446 1997 14,747 1998 6,960 1999 2,443 2000 490 -------- Total Minimum Lease Payments 47,086 Less: Interest (3,162) -------- Present Value of Net Minimum Lease Payments $ 43,924 ======== ============================================================================== The estimated cost of disposal of spent fuel based on a contract with the U.S. Department of Energy ("DOE") is included in nuclear fuel expense. The Energy Policy Act of 1992 establishes a Uranium Enrichment Decontamination and Decommissioning Fund ("D&D Fund") for the DOE's nuclear fuel enrichment facilities. Deposits to the D&D Fund are derived in part from special assessments to utilities. As of December 31, 1995, WE has on its books a remaining estimated liability equal to the projected special assessments of $29.5 million. A corresponding deferred regulatory asset will be amortized to nuclear fuel expense and included in utility rates over the next 12 years. Nuclear Insurance: The Price-Anderson Act ("Act") provides an aggregate limitation of $8.9 billion on public liability claims arising out of a nuclear incident. WE has $200 million of liability insurance from commercial sources. The Act also establishes an industry-wide retrospective rating plan under which nuclear reactor owners could be assessed up to $79 million per reactor (WE owns two), but not more than $10 million in any one year for each reactor, in the event of a nuclear incident. An industry-wide insurance program, with an aggregate limit of $200 million, has been established to cover radiation injury claims of nuclear workers first employed after 1987. If claims in excess of the available funds develop, WE could be assessed a maximum of approximately $3.0 million per reactor. WE has property damage, decontamination and decommissioning insurance totaling $1.5 billion for loss from damage at Point Beach with Nuclear Mutual Limited ("NML") and Nuclear Electric Insurance Limited ("NEIL"). Under the NML and NEIL policies, WE has a potential maximum retrospective premium liability per loss of $5.6 million and $9.8 million, respectively. WE also maintains additional insurance with NEIL covering extra expenses of obtaining replacement power during a prolonged accidental outage (in excess of 21 weeks) at Point Beach. This insurance coverage provides weekly indemnities of $3.5 million per unit for outages during the first year, declining to 80% of the amounts during the second and third years. Under the policy, WE's maximum retrospective premium liability is approximately $7.7 million. - 70 - 71 NOTES TO FINANCIAL STATEMENTS - (cont'd) F - Nuclear Operations - (cont'd) It should not be assumed that, in the event of a major nuclear incident, any insurance or statutory limitation of liability would protect WE from material adverse impact. Nuclear Decommissioning: Subject to approval by the PSCW of the Point Beach Unit 2 steam generator replacements and resolution of the remanded ISFSI matters described above, WE expects to operate the two units at Point Beach to the expiration of their current operating licenses. The estimated cost to decommission the plant in 1995 dollars is $356 million based upon a site specific decommissioning cost study completed in 1994. Assuming plant shutdown at the expiration of the current operating licenses, prompt dismantlement and annual escalation of costs at specific inflation factors established by the PSCW, it is projected that approximately $1.6 billion will be spent over a twenty-year period, beginning in 2010, to decommission the plant. Nuclear decommissioning costs are accrued as depreciation expense over the expected service lives of the two units based upon an external sinking fund method. In 1996, WE has increased its funding levels based on a site specific estimate as required by the PSCW. It is expected that the annual payments to the Nuclear Decommissioning Trust Fund ("Fund") along with the earnings on the Fund will provide sufficient funds at the time of decommissioning. WE believes it is probable that any shortfall in funding would be recoverable in utility rates. As required by Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities ("FAS 115"), WE's debt and equity security investments in the Fund are classified as available for sale. Gains and losses on the Fund were determined on the basis of specific identification; net unrealized holding gains on the Fund were recorded as part of accumulated provision for depreciation. Following is a summary of decommissioning costs and earnings charged to depreciation expense and the Fund balance included in accumulated provision for depreciation at December 31. The Fund balance is stated at fair value: ============================================================================== 1995 1994 1993 -------- -------- -------- (Thousands of Dollars) Decommissioning costs $ 3,456 $ 3,456 $ 3,456 Earnings 7,405 6,682 7,915 -------- -------- -------- Depreciation Expense $ 10,861 $ 10,138 $ 11,371 ======== ======== ======== Total costs accrued to date $235,420 $224,559 Unrealized gain 39,705 2,246 -------- -------- Accumulated Provision for Depreciation $275,125 $226,805 ======== ======== ============================================================================== - 71 - 72 NOTES TO FINANCIAL STATEMENTS - (cont'd) G - Preferred Stock Serial Preferred Stock authorized but unissued is cumulative, $25 par value, 5,000,000 shares. In the event of default in the payment of preferred dividends, no dividends or other distributions may be paid on the Company's common stock. The 3.60% Series Preferred Stock is redeemable in whole or in part at the option of WE at $101 per share plus any accrued dividends. In 1994, WE called for redemption all of its 52,500 outstanding shares of 6.75% Series Preferred Stock at a redemption price of par. In 1993, WE called for redemption 626,500 shares at a purchase price of $104.05 per share plus accrued dividends to the redemption date. H - Long-Term Debt The maturities and sinking fund requirements through 2000 for the aggregate amount of long-term debt outstanding (excluding obligations under capital lease, see Note F) at December 31, 1995 are shown below: ============================================================================== (Thousands of Dollars) 1996 $ 30,000 1997 165,700 1998 60,700 1999 91,700 2000 700 ============================================================================== Sinking fund requirements for the years 1996 through 2000, included in the table above, are $2.8 million. Substantially all utility plant is subject to the applicable mortgage. 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. Unamortized amounts pertaining to reacquired debt are written off currently, when acquired for sinking fund purposes, or amortized in accordance with PSCW orders, when acquired for early retirement. The fair value of the Company's long-term debt was $1.5 billion and $1.2 billion at December 31, 1995 and 1994, respectively. The fair value of the first mortgage bonds and debentures is estimated based upon the market value of the same or similar issues. Book value approximates fair value for the Company's unsecured notes. The fair value of WE's obligations under capital lease is the market value of the Wisconsin Electric Fuel Trust's commercial paper. In September and October 1995, WE issued $98.35 million of unsecured variable rate promissory notes maturing between March 1, 2006 and September 1, 2030. These notes were issued as a revenue and collateral source for an equal principal amount of tax exempt Refunding Revenue Bonds issued on WE's behalf to refund $98.35 million of previously issued tax exempt bonds called for optional redemption that were secured by WE's First Mortgage Bonds. - 72 - 73 NOTES TO FINANCIAL STATEMENTS - (cont'd) H - Long-Term Debt - (cont'd) In December 1995, WE issued $100 million of unsecured One Hundred Year 6 7/8% Debentures due 2095. Proceeds of the issue were added to WE's general funds and were applied to the repayment of short-term borrowings. At December 31, 1995, the interest rate for the $67 million variable rate note due 2016 was 5.00% and the interest rate for the $98.35 million variable rate notes due 2006-2030 was 5.10%. I - Notes Payable Short-term notes payable balances and their corresponding weighted average interest rates consist of: ============================================================================== December 31 1995 1994 -------------------- ---------------------- Interest Interest Balance Rate Balance Rate -------- -------- -------- -------- (Thousands of Dollars) Banks $100,885 5.78% $ 87,399 6.03% Commercial paper 49,809 5.88% 155,106 6.04% -------- -------- $150,694 $242,505 ======== ======== ============================================================================== Unused lines of credit for short-term borrowing amounted to $108.6 million at December 31, 1995. In support of various informal lines of credit from banks, the Company has agreed to maintain unrestricted compensating balances or to pay commitment fees; neither the compensating balances nor the commitment fees are significant. J - Pension Plans Effective in 1993, the PSCW adopted Statement of Financial Accounting Standards No. 87, Employers' Accounting for Pensions ("FAS 87"), for ratemaking. WE has several defined benefit noncontributory pension plans covering all eligible employees. Pension benefits are based on years of service and the employee's compensation. The majority of the plans' assets are equity securities; other assets include corporate and government bonds and real estate. The plans are funded to meet the requirements of the Employee Retirement Income Security Act of 1974. In the opinion of 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 future pension payment obligations to current and future retirees. - 73 - 74 NOTES TO FINANCIAL STATEMENTS - (cont'd) J - Pension Plans - (cont'd) ============================================================================== Pension Cost calculated per FAS 87 1995 1994 1993 - ---------------------------------- -------- -------- -------- (Thousands of Dollars) Components of Net Periodic Pension Cost, Year Ended December 31 - Cost of pension benefits earned by employees $ 8,985 $ 10,933 $ 10,842 Interest cost on projected benefit obligation 41,586 38,736 36,335 Actual (return) loss on plan assets (136,243) 7,634 (43,226) Net amortization and deferral 88,493 (52,180) 1,067 -------- -------- -------- Total pension cost calculated under FAS 87 $ 2,821 $ 5,123 $ 5,018 ======== ======== ======== Actuarial Present Value of Accumulated Benefit Obligation, at December 31 - Vested benefits-employees' right to receive benefit no longer contingent upon continued employment $543,371 $427,847 Nonvested benefits-employees' right to receive benefit contingent upon continued employment 12,651 9,963 -------- -------- Total obligation $556,022 $437,810 ======== ======== Funded Status of Plans: Pension Assets and Obligations at December 31 - Pension assets at fair market value $637,529 $527,182 Projected benefit obligation at present value (584,785) (513,166) Unrecognized transition asset (22,034) (24,628) Unrecognized prior service cost 23,194 19,567 Unrecognized net gain (54,780) (17,569) -------- -------- Projected status of plans $ (876) $ (8,614) ======== ======== Rates used for calculations (%) - Discount rate-interest rate used to adjust for the time value of money 7.25 8.25 7.5 Assumed rate of increase in compensation levels 4.75 5.0 5.0 Expected long-term rate of return on pension assets 9.0 9.0 9.0 ============================================================================== K - Benefits Other Than Pensions Postretirement Benefits: Effective in 1993, the Company adopted prospectively Statement of Financial Accounting Standards No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions ("FAS 106") and elected the 20 year option for amortization of the previously unrecognized accumulated - 74 - 75 NOTES TO FINANCIAL STATEMENTS - (cont'd) K - Benefits Other Than Pensions - (cont'd) postretirement benefit obligation. The PSCW has issued an order recognizing FAS 106 for ratemaking; therefore adoption has no material impact on net income. WE sponsors defined benefit postretirement plans that cover both salaried and nonsalaried employees who retire at age 55 or older with at least 10 years of credited service. The postretirement medical plan provides coverage to retirees and their dependents. Retirees contribute to the medical plan. The group life insurance benefit is based on employee compensation and is reduced upon retirement. Employees' Benefit Trusts ("Trusts") are used to fund a major portion of postretirement benefits. The funding policy for the Trusts is to maximize tax deductibility. The majority of the Trusts' assets are mutual funds. ============================================================================== Postretirement Benefit Cost calculated per FAS 106 1995 1994 1993 - ------------------------------------------- -------- -------- -------- (Thousands of Dollars) Components of Net Periodic Postretirement Benefit Cost, Year Ended December 31 - Cost of postretirement benefits earned by employees $ 2,276 $ 2,653 $ 3,105 Interest cost on projected benefit obligation 10,458 10,148 10,395 Actual return on plan assets (12,598) (3,893) (2,388) Net amortization and deferral 13,951 5,648 5,082 -------- -------- -------- Total postretirement benefit cost calculated under FAS 106 $ 14,087 $ 14,556 $ 16,194 ======== ======== ======== Funded Status of Plans: Postretirement Obligations and Assets at December 31 - Accumulated Postretirement Benefit Obligation at December 31 - Retirees $(92,746) $(83,670) Fully eligible active plan participants (10,304) (7,223) Other active plan participants (41,732) (37,255) -------- -------- Total obligation (144,782) (128,148) Postretirement assets at fair market value 45,086 37,919 -------- -------- Accumulated postretirement benefit obligation in excess of plan assets (99,696) (90,229) Unrecognized transition obligation 83,268 90,302 Unrecognized prior service cost (1,279) (1,169) Unrecognized net gain (6,102) (16,484) -------- -------- Accrued Postretirement Benefit Obligation $(23,809) $(17,580) ======== ======== ============================================================================== - 75 - 76 NOTES TO FINANCIAL STATEMENTS - (cont'd) K - Benefits Other Than Pensions - (cont'd) ============================================================================== Postretirement Benefit Cost calculated per FAS 106 (cont'd) 1995 1994 1993 - ------------------------------------------- -------- -------- -------- (Thousands of Dollars) Rates used for calculations (%) - Discount rate-interest rate used to adjust for the time value of money 7.25 8.25 7.5 Assumed rate of increase in compensation levels 4.75 5.0 5.0 Expected long-term rate of return on postretirement assets 9.0 9.0 9.0 Health care cost trend rate 11.0 declining to 5.0 in year 2002 ============================================================================== Changes in health care cost trend rates will affect the amounts reported. For example, a 1% increase in rates would increase the accumulated postretirement benefit obligation as of December 31, 1995 by $9.5 million and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year then ended by $1 million. Revitalization: In the first quarter of 1994, WE recorded a $73.9 million charge related to its revitalization program. This charge included $37.5 million for Early Retirement Incentive Packages ("ERIP") and $25 million for Severance Packages ("SP"). These plans were used to reduce employee staffing levels. ERIP provided for a monthly income supplement ("ERIP supplement"), medical benefits and waiver of an early retirement pension reduction. The SP included a severance payment, medical/dental insurance, outplacement services, personal financial planning and tuition support. Availability of these plans to various bargaining units was based upon agreements made between WE and the bargaining units. These plans were available to most management employees but not to elected officers. Under ERIP, 403 employees elected to retire in 1994. Under SP, 651 and 75 employees enrolled in 1994 and 1995, respectively. ERIP supplement costs are paid from pension plan trusts and medical/dental benefits from employee benefit trusts. Remaining ERIP and SP costs are paid from general corporate funds. The ultimate timing of cash flows for ERIP supplement costs depends upon the funding limitations of WE's pension plans. With the exception of ERIP supplement costs, approximately $35.4 million have been paid against the revitalization liability through December 31, 1995, and a liability of $0.9 million remains outstanding at December 31, 1995. L - Information By Segments of Business WE is a public utility incorporated in the State of Wisconsin. The Company's principal business segments include electric, gas and steam utility operations. The electric utility generates, transmits, distributes and sells electric energy in southeastern (including metropolitan Milwaukee), east central and northern Wisconsin and in the Upper Peninsula of Michigan. The gas utility purchases, distributes and sells natural gas to retail customers and transports customer-owned gas in three service areas in southeastern, east central and western Wisconsin that are largely within the electric service - 76 - 77 NOTES TO FINANCIAL STATEMENTS - (cont'd) L - Information By Segments of Business - (cont'd) area. The steam utility produces, distributes and sells steam to space heating and processing customers in downtown and the near south side of Milwaukee. The following summarizes the business segments of the Company: ============================================================================== Year ended December 31 1995 1994 1993 - ---------------------- ---------- ---------- ---------- (Thousands of Dollars) Electric Operations Operating revenues $1,437,480 $1,403,562 $1,347,844 Operating income before income taxes 419,271 329,216 329,727 Depreciation 164,789 159,414 149,646 Construction expenditures 223,723 244,718 305,467 Gas Operations Operating revenues 318,262 324,349 331,301 Operating income before income taxes 47,022 30,993 31,025 Depreciation 17,722 16,856 16,235 Construction expenditures 24,851 25,481 24,419 Steam Operations Operating revenues 14,742 14,281 14,090 Operating income before income taxes 3,757 2,825 3,147 Depreciation 1,365 1,344 1,185 Construction expenditures 206 1,213 4,940 Total Operating revenues 1,770,484 1,742,192 1,693,235 Operating income before income taxes 470,050 363,034 363,899 Depreciation 183,876 177,614 167,066 Construction expenditures (including non-utility) 248,867 271,448 334,932 At December 31 - -------------- Net Identifiable Assets Electric $3,901,611 $3,797,755 $3,665,493 Gas 386,864 376,344 385,390 Steam 25,214 25,315 25,119 Non-utility 5,235 2,779 2,971 ---------- ---------- ---------- Total Assets $4,318,924 $4,202,193 $4,078,973 ========== ========== ========== ============================================================================== M - Transactions with Associated Companies Managerial, financial, accounting, legal, data processing and other services may be rendered between associated companies and are billed in accordance with service agreements approved by the PSCW. The Company received from WEC stockholder capital contributions of $30 million in 1995 and 1994, and $10 million in 1993. - 77 - 78 NOTES TO FINANCIAL STATEMENTS - (cont'd) N - Commitments and Contingencies Kimberly Cogeneration Facility: In 1993, a competitive bidding process conducted by the PSCW resulted in selection of a proposal submitted by an unaffiliated independent power producer, LSP-Whitewater L.P. ("LS Power"), to construct a generation facility to meet a portion of WE's anticipated increase in system supply needs. WE subsequently signed a long-term agreement to purchase electricity from the proposed facility. The agreement is contingent upon the facility being completed and going into operation, which at this time is planned for mid-1997. Prior to the 1993 selection of the LS Power generation facility by the PSCW, WE had proposed to construct its own 220 megawatt cogeneration facility in Kimberly, Wisconsin, which was intended to provide process steam to Repap Wisconsin, Inc. ("Repap") starting in mid-1994. In the PSCW Order, the WE project was selected as the second place conditional project if the LS Power project did not proceed. WE had made expenditures for the Kimberly facility of approximately $65.8 million associated with the procurement of three combustion turbines, one steam turbine and three heat recovery boilers in order to achieve the in-service dates as agreed to in a steam service contract with Repap. The Company is currently reviewing other options for use or sale of its Kimberly Cogeneration Facility equipment (the "Equipment"). The Equipment is of a technology of natural gas-fired combined cycle generation equipment that is marketed worldwide. The Company is investigating opportunities to sell the Equipment or to use it in another power project and is currently evaluating potential sales opportunities and/or power projects involving the Equipment. At this time, the Company does not believe that disposition of the Equipment will have a material adverse effect on its financial condition. However, there is a possibility that WE may need to recognize an impairment of the Equipment in the future should the projects noted above not occur and should no other viable sales opportunities and/or power projects involving the Equipment be identified. Manufactured Gas Plant Sites: WE's natural gas business unit is investigating the remediation of a number of former manufactured gas plant ("MGP") sites. Operations at these MGP sites ceased over 40 years ago. Limited remediation activities occurred at a number of these sites during the 1980's, with removal of waste materials known to be present at that time. In 1995, WE presented a plan to investigate and remediate sites to the Wisconsin Department of Natural Resources ("DNR"). During 1995, WE conducted site investigations at four sites and partial remediation activities were conducted at one site. Approximately $1.6 million has been spent through December 31, 1995 for such activities. Remediation costs to be incurred through the year 2000 have been estimated to be $12 million, but the total costs are uncertain pending the results of further site specific investigations and the selection of site specific remedial actions. In a September 11, 1995 letter order, the PSCW allowed WE to defer MGP site remediation costs with final rate treatment of such costs to be determined in future rate cases. As of December 31, 1995, WE has recorded an accrued liability of $1.6 million for MGP site remediation and a related deferred regulatory asset of $3.2 million. WE expects to accrue additional MGP site remediation liabilities during 1996 as site specific investigations are completed and site specific remedial actions are identified. WE will seek rate recovery for these costs and does not anticipate that there will be a material adverse effect on its net income or financial position. - 78 - 79 NOTES TO FINANCIAL STATEMENTS - (cont'd) N - Commitments and Contingencies - (cont'd) Plans for the construction and financing of future additions to utility plant can be found elsewhere in this report in MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - "LIQUIDITY AND CAPITAL RESOURCES - Capital Requirements 1996-2000." - 79 - 80 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and the Stockholders of Wisconsin Electric Power Company In our opinion, the financial statements listed under Item 14(a)(1) appearing on page 82 of this report present fairly, in all material respects, the financial position of Wisconsin Electric Power Company at December 31, 1995 and 1994, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/Price Waterhouse LLP - ----------------------- PRICE WATERHOUSE LLP Milwaukee, Wisconsin January 31, 1996 - 80 - 81 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT In accordance with General Instruction G(3) of Form 10-K, the information under "Election of Directors" in WE's definitive Information Statement for its Annual Meeting of Stockholders to be held May 21, 1996 (the "1996 Annual Meeting Information Statement") is incorporated herein by reference. Also see "Executive Officers of the Registrant" in Part I of this report. ITEM 11. EXECUTIVE COMPENSATION In accordance with General Instruction G(3) of Form 10-K, the information under "Compensation" and "Retirement Plans" in the 1996 Annual Meeting Information Statement is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT All of WE's Common Stock (100% of such class) is owned by the parent company, Wisconsin Energy Corporation, 231 West Michigan Street, P.O. Box 2949, Milwaukee, Wisconsin 53201. The directors, director nominees and executive officers of WE do not own any of the voting securities of WE. In accordance with General Instruction G(3) of Form 10-K, the information concerning their beneficial ownership of WEC stock set forth under "Stock Ownership of Directors, Nominees and Executive Officers" in the 1996 Annual Meeting Information Statement is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. - 81 - 82 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. Financial Statements and Report of Independent Accountants Included in Part II of this report: Income Statement for the three years ended December 31, 1995 Statement of Cash Flows for the three years ended December 31, 1995 Balance Sheet at December 31, 1995 and 1994 Capitalization Statement at December 31, 1995 and 1994 Common Stock Equity Statement for the three years ended December 31, 1995 Notes to Financial Statements Report of Independent Accountants 2. Financial Statement Schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the financial statements or notes thereto. * * * * * The following Wisconsin Energy Company Unaudited Pro Forma Combined Condensed Financial Information is contained herein after this Item 14: Unaudited Pro Forma Combined Condensed Balance Sheet at December 31, 1995 Unaudited Pro Forma Combined Condensed Statements of Income for the 12 months ended December 31, 1995 Notes to Unaudited Pro Forma Combined Condensed Financial Statements 3. Exhibits The following Exhibits are filed with this report: Exhibit No. (3)-1 Bylaws of Wisconsin Electric Power Company ("WE"), as amended and restated January 31, 1996. (4)-1 Indenture for Debt Securities (the "Indenture") dated as of December 1, 1995. - 82 - 83 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - (cont'd) (4)-2 Securities Resolution No. 1 under the Indenture dated December 5, 1995. (23)-1 Price Waterhouse LLP - Milwaukee, WI Consent of Independent Accountants appearing on page 87 of this Annual Report on Form 10-K for the year ended December 31, 1995. (23)-2 Consent of Price Waterhouse LLP - Minneapolis, MN, Northern States Power Company - Wisconsin's ("NSP-WI") Independent Accountants. (23)-3 Consent of Deloitte & Touche LLP - Minneapolis, MN, NSP-WI's Independent Auditors prior to 1995. (27)-1 WE Financial Data Schedule for the fiscal year ended December 31, 1995. In addition to those Exhibits shown above, which are filed herewith, WE hereby incorporates the following Exhibits pursuant to Exchange Act Rule 12b-32 and Regulation Section 201.24 by reference to the filings set forth below: (2)-1 Amended and Restated Agreement and Plan of Merger, dated as of April 28, 1995, as amended and restated as of July 26, 1995, by and among Northern States Power Company ("NSP"), Wisconsin Energy Corporation ("WEC"), Northern Power Wisconsin Corp. ("New NSP") and WEC Sub Corp. (Exhibit (2)-1 to WEC's Registration Statement on Form S-4 filed on August 7, 1995, Registration No. 33-61619 ("Form S-4, No. 33-61619"); other related documents are also filed as exhibits to such Registration Statement.) (2)-2 WEC Stock Option Agreement, dated as of April 28, 1995, by and among NSP and WEC. (Exhibit (2)-2 to Form S-4, No. 33-61619.) (2)-3 NSP Stock Option Agreement, dated as of April 28, 1995, by and among WEC and NSP. (Exhibit (2)-3 to Form S-4, No. 33-61619.) (2)-4 Committees of the Board of Directors of Primergy Corporation ("Primergy"). (Exhibit (2)-4 to Form S-4, No. 33-61619.) (2)-5 Form of Employment Agreement between Primergy and James J. Howard. (Exhibit (2)-5 to Form S-4, No. 33-61619.) (2)-6 Form of Employment Agreement between Primergy and Richard A. Abdoo. (Exhibit (2)-6 to Form S-4, No. 33-61619.) (2)-7 Form of Amended and Restated Articles of Incorporation of New NSP. (Exhibit 3-3 (b) to Form S-4, No. 33-61619.) (2)-8 Letter Agreement, dated January 17, 1995, between NSP and WEC. (Exhibit (2)-8 to WEC's Schedule 13D dated May 4, 1995 with respect to the NSP Stock Option Agreement.) - 83 - 84 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - (cont'd) (2)-9 Letter Agreement, dated April 26, 1995, between NSP and WEC amending Letter Agreement dated January 17, 1995. (Exhibit (2)-9 to WEC's Schedule 13D dated May 4, 1995 with respect to the NSP Stock Option Agreement.) (2)-10 Plan and Agreement of Merger, dated June 30, 1994, by and between WE and Wisconsin Natural Gas Company ("WN"). (Appendix A to WE's Proxy Statement dated October 31, 1994, in File No. 1-1245.) (3)-2 