SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 30, 1999 Commission Registrant; State of Incorporation IRS Employer File Number Address; and Telephone Number Identification No. ----------- --------------------------------- ------------------ 1-9057 WISCONSIN ENERGY CORPORATION 39-1391525 (A Wisconsin Corporation) 231 West Michigan Street P.O. Box 2949 Milwaukee, WI 53201 (414) 221-2345 1-1245 WISCONSIN ELECTRIC POWER COMPANY 39-0476280 (A Wisconsin Corporation) 231 West Michigan Street P.O. Box 2046 Milwaukee, WI 53201 (414) 221-2345 Indicate by check mark whether each 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 each 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 the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date (August 2, 1999): Wisconsin Energy Corporation Common Stock, $.01 Par Value, 117,174,724 shares outstanding. Wisconsin Electric Power Company Common Stock, $10 Par Value, 33,289,327 shares outstanding. Wisconsin Energy Corporation is the sole holder of Wisconsin Electric Power Company Common Stock. WISCONSIN ENERGY CORPORATION WISCONSIN ELECTRIC POWER COMPANY FORM 10-Q REPORT FOR THE QUARTER ENDED JUNE 30, 1999 TABLE OF CONTENTS Item Page - ---- ---- Introduction Part I - Financial Information ------------------------------ 1. Financial Statements Wisconsin Energy Consolidated Condensed Income Statement Consolidated Condensed Balance Sheet Consolidated Statement of Cash Flows Wisconsin Electric Condensed Income Statement Condensed Balance Sheet Statement of Cash Flows Notes to Financial Statements of Wisconsin Energy and Wisconsin Electric 2. Management's Discussion and Analysis of Financial Condition and Results of Operations for Wisconsin Energy and Wisconsin Electric 3. Quantitative and Qualitative Disclosures About Market Risk. Part II - Other Information --------------------------- 1. Legal Proceedings 4. Submission of Matters to a Vote of Security Holders 5. Other Information 6. Exhibits and Reports on Form 8-K Signatures INTRODUCTION Wisconsin Energy Corporation ("Wisconsin Energy" or the "Company") is a holding company whose principal subsidiary is Wisconsin Electric Power Company ("Wisconsin Electric"), an electric, gas and steam utility. Unless qualified by its context when used in this combined Form 10-Q, Wisconsin Energy refers to the holding company and all of its subsidiaries. The unaudited interim financial statements presented in this combined Form 10-Q report include the consolidated statements of Wisconsin Energy as well as separate statements for Wisconsin Electric. The unaudited statements have been prepared by Wisconsin Energy and Wisconsin Electric pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The Wisconsin Energy and Wisconsin Electric financial statements should be read in conjunction with the financial statements and notes thereto included in the companies' combined Annual Report on Form 10-K for the year ended December 31, 1998. This combined Form 10-Q is separately filed by Wisconsin Energy and Wisconsin Electric. Information contained herein relating to any individual registrant is filed by such registrant on its own behalf. PART I - FINANCIAL INFORMATION ------------------------------ ITEM 1. FINANCIAL STATEMENTS WISCONSIN ENERGY CORPORATION CONSOLIDATED CONDENSED INCOME STATEMENT (Unaudited) Three Months Ended Six Months Ended June 30 June 30 ------------------ --------------- 1999 1998 1999 1998 ---- ---- ---- ---- Thousands of Dollars, (Except Per Share Amounts) Operating Revenues $539,008 $475,576 $1,095,725 $991,253 Operating Expenses Fuel 94,209 80,207 164,944 154,108 Purchased power 53,041 41,463 102,701 79,283 Cost of gas sold 27,746 31,105 96,606 103,406 Other operation and maintenance 178,389 181,041 360,855 340,792 Depreciation and amortization 64,443 58,817 131,399 122,021 Property and revenue tax 19,149 15,160 36,873 31,276 ------- ------- -------- ------- Total Operating Expenses 436,977 407,793 893,378 830,886 ------- ------- -------- ------- Pretax Operating Income 102,031 67,783 202,347 160,367 Other Income and Deductions Interest income 8,202 6,332 16,551 13,067 Allowance for other funds used during construction 1,461 877 2,445 1,592 Other (8) (3,045) 4,438 1,165 ------- ------- -------- ------- Total Other Income and Deductions 9,655 4,164 23,434 15,824 Interest Charges and Other Interest expense 35,999 31,430 69,565 62,318 Allowance for borrowed funds used during construction (2,405) (1,957) (4,305) (3,955) Distributions on preferred securities of subsidiary trust 3,425 - 3,653 - Preferred dividend requirement of subsidiary 300 300 601 601 ------- ------- -------- ------- Total Interest Charges and Other 37,319 29,773 69,514 58,964 Income Taxes 25,464 13,320 53,853 39,325 ------- ------- -------- ------- Net Income $48,903 $28,854 $102,414 $77,902 ======= ======= ======== ======= Average Number of Shares of Common Stock Outstanding (Thousands) 116,614 113,687 116,272 113,279 Earnings Per Share of Common Stock (Basic and Diluted) $0.42 $0.25 $0.88 $ 0.69 Dividends Per Share of Common Stock $0.39 $0.39 $0.78 $0.775 The accompanying notes as they relate to Wisconsin Energy Corporation are an integral part of these financial statements. WISCONSIN ENERGY CORPORATION CONSOLIDATED CONDENSED BALANCE SHEET (Unaudited) June 30, December 31, 1999 1998 -------- ------------ (Thousands of Dollars) Assets ------ Property, Plant and Equipment Electric utility $5,019,760 $4,900,836 Gas utility 532,298 523,187 Steam utility 62,934 62,832 Common utility 386,885 420,750 Non-utility plant 219,928 - Other property 293,838 256,912 Accumulated provision for depreciation (3,111,319) (3,021,548) ---------- ---------- 3,404,324 3,142,969 Construction work in progress 170,121 135,544 Leased facilities - net 130,167 133,007 Nuclear fuel - net 94,373 87,660 ---------- ---------- Net Property, Plant and Equipment 3,798,985 3,499,180 Investments 864,800 795,676 Current Assets Cash and cash equivalents 35,369 16,603 Accounts receivable 213,783 190,103 Accrued utility revenues 92,099 130,518 Materials, supplies and fossil fuel 209,852 199,052 Prepayments and other assets 79,988 71,843 ---------- ---------- Total Current Assets 631,091 608,119 Deferred Charges and Other Assets Accumulated deferred income taxes 206,010 199,372 Other 315,691 259,410 ---------- ---------- Total Deferred Charges and Other Assets 521,701 458,782 ---------- ---------- Total Assets $5,816,577 $5,361,757 ========== ========== Capitalization and Liabilities ------------------------------ Capitalization Common stock $797,199 $760,351 Retained earnings 1,155,903 1,144,092 Unearned compensation - restricted stock award (1,195) (1,338) ----------- ---------- Total Common Stock Equity 1,951