Restated Articles of Incorporation of WE, as amended and restated effective January 10, 1995. (Exhibit (3)-1 to WE's Annual Report on Form 10-K for the year ended December 31, 1994, File No. 1-1245.) (4)-3 Reference is made to Article III of the Restated Articles of Incorporation of WE. (Exhibit (3)-2 herein.) Mortgage, Indenture, Supplemental Indenture or Securities Resolution Company Date Exhibit # Under File No. - ------------------------------------------------------------------------------ (4)- 4 Mortgage and Wisconsin 10/28/38 B-1 2-4340 Deed of Trust Electric ("WE") 5 Second WE 6/1/46 7-C 2-6422 6 Third WE 3/1/49 7-C 2-8456 7 Fourth WE 6/1/50 7-D 2-8456 8 Fifth WE 5/1/52 4-G 2-9588 9 Sixth WE 5/1/54 4-H 2-10846 10 Seventh WE 4/15/56 4-I 2-12400 11 Eighth WE 4/1/58 2-I 2-13937 12 Ninth WE 11/15/60 2-J 2-17087 13 Tenth WE 11/1/66 2-K 2-25593 14 Eleventh WE 11/15/67 2-L 2-27504 15 Twelfth WE 5/15/68 2-M 2-28799 16 Thirteenth WE 5/15/69 2-N 2-32629 17 Fourteenth WE 11/1/69 2-O 2-34942 18 Fifteenth WE 7/15/76 2-P 2-54211 19 Sixteenth WE 1/1/78 2-Q 2-61220 20 Seventeenth WE 5/1/78 2-R 2-61220 21 Eighteenth WE 5/15/78 2-S 2-61220 22 Nineteenth WE 8/1/79 (a)2(a) 1-1245 (9/30/79 WE Form 10-Q) 23 Twentieth WE 11/15/79 (a)2(a) 1-1245 (12/31/79 WE Form 10-K) 24 Twenty-First WE 4/15/80 (4)-21 2-69488 25 Twenty-Second WE 12/1/80 (4)-1 1-1245 (12/31/80 WE Form 10-K) 26 Twenty-Third WE 9/15/85 (4)-1 1-1245 (9/30/85 WE Form 10-Q) 27 Twenty-Four WE 9/15/85 (4)-1 1-1245 (9/30/85 WE Form 10-Q) 28 Twenty-Fifth WE 12/15/86 (4)-25 1-1245 (12/31/86 WE Form 10-K) - 84 - 85 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - (cont'd) Mortgage, Indenture, Supplemental Indenture or Securities Resolution Company Date Exhibit # Under File No. - ------------------------------------------------------------------------------ 29 Twenty-Sixth WE 1/15/88 4 1-1245 (1/26/88 Form 8-K) 30 Twenty-Seventh WE 4/15/88 4 1-1245 (3/31/88 Form 10-Q) 31 Twenty-Eighth WE 9/1/89 4 1-1245 (9/30/89 WE Form 10-Q) 32 Twenty-Ninth WE 10/1/91 4-1 1-1245 (12/31/91 WE Form 10-K) 33 Thirtieth WE 12/1/91 4-2 1-1245 (12/31/91 WE Form 10-K) 34 Thirty-First WE 8/1/92 4-1 1-1245 (6/30/92 WE Form 10-Q) 35 Thirty-Second WE 8/1/92 4-2 1-1245 (6/30/92 WE Form 10-Q) 36 Thirty-Third WE 10/1/92 4-1 1-1245 (9/30/92 WE Form 10-Q) 37 Thirty-Fourth WE 11/1/92 4-2 1-1245 (9/30/92 WE Form 10-Q) 38 Thirty-Fifth WE 12/15/92 4-1 1-1245 (12/31/92 WE Form 10-K) 39 Thirty-Sixth WE 1/15/93 4-2 1-1245 (12/31/92 WE Form 10-K) 40 Thirty-Seventh WE 3/15/93 4-3 1-1245 (12/31/92 WE Form 10-K) 41 Thirty-Eighth WE 8/01/93 (4)-1 1-1245 (6/30/93 WE Form 10-Q) 42 Thirty-Ninth WE 9/15/93 (4)-1 1-1245 (9/30/93 WE Form 10-Q) 43 Fortieth WE 1/01/96 (4)-1 1-1245 (1/1/96 WE Form 8-K) All agreements and instruments with respect to long-term debt not exceeding 10 percent of the total assets of the Registrant and its subsidiaries on a consolidated basis have been omitted as permitted by related instructions. The Registrant agrees pursuant to Item 601(b)(4) of Regulation S-K to furnish to the Securities and Exchange Commission, upon request, a copy of all such agreements and instruments. (10)-1 Amended Non-Qualified Trust Agreement by and between WEC and Firstar Trust Company dated January 26, 1996, regarding trust established to provide a source of funds to assist in meeting of the liabilities under various nonqualified deferred compensation plans made between WEC or its subsidiaries and various plan participants. (Exhibit (10)-2 to WEC's Annual Report on Form 10-K for the year ended December 31, 1995, File No. 1-9057.) * (10)-2 Supplemental Benefits Agreement between WEC and Richard A. Abdoo dated November 21, 1994, and April 26, 1995 letter agreement. (Exhibit (10)-1 to WEC's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995, File No. 1-9057. ("WEC's 6/30/95 10-Q")) * - 85 - 86 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - (cont'd) (10)-3 WEC Senior Executive Severance Policy, as adopted effective April 28, 1995 and amended on July 26, 1995. (Exhibit (10)-3 to WEC's 6/30/95 10-Q.) * (10)-4 Service Agreement dated January 1, 1987, between WE, WEC and other non-utility affiliated companies. (Exhibit (10)-(a) to WE's Current Report on Form 8-K dated January 2, 1987 in File No. 1-1245.) (99)-1 Wisconsin Energy Company unaudited pro forma combined condensed statements of income for each of the three years in the period ended December 31, 1994. (Included in WE's Current Report on Form 8-K dated as of August 25, 1995, File No. 1-1245.) (99)-2 Audited Financial Statements of NSP-WI. (Item 8 of NSP-WI's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, File No. 10-3140): Report of Independent Accountants. Independent Auditor's Report for years prior to 1995. Statements of Income and Retained Earnings for the three years ended December 31, 1995. Statements of Cash Flows for the three years ended December 31, 1995. Balance Sheets at December 31, 1995 and 1994. Notes to Financial Statements. - ----------------------- * Management contracts and executive compensation plans or arrangements required to be filed as exhibits pursuant to Item 14(c) of Form 10-K. Certain compensatory plans in which directors or executive officers of the Registrant are eligible to participate are not filed in reliance on the exclusion in Item 601(b)(10)(iii)(B)(6) of Regulation S-K. (b) Reports on Form 8-K No reports on Form 8-K were filed during the fourth quarter of the year ended December 31, 1995. A Current Report on Form 8-K dated as of January 1, 1996 was filed on January 16, 1996 to report the consummation of the merger of WN into WE, incorporate by reference or file related historical and pro forma financial statements and exhibits, and report developments concerning WE's Point Beach Nuclear Plant independent spent fuel storage installation. - 86 - 87 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements and Prospectuses constituting part of the Registration Statements on Form S-3 (Nos. 33-51749 and 33-64343) of Wisconsin Electric Power Company of our report dated January 31, 1996 appearing in this Form 10-K. /s/Price Waterhouse LLP - ----------------------- PRICE WATERHOUSE LLP Milwaukee, Wisconsin March 28, 1996 - 87 - 88 WISCONSIN ENERGY COMPANY UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION On April 28, 1995, Wisconsin Energy Corporation ("WEC"), Wisconsin Electric Power Company's ("WE") parent company, entered into an Agreement and Plan of Merger with Northern States Power Company, a Minnesota corporation ("NSP"), which was amended and restated as of July 26, 1995 (the "Merger Agreement"). The Merger Agreement provides for a strategic business combination involving the two companies in a "merger-of-equals" transaction (the "Transaction"), as previously reported in WE's Current Report on Form 8-K dated as of August 25, 1995 and in its Quarterly Reports on Form 10-Q for the quarters ended March 31, 1995, June 30, 1995 and September 30, 1995 ("WE's 3/31/95, 6/30/95 and 9/30/95 10-Q's"). Detailed information with respect to the Merger Agreement and the proposed Transaction is contained in the Joint Proxy Statement / Prospectus dated August 7, 1995 (contained in WEC's Registration Statement on Form S-4, Registration No. 33-61619) relating to the meetings of the stockholders of WEC and NSP to vote on the Merger Agreement and related matters. Further information concerning the Merger Agreement and the proposed Transaction is included in Item 1. BUSINESS - "MERGER AGREEMENT WITH NORTHERN STATES POWER COMPANY", in Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - "RESULTS OF OPERATIONS - Mergers" and in Note B - "Mergers" in the NOTES TO FINANCIAL STATEMENTS in Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA in this report. As a result of the Transaction, WEC will become a registered public utility holding company under the Public Utility Holding Company Act of 1935, as amended, and will change its name to Primergy Corporation ("Primergy"). Primergy will be the parent company of WE (which will be renamed Wisconsin Energy Company), of NSP (which, for regulatory reasons, will reincorporate in Wisconsin ("New NSP")), and of the other subsidiaries of WEC and NSP. In connection with the Transaction, Northern States Power Company, a Wisconsin corporation ("NSP-WI"), currently a utility subsidiary of NSP, will be merged into Wisconsin Energy Company. Prior to the merger of NSP-WI into Wisconsin Energy Company, New NSP will acquire certain gas utility assets and liabilities of NSP-WI divisions in LaCrosse and Hudson, Wisconsin from NSP-WI. The following unaudited pro forma financial information combines the historical consolidated balance sheets and statements of income of WE (as restated to reflect the merger of WN into WE effective January 1, 1996) and NSP-WI after giving effect to the proposed Transaction. The unaudited pro forma combined condensed balance sheet information at December 31, 1995 give effect to the Transaction as if it had occurred at December 31, 1995. The unaudited pro forma combined condensed statements of income for the twelve months ended December 31, 1995 gives effect to the Transaction as if it had occurred at January 1, 1995. This financial information is prepared on the basis of accounting for the Transaction as a pooling of interests. WE's Current Report on Form 8-K dated as of August 25, 1995 contains unaudited pro forma combined condensed statements of income of Wisconsin Energy Company for each of the three years in the period ended December 31, 1994, which are not repeated herein, but are incorporated by reference as an exhibit to this report. The following unaudited pro forma financial information has been prepared from, and should be read in conjunction with, the historical consolidated financial statements and related notes thereto of WE and NSP-WI. The - 88 - 89 WISCONSIN ENERGY COMPANY UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION - (cont'd) following information is not necessarily indicative of the financial position or operating results that would have occurred had the Transaction been consummated on the date, or at the beginning of the period for which the Transaction is being given effect nor is it necessarily indicative of future operating results or financial position. - 89 - 90 NORTHERN STATES POWER COMPANY - WISCONSIN UNAUDITED PRO FORMA CONDENSED BALANCE SHEET DECEMBER 31, 1995 (In thousands)
NSP-WI Pro Forma NSP-WI Pro Forma Balance Sheet As Reported Adjustments As Adjusted ------------------------------------------ ------------ ------------ ------------ (Note 2) Assets Utility Plant Electric $ 864,514 $ - $ 864,514 Gas 94,425 (33,644) 60,781 Other 63,758 - 63,758 ------------ ------------ ------------ Total 1,022,697 (33,644) 989,053 Accumulated provision for depreciation (370,634) 15,215 (355,419) Nuclear fuel - net - - - ------------ ------------ ------------ Net Utility Plant 652,063 (18,429) 633,634 Current Assets 85,591 16,836 102,427 Other Assets 53,244 (944) 52,300 ------------ ------------ ------------ Total Assets $ 790,898 $ (2,537) $ 788,361 ============ ============ ============ Liabilities and Equity Capitalization Common stock equity $ 318,299 $ - $ 318,299 Cumulative preferred stock and premium - - - Long-term debt 213,235 - 213,235 ------------ ------------ ------------ Total Capitalization 531,534 - 531,534 Current Liabilities Current portion of long-term debt - - - Short-term debt 50,900 - 50,900 Other 51,362 (38) 51,324 ------------ ------------ ------------ Total Current Liabilities 102,262 (38) 102,224 Other Liabilities 157,102 (2,499) 154,603 ------------ ------------ ------------ Total Capitalization and Liabilities $ 790,898 $ (2,537) $ 788,361 ============ ============ ============ See accompanying notes to unaudited pro forma combined condensed financial statements. - 90 -
91 WISCONSIN ENERGY COMPANY * UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET DECEMBER 31, 1995 (In thousands)
Adjusted WE NSP-WI Pro Forma Pro Forma Pro Forma Balance Sheet As Reported As Adjusted Adjustments Combined ------------------------------------------ ------------ ------------ ------------ ------------ (See Page 93) (Note 3) Assets Utility Plant Electric $ 4,608,120 $ 864,514 $ - $ 5,472,634 Gas 491,176 60,781 - 551,957 Other 40,078 63,758 - 103,836 ------------ ------------ ------------ ------------ Total 5,139,374 989,053 - 6,128,427 Accumulated provision for depreciation (2,288,080) (355,419) - (2,643,499) Nuclear fuel - net 59,260 - - 59,260 ------------ ------------ ------------ ------------ Net Utility Plant 2,910,554 633,634 - 3,544,188 Current Assets 517,724 102,427 - 620,151 Other Assets 890,646 52,300 (136,581) 806,365 ------------ ------------ ------------ ------------ Total Assets $ 4,318,924 $ 788,361 $ (136,581) $ 4,970,704 ============ ============ ============ ============ Liabilities and Equity Capitalization Common stock equity $ 1,696,565 $ 318,299 $ - $ 2,014,864 Cumulative preferred stock and premium 30,451 - - 30,451 Long-term debt 1,325,169 213,235 - 1,538,404 ------------ ------------ ------------ ------------ Total Capitalization 3,052,185 531,534 - 3,583,719 Current Liabilities Current portion of long-term debt 51,419 - - 51,419 Short-term debt 150,694 50,900 - 201,594 Other 222,571 51,324 - 273,895 ------------ ------------ ------------ ------------ Total Current Liabilities 424,684 102,224 - 526,908 Other Liabilities 842,055 154,603 (136,581) 860,077 ------------ ------------ ------------ ------------ Total Capitalization and Liabilities $ 4,318,924 $ 788,361 $ (136,581) $ 4,970,704 ============ ============ ============ ============ See accompanying notes to unaudited pro forma combined condensed financial statements. * In connection with the Merger Agreement, WE will be renamed Wisconsin Energy Company. - 91 -
92 WISCONSIN ENERGY COMPANY * UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME 12 MONTHS ENDED DECEMBER 31, 1995 (In thousands)
WE NSP-WI Pro Forma Pro Forma As Reported As Reported Adjustments Combined ----------- ----------- ----------- ----------- Utility Operating Revenues Electric $ 1,437,480 $ 380,724 $ - $ 1,818,204 Gas 318,262 78,058 - 396,320 Steam 14,742 - - 14,742 ----------- ----------- ----------- ----------- Total Operating Revenues 1,770,484 458,782 - 2,229,266 Utility Operating Expenses Electric production - fuel and purchased power 345,387 178,446 - 523,833 Cost of gas sold and transported 188,764 52,356 - 241,120 Other operation 395,242 79,472 - 474,714 Maintenance 112,400 20,780 - 133,180 Depreciation and amortization 183,876 33,059 - 216,935 Taxes other than income taxes 74,765 14,109 - 88,874 Income taxes 141,029 24,662 - 165,691 ----------- ----------- ----------- ----------- Total Operating Expenses 1,441,463 402,884 - 1,844,347 ----------- ----------- ----------- ----------- Utility Operating Income 329,021 55,898 - 384,919 Other Income (Expense) 21,272 2,421 - 23,693 ----------- ----------- ----------- ----------- Income Before Interest Charges and Preferred Dividends 350,293 58,319 - 408,612 Interest Charges 109,625 19,102 - 128,727 ----------- ----------- ----------- ----------- Net Income 240,668 39,217 - 279,885 Preferred Dividend Stock Requirement 1,203 - - 1,203 ----------- ----------- ----------- ----------- Earnings Available for Common Stockholder $ 239,465 $ 39,217 $ - $ 278,682 =========== =========== =========== =========== See accompanying notes to unaudited pro forma combined condensed financial statements. * In connection with the Merger Agreement, WE will be renamed Wisconsin Energy Company. Note: Earnings per share of common stock are not applicable because all of the Wisconsin Energy Company common stock will be owned by Primergy. - 92 -
93 WISCONSIN ENERGY COMPANY * NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS 1. The unaudited pro forma combined condensed financial statements reflect the previously planned merger by WEC of WN into WE to form a single combined utility subsidiary. Completion of the planned merger occurred on January 1, 1996. WE's financial information has been restated to include WN. As previously reported, on April 28, 1995, WEC, WE's parent company, and NSP entered into a Merger Agreement, which was amended and restated as of July 26, 1995. The Merger Agreement provides for a strategic business combination involving WEC and NSP in a "merger-of-equals" transaction. As a result, WEC will become a registered public utility holding company under the Public Utility Holding Company Act of 1935, as amended, and will change its name to Primergy Corporation ("Primergy"). Primergy will be the parent company of NSP, WE (which will be renamed Wisconsin Energy Company) and the other subsidiaries of WEC and NSP. The business combination is intended to be tax-free for income tax purposes and to be accounted for as a "pooling of interests". Subject to obtaining all requisite approvals, WEC and NSP anticipate completing this business combination by January 1, 1997. As part of this proposed merger, the unaudited pro forma combined condensed financial statements reflect the merger of NSP-WI, currently a wholly owned subsidiary of NSP, into Wisconsin Energy Company. Prior to the merger of NSP-WI into Wisconsin Energy Company, New NSP will acquire certain gas utility assets in LaCrosse and Hudson, Wisconsin from NSP-WI. 2. A pro forma adjustment has been made in the NSP-WI Unaudited Pro Forma Condensed Balance Sheet at December 31, 1995 to reflect the sale at net book value of the gas utility assets and liabilities of NSP-WI divisions in LaCrosse and Hudson, Wisconsin to New NSP. 3. A pro forma adjustment has been made in the Wisconsin Energy Company Unaudited Pro Forma Combined Condensed Balance Sheet at December 31, 1995 to conform the presentation of noncurrent deferred income taxes into one net amount. All other financial statement presentation and accounting policy differences are immaterial and have not been adjusted in the unaudited pro forma combined condensed financial statements. 4. Unaudited pro forma income statement amounts for Wisconsin Energy Company do not reflect the transfer of the LaCrosse and Hudson divisions by NSP-WI to New NSP. The revenues related to those divisions for the twelve months ended December 31, 1995 were $28,897,000. The amount of related expenses has not been quantified. 5. Intercompany transactions (including purchased power and exchanged power transactions) between WE and NSP-WI during the period presented were not material and, accordingly, no pro forma adjustments were made to eliminate such transactions. * In connection with the Merger Agreement, WE will be renamed Wisconsin Energy Company. - 93 - 94 WISCONSIN ENERGY COMPANY * NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS (Cont'd) 6. The allocation between NSP and WEC and their customers of the estimated cost savings resulting from the transactions contemplated by the Merger Agreement, net of the costs incurred to achieve such savings, will be subject to regulatory review and approval. Cost savings resulting from the proposed merger are estimated to be approximately $2 billion over a 10-year period, net of transaction costs (including fees for financial advisors, attorneys, accountants, consultants, filings and printing) and costs to achieve the savings of approximately $30 million and $122 million, respectively. None of these estimated cost savings, the costs to achieve such savings, or transaction costs have been reflected in the unaudited pro forma combined condensed financial statements. * In connection with the Merger Agreement, WE will be renamed Wisconsin Energy Company. - 94 - 95 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. WISCONSIN ELECTRIC POWER COMPANY /s/R. A. Abdoo By ------------------------------------- Date March 28, 1996 (R. A. Abdoo, Chairman of the Board and Chief Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature and Title Date /s/R. A. Abdoo - --------------------------------------------------- March 28, 1996 (R. A. Abdoo, Chairman of the Board and Chief Executive Officer and Director - Principal Executive Officer) /s/R. R. Grigg, Jr. - --------------------------------------------------- March 28, 1996 (R. R. Grigg, Jr., President and Chief Operating Officer and Director) /s/D. K. Porter - --------------------------------------------------- March 28, 1996 (D. K. Porter, Senior Vice President and Director) /s/C. H. Baker - --------------------------------------------------- March 28, 1996 (C. H. Baker, Vice President and Chief Financial Officer) /s/A. K. Klisurich - --------------------------------------------------- March 28, 1996 (A. K. Klisurich, Controller - Principal Accounting Officer) - 95 - 96 Signature and Title Date /s/J. F. Ahearne - ---------------------------------------------------- March 28, 1996 (J. F. Ahearne, Director) /s/J. F. Bergstrom - ---------------------------------------------------- March 28, 1996 (J. F. Bergstrom, Director) /s/R. A. Cornog - ---------------------------------------------------- March 28, 1996 (R. A. Cornog, Director) /s/G. B. Johnson - ---------------------------------------------------- March 28, 1996 (G. B. Johnson, Director) /s/F. P. Stratton - ---------------------------------------------------- March 28, 1996 (F. P. Stratton, Jr., Director) /s/J. G. Udell - ---------------------------------------------------- March 28, 1996 (J. G. Udell, Director) - 96 - 97 Wisconsin Electric Power Company EXHIBIT INDEX ------------- 1995 Annual Report on Form 10-K For the Year Ended December 31, 1995 Exhibit Number - ------- The following Exhibits are filed with this report: (3)-1 Bylaws of Wisconsin Electric Power Company ("WE"), as amended and restated January 31, 1996. (4)-1 Indenture for Debt Securities (the "Indenture") dated as of December 1, 1995. (4)-2 Securities Resolution No. 1 under the Indenture dated December 5, 1995. (23)-1 Price Waterhouse LLP - Milwaukee, WI Consent of Independent Accountants appearing on page 87 of this Annual Report on Form 10-K for the year ended December 31, 1995. (23)-2 Consent of Price Waterhouse LLP - Minneapolis, MN, Northern States Power Company - Wisconsin's ("NSP-WI") Independent Accountants. (23)-3 Consent of Deloitte & Touche LLP - Minneapolis, MN, NSP-WI's Independent Auditors prior to 1995. (27)-1 WE Financial Data Schedule for the fiscal year ended December 31, 1995. In addition to those Exhibits shown above, which are filed herewith, WE hereby incorporates the following Exhibits pursuant to Exchange Act Rule 12b-32 and Regulation Section 201.24 by reference to the filings set forth below: (2)-1 Amended and Restated Agreement and Plan of Merger, dated as of April 28, 1995, as amended and restated as of July 26, 1995, by and among Northern States Power Company ("NSP"), Wisconsin Energy Corporation ("WEC"), Northern Power Wisconsin Corp. ("New NSP") and WEC Sub Corp. (Exhibit (2)-1 to WEC's Registration Statement on Form S-4 filed on August 7, 1995, Registration No. 33-61619 ("Form S-4, No. 33-61619"); other related documents are also filed as exhibits to such Registration Statement.) (2)-2 WEC Stock Option Agreement, dated as of April 28, 1995, by and among NSP and WEC. (Exhibit (2)-2 to Form S-4, No. 33-61619.) (2)-3 NSP Stock Option Agreement, dated as of April 28, 1995, by and among WEC and NSP. (Exhibit (2)-3 to Form S-4, No. 33-61619.) (2)-4 Committees of the Board of Directors of Primergy Corporation ("Primergy"). (Exhibit (2)-4 to Form S-4, No. 33-61619.) (2)-5 Form of Employment Agreement between Primergy and James J. Howard. (Exhibit (2)-5 to Form S-4, No. 33-61619.) - 97 - 98 Exhibit Number - ------- (2)-6 Form of Employment Agreement between Primergy and Richard A. Abdoo. (Exhibit (2)-6 to Form S-4, No. 33-61619.) (2)-7 Form of Amended and Restated Articles of Incorporation of New NSP. (Exhibit 3-3 (b) to Form S-4, No. 33-61619.) (2)-8 Letter Agreement, dated January 17, 1995, between NSP and WEC. (Exhibit (2)-8 to WEC's Schedule 13D dated May 4, 1995 with respect to the NSP Stock Option Agreement.) (2)-9 Letter Agreement, dated April 26, 1995, between NSP and WEC amending Letter Agreement dated January 17, 1995. (Exhibit (2)-9 to WEC's Schedule 13D dated May 4, 1995 with respect to the NSP Stock Option Agreement.) (2)-10 Plan and Agreement of Merger, dated June 30, 1994, by and between WE and Wisconsin Natural Gas Company ("WN"). (Appendix A to WE's Proxy Statement dated October 31, 1994, in File No. 1-1245.) (3)-2 Restated Articles of Incorporation of WE, as amended and restated effective January 10, 1995. (Exhibit (3)-1 to WE's Annual Report on Form 10-K for the year ended December 31, 1994, File No. 1-1245.) (4)-3 Reference is made to Article III of the Restated Articles of Incorporation of WE. (Exhibit (3)-2 herein.) Mortgage, Indenture, Supplemental Indenture or Securities Resolution Company Date Exhibit # Under File No. - ------------------------------------------------------------------------------ (4)- 4 Mortgage and Wisconsin 10/28/38 B-1 2-4340 Deed of Trust Electric ("WE") 5 Second WE 6/1/46 7-C 2-6422 6 Third WE 3/1/49 7-C 2-8456 7 Fourth WE 6/1/50 7-D 2-8456 8 Fifth WE 5/1/52 4-G 2-9588 9 Sixth WE 5/1/54 4-H 2-10846 10 Seventh WE 4/15/56 4-I 2-12400 11 Eighth WE 4/1/58 2-I 2-13937 12 Ninth WE 11/15/60 2-J 2-17087 13 Tenth WE 11/1/66 2-K 2-25593 14 Eleventh WE 11/15/67 2-L 2-27504 15 Twelfth WE 5/15/68 2-M 2-28799 16 Thirteenth WE 5/15/69 2-N 2-32629 17 Fourteenth WE 11/1/69 2-O 2-34942 18 Fifteenth WE 7/15/76 2-P 2-54211 19 Sixteenth WE 1/1/78 2-Q 2-61220 20 Seventeenth WE 5/1/78 2-R 2-61220 21 Eighteenth WE 5/15/78 2-S 2-61220 - 98 - 99 Mortgage, Indenture, Supplemental Indenture or Securities Resolution Company Date Exhibit # Under File No. - ------------------------------------------------------------------------------ 22 Nineteenth WE 8/1/79 (a)2(a) 1-1245 (9/30/79 WE Form 10-Q) 23 Twentieth WE 11/15/79 (a)2(a) 1-1245 (12/31/79 WE Form 10-K) 24 Twenty-First WE 4/15/80 (4)-21 2-69488 25 Twenty-Second WE 12/1/80 (4)-1 1-1245 (12/31/80 WE Form 10-K) 26 Twenty-Third WE 9/15/85 (4)-1 1-1245 (9/30/85 WE Form 10-Q) 27 Twenty-Four WE 9/15/85 (4)-1 1-1245 (9/30/85 WE Form 10-Q) 28 Twenty-Fifth WE 12/15/86 (4)-25 1-1245 (12/31/86 WE Form 10-K) 29 Twenty-Sixth WE 1/15/88 4 1-1245 (1/26/88 Form 8-K) 30 Twenty-Seventh WE 4/15/88 4 1-1245 (3/31/88 Form 10-Q) 31 Twenty-Eighth WE 9/1/89 4 1-1245 (9/30/89 WE Form 10-Q) 32 Twenty-Ninth WE 10/1/91 4-1 1-1245 (12/31/91 WE Form 10-K) 33 Thirtieth WE 12/1/91 4-2 1-1245 (12/31/91 WE Form 10-K) 34 Thirty-First WE 8/1/92 4-1 1-1245 (6/30/92 WE Form 10-Q) 35 Thirty-Second WE 8/1/92 4-2 1-1245 (6/30/92 WE Form 10-Q) 36 Thirty-Third WE 10/1/92 4-1 1-1245 (9/30/92 WE Form 10-Q) 37 Thirty-Fourth WE 11/1/92 4-2 1-1245 (9/30/92 WE Form 10-Q) 38 Thirty-Fifth WE 12/15/92 4-1 1-1245 (12/31/92 WE Form 10-K) 39 Thirty-Sixth WE 1/15/93 4-2 1-1245 (12/31/92 WE Form 10-K) 40 Thirty-Seventh WE 3/15/93 4-3 1-1245 (12/31/92 WE Form 10-K) 41 Thirty-Eighth WE 8/01/93 (4)-1 1-1245 (6/30/93 WE Form 10-Q) 42 Thirty-Ninth WE 9/15/93 (4)-1 1-1245 (9/30/93 WE Form 10-Q) 43 Fortieth WE 1/01/96 (4)-1 1-1245 (1/1/96 WE Form 8-K) All agreements and instruments with respect to long-term debt not exceeding 10 percent of the total assets of the Registrant and its subsidiaries on a consolidated basis have been omitted as permitted by related instructions. The Registrant agrees pursuant to Item 601(b)(4) of Regulation S-K to furnish to the Securities and Exchange Commission, upon request, a copy of all such agreements and instruments. - 99 - 100 Exhibit Number - ------- (10)-1 Amended Non-Qualified Trust Agreement by and between WEC and Firstar Trust Company dated January 26, 1996, regarding trust established to provide a source of funds to assist in meeting of the liabilities under various nonqualified deferred compensation plans made between WEC or its subsidiaries and various plan participants. (Exhibit (10)-2 to WEC's Annual Report on Form 10-K for the year ended December 31, 1995, File No. 1-9057.) * (10)-2 Supplemental Benefits Agreement between WEC and Richard A. Abdoo dated November 21, 1994, and April 26, 1995 letter agreement. (Exhibit (10)-1 to WEC's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995, File No. 1-9057. ("WEC's 6/30/95 10-Q")) * (10)-3 WEC Senior Executive Severance Policy, as adopted effective April 28, 1995 and amended on July 26, 1995. (Exhibit (10)-3 to WEC's 6/30/95 10-Q.) * (10)-4 Service Agreement dated January 1, 1987, between WE, WEC and other non-utility affiliated companies. (Exhibit (10)-(a) to WE's Current Report on Form 8-K dated January 2, 1987 in File No. 1-1245.) (99)-1 Wisconsin Energy Company unaudited pro forma combined condensed statements of income for each of the three years in the period ended December 31, 1994. (Included in WE's Current Report on Form 8-K dated as of August 25, 1995, File No. 1-1245.) (99)-2 Audited Financial Statements of NSP-WI. (Item 8 of NSP-WI's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, File No. 10-3140): Report of Independent Accountants. Independent Auditor's Report for years prior to 1995. Statements of Income and Retained Earnings for the three years ended December 31, 1995. Statements of Cash Flows for the three years ended December 31, 1995. Balance Sheets at December 31, 1995 and 1994. Notes to Financial Statements. - --------------------------- * Management contracts and executive compensation plans or arrangements required to be filed as exhibits pursuant to Item 14(c) of Form 10-K. Certain compensatory plans in which directors or executive officers of the Registrant are eligible to participate are not filed in reliance on the exclusion in Item 601(b)(10)(iii)(B)(6) of Regulation S-K. - 100 - EX-3.1 2 BYLAWS OF WE, AS AMENDED AND RESTATED - JANUARY 31, 1996 1 Exhibit (3)-1 BYLAWS of WISCONSIN ELECTRIC POWER COMPANY As Amended and Restated January 31, 1996 2 TABLE OF CONTENTS ARTICLE I. STOCKHOLDERS.............................................. 1 1.01 Annual Meeting....................................................... 1 1.02 Special Meetings..................................................... 1 1.03 Place of Meetings; Postponements and Adjournments.................... 1 1.04 Notices to Stockholders.............................................. 1 (a) Required Notice.................................................. 1 (b) Fundamental Transactions......................................... 2 1.05 Fixing of Record Date................................................ 2 1.06 Quorum and Voting Requirements....................................... 2 1.07 Conduct of Meetings.................................................. 3 1.08 Voting at Meetings................................................... 3 (a) Proxies; Balloting and Inspectors of Election.................... 3 (b) Proxies Upon Accrual of Special Right............................ 3 1.09 Stockholder Unanimous Consent Without a Meeting...................... 3 1.10 Stockholder Waiver of Notice......................................... 4 1.11 Notice of Stockholder Nomination(s) and/or Proposal(s)............... 4 ARTICLE II. BOARD OF DIRECTORS....................................... 5 2.01 Number............................................................... 5 2.02 Term of Office....................................................... 5 2.03 Election and Tenure.................................................. 5 2.04 Removal.............................................................. 6 2.05 Vacancies............................................................ 6 2.06 Regular Meetings..................................................... 6 2.07 Special Meetings..................................................... 6 2.08 Meetings by Telephone or Other Communication Technology.............. 6 2.09 Notice of Meetings................................................... 7 2.10 Quorum............................................................... 7 2.11 Manner of Acting..................................................... 7 2.12 Committees........................................................... 7 2.13 Compensation......................................................... 8 2.14 Presumption of Assent................................................ 8 2.15 Director Unanimous Consent Without a Meeting......................... 8 ARTICLE III. OFFICERS................................................ 9 3.01 Positions............................................................ 9 3.02 Resignation and Removal.............................................. 9 3.03 Vacancies............................................................ 9 3.04 Powers and Duties.................................................... 9 ARTICLE IV. CERTIFICATES FOR SHARES AND THEIR TRANSFER............... 9 4.01 Stock Certificates and Facsimile Signatures.......................... 9 4.02 Transfer of Stock.................................................... 10 4.03 Lost, Destroyed or Stolen Certificates............................... 10 4.04 Shares Without Certificates.......................................... 10 ARTICLE V. INDEMNIFICATION........................................... 11 5.01 Mandatory Indemnification............................................ 11 5.02 Certain Definitions.................................................. 11 5.03 Legal Enforceability................................................. 11 5.04 Limitation on Modification or Termination............................ 11 5.05 Non-Exclusive Bylaw.................................................. 11 ARTICLE VI. OTHER INDEMNIFICATION PROVISIONS......................... 12 6.01 Indemnification for Successful Defense............................... 12 6.02 Other Indemnification................................................ 12 6.03 Written Request...................................................... 12 6.04 Nonduplication....................................................... 12 6.05 Determination of Right to Indemnification............................ 12 -i- 3 6.06 Advance of Expenses.................................................. 13 6.07 Limitations on Indemnification....................................... 14 6.08 Court-Ordered Indemnification........................................ 14 6.09 Indemnification and Allowance of Expenses of Employees and Agents.... 14 6.10 Insurance............................................................ 15 6.11 Securities Law Claims................................................ 15 6.12 Liberal Construction................................................. 15 ARTICLE VII. CONTRACTS, CHECKS, NOTES, BONDS, ETC.................... 15 7.01 Contracts............................................................ 15 7.02 Checks, Drafts, Etc.................................................. 15 ARTICLE VIII. FISCAL YEAR............................................ 16 ARTICLE IX. CORPORATE SEAL........................................... 16 ARTICLE X. EFFECT OF HEADINGS........................................ 16 ARTICLE XI. AMENDMENTS............................................... 16 11.01 By Stockholders...................................................... 16 11.02 By Directors......................................................... 16 11.03 Implied Amendments................................................... 17 11.04 Certain Voting Requirements Preserved................................ 17 -ii- 4 ARTICLE I. STOCKHOLDERS 1.01. Annual Meeting. The annual meeting of the stockholders of the corporation shall be held each year on the first business day of June, or on such earlier or later date and at the time designated by or under the authority of the Board of Directors, the Chairman of the Board, the President or the Secretary, for the purpose of electing directors and for the transaction of such other business as may properly come before the meeting. 1.02. Special Meetings. Special meetings of the stockholders, for any purpose or purposes, unless otherwise prescribed by the Wisconsin Business Corporation Law, may be called by the Chairman of the Board, the President or a majority of the Board of Directors, or in case the meeting is for the purpose of enabling the holders of the Six Per Cent Preferred Stock, the $100 Par Value Serial Preferred Stock and the $25 Par Value Serial Preferred Stock (hereinafter together called the "Preferred Stocks") to elect directors of the corporation, upon the conditions set forth in the Articles of Incorporation, then, upon call as therein provided. [Old Bylaw I, Section 2.] If and as required by the Wisconsin Business Corporation Law, a special meeting shall be called upon written demand describing one or more purposes for which it is to be held by holders of shares with at least 10% of the votes entitled to be cast on any issue proposed to be considered at the meeting. The time and purpose or purposes of any special meeting shall be described in the notice required by Section 1.04 of these Bylaws and only business within the purpose(s) described in such notice shall be conducted at such meeting. 1.03. Place of Meetings; Postponements and Adjournments. The Board of Directors, the Chairman of the Board, the President or the Secretary may designate any place, either within or without the State of Wisconsin, as the place of meeting for any annual meeting or any special meeting, including any adjourned meeting. The Board of Directors, the Chairman of the Board, the President or the Secretary may postpone any previously scheduled annual meeting or special meeting by giving public notice of the postponed meeting date at any time prior to the scheduled meeting date. If no designation is made, the place of meeting shall be the principal office of the corporation. Any meeting may be adjourned from time to time, whether or not a quorum is present, by the chairperson of the meeting or by vote of a majority of the votes entitled to be cast by the shares represented thereat. 1.04. Notices to Stockholders. (a) Required Notice. Notice may be communicated by mail, private carrier, or any other means permissible under Wisconsin law. Written notice stating the scheduled place, day and hour of the meeting and, in case of a special meeting, the purpose or purposes for which the meeting is called, shall be communicated or sent not less than ten (10) days, unless a longer period is required by the Wisconsin Business Corporation Law or the Articles of Incorporation, nor more than ninety (90) days, unless a longer period is permitted or a shorter period is required by the Wisconsin Business Corporation Law, before the date of the meeting, by or at the direction of the Chairman of the Board, the President or the Secretary, to each stockholder of record entitled to vote at such meeting or, for the fundamental transactions described in subsections (b)(1) to (4) below, for which the Wisconsin Business Corporation Law requires that notice be given to stockholders not entitled to vote, to all stockholders of record. At least twenty (20) days' notice shall be provided if the purpose, or one of the purposes, of the meeting is to consider a plan of merger or share exchange for which stockholder approval is -1- 5 required by law, or the sale, lease, exchange or other disposition of all or substantially all of the corporation's property, with or without good will, otherwise than in the usual and regular course of business. A stockholder may waive notice in accordance with Section 1.10 of these Bylaws. (b) Fundamental Transactions. If a purpose of any stockholder meeting is to consider either: (1) a proposed amendment to the Articles of Incorporation (including any restated articles); (2) a plan of merger or share exchange for which stockholder approval is required by law; (3) the sale, lease, exchange or other disposition of all or substantially all of the corporation's property, with or without good will, otherwise than in the usual and regular course of business; (4) the dissolution of the corporation; or (5) the removal of a director, the notice must so state and in cases (1), (2) and (3) above must be accompanied by, respectively, a copy or summary of the: (1) proposed articles of amendment or a copy of the restated articles that identifies any amendment or other change; (2) proposed plan of merger or share exchange; or (3) proposed transaction for disposition of all or substantially all of the corporation's property. If the proposed corporate action creates dissenters' rights, the notice must state that stockholders and beneficial stockholders are or may be entitled to assert dissenters' rights, and must be accompanied by a copy of Sections 180.1301 to 180.1331 (or successor provisions) of the Wisconsin Business Corporation Law. 1.05. Fixing of Record Date. The Board of Directors, or any officer authorized by the Board of Directors, may fix in advance a date as the record date for one or more voting groups for any determination of stockholders entitled to notice of a stockholders' meeting, to demand a special meeting, to vote, or to take any other action, such date in any case to be not more than seventy (70) days and, in case of a meeting of stockholders, dividend or stock split, not less than ten (10) days prior to the meeting or action requiring such determination of stockholders, and may fix the record date for determining stockholders entitled to a share dividend or distribution. If within thirty (30) days after the corporation receives one or more written demands for a special stockholder meeting that purport to satisfy the requirements of Section 180.0702(1)(b) of the Wisconsin Business Corporation Law (or any successor provision) no record date has been fixed pursuant to the first sentence of this Section 1.05 for the determination of stockholders entitled to demand such a stockholder meeting, the record date for determining stockholders entitled to demand such meeting shall be the date that the first stockholder signed the demand. If no record date has been fixed pursuant to the first sentence of this Section 1.05 for the determination of stockholders entitled (A) to notice of or to vote at a meeting of stockholders prior to the time that notice of the meeting is mailed or otherwise delivered to stockholders, or (B) to consent to action without a meeting within thirty (30) days after the corporation receives the first written consent to stockholder action without a meeting, (a) the close of business on the day before the first notice of the meeting is mailed or otherwise delivered to stockholders or (b) the date that the first stockholder signed the first written consent to stockholder action without a meeting, respectively, shall be the record date for the determination of such stockholders. When a determination of stockholders entitled to vote at any meeting of stockholders has been made as provided in this section, such determination shall be applied to any postponement or adjournment thereof unless the Board of Directors fixes a new record date and except as otherwise required by law. A new record date must be set if a meeting is postponed or adjourned to a date more than 120 days after the date fixed for the original meeting. 1.06. Quorum and Voting Requirements. Except as otherwise provided in the Articles of Incorporation or in the Wisconsin Business Corporation Law, a -2- 6 majority of the votes entitled to be cast by shares entitled to vote as a separate voting group on a matter, represented in person or by proxy, shall constitute a quorum of that voting group for action on that matter at a meeting of stockholders. If a quorum exists, action on a matter, other than the election of directors, by a voting group is approved if the votes cast within the voting group favoring the action exceed the votes cast opposing the action unless a greater number of affirmative votes is required by the Wisconsin Business Corporation Law, the Articles of Incorporation, or any other provision of these Bylaws. If the Articles of Incorporation or the Wisconsin Business Corporation Law provide for voting by two (2) or more classes or voting groups on a matter, action on that matter is taken only when voted upon by each of those voting groups counted separately. 1.07. Conduct of Meetings. The Chairman of the Board, or in his absence or at his request, the President, and in the President's absence, a Vice President, and in their absence, any person chosen by the stockholders present shall call the meeting of the stockholders to order and shall act as chairperson of the meeting, and the Secretary shall act as secretary of all meetings of the stockholders, but, in the absence of the Secretary, the chairperson of the meeting may appoint any other person to act as secretary of the meeting. 1.08. Voting at Meetings. (a) Proxies; Balloting and Inspectors of Election. At all meetings of stockholders, a stockholder entitled to vote may vote in person or by proxy appointed in writing by the stockholder or by his or her duly authorized attorney-in-fact. Voting at meetings of stockholders need not be by written ballot unless so determined by the Board of Directors, the Chairman of the Board, the President or the Secretary. Voting at meetings of stockholders shall be conducted by one or more inspectors of election appointed by the Board of Directors, the Chairman of the Board, the President or the Secretary. However, no director or person who is a candidate for the office of director shall be appointed as such inspector. The inspectors, or persons representing the inspector if the inspector is an institution, before entering upon the discharge of their duties, shall take and subscribe an oath faithfully to execute the duties of inspector at such meeting with strict impartiality and according to the best of their ability. (b) Proxies Upon Accrual of Special Right. In connection with the first election of a majority of the members of the Board of Directors by the holders of the Preferred Stocks upon accrual of the special right of such holders to elect a majority of the members of the Board, as provided in Article III of the Articles of Incorporation, the corporation shall prepare and mail to such holders of record such proxy forms, communications and documents as may be deemed appropriate (and also such as may be required by any governmental authority having jurisdiction) for the purpose of soliciting proxies for the election of directors by such holders, voting separately as a class without regard to series. [Old Bylaw I, Section 5D.] 1.09. Stockholder Unanimous Consent Without a Meeting. Any action required by the Articles of Incorporation, Bylaws or any provision of law to be taken at a meeting of stockholders or any other action which may be taken at such a meeting may be taken without a meeting if consent in writing setting forth the action so taken shall be signed by all of the stockholders entitled to vote with respect to the subject matter thereof and such consent shall have the same force and effect as a unanimous vote. -3- 7 1.10. Stockholder Waiver of Notice. A stockholder may waive any notice required by the Wisconsin Business Corporation Law, the Articles of Incorporation or these Bylaws before or after the date and time stated in the notice. The waiver shall be in writing and signed by the stockholder entitled to the notice, shall contain the same information that would have been required in the notice under the Wisconsin Business Corporation Law except that the time and place of meeting need not be stated, and shall be delivered to the corporation for inclusion in the corporate records. A stockholder's attendance at a meeting, in person or by proxy, waives objection to both of the following: (a) Lack of notice or defective notice of the meeting, unless the stockholder at the beginning of the meeting or promptly upon arrival objects to holding the meeting or transacting business at the meeting. (b) Consideration of a particular matter at the meeting that is not within the purpose described in the meeting notice, unless the stockholder objects to considering the matter when it is presented. 1.11. Notice of Stockholder Nomination(s) and/or Proposal(s). Except with respect to nomination(s) or proposal(s) adopted or recommended by the Board of Directors for inclusion in the corporation's proxy statement for its annual meeting, a stockholder entitled to vote at a meeting may nominate a person or persons for election as director(s) or propose action(s) to be taken at a meeting only if written notice of any stockholder nomination(s) and/or proposal(s) to be considered for a vote at an annual meeting of stockholders is delivered personally or mailed by Certified Mail-Return Receipt Requested at least seventy (70) days and not more than one hundred (100) days before the scheduled date of such meeting to the Secretary of the corporation at the principal business office of the corporation. With respect to stockholder nomination(s) for the election of directors each such notice shall set forth: (a) the name and address of the stockholder who intends to make the nomination(s), of any beneficial owner of shares on whose behalf such nomination is being made and of the person or persons to be nominated; (b) a representation that the stockholder is a holder of record of stock of the corporation entitled to vote at such meeting (including the number of shares the stockholder owns as of the record date (or as of the most recent practicable date if no record date has been set) and the length of time the shares have been held) and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (c) a description of all arrangements and understandings between the stockholder or any beneficial holder on whose behalf it holds such shares, and their respective affiliates, and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder; (d) such other information regarding each nominee proposed by such stockholder as would have been required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission (whether or not such rules are applicable) had each nominee been nominated, or intended to be nominated, by the Board of Directors; and (e) the consent of each nominee to serve as a director of the corporation if so elected. With respect to stockholder proposal(s) for action(s) to be taken at an annual meeting of stockholders, the notice shall clearly set forth: (a) the name and address of the stockholder who intends to make the proposal(s); (b) a representation that the stockholder is a holder of record of the stock of the corporation entitled to vote at the meeting (including the number of shares the stockholder owns as of the record date (or as of the most recent practicable date if no record date has been set) and the length of time the shares have been held) and intends to -4- 8 appear in person or by proxy to make the proposal(s) specified in the notice; (c) the proposal(s) and a brief supporting statement of such proposal(s); and (d) such other information regarding the proposal(s) as would have been required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission (whether or not such rules are applicable). Except with respect to nomination(s) or proposal(s) adopted or recommended by the Board of Directors for inclusion in the notice to stockholders for a special meeting of stockholders, a stockholder entitled to vote at a special meeting may nominate a person or persons for election as director(s) and/or propose action(s) to be taken at a meeting only if written notice of any stockholder nomination(s) and/or proposal(s) to be considered for a vote at a special meeting is delivered personally or mailed by Certified Mail-Return Receipt Requested to the Secretary of the corporation at the principal business office of the corporation so that it is received in a reasonable period of time before such special meeting and only if such nomination or proposal is within the purposes described in the notice to stockholders of the special meeting. All other notice requirements regarding stockholder nomination(s) and/or proposal(s) applicable to annual meetings also apply to nomination(s) and/or proposal(s) for special meetings. The chairperson of the meeting may refuse to acknowledge the nomination(s) and/or proposal(s) of any person made without compliance with the foregoing procedures. This section shall not affect the corporation's rights or responsibilities with respect to its proxies or proxy statement for any meeting. ARTICLE II. BOARD OF DIRECTORS 2.01. Number. The number of directors constituting the whole Board of Directors shall be such number as shall be fixed from time to time by the affirmative vote of the whole Board but in no event shall the number be less than three. The number of directors at any time constituting the whole Board shall not be reduced so as to shorten the term of any director then in office. Directors need not be stockholders of the corporation. 2.02. Term of Office. The directors shall hold office until the next annual meeting of stockholders at which their respective terms of office shall expire and until their respective successors are duly elected and qualified, unless their term of office shall be sooner terminated as provided in the Articles of Incorporation in connection with the accrual of the special right of the holders of the Preferred Stocks to elect a majority of the members of the Board of Directors in the event of certain dividend defaults. [Art. III.C.(6)(b) of Restated Articles] 2.03. Election and Tenure. Unless action is taken without a meeting under these Bylaws, directors shall be elected by a plurality of the votes cast by the shares entitled to vote in the election at a stockholders meeting at which a quorum is present. Each director shall hold office until the end of such director's term and until such director's successor has been elected, or until such director's prior death, resignation or removal. A director may resign at any time by filing a written resignation with the Secretary of the corporation. -5- 9 2.04. Removal. Subject to the remainder of this Section 2.04, the shareholders may remove one or more directors from office as provided in the Wisconsin Business Corporation Law. During any continuance of the special right of the holders of the Preferred Stocks to elect a majority of the members of the Board, as provided in Article III of the Articles of Incorporation, at any meeting of the stockholders, the holders of a majority of the votes entitled to be cast by shares of the Preferred Stocks of the corporation, voting separately as a class without regard to series, may remove any director theretofore elected by the holders of the Preferred Stocks or elected by the Board to fill a vacancy among the directors elected by the holders of the Preferred Stocks, and may fill any vacancy in the Board for the unexpired term thus caused; and the holders of a majority of the votes entitled to be cast by the shares of Common Stock of the corporation, voting separately as a class, may remove any director theretofore elected by the Common stockholders or elected by the Board to fill a vacancy among the directors elected by the Common stockholders, and may fill the vacancy in the Board for the unexpired term thus caused. [Old Bylaw II, Section 2, 2nd Paragraph.] 2.05. Vacancies. Any vacancy occurring in the Board of Directors, including a vacancy created by an increase in the number of directors, may be filled by the stockholders or the Board of Directors. If the directors remaining in office constitute fewer than a quorum of the Board, the directors may fill a vacancy by the affirmative vote of a majority of all directors remaining in office. Each director so elected shall hold office for a term expiring at the next annual stockholders' meeting. However, if the vacant office was held by a director elected by the holders of the Preferred Stocks or by the holders of the Common Stock, only the holders of shares of that voting group may vote to fill the vacancy if it is filled by the shareholders, and only the remaining directors elected by that voting group may vote to fill the vacancy if it is filled by the directors. [WBCL Section 180.0810(2), replacing Old Bylaw II, Section 2, 1st Paragraph.] 2.06. Regular Meetings. Regular meetings of the Board of Directors and any committee thereof shall be held at such time and place, either within or without the State of Wisconsin, as may from time to time be fixed by the Board or such committee without other notice than the schedule prepared by the Secretary or the resolution or other action of the Board or committee establishing the time and place of such regular meetings. 2.07. Special Meetings. Special meetings of the Board of Directors may be called by or at the request of the Board of Directors, the Executive Committee, the Chairman of the Board, the President, any committee designated by the Board with specific authority to do such or any two (2) directors. Special meetings of any committee may be called by or at the request of the foregoing persons or the chairman of the committee. The persons calling any special meeting of the Board of Directors or committee may fix any place, either within or without the State of Wisconsin, as the place for holding any special meeting called by them, and if no other place is fixed the place of meeting shall be the principal business office of the corporation. 2.08. Meetings by Telephone or Other Communication Technology. (a) Any or all directors may participate in a regular or special meeting of the Board of Directors or in a committee meeting by, or conduct the meeting through the use of, telephone or any other means of communication by which either: (i) all participating directors may simultaneously hear each other during the meeting or (ii) all communication during the meeting is immediately transmitted to each participating director, and each participating director is able to immediately send messages to all other participating directors. -6- 10 (b) If a meeting will be conducted through the use of any means described in paragraph (a), all participating directors shall be informed that a meeting is taking place at which official business may be transacted. A director participating in a meeting by any means described in paragraph (a) is deemed to be present in person at the meeting. 2.09. Notice of Meetings. Notice of each meeting of the Board of Directors (unless otherwise provided in or pursuant to Section 2.06 of these Bylaws) shall be given by written notice delivered personally or mailed or given by telephone or telegram to each director at his business address or at such other address as such director shall have designated in writing filed with the Secretary, in each case not less than 6 hours prior thereto. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail so addressed, with postage thereon prepaid. If notice be given by telegram, such notice shall be deemed to be delivered when the telegram is delivered to the telegraph company; if by telephone, at the time the call is completed. Whenever any notice whatever is required to be given to any director of the corporation under the Articles of Incorporation, Bylaws or any provision of law, a waiver thereof in writing, signed at any time, whether before or after the time of meeting, by the director entitled to such notice, shall be deemed equivalent to the giving of such notice. The attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting and objects thereat to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board need be specified in the notice or waiver of notice of such meeting. 2.10. Quorum. Except as otherwise provided by the Wisconsin Business Corporation Law or these Bylaws, a majority of the number of directors as provided in or pursuant to Section 2.01 shall constitute a quorum of the Board of Directors, and a majority of the number of directors appointed to serve on a committee shall constitute a quorum of the committee. If at any meeting of the Board of Directors or any committee thereof there shall be less than a quorum present, a majority of the directors present may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall have been obtained, when any business may be transacted which might have been transacted at the meeting as first convened had there been a quorum. 2.11. Manner of Acting. The affirmative vote of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors or any committee thereof unless the affirmative vote of a greater number is otherwise required by the Wisconsin Business Corporation Law, the Articles of Incorporation, the Bylaws or any provision of law. 2.12. Committees. The Board of Directors, by resolution adopted by the affirmative vote of a majority of all the directors then in office, may create one or more committees, each committee to consist of two (2) or more directors appointed by the Board of Directors to serve as members of the committee, which to the extent provided in the resolution as initially adopted, and as thereafter supplemented or amended by further resolution adopted by a like vote, may exercise the authority of the Board of Directors. Notwithstanding the foregoing, no committee may: (a) authorize distributions; (b) approve or propose to stockholders action that the Wisconsin Business Corporation Law requires be approved by stockholders; (c) fill vacancies on the Board of Directors or any of its committees, except that the Board of -7- 11 Directors may provide by resolution that any vacancies on a committee shall be filled by the affirmative vote of a majority of the remaining committee members; (d) amend the Articles of Incorporation; (e) adopt, amend or repeal Bylaws; (f) approve a plan of merger not requiring stockholder approval; (g) authorize or approve reacquisition of shares, except according to a formula or method prescribed by the Board of Directors; or (h) authorize or approve the issuance or sale or contract for sale of shares, or determine the designation and relative rights, preferences and limitations of a class or series of shares, except within limits prescribed by the Board of Directors. Unless otherwise provided by the Board of Directors, members of any committee shall serve at the pleasure of the Board of Directors. The Board of Directors may elect one or more of its members as alternate members of any such committee who may take the place of any absent member or members at any meeting of such committee, upon request by the Chairman of the Board or upon request by the chairperson of such meeting. Each such committee shall fix its own rules (consistent with the Wisconsin Business Corporation Law, the Articles of Incorporation and these Bylaws) governing the conduct of its activities and shall make such reports to the Board of Directors of its activities as the Board of Directors may request. Unless otherwise provided by the Board of Directors in creating a committee, a committee may employ counsel, accountants and other consultants to assist it in the exercise of authority. The provisions of Section 2.09 shall also apply to notice and waiver of notice of meetings of any committee of the Board of Directors. 2.13. Compensation. The Board of Directors, by affirmative vote of a majority of the directors then in office, and irrespective of any personal interest of any of its members, may (a) establish reasonable compensation of all directors for services to the corporation as directors, officers or otherwise, and the manner and time and payment thereof, (b) provide for reasonable pensions, disability or death benefits, and other benefits or payments, to directors, officers and employees and to their estates, families, dependents or beneficiaries on account of prior services rendered by such directors, officers and employees to the corporation, and (c) provide for reimbursement of reasonable expenses incurred in the performance of directors' duties. 2.14. Presumption of Assent. A director who is present and is announced as present at a meeting of the Board of Directors or a committee thereof at which action on any corporate matter is taken shall be presumed to have assented to the action taken unless (a) the director objects at the beginning of the meeting or promptly upon his or her arrival to holding the meeting or transacting business at the meeting, or (b) the director's dissent or abstention from the action taken is entered in the minutes of the meeting, or (c) the director delivers his or her written notice of dissent or abstention to the presiding officer of the meeting before the adjournment thereof or to the corporation immediately after the adjournment of the meeting, or (d) the director dissents or abstains from an action taken, minutes of the meeting are prepared that fail to show the director's dissent or abstention and the director delivers to the corporation a written notice of that failure promptly after receiving the minutes. Such right to dissent or abstain shall not apply to a director who voted in favor of an action. 2.15. Director Unanimous Consent Without a Meeting. Any action required or permitted by the Articles of Incorporation, these Bylaws or any provision of law to be taken at a Board of Directors meeting or committee meeting may be taken without a meeting if the action is taken by all members -8- 12 of the Board or committee. The action shall be evidenced by one or more written consents describing the action taken, signed by each director and retained by the corporation. Action taken hereunder is effective when the last director signs the consent, unless the consent specifies a different effective date. A consent signed hereunder has the effect of a unanimous vote taken at a meeting at which all directors or committee members were present, and may be described as such in any document. ARTICLE III. OFFICERS 3.01. Positions. The officers of the corporation shall include a Chairman of the Board, a President, the number of Vice Presidents provided for by the Board of Directors, a Treasurer, and a Secretary, each of whom shall be appointed by the Board of Directors. The Board of Directors shall also designate a Chief Executive Officer, a Chief Operating Officer and a Chief Financial Officer. Such other officers and assistant officers as may be deemed necessary may be appointed by the Board of Directors. Any two or more offices may be held by the same person. 3.02. Resignation and Removal. An officer shall hold office until he or she resigns, dies, is removed hereunder, or a different person is appointed to the office. An officer may resign at any time by delivering an appropriate written notice to the corporation. The resignation is effective when the notice is delivered, unless the notice specifies a later effective date and the corporation accepts the later effective date. Any officer may be removed from office by the affirmative vote of a majority of the whole Board of Directors at any time, with or without cause and notwithstanding the contract rights, if any, of the person removed. Except as provided in the preceding sentence, the resignation or removal is subject to any remedies provided by any contract between the officer and the corporation or otherwise provided by law. Appointment shall not of itself create contract rights. 3.03. Vacancies. A vacancy in any office because of death, resignation, removal or otherwise, shall be filled by the Board of Directors. The Board of Directors may, from time to time, omit to elect one or more officers or may omit to fill a vacancy, and in such case, the designated duties of such officer, unless otherwise provided in these Bylaws, shall be discharged by the Chief Executive Officer or such other officers as he or she may designate. 3.04. Powers and Duties. Subject to such limitations as the Board of Directors may from time to time prescribe, the officers of the corporation shall each have such powers and duties as generally pertain to their respective offices, as well as such powers and duties as from time to time may be conferred by the Chief Executive Officer or the Board of Directors. The Treasurer and the Assistant Treasurers may be required to give bond for the faithful discharge of their duties, in such sum and of such character as the Board of Directors may from time to time prescribe. ARTICLE IV. CERTIFICATES FOR SHARES AND THEIR TRANSFER 4.01. Stock Certificates and Facsimile Signatures. The certificates for shares of stock of the corporation shall be signed either manually or by -9- 13 facsimile signature by the Chief Executive Officer, the President or a Vice President, and by the Secretary or an Assistant Secretary of the corporation, or any other officer or officers that the Board of Directors designates, and may be sealed with the seal of the corporation. The certificates for shares shall be countersigned and registered either manually or by facsimile signature in such manner, if any, as the Board of Directors may from time to time prescribe. The transfer agent and the registrar may, but need not be, the same person or agency. In the event that the corporation or its agent is acting in the dual capacity of transfer agent and registrar, a single manual or facsimile signature may be used. In case any such person acting as an officer, transfer agent or registrar, who has signed, or whose facsimile signature has been placed upon such certificate, shall have ceased to be such officer, transfer agent or registrar, before such certificate is issued, it may be used by the corporation with the same effect as if such person had not ceased to be such at the date of its issue. 4.02. Transfer of Stock. The shares of stock of the corporation shall be transferable on the books of the corporation upon request by the holders thereof or by duly authorized attorney, upon surrender and cancellation of certificates for a like number of shares of the same class and series of stock, with duly executed assignment and power of transfer endorsed thereon or attached thereto, and with such proof of the authenticity of the signature as the corporation or its agents may reasonably require. Prior to due presentment of a certificate for shares for registration of transfer the corporation may treat the registered owner of such shares as the person exclusively entitled to vote, to receive notifications and otherwise to have and exercise all the rights and powers of an owner. Where a certificate for shares is presented to the corporation with a request to register for transfer, the corporation shall not be liable to the owner or any other person suffering loss as a result of such registration of transfer if (a) there were on or with the certificate the necessary endorsements, and (b) the corporation had no duty to inquire into adverse claims or has discharged any such duty. The corporation may require reasonable assurance that said endorsements are genuine and effective and in compliance with such other regulations as may be prescribed by or under the authority of the Board of Directors. 4.03. Lost, Destroyed or Stolen Certificates. Where the owner claims that his certificate for shares has been lost, destroyed or wrongfully taken, a new certificate shall be issued in place thereof if the owner (a) so requests before the corporation has notice that such shares have been acquired by a bona fide purchaser, (b) files with the corporation a sufficient indemnity bond and (c) satisfies such other reasonable requirements as may be prescribed by or under the authority of the Board of Directors. 4.04. Shares Without Certificates. The Board of Directors may authorize the issuance of any shares of any of its classes or series without certificates. The authorization does not affect shares already represented by certificates until the certificates are surrendered to the corporation. Within a reasonable time after the issuance or transfer of shares without certificates, the corporation shall send the stockholder a written statement that includes (1) all of the information required on share certificates and (2) any transfer restrictions applicable to the shares. -10- 14 ARTICLE V. INDEMNIFICATION 5.01. Mandatory Indemnification. The corporation shall indemnify to the fullest extent permitted by law any person who is or was a party or threatened to be made a party to any legal proceeding by reason of the fact that such person is or was a director or officer of the corporation, or is or was serving at the request of the corporation as a director or officer of another enterprise, against expenses (including attorney fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with such legal proceeding. 5.02. Certain Definitions. As used in this Article V, (a) "indemnify" includes the advancement of expenses upon receipt of an undertaking to repay upon specified conditions, (b) "fullest extent permitted by law" means the fullest extent to which indemnity may lawfully be provided by, pursuant to or consistently with, the provisions of Sections 180.0850 to 180.0859 of the Wisconsin Business Corporation Law (or any successor provisions) or any other applicable law, whether statutory or otherwise, (c) "person" includes the person's heirs, executors and administrators, (d) "legal proceeding" means any threatened, pending or completed action, suit or proceeding, whether or not by or in right of the corporation, (e) "other enterprise" includes any corporation, partnership, joint venture, trust, dividend reinvestment plan, stock purchase plan, employee benefit plan or other plan or entity, (f) "expenses" include expenses in the enforcement of rights under this Bylaw and any excise taxes assessed with respect to an employee benefit plan and (g) in respect of any of such plans, (i) "serving at the request of the corporation as a director or officer" includes serving at the request of the corporation in any capacity that involves services or duties with respect to the plan or its participants or beneficiaries and (ii) action reasonably believed to be in the interest of such participants or beneficiaries shall be deemed reasonably believed to be in, or not opposed to, the best interests of the corporation. 5.03. Legal Enforceability. The rights provided to any person by the terms of this Article V shall be legally enforceable against the corporation by such person, who shall be presumed to have relied on the provisions of this Article V in undertaking or continuing any of the positions with the corporation or other enterprise referred to in Section 5.01. 5.04. Limitation on Modification or Termination. No modification or termination of this Article V shall be effected which would impair any rights hereunder arising at any time out of events occurring prior to such modification or termination. 5.05. Non-Exclusive Bylaw. This Article V is not intended to be exclusive and accordingly shall not be construed as impairing in any way the power and authority of the corporation, to the extent legally permissible without regard to this Article V, in its discretion to indemnify or agree to indemnify, or to purchase insurance indemnifying, any employee, agent or other person. -11- 15 ARTICLE VI. OTHER INDEMNIFICATION PROVISIONS 6.01. Indemnification for Successful Defense. Within twenty (20) days after receipt of a written request pursuant to Section 6.03, the corporation shall indemnify a director or officer, to the extent he or she has been successful on the merits or otherwise in the defense of a proceeding, for all reasonable expenses incurred in the proceeding if the director or officer was a party because he or she is a director or officer of the corporation. 6.02. Other Indemnification. (a) In cases not included under Section 6.01, the corporation shall indemnify a director or officer against all liabilities and expenses incurred by the director or officer in a proceeding to which the director or officer was a party because he or she is a director or officer of the corporation, unless liability was incurred because the director or officer breached or failed to perform a duty he or she owes to the corporation and the breach or failure to perform constitutes any of the following: (1) A willful failure to deal fairly with the corporation or its stockholders in connection with a matter in which the director or officer has a material conflict of interest. (2) A violation of criminal law, unless the director or officer had reasonable cause to believe that his or her conduct was lawful or no reasonable cause to believe that his or her conduct was unlawful. (3) A transaction from which the director or officer derived an improper personal profit. (4) Willful misconduct. (b) Determination of whether indemnification is required under this Section or Article V shall be made pursuant to Section 6.05. (c) The termination of a proceeding by judgment, order, settlement or conviction, or upon a plea of no contest or an equivalent plea, does not, by itself, create a presumption that indemnification of the director or officer is not required under this Section. 6.03. Written Request. A director or officer who seeks indemnification under Article V or Sections 6.01 or 6.02 shall make a written request to the corporation. 6.04. Nonduplication. The corporation shall not indemnify a director or officer under Sections 6.01 or 6.02 if the director or officer has previously received indemnification or allowance of expenses from any person, including the corporation, in connection with the same proceeding. However, the director or officer has no duty to look to any other person for indemnification. 6.05. Determination of Right to Indemnification. (a) Unless otherwise provided by the Articles of Incorporation or by written agreement between the director or officer and the corporation, the director or officer seeking indemnification under Article V or Section 6.02 shall select one of the following means for determining his or her right to indemnification: -12- 16 (1) By a majority vote of a quorum of the Board of Directors consisting of directors not at the time parties to the same or related proceedings. If a quorum of disinterested directors cannot be obtained, by majority vote of a committee duly appointed by the Board of Directors and consisting solely of two (2) or more directors who are not at the time parties to the same or related proceedings. Directors who are parties to the same or related proceedings may participate in the designation of members of the committee. (2) By independent legal counsel selected by a quorum of the Board of Directors or its committee in the manner prescribed in sub. (1) or, if unable to obtain such a quorum or committee, by a majority vote of the full Board of Directors, including directors who are parties to the same or related proceedings. (3) By a panel of three (3) arbitrators consisting of one arbitrator selected by those directors entitled under sub. (2) to select independent legal counsel, one arbitrator selected by the director or officer seeking indemnification and one arbitrator selected by the two (2) arbitrators previously selected. (4) By an affirmative vote of shares represented at a meeting of stockholders at which a quorum of the voting group entitled to vote thereon is present. Shares owned by, or voted under the control of, persons who are at the time parties to the same or related proceedings, whether as plaintiffs or defendants or in any other capacity, may not be voted in making the determination. (5) By a court under Section 6.08. (6) By any other method provided for in any additional right to indemnification. (b) In any determination under (a), the burden of proof is on the corporation to prove by clear and convincing evidence that indemnification under Article V or Section 6.02 should not be allowed. (c) A written determination as to a director's or officer's indemnification under Article V or Section 6.02 shall be submitted to both the corporation and the director or officer within 60 days of the selection made under (a). (d) If it is determined that indemnification is required under Article V or Section 6.02, the corporation shall pay all liabilities and expenses not prohibited by Section 6.04 within ten (10) days after receipt of the written determination under (c). The corporation shall also pay all expenses incurred by the director or officer in the determination process under (a). 6.06. Advance of Expenses. Within ten (10) days after receipt of a written request by a director or officer who is a party to a proceeding, the corporation shall pay or reimburse his or her reasonable expenses as incurred if the director or officer provides the corporation with all of the following: (1) A written affirmation of his or her good faith belief that he or she has not breached or failed to perform his or her duties to the corporation. -13- 17 (2) A written undertaking, executed personally or on his or her behalf, to repay the allowance to the extent that it is ultimately determined under Section 6.05 that indemnification under Article V or Section 6.02 is not required and that indemnification is not ordered by a court under Section 6.08(b)(2). The undertaking under this subsection shall be an unlimited general obligation of the director or officer and may be accepted without reference to his or her ability to repay the allowance. The undertaking may be secured or unsecured. 6.07. Limitations on Indemnification. (a) Regardless of the existence or rights under these Bylaws and additional rights to indemnification under any agreement with the corporation, the corporation shall not indemnify a director or officer, or permit a director or officer to retain any allowance of expenses, unless it is determined by or on behalf of the corporation that the director or officer did not breach or fail to perform a duty he or she owes to the corporation which constitutes conduct under Section 6.02(a)(1), (2), (3) or (4). A director or officer who is a party to the same or related proceedings for which indemnification or an allowance of expenses is sought may not participate in a determination under this subsection. (b) Sections 6.01 to 6.12 do not affect the corporation's power to pay or reimburse expenses incurred by a director or officer in any of the following circumstances. (1) As a witness in a proceeding to which he or she is not a party. (2) As a plaintiff or petitioner in a proceeding because he or she is or was an employee, agent, director or officer of the corporation. 6.08. Court-Ordered Indemnification. (a) Except as provided otherwise by written agreement between the director or officer and the corporation, a director or officer who is a party to a proceeding may apply for indemnification to the court conducting the proceeding or to another court of competent jurisdiction. Application shall be made for an initial determination by the court under Section 6.05(a)(5) or for review by the court of an adverse determination under Section 6.05(a) (1), (2), (3), (4) or (6). After receipt of an application, the court shall give any notice it considers necessary. (b) The court shall order indemnification if it determines any of the following: (1) That the director or officer is entitled to indemnification under Article V or Sections 6.01 or 6.02. (2) That the director or officer is fairly and reasonably entitled to indemnification in view of all the relevant circumstances, regardless of whether indemnification is required under Article V or Section 6.02. (c) If the court determines under (b) that the director or officer is entitled to indemnification, the corporation shall pay the director's or officer's expenses incurred to obtain the court-ordered indemnification. 6.09. Indemnification and Allowance of Expenses of Employees and Agents. The corporation shall indemnify an employee of the corporation who is not a director or officer of the corporation, to the extent that he or she has -14- 18 been successful on the merits or otherwise in defense of a proceeding, for all reasonable expenses incurred in the proceeding if the employee was a party because he or she was an employee of the corporation. In addition, the corporation may indemnify and allow reasonable expenses of an employee or agent who is not a director or officer of the corporation to the extent provided by the Articles of Incorporation or these Bylaws, by general or specific action of the Board of Directors or by contract. 6.10. Insurance. The corporation may purchase and maintain insurance on behalf of an individual who is an employee, agent, director or officer of the corporation against liability asserted against or incurred by the individual in his or her capacity as an employee, agent, director or officer, regardless of whether the corporation is required or authorized to indemnify or allow expenses to the individual against the same liability under Article V or Sections 6.01, 6.02, 6.06, 6.07 and 6.09. 6.11. Securities Law Claims. (a) Pursuant to the public policy of the State of Wisconsin, the corporation shall provide indemnification and allowance of expenses and may insure for any liability incurred in connection with a proceeding involving securities regulation described under (b) to the extent required or permitted under Article V or Sections 6.01 to 6.10. (b) Article V and Sections 6.01 to 6.10 apply, to the extent applicable to any other proceeding, to any proceeding involving a federal or state statute, rule or regulation regulating the offer, sale or purchase of securities, securities brokers or dealers, or investment companies or investment advisers. 6.12. Liberal Construction. In order for the corporation to obtain and retain qualified directors, officers and employees, the foregoing provisions shall be liberally administered in order to afford maximum indemnification of directors, officers and, where Section 6.09 of these Bylaws applies, employees. The indemnification above provided for shall be granted in all applicable cases unless to do so would clearly contravene law, controlling precedent or public policy. ARTICLE VII. CONTRACTS, CHECKS, NOTES, BONDS, ETC. 7.01. Contracts. The Board of Directors may authorize any officer or officers, agent or agents, to enter into any contract or execute or deliver any document or instrument, whether of conveyance or otherwise, in the name of and on behalf of the corporation, and such authorization may be general or confined to specific instances. 7.02. Checks, Drafts, Etc. All checks and drafts on the corporation's bank accounts and all bills of exchange and promissory notes, and all acceptances, obligations and other instruments for the payment of money, shall be signed or, in the case of wire transfers, shall be authorized by such officer or officers, employee or employees or agent or agents as shall be thereunto authorized from time to time by the Board of Directors; provided that checks drawn on the corporation's bank accounts may bear the facsimile signature of such officer or officers, employee or employees, or agent or agents as the Board of Directors shall authorize; and provided further that in the case of notes, bonds or debentures issued under a trust instrument of the corporation and required to be signed by two officers of the corporation, the signatures of either or both of such officers may be in facsimile if -15- 19 specifically authorized and directed by the Board of Directors of the corporation and if such notes, bonds or debentures are required to be authenticated by a corporate trustee which is a party to the trust instrument. In case any such officer who has signed or whose facsimile signature has been placed upon such instrument shall have ceased to be such officer before such instrument is issued, it may be issued by the corporation with the same effect as if such officer had not ceased to be such at the date of its issue. ARTICLE VIII. FISCAL YEAR The fiscal year of the corporation shall begin on the first day of January in each year and shall end on the thirty-first day of December following. ARTICLE IX. CORPORATE SEAL The corporate seal shall have inscribed thereon the name of the corporation and the words "Corporate Seal, Jan. 29, 1896." ARTICLE X. EFFECT OF HEADINGS The descriptive headings and references to Articles and Sections in these Bylaws were formulated, used and inserted herein for convenience only and shall not be deemed to affect the meaning or construction of any of the provisions hereof. ARTICLE XI. AMENDMENTS 11.01. By Stockholders. These Bylaws may be amended or repealed and new Bylaws may be adopted by the stockholders by the vote provided in Section 1.06 of these Bylaws except as specifically provided below or in the Articles of Incorporation. If authorized by the Articles of Incorporation, the stockholders may adopt or amend a Bylaw that fixes a greater or lower quorum requirement or a greater voting requirement for stockholders or voting groups of stockholders than otherwise is provided in the Wisconsin Business Corporation Law. The adoption or amendment of a Bylaw that adds, changes or deletes a greater or lower quorum requirement or a greater voting requirement for stockholders must meet the same quorum requirement and be adopted by the same vote and voting groups required to take action under the quorum and voting requirement then in effect. 11.02. By Directors. Except as the Articles of Incorporation may otherwise provide, these Bylaws may also be amended or repealed and new Bylaws may be adopted by the Board of Directors by the vote provided in Sections 2.10 and 2.11, but (a) no Bylaw adopted by the stockholders shall be amended, repealed or readopted by the Board of Directors if such Bylaw provides that it -16- 20 may not be amended, repealed or readopted by the Board of Directors and (b) a Bylaw adopted or amended by the stockholders that fixes a greater or lower quorum requirement or a greater voting requirement for the Board of Directors than otherwise is provided in the Wisconsin Business Corporation Law may not be amended or repealed by the Board of Directors unless the Bylaw expressly provides that it may be amended or repealed by a specified vote of the Board of Directors. Action by the Board of Directors to adopt or amend a Bylaw that changes the quorum or voting requirement for the Board of Directors must meet the same quorum requirement and be adopted by the same vote required to take action under the quorum and voting requirement then in effect, unless a different voting requirement is specified as provided by the preceding sentence. A Bylaw that fixes a greater or lower quorum requirement or a greater voting requirement for stockholders or voting groups of stockholders than otherwise is provided in the Wisconsin Business Corporation Law may not be adopted, amended or repealed by the Board of Directors. 11.03. Implied Amendments. Any action taken or authorized by the stockholders or by the Board of Directors, which would be inconsistent with the Bylaws then in effect but is taken or authorized by a vote that would be sufficient to amend the Bylaws so that the Bylaws would be consistent with such action, shall be given the same effect as though the Bylaws had been temporarily amended or suspended so far, but only so far, as is necessary to permit the specific action so taken or authorized. 11.04. Certain Voting Requirements Preserved. If the corporation had a Bylaw in effect on December 31, 1990, that establishes a greater shareholder voting requirement than one required under the Wisconsin Business Corporation Law, that voting requirement applies until the Bylaw is amended or repealed. [WBCL, Section 180.1706(4).] -17- EX-4.1 3 INDENTURE FOR DEBT SECURITIES 1 Exhibit (4)-1 CONFORMED COPY - ---------------------------------------------------------------------------- WISCONSIN ELECTRIC POWER COMPANY and FIRSTAR TRUST COMPANY, as Trustee ----------------------- INDENTURE Dated as of December 1, 1995 ---------------------- DEBT SECURITIES - ------------------------------------------------------------------------------ 2 WISCONSIN ELECTRIC POWER COMPANY PARTIAL CROSS-REFERENCE TABLE Trust Indenture Act of 1939 and Indenture dated as of December 1, 1995 Indenture Section TIA Section 2.05............................................317(b) 2.06............................................312(a), 313(c) 2.11............................................316(a) (last sentence) 4.04............................................314(a)(4) 4.05............................................314(a)(1) 6.03............................................317(a)(1) 6.04............................................316(a)(1)(B) 6.05............................................316(a)(1)(A) 6.07............................................317(a)(1) 7.01............................................315(a), 315(d) 7.04............................................315(b) 7.05............................................313(a) 7.05............................................313(d) 7.07............................................310(a), 310(b) 7.09............................................310(a)(2) 8.02............................................310(a),310(b) 9.04............................................316(c) 10.01...........................................318(a) 10.02...........................................313(c) 10.03...........................................314(c)(1), 314(c)(2) 10.04...........................................314(e) 3 WISCONSIN ELECTRIC POWER COMPANY DEBT SECURITIES INDENTURE Dated As Of December 1, 1995 TABLE OF CONTENTS Article Section Heading Page - ------- ------- ------- ---- 1 DEFINITIONS 1.01 Definitions.................................... 1 1.02 Other Definitions.............................. 3 1.03 Rules of Construction.......................... 3 2 THE SECURITIES 2.01 Issuable in Series............................. 3 2.02 Execution and Authentication................... 5 2.03 Securities Agents.............................. 5 2.04 Bearer Securities.............................. 6 2.05 Paying Agent to Hold Money in Trust........................................ 6 2.06 Securityholder Lists........................... 7 2.07 Transfer and Exchange.......................... 7 2.08 Replacement Securities......................... 7 2.09 Outstanding Securities......................... 8 2.10 Discounted Securities.......................... 8 2.11 Treasury Securities............................ 8 2.12 Global Securities.............................. 8 2.13 Temporary Securities........................... 9 2.14 Cancellation................................... 9 2.15 Defaulted Interest............................. 9 3 REDEMPTION 3.01 Notices to Trustee............................. 10 3.02 Selection of Securities to Be Redeemed..................................... 10 3.03 Notice of Redemption........................... 10 3.04 Effect of Notice of Redemption................................... 11 3.05 Payment of Redemption Price.................... 11 3.06 Securities Redeemed in Part.................... 12 4 COVENANTS 4.01 Payment of Securities.......................... 12 4.02 Overdue Interest............................... 12 4.03 No Lien Created, etc........................... 12 4.04 Compliance Certificate......................... 12 4.05 SEC Reports.................................... 13 4.06 Certain Definitions............................ 13 4.07 Limitations on Liens........................... 15 5 SUCCESSORS 5.01 When Company May Merge, etc.................... 16 -i- 4 Article Section Heading Page - ------- ------- ------- ---- 6 DEFAULTS AND REMEDIES 6.01 Events of Default.............................. 16 6.02 Acceleration................................... 18 6.03 Other Remedies................................. 18 6.04 Waiver of Past Defaults........................ 18 6.05 Control by Majority............................ 18 6.06 Limitation on Suits............................ 19 6.07 Collection Suit by Trustee..................... 19 6.08 Priorities..................................... 19 7 TRUSTEE 7.01 Rights of Trustee.............................. 20 7.02 Individual Rights of Trustee................... 20 7.03 Trustee's Disclaimer........................... 20 7.04 Notice of Defaults............................. 21 7.05 Reports by Trustee to Holders.................. 21 7.06 Compensation and Indemnity..................... 21 7.07 Replacement of Trustee......................... 22 7.08 Successor Trustee by Merger, etc............... 23 7.09 Trustee's Capital and Surplus.................. 23 8 DISCHARGE OF INDENTURE 8.01 Defeasance..................................... 23 8.02 Conditions to Defeasance....................... 23 8.03 Application of Trust Money..................... 24 8.04 Repayment to Company........................... 24 9 AMENDMENTS AND WAIVERS 9.01 Without Consent of Holders..................... 25 9.02 With Consent of Holders........................ 25 9.03 Compliance with Trust Indenture Act............ 26 9.04 Effect of Consents............................. 26 9.05 Notation on or Exchange of Securities.......... 26 9.06 Trustee Protected.............................. 26 10 MISCELLANEOUS 10.01 Trust Indenture Act............................ 26 10.02 Notices........................................ 27 10.03 Certificate and Opinion as to Conditions Precedent......................... 27 10.04 Statements Required in Certificate or Opinion.. 28 10.05 Rules by Company and Agents.................... 28 10.06 Legal Holidays................................. 28 10.07 No Recourse Against Others..................... 28 10.08 Duplicate Originals............................ 28 10.09 Governing Law.................................. 28 SIGNATURES..................................... 29 Exhibit A: A Form of Registered Security..................................... 33 Exhibit B: A Form of Bearer Security.................... 38 Notes to Exhibits A and B................................ 45 Exhibit C: Assignment Form.............................. 47 -ii- 5 INDENTURE dated as of December 1, 1995 between WISCONSIN ELECTRIC POWER COMPANY, a Wisconsin corporation (the "Company"), and FIRSTAR TRUST COMPANY, a Wisconsin state banking corporation (the "Trustee"). Each party agrees as follows for the benefit of the Holders of the Company's debt securities issued under this Indenture: ARTICLE 1--DEFINITIONS SECTION 1.01. Definitions. "Affiliate" means any person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company. "Agent" means any Registrar, Transfer Agent or Paying Agent. "Authorized Newspaper" means a newspaper that is: (1) printed in the English language or in an official language of the country of publication; (2) customarily published on each business day in the place of publication; and (3) of general circulation in the relevant place or in the financial community of such place. Whenever successive publications in an Authorized Newspaper are required, they may be made on the same or different business days and in the same or different Authorized Newspapers. "Bearer Security" means a Security payable to bearer. "Board" means the Board of Directors of the Company or any authorized committee of the Board. "Company" means the party named as such above until a successor replaces it and thereafter means the successor. "coupon" means an interest coupon for a Bearer Security. "Default" means any event which is, or after notice or passage of time would be, an Event of Default. "Discounted Security" means a Security where the amount of principal due upon acceleration is less than the stated principal amount. "Holder" or "Securityholder" means the person in whose name a Registered Security is registered and the bearer of a Bearer Security or coupon. "Indenture" means this Indenture and any Securities Resolution as amended from time to time. "Lien" means any mortgage, pledge, security interest or other lien. "Officer" means the Chairman of the Board, any Vice Chairman, the Pres- ident, any Executive Vice President, any Senior Vice President, any Vice President, the Treasurer, the Secretary, the Controller, any Assistant Treasurer, any Assistant Secretary or any Assistant Controller of the Company. -1- 6 "Officers' Certificate" means a certificate signed by any one or more Officers. "Opinion of Counsel" means a written opinion, complying with Sections 10.03 and 10.04 hereof, from legal counsel who is acceptable to the Trustee. The counsel may be an employee of or counsel to the Company or the Trustee. "principal" of a debt security means the principal of the security plus the premium, if and when applicable, on the security. "Registered Security" means a Security registered as to principal and interest by the Registrar. "SEC" means the Securities and Exchange Commission. "Securities" means the debt securities issued under this Indenture. "Securities Resolution" means a resolution establishing a series of Securities adopted by the Board or by an Officer or committee of Officers pursuant to Board delegation or a supplemental indenture establishing such series of Securities executed by an authorized Officer. "series" means a series of Securities or the Securities of the series. "Subsidiary" means a corporation a majority of whose Voting Stock is owned by the Company or a Subsidiary. "TIA" means the Trust Indenture Act of 1939 (15 U.S. Code Sections 77aaa-77bbbb), as amended by the Trust Indenture Reform Act of 1990, as in effect on the date shown above. "Trustee" means the party named as such above until a successor replaces it and thereafter means the successor. "Trust Officer" means the Chairman of the Board, the President or any other officer or assistant officer of the Trustee assigned by the Trustee to administer its corporate trust matters. "United States" means the United States of America, its territories and possessions and other areas subject to its jurisdiction. "Voting Stock" means capital stock having voting power under ordinary circumstances to elect directors. "Yield to Maturity" means the yield to maturity on a Security at the time of its issuance or at the most recent determination of interest on the Security. -2- 7 SECTION 1.02. Other Definitions. Term Defined in Section "Bankruptcy Law"............................. 6.01 "Conditional Redemption"..................... 3.04 "Custodian".................................. 6.01 "Event of Default"........................... 6.01 "Funded Debt"................................ 4.06 "Legal Holiday".............................. 10.06 "Mortgage"................................... 4.06 "Paying Agent"............................... 2.03 "Permitted Encumbrances"..................... 4.06 "Person"..................................... 4.06 "Principal Property"......................... 4.06 "Registrar".................................. 2.03 "Tangible Net Worth"......................... 4.06 "Transfer Agent"............................. 2.03 "Treasury Regulations"....................... 2.04 "U.S. Government Obligations"................ 8.02 SECTION 1.03. Rules of Construction. Unless the context otherwise requires: (1) a term has the meaning assigned to it; (2) an accounting term not otherwise defined has the meaning assigned to it in accordance with generally accepted accounting principles in the United States; (3) generally accepted accounting principles are those applicable from time to time; (4) all terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by SEC rule under the TIA have the meanings assigned to them by such definitions; (5) "or" is not exclusive; and (6) words in the singular include the plural, and in the plural include the singular. ARTICLE 2--THE SECURITIES SECTION 2.01. Issuable in Series. The aggregate principal amount of Securities that may be issued under this Indenture is unlimited. The Securities may be issued from time to time in one or more series. Each series shall be created by a Securities Resolution that establishes the terms of the series, which may include the following: (1) the title of the series; (2) the aggregate principal amount of the series; -3- 8 (3) the interest rate, if any, or method of calculating the interest rate; (4) the date from which interest will accrue; (5) the record dates for interest payable on Registered Securities; (6) the dates when principal and interest are payable; (7) the manner of paying principal and interest; (8) the places where principal and interest are payable; (9) the Registrar, Transfer Agent and Paying Agent; (10) the terms of any mandatory or optional redemption by the Company; (11) the terms of any redemption at the option of Holders; (12) the denominations in which Securities are issuable; (13) whether Securities will be issuable as Registered Securities or Bearer Securities; (14) whether and upon what terms Registered Securities and Bearer Securities may be exchanged; (15) whether any Securities will be represented by a Security in global form and the terms of any global Security; (16) the terms of any tax indemnity; (17) the currencies (including any composite currency) in which principal or interest may be paid and if payments of principal or interest may be made in a currency other than that in which Securities are denominated, the manner for determining such payments; (18) if amounts of principal or interest may be determined by reference to an index, formula or other method, the manner for determining such amounts; (19) provisions for electronic issuance of Securities or for Securities in uncertificated form; (20) the portion of principal payable upon acceleration of a Discounted Security; (21) whether Section 4.07 applies, and any Events of Default or covenants in addition to or in lieu of those set forth in this Indenture; (22) whether and upon what terms Securities may be defeased; (23) the forms of the Securities or any coupon, which may be in the form of Exhibit A or B; (24) any terms that may be required by or advisable under U.S. or other applicable laws; and -4- 9 (25) any other terms not inconsistent with this Indenture. All Securities of one series need not be issued at the same time and, unless otherwise provided, a series may be reopened for issuances of additional Securities of such series. The creation and issuance of a series and the authentication and delivery thereof are not subject to any conditions precedent. SECTION 2.02. Execution and Authentication. Two Officers shall sign the Securities by manual or facsimile signature. The Company's seal shall be reproduced on the Securities, which seal may be affixed or in facsimile form. An Officer shall sign any coupons by facsimile signature. If an Officer whose signature is on a Security or its coupons no longer holds that office at the time the Security is authenticated or delivered, the Security and coupons shall nevertheless be valid. A Security and its coupons shall not be valid until the Security is authenticated by the manual signature of the Registrar. The signature shall be conclusive evidence that the Security has been authenticated under this Indenture. Each Registered Security shall be dated the date of its authentication. Each Bearer Security shall be dated the date of its authentication or as provided in the Securities Resolution. Securities may have notations, legends or endorsements required by law, stock exchange rule, agreement or usage, which shall be provided to the Trustee in writing by the Company. In the event Securities are issued in electronic or other uncertificated form, such Securities may be validly issued without the signatures or seal contemplated by this Section 2.02. SECTION 2.03. Securities Agents. The Company shall maintain an office or agency where Securities may be authenticated ("Registrar"), where Securities may be presented for registration of transfer or for exchange ("Transfer Agent") and where Securities may be presented for payment ("Paying Agent"). Whenever the Company must issue or deliver Securities pursuant to this Indenture, the Registrar shall authenticate the Securities at the Company's request. The Transfer Agent shall keep a register of the Securities and of their transfer and exchange. The Trustee shall be, and is hereby appointed as, the Registrar. The Company may appoint more than one Transfer Agent or Paying Agent for a series. The Company shall notify the Trustee of the name and address of any Agent not a party to this Indenture. If the Company fails to maintain a Transfer Agent or Paying Agent for a series, the Trustee shall act as such. -5- 10 SECTION 2.04. Bearer Securities. U.S. laws and Treasury Regulations restrict sales or exchanges of and payments on Bearer Securities. Therefore, except as provided below: (1) Bearer Securities will be offered, sold and delivered only outside the United States and will be delivered only upon presentation of a certificate in a form prescribed by the Company to comply with U.S. laws and regulations. (2) Bearer Securities will not be issued in exchange for Registered Securities. (3) All payments of principal and interest (including original issue discount) on Bearer Securities will be made outside the United States by a Paying Agent located outside the United States unless the Company determines that: (A) such payments may not be made by such Paying Agent because the payments are illegal or prevented by exchange controls as described in Treasury Regulation section 1.163-5(c)(2)(v); and (B) making the payments in the United States would not have an adverse tax effect on the Company. If there is a change in the relevant provisions of U.S. laws or Treasury Regulations or the judicial or administrative interpretation thereof, a restriction set forth in paragraph (1), (2) or (3) above will not apply to a series if the Company determines that the relevant provisions no longer apply to the series or that failure to comply with the relevant provisions would not have an adverse tax effect on the Company or on Securityholders or cause the series to be treated as "registration-required" obligations under U.S. law. The Company shall notify the Trustee in writing of any determinations by the Company under this Section. "Treasury Regulations" means regulations of the U.S. Treasury Department under the Internal Revenue Code of 1986, as amended. SECTION 2.05. Paying Agent to Hold Money in Trust. The Company shall require each Paying Agent for a series other than the Trustee to agree in writing that the Paying Agent will hold in trust for the benefit of the persons entitled thereto all money held by the Paying Agent for the payment of principal of or interest on the series, and will notify the Trustee in writing of any default by the Company in making any such payment. While any such default continues, the Trustee may require a Paying Agent to pay all money so held by it to the Trustee. The Company at any time may require a Paying Agent to pay all money held by it to the Trustee. Upon payment over to the Trustee, the Paying Agent shall have no further liability for the money. If the Company or an Affiliate acts as Paying Agent for a series, it shall segregate and hold as a separate trust fund all money held by it as Paying Agent for the series. -6- 11 SECTION 2.06. Securityholder Lists. The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of Securityholders. If the Trustee is not the Transfer Agent, the Company shall furnish to the Trustee semiannually and at such other times as the Trustee may request a list in such form and as of such date as the Trustee may reasonably require of the names and addresses of Holders of Registered Securities and Holders of Bearer Securities whose names are on the list referred to below. The Transfer Agent shall keep a list of the names and addresses of Holders of Bearer Securities who file a request to be included on such list. A request will remain in effect for two years but successive requests may be made. Whenever the Company or the Trustee is required to mail a notice to all Holders of Registered Securities of a series, it also shall mail the notice to Holders of Bearer Securities of the series whose names are on the list, if any. Whenever the Company is required to publish a notice to all Holders of Bearer Securities of a series, it also shall mail the notice to such of them whose names are on the list, if any. SECTION 2.07. Transfer and Exchange. Where Registered Securities of a series are presented to the Transfer Agent with a request to register a transfer or to exchange them for an equal principal amount of Registered Securities of other denominations of the series, the Transfer Agent shall register the transfer or make the exchange if its requirements for such transactions are met. Where Bearer Securities of a series are presented to the Transfer Agent with a request to exchange them for an equal principal amount of Bearer Securities of other denominations of the series, the Transfer Agent shall make the exchange if its requirements for such transactions are met. The Transfer Agent may require a Holder to pay a sum sufficient to cover any taxes imposed on a transfer or exchange. If a series provides for Registered and Bearer Securities and for their exchange, Bearer Securities may be exchanged for Registered Securities and Registered Securities may be exchanged for Bearer Securities as provided in the Securities or the Securities Resolution establishing the series if the requirements of the Transfer Agent for such transactions are met and if Section 2.04 permits the exchange. SECTION 2.08. Replacement Securities. If the Holder of a Security or coupon claims that it has been lost, destroyed or wrongfully taken, then, in the absence of notice to the Company or the Trustee that the Security or coupon has been acquired by a bona fide purchaser, the Company shall issue a replacement Security or coupon if the Company and the Trustee receive: (1) evidence satisfactory to them of the loss, destruction or taking; (2) an indemnity bond satisfactory to them; and -7- 12 (3) payment of a sum sufficient to cover their expenses and any taxes for replacing the Security or coupon. A replacement Security shall have coupons attached corresponding to those, if any, on the replaced Security. Every replacement Security or coupon is an additional obligation of the Company. SECTION 2.09. Outstanding Securities. The Securities outstanding at any time are all the Securities authenticated by the Registrar except for those canceled by it, those delivered to it for cancellation, and those described in this Section as not outstanding. If a Security is replaced pursuant to Section 2.08, it ceases to be outstanding unless the Trustee and the Company receive proof satisfactory to them that the replaced Security is held by a bona fide purchaser. If Securities are considered paid under Section 4.01, they cease to be outstanding and interest on them ceases to accrue. A Security does not cease to be outstanding because the Company or an Affiliate holds the Security. SECTION 2.10. Discounted Securities. In determining whether the Holders of the required principal amount of Securities have concurred in any direction, waiver or consent, the principal amount of a Discounted Security shall be the amount of principal that would be due as of the date of such determination if payment of the Security were accelerated on that date. SECTION 2.11. Treasury Securities. In determining whether the Holders of the required principal amount of Securities have concurred in any direction, waiver or consent, Securities owned by the Company or an Affiliate shall be disregarded, except that for the purposes of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent, only Securities for which the Trustee has received an Officers' Certificate stating that such Securities are so owned shall be so disregarded. SECTION 2.12. Global Securities. If the Securities Resolution establishing a series so provides, the Company may issue some or all of the Securities of the series in temporary or permanent global form. A global Security may be in registered form, in bearer form with or without coupons or in uncertificated form. A global Security shall represent that amount of Securities of a series as specified in the global Security or as endorsed thereon from time to time. At the Company's request, the Registrar shall endorse a global Security to reflect the amount of any increase or decrease in the Securities represented thereby. -8- 13 The Company may issue a global Security only to a depositary designated by the Company. A depositary may transfer a global Security only as a whole to its nominee or to a successor depositary. The Securities Resolution may establish, among other things, the manner of paying principal and interest on a global Security and whether and upon what terms a beneficial owner of an interest in a global Security may exchange such interest for definitive Securities. The Company, an Affiliate, the Trustee and any Agent shall not be responsible for any acts or omissions of a depositary, for any depositary records of beneficial ownership interests or for any transactions between the depositary and beneficial owners. SECTION 2.13. Temporary Securities. Until definitive Securities of a series are ready for delivery, the Company may use temporary Securities. Temporary Securities shall be substantially in the form of definitive Securities but may have variations that the Company considers appropriate for temporary Securities. Temporary Securities may be in global form. Temporary Bearer Securities may have one or more coupons or no coupons. Without unreasonable delay, the Company shall deliver definitive Securities in exchange for temporary Securities. SECTION 2.14. Cancellation. The Company at any time may deliver Securities to the Registrar for cancellation. The Transfer Agent and the Paying Agent shall forward to the Registrar any Securities and coupons surrendered to them for payment, exchange or registration of transfer. The Registrar shall cancel all Securities or coupons surrendered for payment, registration of transfer, exchange or cancellation as follows: the Registrar will cancel all Registered Securities and matured coupons. The Registrar also will cancel all Bearer Securities and unmatured coupons unless the Company requests the Registrar to hold the same for redelivery. Any Bearer Securities so held shall be considered delivered for cancellation under Section 2.09. The Registrar shall destroy canceled Securities and coupons and deliver a certificate of cancellation thereof to the Company unless the Company otherwise directs. Unless the Securities Resolution establishing a series otherwise provides, the Company may not issue new Securities to replace Securities that the Company has paid or that the Company has delivered to the Registrar for cancellation. SECTION 2.15. Defaulted Interest. If the Company defaults in a payment of interest on Registered Securities, it need not pay the defaulted interest to Holders on the regular record date. The Company may fix a special record date for determining Holders entitled to receive defaulted interest or the Company may pay defaulted interest in any other lawful manner. -9- 14 ARTICLE 3--REDEMPTION SECTION 3.01. Notices to Trustee. Securities of a series that are redeemable before maturity shall be redeemable in accordance with their terms and, unless the Securities Resolution establishing the series otherwise provides, in accordance with this Article. In the case of a redemption by the Company, the Company shall notify the Trustee of the redemption date and the principal amount of Securities to be redeemed. The Company shall notify the Trustee at least 35 days before the redemption date unless a shorter notice is satisfactory to the Trustee. If the Company is required to redeem Securities, it may reduce the principal amount of Securities required to be redeemed to the extent it is permitted a credit by the terms of the Securities and it notifies the Trustee of the amount of the credit and the basis for it. If the reduction is based on a credit for acquired or redeemed Securities that the Company has not previously delivered to the Registrar for cancellation, the Company shall deliver the Securities at the same time as the notice. SECTION 3.02. Selection of Securities to Be Redeemed. If less than all the Securities of a series are to be redeemed, the Trustee shall select the Securities to be redeemed pro rata or by any other method the Trustee considers fair and appropriate, unless the Company otherwise directs in writing. The Trustee shall make the selection from Securities of the series outstanding not previously called for redemption. The Trustee may select for redemption portions of the principal of Securities having denominations larger than the minimum denomination for the series. Securities and portions thereof selected for redemption shall be in amounts equal to the minimum denomination for the series or an integral multiple thereof. Provisions of this Indenture that apply to Securities called for redemption also apply to portions of Securities called for redemption. SECTION 3.03. Notice of Redemption. At least 30 days but not more than 60 days before a redemption date, the Company shall mail a notice of redemption by first-class mail to each Holder of Registered Securities whose Securities are to be redeemed. If Bearer Securities are to be redeemed, the Company shall publish a notice of redemption in an Authorized Newspaper as provided in the Securities. A notice shall identify the Securities of the series to be redeemed and shall state: (1) the redemption date; (2) the redemption price; (3) the name and address of the Paying Agent; -10- 15 (4) that Securities called for redemption, together with all coupons, if any, maturing after the redemption date, must be surrendered to the Paying Agent to collect the redemption price; (5) that interest on Securities called for redemption ceases to accrue on and after the redemption date; (6) whether the redemption by the Company is mandatory or optional; and (7) whether the redemption is conditional as provided in Section 3.04, the terms of the condition, and that, if the condition is not satisfied or is not waived by the Company, the Securities will not be redeemed and such a failure to redeem will not constitute an Event of Default. A redemption notice given by publication need not identify Registered Securities to be redeemed. At the Company's request, the Trustee shall give the notice of redemption in the Company's name and at its expense. SECTION 3.04. Effect of Notice of Redemption. Except as provided below, once notice of redemption is given, Securities called for redemption become due and payable on the redemption date at the redemption price stated in the notice. A notice of redemption may provide that it is subject to the occurrence of any event before the date fixed for such redemption as described in such notice ("Conditional Redemption") and such notice of Conditional Redemption shall be of no effect unless all such conditions to the redemption have occurred before such date or have been waived by the Company. SECTION 3.05. Payment of Redemption Price. On or before the redemption date, the Company shall deposit with the Paying Agent money sufficient to pay the redemption price of and accrued interest on all Securities to be redeemed on that date. When the Holder of a Security surrenders it for redemption in accordance with the redemption notice, the Company shall pay to the Holder on the redemption date the redemption price and accrued interest to such date, except that: (1) the Company will pay any such interest (except defaulted interest) to Holders on the record date of Registered Securities if the redemption date occurs on an interest payment date; and (2) the Company will pay any such interest to Holders of coupons that mature on or before the redemption date upon surrender of such coupons to the Paying Agent. Coupons maturing after the redemption date on a called Security are void absent a payment default on that date. Nevertheless, if a Holder surrenders for redemption a Bearer Security missing any such coupons, the -11- 16 Company may deduct the face amount of such coupons from the redemption price. If thereafter the Holder surrenders to the Paying Agent the missing coupons, the Company will return the amount so deducted. The Company also may waive surrender of the missing coupons if it receives an indemnity bond satisfactory to the Company. SECTION 3.06. Securities Redeemed in Part. Upon surrender of a Security that is redeemed in part, the Company shall deliver to the Holder a new Security of the same series equal in principal amount to the unredeemed portion of the Security surrendered. ARTICLE 4--COVENANTS SECTION 4.01. Payment of Securities. The Company shall pay the principal of and interest on a series in accordance with the terms of the Securities for the series, any related coupons, and this Indenture. On each payment date, the Company shall have deposited with the Paying Agent in funds which are then immediately available money sufficient to pay all principal and interest then due on the series. Principal and interest on a series shall be considered paid on the date due if the Paying Agent for the series holds on that date money sufficient to pay all principal and interest then due on the series. SECTION 4.02. Overdue Interest. Unless the Securities Resolution establishing a series otherwise provides, the Company shall pay interest on overdue principal of a Security of a series at the rate (or Yield to Maturity in the case of a Discounted Security) borne by the series; it shall pay interest on overdue installments of interest at the same rate or Yield to Maturity to the extent lawful. SECTION 4.03. No Lien Created, etc. This Indenture and the Securities do not create a Lien, charge or encumbrance on any property of the Company or any Subsidiary. SECTION 4.04. Compliance Certificate. The Company shall deliver to the Trustee, within 120 days after the end of each fiscal year of the Company, a brief certificate signed by the principal executive officer, principal financial officer or principal accounting officer of the Company, as to the signer's knowledge of the Company's compliance with all conditions and covenants under this Indenture (determined without regard to any period of grace or requirement of notice provided herein). Any other obligor on the Securities also shall deliver to the Trustee such a certificate similarly signed as to its compliance with this Indenture within 120 days after the end of each of its fiscal years. The certificates need not comply with Section 10.04. -12- 17 SECTION 4.05. SEC Reports. The Company shall provide to the Trustee, within 15 days after the Company is required to file the same with the SEC, copies of the annual reports and of the information, documents, and other reports (or such portions of the foregoing as the SEC may prescribe) which the Company is required to file with the SEC pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Any other obligor on the Securities shall do likewise as to the above items which it is required to file with the SEC pursuant to those Sections. SECTION 4.06. Certain Definitions. "Funded Debt" means all indebtedness for money borrowed having a maturity of more than twelve months from the date of the most recent balance sheet of the Company (or consolidated balance sheet of the Company and its Subsidiaries if the Company then has one or more Subsidiaries the accounts of which are consolidated with the accounts of the Company) or renewable and extendible beyond twelve months at the option of the borrower and all obligations in respect of lease rentals which under generally accepted accounting principles would be shown on such balance sheet (or consolidated balance sheet) of the Company as a liability item other than a current liability; provided, however, that Funded Debt shall not include any of the foregoing to the extent that such indebtedness or obligations are not required by generally accepted accounting principles to be shown on such balance sheet. "Mortgage" means the Company's Mortgage and Deed of Trust dated October 28, 1938, as heretofore or hereafter amended, modified and supplemented, to Firstar Trust Company, as trustee, providing for the Company's First Mortgage Bonds. "Permitted Encumbrances" means any of the following: (1) Liens of taxes, assessments or governmental charges for the then current year and taxes, assessments or governmental charges not then delinquent; Liens for workers' compensation awards and similar obligations not then delinquent; mechanics', laborers', materialmen's and similar Liens not then delinquent; and any of such Liens, whether or not delinquent, whose validity is at the time being contested in good faith by the Company or any Subsidiary; (2) Liens and charges incidental to construction or current operations which have not at the time been filed or asserted or the payment of which has been adequately secured or which, in the opinion of counsel, are not material in amount; (3) Liens, securing obligations neither assumed by the Company or any Subsidiary nor on account of which any of them customarily pays interest directly or indirectly, existing, either at the date hereof, or, as to property hereafter acquired, at the time of acquisition by the Company or a Subsidiary; (4) Any right which any municipal or governmental body or agency may have by virtue of any franchise, license, contract or statute to purchase, or designate a purchaser of or order the sale of, any property of the Company or any Subsidiary upon -13- 18 payment of reasonable compensation therefor, or to terminate any franchise, license or other rights or to regulate the property and business of the Company or any Subsidiary; (5) The Lien of judgments covered by insurance, or upon appeal and covered, if necessary, by the filing of an appeal bond, or if not so covered not exceeding at any one time $1,000,000 in aggregate amount; (6) Easements or reservations in respect of any property of the Company or any Subsidiary for the purpose of roads, pipelines, utility transmission and distribution lines or other rights-of- way and similar purposes, zoning ordinances, regulations, reservations, restrictions, covenants, party wall agreements, conditions of record and other encumbrances (other than to secure the payment of money), none of which in the opinion of counsel are such as to interfere with the proper operation and development of the property affected thereby in the business of the Company and its Subsidiaries for the use intended; (7) Any Lien or encumbrance, moneys sufficient for the discharge of which have been deposited in trust with the Trustee hereunder or with the trustee or mortgagee under the instrument evidencing such Lien or encumbrance, with irrevocable authority to the Trustee hereunder or to such other trustee or mortgagee to apply such moneys to the discharge of such Lien or encumbrance to the extent required for such purpose; (8) Any defects of title and any terms, conditions, agreements, covenants, exceptions and reservations expressed or provided in deeds or other instruments, respectively, under and by virtue of which the Company or any Subsidiary has acquired any property or shall hereafter acquire any property, none of which, in the opinion of counsel, materially adversely affects the operation of the properties of the Company and its Subsidiaries, taken as a whole; (9) The pledge of cash or marketable securities for the purpose of obtaining any indemnity, performance or other similar bonds in the ordinary course of business, or as security for the payment of taxes or other assessments being contested in good faith, or for the purpose of obtaining a stay or discharge in the course of any legal proceedings; (10) The pledge or assignment in the ordinary course of business of electricity, gas (either natural or artificial) or steam, accounts receivable or customers' installment paper; (11) Rights reserved to or vested in others to take or receive any part of the electricity, gas (either natural or artificial), steam or any by-products thereof generated or produced by or from any properties of the Company or with respect to any other rights concerning electricity, gas (either natural or artificial) or steam supply, transportation, or storage which are in use in the ordinary course of the electricity, gas (either natural or artificial) or steam business; (12) Any landlord's Lien; -14- 19 (13) Liens created or assumed by the Company or a Subsidiary in connection with the issuance of debt securities, the interest on which is excludable from the gross income of the holders of such securities pursuant to Section 103 of the Internal Revenue Code of 1986, or any successor section, for purposes of financing, in whole or in part, the acquisition or construction of property to be used by the Company or a Subsidiary, but such Liens shall be limited to the property so financed (and the real estate on which such property is to be located); (14) Liens incurred pursuant to Section 7.06; (15) Liens affixing to property of the Company or a Subsidiary at the time a Person consolidates with or merges into, or transfers all or substantially all of its assets to, the Company or a Subsidiary, provided that in the opinion of the Board or Company management (evidenced by a certified Board resolution or an Officers' Certificate delivered to the Trustee) the property acquired pursuant to the consolidation, merger or asset transfer is adequate security for the Lien; and (16) Liens or encumbrances not otherwise permitted if, at the time of incurrence and after giving effect thereto, the aggregate of all obligations of the Company and its Subsidiaries secured thereby does not exceed 10% of Tangible Net Worth. "Person" means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Principal Property" means any tangible real or personal property or portion thereof unless, in the opinion of the Board or Company management (evidenced by a certified Board resolution or an Officers' Certificate delivered to the Trustee) such property is not of material importance to the total business conducted by the Company and its Subsidiaries taken as a whole. "Tangible Net Worth" means (i) common stockholders' equity appearing on the most recent balance sheet of the Company (or consolidated balance sheet of the Company and its Subsidiaries if the Company then has one or more Subsidiaries the accounts of which are consolidated with the accounts of the Company) prepared in accordance with generally accepted accounting principles less (ii) intangible assets (excluding intangible assets recoverable through rates as prescribed by applicable regulatory authorities). SECTION 4.07. Limitations on Liens. So long as there remain outstanding any Securities of any series to which this Section 4.07 applies under the terms of the series, the Company will not, and will not permit any Subsidiary to, create or suffer to be created or to exist any Lien on any of its properties or assets now owned or hereafter acquired to secure any indebtedness, without making effective provision whereby the Securities of such series shall be equally and ratably secured with any and all such indebtedness and with any other indebtedness similarly entitled to be equally and ratably secured. However, this restriction shall not apply to or prevent the creation or existence of: (1) the Mortgage securing the Company's First Mortgage Bonds or any indenture supplemental thereto subjecting any property to the -15- 20 Lien thereof or confirming the Lien thereof upon any property, whether now owned or hereafter acquired; (2) Liens on property existing at the time of acquisition or construction of such property (or created within one year after completion of such acquisition or construction), whether by purchase, merger, construction or otherwise (or on the property of a Subsidiary at the date it became a Subsidiary), or to secure the payment of all or any part of the purchase price or construction cost thereof, including the extension of any such Liens to repairs, renewals, replacements, substitutions, betterments, additions, extensions and improvements then or thereafter made on the property subject thereto; (3) any extensions, renewals or replacements (or successive extensions, renewals or replacements), in whole or in part of Liens (including, without limitation, the Mortgage) permitted by the foregoing clauses (1) and (2); (4) the pledge of any bonds or other securities at any time issued under any of the Liens permitted by clauses (1), (2) or (3); or (5) Permitted Encumbrances. Further, this restriction shall not apply to or prevent the creation or existence of leases made, or existing on property acquired, in the ordinary course of business. ARTICLE 5--SUCCESSORS SECTION 5.01. When Company May Merge, etc. Unless the Securities Resolution establishing a series otherwise provides, the Company shall not consolidate with or merge into, or transfer all or substantially all of its assets to, any Person unless: (1) the Person is organized under the laws of the United States or a State thereof; (2) the Person assumes by supplemental indenture all the obligations of the Company under this Indenture, the Securities and any coupons; and (3) immediately after the transaction no Default exists. The successor shall be substituted for the Company, and thereafter all obligations of the Company under this Indenture, the Securities and any coupons shall terminate. ARTICLE 6--DEFAULTS AND REMEDIES SECTION 6.01. Events of Default. Unless the Securities Resolution establishing a series otherwise provides, an "Event of Default" on the series so established occurs if: -16- 21 (1) the Company defaults in any payment of interest on any Securities of the series when the same becomes due and payable and the Default continues for a period of 60 days; (2) the Company defaults in the payment of the principal of any Securities of the series when the same becomes due and payable at maturity or upon redemption, acceleration or otherwise; (3) the Company defaults in the payment or satisfaction of any sinking fund obligation with respect to any Securities of a series as required by the Securities Resolution establishing such series and the Default continues for a period of 60 days; (4) the Company defaults in the performance of any of its other agreements applicable to the series and the Default continues for 90 days after the notice specified below; (5) the Company pursuant to or within the meaning of any Bankruptcy Law: (A) commences a voluntary case, (B) consents to the entry of an order for relief against it in an involuntary case, (C) consents to the appointment of a Custodian for it or for all or substantially all of its property, or (D) makes a general assignment for the benefit of its creditors; (6) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (A) is for relief against the Company in an involuntary case, (B) appoints a Custodian for the Company or for all or substantially all of its property, or (C) orders the liquidation of the Company, and the order or decree remains unstayed and in effect for 60 days; or (7) there occurs any other Event of Default provided for in the series. The term "Bankruptcy Law" means Title 11, U.S. Code or any similar Federal or State law for the relief of debtors. The term "Custodian" means any receiver, trustee, assignee, liquidator or a similar official under any Bankruptcy Law. A Default under clause (4) is not an Event of Default until the Trustee or the Holders of at least 25% in principal amount of the series notify the Company of the Default and the Company does not cure the Default within the time specified after receipt of the notice. The notice must specify the Default, demand that it be remedied and state that the notice is a "Notice of Default." If Holders notify the Company of a Default, they shall notify the Trustee at the same time. -17- 22 The failure to redeem any Security subject to a Conditional Redemption is not an Event of Default if any event on which such redemption is so conditioned does not occur before the redemption date. SECTION 6.02. Acceleration. If an Event of Default occurs and is continuing on a series, the Trustee by notice to the Company, or the Holders of at least 25% in principal amount of the series by notice to the Company and the Trustee, may declare the principal of and accrued interest on all the Securities of the series to be due and payable immediately. Discounted Securities may provide that the amount of principal due upon acceleration is less than the stated principal amount. The Holders of a majority in principal amount of the series by notice to the Trustee may rescind an acceleration and its consequences if the rescission would not conflict with any judgment or decree and if all existing Events of Default on the series have been cured or waived except nonpayment of principal or interest that has become due solely because of the acceleration. SECTION 6.03. Other Remedies. If an Event of Default occurs and is continuing on a series, the Trustee may pursue any available remedy to collect principal or interest then due on the series, to enforce the performance of any provision applicable to the series, or otherwise to protect the rights of the Trustee and Holders of the series. The Trustee may maintain a proceeding even if it does not possess any of the Securities or coupons or does not produce any of them in the proceeding. A delay or omission by the Trustee or any Securityholder in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. All remedies are cumulative to the extent permitted by law. SECTION 6.04. Waiver of Past Defaults. The Holders of a majority in principal amount of a series by notice to the Trustee may waive an existing Default on the series and its consequences except: (1) a Default in the payment of the principal of or interest on the series, or (2) a Default in respect of a provision that under Section 9.02 cannot be amended without the consent of each Securityholder affected. SECTION 6.05. Control by Majority. The Holders of a majority in principal amount of a series may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, or of exercising any trust or power conferred on the Trustee, with respect to the series. However, the Trustee may refuse to fol- low any direction that conflicts with law or this Indenture. -18- 23 SECTION 6.06. Limitation on Suits. A Securityholder of a series may pursue a remedy with respect to the series only if: (1) the Holder gives to the Trustee notice of a continuing Event of Default on the series; (2) the Holders of at least 25% in principal amount of the series make a request to the Trustee to pursue the remedy; (3) such Holder or Holders offer to the Trustee indemnity satisfactory to the Trustee against any loss, liability or expense; (4) the Trustee does not comply with the request within 60 days after receipt of the request and the offer of indemnity; and (5) during such 60-day period the Holders of a majority in principal amount of the series do not give the Trustee a direction inconsistent with such request. A Securityholder may not use this Indenture to prejudice the rights of another Securityholder or to obtain a preference or priority over another Securityholder. SECTION 6.07. Collection Suit by Trustee. If an Event of Default in payment of interest, principal or sinking fund payment specified in Section 6.01(1), (2) or (3) occurs and is continuing on a series, the Trustee may recover judgment in its own name and as trustee of an express trust against the Company for the whole amount of principal and interest remaining unpaid on the series. SECTION 6.08. Priorities. If the Trustee collects any money for a series pursuant to this Article, it shall pay out the money in the following order: First: to the Trustee for amounts due under Section 7.06; Second: to Securityholders of the series for amounts due and unpaid for principal and interest, ratably, without preference or priority of any kind, according to the amounts due and payable for principal and interest, respectively; and Third: to the Company. The Trustee may fix a payment date for any payment to Securityholders. -19- 24 ARTICLE 7--TRUSTEE SECTION 7.01. Rights of Trustee. (1) The Trustee may rely on any document believed by it to be genuine and to have been signed or presented by the proper person. The Trustee need not investigate any fact or matter stated in the document. (2) Before the Trustee acts or refrains from acting, it may require an Officers' Certificate or an Opinion of Counsel. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on the Certificate or Opinion. (3) The Trustee may act through agents and shall not be responsible for the misconduct or negligence of any agent appointed with due care. (4) The Trustee shall not be liable for any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 6.05. (5) The Trustee may refuse to perform any duty or exercise any right or power which it reasonably believes may expose it to any loss, liability or expense unless it receives indemnity satisfactory to it against such loss, liability or expense. (6) The Trustee shall not be liable for interest on any money received by it except as the Trustee may agree with the Company. Money held in trust by the Trustee need not be segregated from other funds except to the extent required by law. (7) The Trustee shall have no duty with respect to a Default unless a Trust Officer has received written notice of such Default. (8) The Trustee shall not be liable for any action it takes or omits to take in good faith which it believes to be authorized and within its powers. (9) Any Agent shall have the same rights and be protected to the same extent as if it were Trustee. SECTION 7.02. Individual Rights of Trustee. The Trustee in its individual or any other capacity may become the owner or pledgee of Securities or coupons and may otherwise deal with the Company or an Affiliate with the same rights it would have if it were not Trustee. Any Agent may do the same with like rights. SECTION 7.03. Trustee's Disclaimer. The Trustee makes no representation as to the validity or adequacy of this Indenture or the Securities or any coupons; it shall not be accountable for the Company's use of the proceeds from the Securities; it shall not be responsible for any statement in the Securities or any coupons; it shall not be responsible for any overissue; it shall not be responsible for determining -20- 25 whether the form and terms of any Securities or coupons were established in conformity with this Indenture; and it shall not be responsible for determining whether any Securities were issued in accordance with this Indenture. SECTION 7.04. Notice of Defaults. If a Default occurs and is continuing on a series and if it is known to the Trustee, the Trustee shall mail a notice of the Default within 90 days after it occurs to Holders of Registered Securities of the series. Except in the case of a Default in payment on a series, the Trustee may withhold the notice if and so long as a committee of its Trust Officers in good faith determines that withholding the notice is in the interest of Holders of the series. The Trustee shall withhold notice of a Default described in Section 6.01(4) until at least 90 days after it occurs. SECTION 7.05. Reports by Trustee to Holders. Any report required by TIA Section 313(a) to be mailed to Securityholders shall be mailed by the Trustee on or before July 15 of each year. A copy of each report at the time of its mailing to Securityholders shall be filed with the SEC and each stock exchange on which any Securities are listed. The Company shall notify the Trustee when any Securities are listed on a stock exchange. SECTION 7.06. Compensation and Indemnity. The Company shall pay to the Trustee from time to time reasonable compensation for its services. The Trustee's compensation shall not be limited by any law on compensation of a trustee of an express trust. The Company shall reimburse the Trustee upon request for all reasonable out-of- pocket expenses incurred by it. Such expenses shall include the reasonable compensation and expenses of the Trustee's agents and counsel. The Company shall indemnify the Trustee (including its officers, directors and employees) against any loss or liability incurred by it. The Trustee shall notify the Company promptly of any claim for which it may seek indemnity. The Company shall defend the claim and the Trustee shall cooperate in the defense. The Trustee may have separate counsel and the Company shall pay the reasonable fees and expenses of such counsel. The Company need not pay for any settlement made without its consent. The Company need not reimburse any expense or indemnify against any loss or liability incurred by the Trustee through negligence or bad faith. To secure the Company's payment obligations in this Section, the Trustee shall have a Lien prior to the Securities and any coupons on all money or property held or collected by the Trustee, except that held in trust to pay principal or interest on particular Securities. When the Trustee incurs expenses or renders services after an Event of Default specified in Section 6.01(5) or (6) occurs, such expenses and the compensation for such services are intended to constitute expenses of administration under any Bankruptcy Law. -21- 26 The provisions of this Section shall survive any termination or discharge of this Indenture (including without limitation any termination under any Bankruptcy Law) and the resignation or removal of the Trustee. SECTION 7.07. Replacement of Trustee. A resignation or removal of the Trustee and appointment of a successor Trustee shall become effective only upon the successor Trustee's acceptance of appointment as provided in this Section. The Trustee may resign by so notifying the Company. The Holders of a majority in principal amount of the Securities may remove the Trustee by so notifying the Trustee and may appoint a successor Trustee with the Company's consent. The Company may remove the Trustee if: (1) the Trustee fails to comply with TIA Section 310(a) or TIA Section 310(b) or with Section 7.09; (2) the Trustee is adjudged a bankrupt or an insolvent; (3) a Custodian or other public officer takes charge of the Trustee or its property; (4) the Trustee becomes incapable of acting; or (5) an event of the kind described in Section 6.01(5) or (6) occurs with respect to the Trustee. The Company also may remove the Trustee with or without cause if the Company so notifies the Trustee six months in advance and if no Default occurs or is continuing during the six-month period. If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason, the Company shall promptly appoint a successor Trustee. If a successor Trustee does not take office within 30 days after the retiring Trustee resigns or is removed, the retiring Trustee, the Company or the Holders of a majority in principal amount of the Securities may petition any court of competent jurisdiction for the appointment of a successor Trustee. If the Trustee fails to comply with TIA Section 310(a) or TIA Section 310(b) or with Section 7.09, any Securityholder may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Company. Thereupon the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. The successor Trustee shall mail a notice of its succession to Holders of Registered Securities. The retiring Trustee shall promptly transfer all property held by it as Trustee to the successor Trustee, subject to the Lien provided for in Section 7.06. -22- 27 SECTION 7.08. Successor Trustee by Merger, etc. If the Trustee consolidates, merges or converts into, or transfers all or substantially all of its corporate trust business to, another corporation, the successor corporation without any further act shall be the successor Trustee. SECTION 7.09. Trustee's Capital and Surplus. The Trustee at all times shall have a combined capital and surplus of at least $10,000,000 as set forth in its most recent published report of condition. ARTICLE 8--DISCHARGE OF INDENTURE SECTION 8.01. Defeasance. Securities of a series may be defeased in accordance with their terms and, unless the Securities Resolution establishing the series otherwise provides, in accordance with this Article. The Company at any time may terminate as to a series all of its obligations under this Indenture, the Securities of a series and any related coupons ("legal defeasance option"). The Company at any time may terminate as to a series its obligations, if any, under Section 4.07 and any other restrictive covenants which may be applicable to a particular series ("covenant defeasance option"). However, in the case of the legal defeasance option, the Company's obligations in Sections 2.03, 2.04, 2.05, 2.06, 2.07, 2.08, 7.06, 7.07 and 8.04 shall survive until the Securities of the series are no longer outstanding; thereafter the Company's obligations in Section 7.06 shall survive. The Company may exercise its legal defeasance option notwithstanding its prior exercise of its covenant defeasance option. If the Company exercises its legal defeasance option, a series may not be accelerated because of an Event of Default. If the Company exercises its covenant defeasance option, a series may not be accelerated by reference to Section 4.07 or any other restrictive covenants which may be applicable to a particular series so defeased under the terms of the series. The Trustee upon request shall acknowledge in writing the discharge of those obligations that the Company terminates. SECTION 8.02. Conditions to Defeasance. The Company may exercise as to a series its legal defeasance option or its covenant defeasance option if: (1) the Company irrevocably deposits in trust with the Trustee or another trustee money or U.S. Government Obligations; (2) the Company delivers to the Trustee a certificate from a nationally recognized firm of independent accountants expressing their opinion that the payments of principal and interest when due on the deposited U.S. Government Obligations without reinvestment plus any deposited money without -23- 28 investment will provide cash at such times and in such amounts as will be sufficient to pay principal and interest when due on all the Securities of the series to maturity or redemption, as the case may be; (3) immediately after the deposit no Default exists; (4) the deposit does not constitute a default under any other agreement binding on the Company; (5) the deposit does not cause the Trustee to have a conflicting interest under TIA Section 310(a) or TIA Section 310(b) as to another series; (6) the Company delivers to the Trustee an Opinion of Counsel to the effect that Holders of the series will not recognize income, gain or loss for Federal income tax purposes as a result of the defeasance; and (7) 91 days pass after the deposit is made and during the 91-day period no Default specified in Section 6.01(5) or (6) occurs that is continuing at the end of the period. Before or after a deposit the Company may make arrangements satisfactory to the Trustee for the redemption of Securities at a future date in accordance with Article 3. "U.S. Government Obligations" means securities which are direct obligations of (i) the United States or (ii) an agency or instrumentality of the United States, the payment of which is unconditionally guaranteed by the United States, which, in either case, have the full faith and credit of the United States pledged for payment and are not callable at the issuer's option, or certificates representing an ownership interest in such obligations. SECTION 8.03. Application of Trust Money. The Trustee shall hold in trust money or U.S. Government Obligations deposited with it pursuant to Section 8.02. It shall apply the deposited money and the money from U.S. Government Obligations through the Paying Agent and in accordance with this Indenture to the payment of principal and interest on Securities of the defeased series. SECTION 8.04. Repayment to Company. The Trustee and the Paying Agent shall promptly turn over to the Company upon request any excess money or securities held by them at any time. The Trustee and the Paying Agent shall pay to the Company upon request any money held by them for the payment of principal or interest that remains unclaimed for two years. After payment to the Company, Securityholders entitled to the money must look to the Company for payment as unsecured general creditors unless an abandoned property law designates another person. -24- 29 ARTICLE 9--AMENDMENTS AND WAIVERS SECTION 9.01. Without Consent of Holders. The Company and the Trustee may amend this Indenture, the Securities or any coupons without the consent of any Securityholder: (1) to cure any ambiguity, omission, defect or inconsistency; (2) to comply with Article 5; (3) to provide that specific provisions of this Indenture shall not apply to a series not previously issued; (4) to create a series and establish its terms; (5) to provide for a separate Trustee for one or more series; or (6) to make any change that does not materially adversely affect the rights of any Securityholder. SECTION 9.02. With Consent of Holders. The Company and the Trustee may amend this Indenture, the Securities and any coupons with the written consent of the Holders of a majority in principal amount of the Securities of all series affected by the amendment voting as one class. However, without the consent of each Securityholder affected, an amendment under this Section may not: (1) reduce the amount of Securities whose Holders must consent to an amendment; (2) reduce the interest on or change the time for payment of interest on any Security; (3) change the fixed maturity of any Security; (4) reduce the principal of any non-Discounted Security or reduce the amount of principal of any Discounted Security that would be due upon an acceleration thereof; (5) change the currency in which principal or interest on a Security is payable; or (6) make any change in Section 6.04 or 9.02, except to increase the amount of Securities whose Holders must consent to an amendment or waiver or to provide that other provisions of this Indenture cannot be amended or waived without the consent of each Securityholder affected thereby. An amendment of a provision included solely for the benefit of one or more series does not affect Securityholders of any other series. Securityholders need not consent to the exact text of a proposed amendment or waiver; it is sufficient if they consent to the substance thereof. -25- 30 SECTION 9.03. Compliance with Trust Indenture Act. Every amendment pursuant to Section 9.01 or 9.02 shall be set forth in a supplemental indenture that complies with the TIA as then in effect. If a provision of the TIA requires or permits a provision of this Indenture and the TIA provision is amended, then the Indenture provision shall be automatically amended to like effect. SECTION 9.04. Effect of Consents. An amendment or waiver becomes effective in accordance with its terms and thereafter binds every Securityholder entitled to consent to it. A consent to an amendment or waiver by a Holder of a Security is a continuing consent by the Holder and every subsequent Holder of a Security that evidences the same debt as the consenting Holder's Security. Any Holder or subsequent Holder may revoke the consent as to his Security if the Trustee receives notice of the revocation before the amendment or waiver becomes effective. The Company may fix a record date for the determination of Holders of Registered Securities entitled to give a consent. The record date shall not be less than 10 nor more than 60 days prior to the first written solicitation of Securityholders. SECTION 9.05. Notation on or Exchange of Securities. The Company or the Trustee may place an appropriate notation about an amendment or waiver on any Security thereafter authenticated. The Company may issue in exchange for affected Securities new Securities that reflect the amendment or waiver. SECTION 9.06. Trustee Protected. The Trustee need not sign any supplemental indenture that adversely affects its rights. The Trustee shall be entitled to receive, and shall be fully protected in relying upon, an Opinion of Counsel and an Officers' Certificate each stating that the execution of any amendment or supplement or waiver authorized pursuant to this Article is authorized or permitted by this Indenture, and that such amendment or supplement or waiver constitutes the legal, valid and binding obligation of the Company. ARTICLE 10--MISCELLANEOUS SECTION 10.01. Trust Indenture Act. The provisions of TIA Sections 310 through 317 that impose duties on any person (including the provisions automatically deemed included herein unless expressly excluded by this Indenture) are a part of and govern this Indenture, whether or not expressly set forth herein. If any provision of this Indenture limits, qualifies or conflicts with another provision which is required to be included in this Indenture by the TIA, the required provision shall control. -26- 31 SECTION 10.02. Notices. Any notice by one party to another is duly given if in writing and delivered in person, sent by facsimile transmission confirmed by mail or mailed by first-class mail to the other's address shown below: Company: Wisconsin Electric Power Company 231 West Michigan Street P.O. Box 2046 Milwaukee, WI 53201 Attention: Corporate Secretary Trustee: Firstar Trust Company 777 East Wisconsin Avenue Milwaukee, WI 53202 Attention: Corporate Trust Department A party by notice to the other parties may designate additional or different addresses for subsequent notices. Any notice mailed to a Securityholder shall be mailed to his address shown on the register kept by the Transfer Agent or on the list referred to in Section 2.06. Failure to mail a notice to a Securityholder or any defect in a notice mailed to a Securityholder shall not affect the sufficiency of the notice mailed to other Securityholders or the sufficiency of any published notice. If a notice is mailed in the manner provided above within the time prescribed, it is duly given, whether or not the addressee receives it. If the Company mails a notice to Securityholders, it shall mail a copy to the Trustee and each Agent at the same time. If in the Company's opinion it is impractical to mail a notice required to be mailed or to publish a notice required to be published, the Company may give such substitute notice as the Trustee approves. Failure to publish a notice as required or any defect in it shall not affect the sufficiency of any mailed notice. All notices shall be in the English language, except that any published notice may be in an official language of the country of publication. A "notice" includes any communication required by this Indenture. SECTION 10.03. Certificate and Opinion as to Conditions Precedent. Upon any request or application by the Company to the Trustee to take any action under this Indenture, the Company shall if so requested furnish to the Trustee: (1) an Officers' Certificate stating that, in the opinion of the signers, all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with; and (2) an Opinion of Counsel stating that, in the opinion of such counsel, all such conditions precedent have been complied with. -27- 32 SECTION 10.04. Statements Required in Certificate or Opinion. Each certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture shall include: (1) a statement that the person making such certificate or opinion has read such covenant or condition; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of such person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such cove- nant or condition has been complied with; and (4) a statement as to whether or not, in the opinion of such person, such condition or covenant has been complied with. SECTION 10.05. Rules by Company and Agents. The Company may make reasonable rules for action by or a meeting of Securityholders. An Agent may make reasonable rules and set reasonable requirements for its functions. SECTION 10.06. Legal Holidays. A "Legal Holiday" is a Saturday, a Sunday or a day on which banking institutions are not required to be open. If a payment date is a Legal Holiday at a place of payment, unless the Securities Resolution establishing a series otherwise provides with respect to Securities of the series, payment may be made at that place on the next succeeding day that is not a Legal Holi- day, and no interest shall accrue for the intervening period. SECTION 10.07. No Recourse Against Others. All liability described in the Securities of any director, officer, employee or stockholder, as such, of the Company is waived and released. SECTION 10.08. Duplicate Originals. The parties may sign any number of copies of this Indenture. One signed copy is enough to prove this Indenture. SECTION 10.09. Governing Law. The laws of the State of Wisconsin shall govern this Indenture, the Securities and any coupons, unless federal law governs. -28- 33 SIGNATURES IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, and their respective corporate seals to be hereunto affixed and attested, all as of the date first above written. WISCONSIN ELECTRIC POWER COMPANY (CORPORATE SEAL) By /s/ Richard R. Grigg, Jr. ------------------------------- Richard R. Grigg, Jr. President and Chief Operating Officer Attest: /s/ Ann Marie Brady - ------------------------- Ann Marie Brady Secretary FIRSTAR TRUST COMPANY By /s/ Gene E. Ploeger ------------------------------- (CORPORATE SEAL) Gene Ploeger Assistant Vice President Attest: /s/ Amy E. Nolde - ------------------------- Amy Nolde Assistant Secretary -29- 34 (THIS PAGE INTENTIONALLY LEFT BLANK) -30- 35 STATE OF WISCONSIN,) ) ss.: COUNTY OF MILWAUKEE) On this 6th day of December, 1995, before me personally appeared Richard R. Grigg, Jr. and Ann Marie Brady to me personally known who being by me severally duly sworn, did say: that Richard R. Grigg, Jr. is President and Chief Operating Officer and Ann Marie Brady is Secretary of WISCONSIN ELECTRIC POWER COMPANY, and that the seal affixed to the foregoing instrument is the corporate seal of said corporation and that said instrument was signed and sealed on behalf of said corporation by authority of its Board of Directors; and said Richard R. Grigg, Jr. and Ann Marie Brady severally acknowledged said instrument to be the free act and deed of said corporation. /s/ Karen G. Paul - ------------------------------ Notary Public State of Wisconsin My Commission expires 10/12/97 (SEAL OF NOTARY PUBLIC) STATE OF WISCONSIN,) ) ss.: COUNTY OF MILWAUKEE) On this 6th day of December, 1995, before me personally appeared Gene Ploeger and Amy Nolde to me personally known, who being by me severally duly sworn, did say: that Gene Ploeger is an Assistant Vice President and Amy Nolde is an Assistant Secretary of FIRSTAR TRUST COMPANY, and that the seal affixed to the foregoing instrument is the corporate seal of said corporation and that said instrument was signed and sealed on behalf of said corporation by authority of its Board of Directors; and said Gene Ploeger and Amy Nolde severally acknowledged said instrument to be the free act and deed of said corporation. /s/ Janice S. Grezinski - ------------------------ Notary Public State of Wisconsin My Commission expires 2-2-97 (SEAL OF NOTARY PUBLIC) -31- 36 (THIS PAGE INTENTIONALLY LEFT BLANK) -32- 37 EXHIBIT A A Form of Registered Security No._____________ $_____________ WISCONSIN ELECTRIC POWER COMPANY [Title of Security] WISCONSIN ELECTRIC POWER COMPANY promises to pay to ______________________________________________ or registered assigns the principal sum of ____________ Dollars on ______________, ____ Interest Payment Dates: ___________________ Record Dates: ___________________ Dated: FIRSTAR TRUST COMPANY WISCONSIN ELECTRIC POWER COMPANY Transfer Agent and Paying Agent by ______________________________ Authenticated: [Title of Authorized Officer] FIRSTAR TRUST COMPANY (CORPORATE SEAL) Registrar, by ______________________________ ______________________________ Authorized Signature [Assistant] Secretary -33- 38 WISCONSIN ELECTRIC POWER COMPANY [Title of Security] 1. Interest.(1) Wisconsin Electric Power Company (the "Company"), a Wisconsin corporation, promises to pay interest on the principal amount of this Security at the rate per annum shown above. The Company will pay interest semiannually on _________________ and _________________ of each year commencing ________________, 19__. Interest on the Securities will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from _________________, 19__. Interest will be computed on the basis of a 360-day year of twelve 30-day months. 2. Method of Payment.(2) The Company will pay interest on the Securities to the persons who are registered holders of Securities at the close of business on the record date for the next interest payment date, except as otherwise provided in the Indenture. Holders must surrender Securities to a Paying Agent to collect principal payments. The Company will pay principal and interest in money of the United States that at the time of payment is legal tender for payment of public and private debts. The Company may pay principal and interest by check payable in such money. It may mail an interest check to a holder's registered address. 3. Securities Agents.(2A) Initially, Firstar Trust Company will act as Paying Agent, Transfer Agent and Registrar. The Company may change any Paying Agent or Transfer Agent without notice. The Company or any Affiliate may act in any such capacity. Subject to certain conditions, the Company may change the Trustee. 4. Indenture. The Company issued the securities of this series (the "Securities") under an Indenture dated as of December 1, 1995 (the "Indenture") between the Company and Firstar Trust Company (the "Trustee"). The terms of the Securities include those stated in the Indenture and in the Securities Resolution establishing the Securities and those made part of the Indenture by the Trust Indenture Act of 1939 (15 U.S. Code Sections 77aaa-77bbbb). Securityholders are referred to the Indenture, the Securities Resolution and such Act for a statement of such terms. 5. Optional Redemption.(3) On or after _____________, ____, the Company may redeem all the Securities at any time or some of them from time to time at the following redemption prices (expressed in percentages of principal amount), plus accrued interest to the redemption date. -34- 39 If redeemed during the 12-month period beginning _______________, Year Percentage Year Percentage and thereafter at 100%. 6. Mandatory Redemption.(4) The Company will redeem $____________ principal amount of Securities on _________________________ and on each _______________ thereafter through ____________________ at a redemption price of 100% of principal amount, plus accrued interest to the redemption date.(5) The Company may reduce the principal amount of Securities to be redeemed pursuant to this paragraph by subtracting 100% of the principal amount (excluding premium) of any Securities (i) that the Company has acquired or that the Company has redeemed other than pursuant to this paragraph and (ii) that the Company has delivered to the Registrar for cancellation. The Company may so subtract the same Security only once. 7. Additional Optional Redemption.(6) In addition to redemptions pursuant to the above paragraph(s), the Company may redeem not more than $____________ principal amount of Securities on ________________________ and on each __________________ thereafter through __________________ at a redemption price of 100% of principal amount, plus accrued interest to the redemption date. 8. Notice of Redemption.(7) Notice of redemption will be mailed at least 30 days but not more than 60 days before the redemption date to each holder of Securities to be redeemed at his registered address. 9. Denominations, Transfer, Exchange. The Securities are in registered form without coupons in denominations of $1,000(8) and whole multiples of $1,000. The transfer of Securities may be registered and Securities may be exchanged as provided in the Indenture. The Transfer Agent may require a holder, among other things, to furnish appropriate endorse- ments and transfer documents and to pay any taxes and fees required by law or the Indenture. The Transfer Agent need not exchange or register the transfer of any Security or portion of a Security selected for redemption. Also, it need not exchange or register the transfer of any Securities for a period of 15 days before a selection of Securities to be redeemed. 10. Persons Deemed Owners. The registered holder of a Security may be treated as its owner for all purposes. 11. Amendments and Waivers. Subject to certain exceptions, the Indenture or the Securities may be amended with the consent of the holders of a majority in principal amount of the securities of all series affected by the amendment.(9) -35- 40 Subject to certain exceptions, a default on a series may be waived with the consent of the holders of a majority in principal amount of the series. Without the consent of any Securityholder, the Indenture or the Securities may be amended, among other things, to cure any ambiguity, omission, defect or inconsistency; to provide for assumption of Com- pany obligations to Securityholders; or to make any change that does not materially adversely affect the rights of any Securityholder. 12. Restrictive Covenants.(10) The Securities are unsecured general obligations of the Company limited to $____________ principal amount. The Indenture does not limit other unsecured debt. Section 4.07 of the Indenture, which if applicable limits certain mortgages and other liens, [will] [will not] apply with respect to the Securities. [The limitations are subject to a number of important qualifications and exceptions.] 13. Successors. When a successor assumes all the obligations of the Company under the Securities and the Indenture, the Company will be released from those obligations. 14. Defeasance Prior to Redemption or Maturity.(11) Subject to certain conditions, the Company at any time may terminate some or all of its obligations under the Securities and the Indenture if the Company deposits with the Trustee money or U.S. Government Obligations for the payment of principal and interest on the Securities to redemption or maturity. U.S. Government Obligations are securities backed by the full faith and credit of the United States of America or certificates representing an ownership interest in such Obligations. 15. Defaults and Remedies. An Event of Default(12) includes: default for 60 days in payment of interest on the Securities; default in payment of principal on the Securities; default for 60 days in the payment of any sinking fund obligation; default by the Company for a specified period after notice to it in the performance of any of its other agreements applicable to the Securities; certain events of bankruptcy or insolvency; and any other Event of Default provided for in the series. If an Event of Default occurs and is continuing, the Trustee or the holders of at least 25% in principal amount of the Securities may declare the principal(13) of all the Securities to be due and payable immediately. Securityholders may not enforce the Indenture or the Securities except as provided in the Indenture. The Trustee may require indemnity satisfactory to it before it enforces the Indenture or the Securities. Subject to certain limitations, holders of a majority in principal amount of the Securities may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Securityholders notice of any continuing default (except a default in payment of principal or interest) if it determines that withholding notice is in their interests. The Company must furnish an annual compliance certificate to the Trustee. -36- 41 16. Trustee Dealings with Company. Firstar Trust Company, the Trustee under the Indenture, in its individual or any other capacity, may make loans to, accept deposits from, and perform services for the Company or its Affiliates, and may otherwise deal with those persons, as if it were not Trustee. 17. No Recourse Against Others. A director, officer, employee or stockholder, as such, of the Company shall not have any liability for any obligations of the Company under the Securities or the Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. Each Securityholder by accepting a Security waives and releases all such liability. The waiver and release are part of the consideration for the issue of the Securities. 18. Authentication. This Security shall not be valid until authenticated by a manual signature of the Registrar. 19. Abbreviations. Customary abbreviations may be used in the name of a Securityholder or an assignee, such as: TEN COM (=tenants in common), TEN ENT (=tenants by the entirety), JT TEN (=joint tenants with right of survivorship and not as tenants in common), CUST (=custodian), U/G/M/A (=Uniform Gifts to Minors Act), and U/T/M/A (=Uniform Transfers to Minors Act). The Company will furnish to any Securityholder upon written request and without charge a copy of the Indenture and the Securities Resolution, which contains the text of this Security in larger type. Requests may be made to: Corporate Secretary, Wisconsin Electric Power Company, 231 West Michigan Street, P.O. Box 2046, Milwaukee, WI 53201. -37- 42 EXHIBIT B A Form of Bearer Security No. _____________ $_____________ WISCONSIN ELECTRIC POWER COMPANY [Title of Security] WISCONSIN ELECTRIC POWER COMPANY promises to pay to bearer the principal sum of ______________ Dollars on ____________, ____ Interest Payment Dates: _____________________________ Dated: FIRSTAR TRUST COMPANY WISCONSIN ELECTRIC POWER COMPANY Transfer Agent and Paying Agent by _____________________________ Authenticated: [Title of Authorized Officer] FIRSTAR TRUST COMPANY (CORPORATE SEAL) Registrar, by _____________________________ ___________________________ Authorized Signature [Assistant] Secretary -38- 43 WISCONSIN ELECTRIC POWER COMPANY [Title of Security] 1. Interest.(1) Wisconsin Electric Power Company (the "Company"), a Wisconsin corporation, promises to pay to bearer interest on the principal amount of this Security at the rate per annum shown above. The Company will pay interest semiannually on __________________________ and __________________________ of each year commencing _________________, 19__. Interest on the Securities will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from ______________, 19__. Interest will be computed on the basis of a 360-day year of twelve 30-day months. 2. Method of Payment.(2) Holders must surrender Securities and any coupons to a Paying Agent to collect principal and interest payments. The Company will pay principal and interest in money of the United States that at the time of payment is legal tender for payment of public and private debts. The Company may pay principal and interest by check payable in such money. 3. Securities Agents.(2A) Initially, Firstar Trust Company will act as Transfer Agent, Paying Agent and Registrar. The Company may change any Paying Agent or Transfer Agent without notice. The Company or any Affiliate may act in any such capacity. Subject to certain conditions, the Company may change the Trustee. 4. Indenture. The Company issued the securities of this series (the "Securities") under an Indenture dated as of December 1, 1995 (the "Indenture") between the Company and Firstar Trust Company (the "Trustee"). The terms of the Securities include those stated in the Indenture and the Securities Resolution establishing the series and those made part of the Indenture by the Trust Indenture Act of 1939 (15 U.S. Code Sections 77aaa-77bbbb). Securityholders are referred to the Indenture, the Securities Resolution and such Act for a statement of such terms. 5. Optional Redemption.(3) On or after ____________, ____, the Company may redeem all the Securities at any time or some of them from time to time at the following redemption prices (expressed in percentages of principal amount), plus accrued interest to the redemption date. If redeemed during the 12-month period beginning ___________________, Year Percentage Year Percentage and thereafter at 100%. -39- 44 6. Mandatory Redemption.(4) The Company will redeem $_________ principal amount of Securities on __________________ and on each __________________ thereafter through _________________ at a redemption price of 100% of principal amount, plus accrued interest to the redemption date(5). The Company may reduce the principal amount of Securities to be redeemed pursuant to this paragraph by subtracting 100% of the principal amount (excluding premium) of any Securities (i) that the Company has acquired or that the Company has redeemed other than pursuant to this paragraph and (ii) that the Company has delivered to the Registrar for cancellation. The Company may so subtract the same Security only once. 7. Additional Optional Redemption.(6) In addition to redemptions pursuant to the above paragraph(s), the Company may redeem not more than $____________ principal amount of Securities on __________________ and on each __________________ thereafter through __________________ at a redemption price of 100% of principal amount, plus accrued interest to the redemption date. 8. Notice of Redemption.(7) Notice of redemption will be published once in an Authorized Newspaper in the City of New York and if the Securities are listed on any stock exchange located outside the United States and such stock exchange so requires, in any other required city outside the United States at least 30 days but not more than 60 days before the redemption date. Notice of redemption also will be mailed to holders who have filed their names and addresses with the Transfer Agent within the two preceding years. A holder of Securities may miss important notices if he fails to maintain his name and address with the Transfer Agent. 9. Denominations, Transfer, Exchange. The Securities are in bearer form with coupons in denominations of $5,000(8) and whole multiples of $5,000. The Securities may be transferred by delivery and exchanged as provided in the Indenture. Upon an exchange, the Transfer Agent may require a holder, among other things, to furnish appropriate documents and to pay any taxes and fees required by law or the Indenture. The Transfer Agent need not exchange any Security or portion of a Security selected for redemption. Also, it need not exchange any Securities for a period of 15 days before a selection of Securities to be redeemed. 10. Persons Deemed Owners. The holder of a Security or coupon may be treated as its owner for all purposes. 11. Amendments and Waivers. Subject to certain exceptions, the Indenture or the Securities may be amended with the consent of the holders of a majority in principal amount of the securities of all series affected by the amendment.(9) Subject to certain exceptions, a default on a series may be waived with the consent of the holders of a majority in principal amount of the series. -40- 45 Without the consent of any Securityholder, the Indenture or the Securities may be amended, among other things, to cure any ambiguity, omission, defect or inconsistency; to provide for assumption of Company obligations to Securityholders; or to make any change that does not materially adversely affect the rights of any Securityholder. 12. Restrictive Covenants.(10) The Securities are unsecured general obligations of the Company limited to $____________ principal amount. The Indenture does not limit other unsecured debt. Section 4.07 of the Indenture, which if applicable limits certain mortgages and other liens, [will] [will not] apply with respect to the Securities. [The limitations are subject to a number of important qualifications and exceptions.] 13. Successors. When a successor assumes all the obligations of the Company under the Securities, any coupons and the Indenture, the Company will be released from those obligations. 14. Defeasance Prior to Redemption or Maturity.(11) Subject to certain conditions, the Company at any time may terminate some or all of its obligations under the Securities, any coupons and the Indenture if the Company deposits with the Trustee money or U.S. Government Obligations for the payment of principal and interest on the Securities to redemption or maturity. U.S. Government Obligations are securities backed by the full faith and credit of the United States of America or certificates representing an ownership interest in such Obligations. 15. Defaults and Remedies. An Event of Default(12) includes: default for 60 days in payment of interest on the Securities; default in payment of principal on the Securities; default for 60 days in the making of any sinking fund payment; default by the Company for a specified period after notice to it in the performance of any of its other agreements applicable to the Securities; certain events of bankruptcy or insolvency; and any other Event of Default provided for in the series. If an Event of Default occurs and is continuing, the Trustee or the holders of at least 25% in principal amount of the Securities may declare the principal(13) of all the Securities to be due and payable immediately. Securityholders may not enforce the Indenture or the Securities except as provided in the Indenture. The Trustee may require indemnity satisfactory to it before it enforces the Indenture or the Securities. Subject to certain limitations, holders of a majority in principal amount of the Securities may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Securityholders notice of any continuing default (except a default in payment of principal or interest) if it determines that withholding notice is in their interests. The Company must furnish an annual compliance certificate to the Trustee. -41- 46 16. Trustee Dealings with Company. Firstar Trust Company, the Trustee under the Indenture, in its individual or any other capacity, may make loans to, accept deposits from, and perform services for the Company or its Affiliates, and may otherwise deal with those persons, as if it were not Trustee. 17. No Recourse Against Others. A director, officer, employee or stockholder, as such, of the Company shall not have any liability for any obligations of the Company under the Securities or the Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. Each Securityholder by accepting a Security waives and releases all such liability. The waiver and release are part of the consideration for the issue of the Securities. 18. Authentication. This Security shall not be valid until authenticated by a manual signature of the Registrar. 19. Abbreviations. Customary abbreviations may be used in the name of a Securityholder or an assignee, such as: TEN COM (=tenants in common), TEN ENT (=tenants by the entirety), JT TEN (=joint tenants with right of survivorship and not as tenants in common), CUST (=custodian), U/G/M/A (=Uniform Gifts to Minors Act), and U/T/M/A (=Uniform Transfers to Minors Act). The Company will furnish to any Securityholder upon written request and without charge a copy of the Indenture and the Securities Resolution, which contains the text of this Security in larger type. Requests may be made to: Corporate Secretary, Wisconsin Electric Power Company, 231 West Michigan Street, P.O. Box 2046, Milwaukee, WI 53201. -42- 47 [FACE OF COUPON] .............. [$]........... Due........... WISCONSIN ELECTRIC POWER COMPANY [Title of Security] Unless the Security attached to this coupon has been called for redemption, Wisconsin Electric Power Company (the "Company") will pay to bearer, upon surrender, the amount shown hereon when due. This coupon may be surrendered for payment to any Paying Agent listed on the back of this coupon unless the Company has replaced such Agent. Payment may be made by check. This coupon represents six months' interest. ___________________________________ By_________________________________ [REVERSE OF COUPON] PAYING AGENTS -43- 48 (THIS PAGE INTENTIONALLY LEFT BLANK) -44- 49 NOTES TO EXHIBITS A AND B (1) If the Security is not to bear interest at a fixed rate per annum, insert a description of the manner in which the rate of interest is to be determined. If the Security is not to bear interest prior to maturity, so state. (2) If the method or currency of payment is different, insert a statement thereof. (2A) As is done in Section 2.03 of the Indenture, the Trustee must be appointed Registrar under Section 182.23, Wis. Stats., and Wisconsin Electric Power Company's Bylaws as in effect as of the date of this Indenture, for officers' signatures on Securities to be in facsimile. (3) If applicable. If the Security is to be subject to a nonrefunding restriction, insert a brief summary thereof. If the redemption is to be subject to a condition, insert a brief summary thereof. (4) If applicable. (5) If the Security is a Discounted Security, insert amount to be redeemed or method of calculating such amount. (6) If applicable. Also insert, if applicable, provisions for repayment of Securities at the option of the Securityholder. (7) If applicable. If the Company may condition such redemption on the happening of a stated event, in which case the notice will so provide, insert a brief summary thereof. (8) If applicable. Insert additional or different denominations. (9) If different terms apply, insert a brief summary thereof. (10) If applicable. If the Security is to have the benefit of additional or different covenants, insert a brief summary thereof. (11) If applicable. If different defeasance terms apply, insert a brief summary thereof. (12) If additional or different Events of Default apply, insert a brief summary thereof. (13) If the Security is a Discounted Security, set forth the amount due and payable upon an Event of Default. Note: U.S. tax law may require certain legends on Discounted and Bearer Securities. -45- 50 (THIS PAGE INTENTIONALLY LEFT BLANK) -46- 51 EXHIBIT C ASSIGNMENT FORM To assign this Security, fill in the form below: I or we assign and transfer this Security to ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ (Print or type assignee's name, address and zip code) _____________________________________________ (Insert assignee's soc. sec. or tax I.D. no.) and irrevocably appoint ___________________________________ agent to transfer this Security on the books of the Company. The agent may substitute another to act for him. Date: _______________ Your Signature: ________________________ ________________________ (Sign exactly as your name appears on the face of this Security) [Signature Guaranteed: ___________________________________] -47- EX-4.2 4 SECURITIES RESOLUTION NO. 1 1 Exhibit (4)-2 Closing Document No. 4(f) ONE HUNDRED YEAR 6-7/8% DEBENTURES DUE DECEMBER 1, 2095 SECURITIES RESOLUTION NO. 1 OF WISCONSIN ELECTRIC POWER COMPANY The actions described below are taken by the Board (as defined in the Indenture referred to below) of WISCONSIN ELECTRIC POWER COMPANY (the "Company") pursuant to resolutions adopted by the Board of Directors of the Company as of April 28, 1993, July 26, 1995, August 23, 1995 and October 25, 1995, resolutions adopted by the Finance Committee of the Board of Directors as of December 5, 1995, and Section 2.01 of the Indenture dated as of December 1, 1995 (the "Indenture") between the Company and Firstar Trust Company, as trustee. Terms used herein and not defined have the same meaning as in the Indenture. RESOLVED, that a new series of Securities is authorized as follows: 1. The title of the series is One Hundred Year 6-7/8% Debentures due December 1, 2095 ("6-7/8% Debentures"). 2. The form of the 6-7/8% Debentures shall be substantially in the form of Exhibit 1 hereto. 3. The 6-7/8% Debentures shall have the terms set forth in Exhibit 1. 4. The 6-7/8% Debentures shall have such other terms as are set forth in Exhibit 2 hereto. 5. The 6-7/8% Debentures shall be sold to the underwriter(s) named in the Prospectus Supplement dated December 5, 1995 on the following terms: Price to Public: 97.990% Underwriting Discount: 1.125% Closing Date: December 8, 1995 This Securities Resolution shall be effective as of December 5, 1995. 2 EXHIBIT 1 No. _____________ $_____________ WISCONSIN ELECTRIC POWER COMPANY One Hundred Year 6-7/8% Debentures due December 1, 2095 WISCONSIN ELECTRIC POWER COMPANY promises to pay to ______________________________________________ or registered assigns the principal sum of ____________________________________________ Dollars on December 1, 2095 Interest Payment Dates: June 1 and December 1 Record Dates: May 15 and November 15 Dated: FIRSTAR TRUST COMPANY WISCONSIN ELECTRIC POWER COMPANY Transfer Agent and Paying Agent by ______________________________ Authenticated: [Title of Authorized Officer] FIRSTAR TRUST COMPANY (CORPORATE SEAL) Registrar, by ______________________________ ______________________________ Authorized Signature [Assistant] Secretary - 2 - 3 WISCONSIN ELECTRIC POWER COMPANY One Hundred Year 6-7/8% Debentures due December 1, 2095 1. Interest. Wisconsin Electric Power Company (the "Company"), a Wisconsin corporation, promises to pay interest on the principal amount of this Security at the rate per annum shown above. The Company will pay interest semiannually on June 1 and December 1 of each year commencing June 1, 1996. Interest on the Securities will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from December 1, 1995. Interest will be computed on the basis of a 360-day year of twelve 30-day months. 2. Method of Payment. The Company will pay interest on the Securities to the persons who are registered holders of Securities at the close of business on the record date for the next interest payment date, except as otherwise provided in the Indenture. Holders must surrender Securities to a Paying Agent to collect principal payments. The Company will pay principal and interest in money of the United States that at the time of payment is legal tender for payment of public and private debts. The Company may pay principal and interest by check payable in such money. It may mail an interest check to a holder's registered address. 3. Securities Agents. Initially, Firstar Trust Company will act as Paying Agent, Transfer Agent and Registrar. The Company may change any Paying Agent or Transfer Agent without notice. The Company or any Affiliate may act in any such capacity. Subject to certain conditions, the Company may change the Trustee. 4. Indenture. The Company issued the securities of this series (the "Securities") under an Indenture dated as of December 1, 1995 (the "Indenture") between the Company and Firstar Trust Company (the "Trustee"). The terms of the Securities include those stated in the Indenture and in the Securities Resolution establishing the Securities and those made part of the Indenture by the Trust Indenture Act of 1939 (15 U.S. Code Sections 77aaa-77bbbb). Securityholders are referred to the Indenture, the Securities Resolution and such Act for a statement of such terms. 5. Redemption. The Securities will not be redeemable prior to maturity. 6. Denominations, Transfer, Exchange. The Securities are in registered form without coupons in denominations of $1,000 and whole multiples of $1,000. The transfer of Securities may be registered and Securities may be exchanged as provided in the Indenture. The Transfer Agent may require a holder, among other things, to furnish appropriate endorsements and transfer documents and to pay any taxes and fees required by law or the Indenture. The Transfer Agent - 3 - 4 need not exchange or register the transfer of any Security or portion of a Security selected for redemption. Also, it need not exchange or register the transfer of any Securities for a period of 15 days before a selection of Securities to be redeemed. 7. Persons Deemed Owners. The registered holder of a Security may be treated as its owner for all purposes. 8. Amendments and Waivers. Subject to certain exceptions, the Indenture or the Securities may be amended with the consent of the holders of a majority in principal amount of the securities of all series affected by the amendment. Subject to certain exceptions, a default on a series may be waived with the consent of the holders of a majority in principal amount of the series. Without the consent of any Securityholder, the Indenture or the Securities may be amended, among other things, to cure any ambiguity, omission, defect or inconsistency; to provide for assumption of Company obligations to Securityholders; or to make any change that does not materially adversely affect the rights of any Securityholder. 9. Restrictive Covenants. The Securities are unsecured general obligations of the Company limited to $100,000,000 principal amount. The Indenture does not limit other unsecured debt. Section 4.07 of the Indenture, which if applicable limits certain mortgages and other liens, will apply with respect to the Securities. The limitations are subject to a number of important qualifications and exceptions. 10. Successors. When a successor assumes all the obligations of the Company under the Securities and the Indenture, the Company will be released from those obligations. 11. Defeasance Prior to Redemption or Maturity. Subject to certain conditions, the Company at any time may terminate some or all of its obligations under the Securities and the Indenture if the Company deposits with the Trustee money or U.S. Government Obligations for the payment of principal and interest on the Securities to redemption or maturity. U.S. Government Obligations are securities backed by the full faith and credit of the United States of America or certificates representing an ownership interest in such Obligations. 12. Defaults and Remedies. An Event of Default includes: default for 60 days in payment of interest on the Securities; default in payment of principal on the Securities; default for 60 days in the payment of any sinking fund obligation; default by the Company for a specified period after notice to it in the performance of any of its other agreements applicable to the Securities; certain events of bankruptcy or insolvency; and any other Event of - 4 - 5 Default provided for in the series. If an Event of Default occurs and is continuing, the Trustee or the holders of at least 25% in principal amount of the Securities may declare the principal of all the Securities to be due and payable immediately. Securityholders may not enforce the Indenture or the Securities except as provided in the Indenture. The Trustee may require indemnity satisfactory to it before it enforces the Indenture or the Securities. Subject to certain limitations, holders of a majority in principal amount of the Securities may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Securityholders notice of any continuing default (except a default in payment of principal or interest) if it determines that withholding notice is in their interests. The Company must furnish an annual compliance certificate to the Trustee. 13. Trustee Dealings with Company. Firstar Trust Company, the Trustee under the Indenture, in its individual or any other capacity, may make loans to, accept deposits from, and perform services for the Company or its Affiliates, and may otherwise deal with those persons, as if it were not Trustee. 14. No Recourse Against Others. A director, officer, employee or stockholder, as such, of the Company shall not have any liability for any obligations of the Company under the Securities or the Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. Each Securityholder by accepting a Security waives and releases all such liability. The waiver and release are part of the consideration for the issue of the Securities. 15. Authentication. This Security shall not be valid until authenticated by a manual signature of the Registrar. 16. Abbreviations. Customary abbreviations may be used in the name of a Securityholder or an assignee, such as: TEN COM (=tenants in common), TEN ENT (=tenants by the entirety), JT TEN (=joint tenants with right of survivorship and not as tenants in common), CUST (=custodian), U/G/M/A (=Uniform Gifts to Minors Act), and U/T/M/A (=Uniform Transfers to Minors Act). The Company will furnish to any Securityholder upon written request and without charge a copy of the Indenture and the Securities Resolution, which contains the text of this Security in larger type. Requests may be made to: Corporate Secretary, Wisconsin Electric Power Company, 231 West Michigan Street, P.O. Box 2046, Milwaukee, WI 53201. - 5 - 6 EXHIBIT 2 6-7/8% Debentures Supplemental Terms In addition to the terms set forth in Exhibit 1 to Securities Resolution No. 1, the 6-7/8% Debentures shall have the following terms: Section 1. Definitions. Capitalized terms used and not defined herein shall have the meaning given such terms in the Indenture. The following is an additional definition applicable to the 6-7/8% Debentures: "Depositary" means, with respect to the 6-7/8% Debentures issued as a global Security, The Depository Trust Company, New York, New York, or any successor thereto registered under the Securities Exchange Act of 1934 or other applicable statute or regulation. Section 2. Securities Issuable as Global Securities. (a) The 6-7/8% Debentures shall be issued in the form of one or more permanent global Securities and shall, except as otherwise provided in this Section 2, be registered only in the name of the Depositary or its nominee. Each global Security shall bear a legend substantially to the following effect: "Unless this certificate is presented by an authorized representative of The Depository Trust Company, a New York corporation ("DTC"), to the Company or its agent for registration of transfer, exchange, or payment, and any certificate issued is registered in the name of Cede & Co. or in such other name as is requested by an authorized representative of DTC (and any payment is made to Cede & Co. or to such other entity as is requested by an authorized representative of DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the registered owner hereof, Cede & Co., has an interest herein." (b) If at any time (i) the Depositary with respect to the 6-7/8% Debentures notifies the Company that it is unwilling or unable to continue as Depositary for such global Security or (ii) the Depositary for the 6-7/8% Debentures shall no longer be eligible or in good standing under the Securities Exchange Act of 1934 or other applicable statute or regulation, the Company shall appoint a successor Depositary with respect to such global Security. If a successor Depositary for such global Security is not appointed by the Company within 90 days after the Company receives such notice or becomes aware of such ineligibility, the Transfer Agent shall register the exchange of such global Security for an equal principal amount of Registered Securities in the manner provided in Section 2.07 of the Indenture. (c) The Transfer Agent shall register the transfer or exchange of a global Security for Registered Securities pursuant to Section 2.07 of the Indenture if (i) a Default or Event of Default shall have occurred and be continuing with respect to the 6-7/8% Debentures or (ii) the Company determines that the 6-7/8% Debentures shall no longer be represented by global Securities. - 6 - 7 (d) In any exchange provided for in the preceding paragraphs (b) or (c), the Company will execute and the Registrar will authenticate and deliver Registered Securities. Registered Securities issued in exchange for a global Security shall be in such names and denominations as the Depositary for such global Security shall instruct the Registrar. The Registrar shall deliver such Registered Securities to the persons in whose names such Securities are so registered. (e) The 6-7/8% Debentures will trade in the Depositary's Same-Day Funds Settlement System. All payments of principal and interest on global Securities will be made by the Company in immediately available funds. - 7 - EX-23.2 5 CONSENT OF INDEPENDENT ACCOUNTANTS 1 Exhibit (23)-2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements and Prospectuses constituting part of the Registration Statements on Form S-3 (Nos. 33-51749 and 33-64343) of Wisconsin Electric Power Company of our report dated February 5, 1996, except as to the Environmental Contingencies section of Note 8, which is as of February 19, 1996, relating to the financial statements of Northern States Power Company, a Wisconsin Corporation ("NSP-WI"), appearing in NSP-WI's Form 10-K for the year ended December 31, 1995, which is incorporated by reference in this Form 10-K. /s/Price Waterhouse LLP - ------------------------ PRICE WATERHOUSE LLP Minneapolis, Minnesota March 28, 1996 EX-23.3 6 INDEPENDENT AUDITORS' CONSENT OF DELOITTE & TOUCHE 1 Exhibit (23)-3 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in the Registration Statements and Prospectuses on Form S-3 (Nos. 33-51749 and 33-64343) of Wisconsin Electric Power Company of our report dated January 27, 1995 appearing on page 23 in Item 8 of the Annual Report on Form 10-K of Northern States Power Company (Wisconsin) for the fiscal year ended December 31, 1995 (File No. 10- 3140). /s/Deloitte & Touche LLP - ------------------------ DELOITTE & TOUCHE LLP Minneapolis, Minnesota March 27, 1996 EX-27.1 7 WE SCHEDULE UT - FISCAL YEAR ENDED DECEMBER 31, 1995
UT THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED FINANCIAL STATEMENTS OF WISCONSIN ELECTRIC POWER COMPANY FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 U.S. DOLLARS DEC-31-1995 JAN-01-1995 DEC-31-1995 12-MOS 1 PER-BOOK 2,910,554 427,627 517,724 0 463,019 4,318,924 332,893 280,689 1,082,983 1,696,565 0 30,451 1,137,314 100,885 165,350 49,809 30,000 0 22,505 21,419 1,064,626 4,318,924 1,770,484 141,029 1,300,434 1,441,463 329,021 21,272 350,293 109,625 240,668 1,203 239,465 159,576 99,727 438,090 0 0 Earnings per share of common stock is not applicable because all of the company's common stock is owned by Wisconsin Energy Corporation. See financial statements and notes in accompanying 10-K.
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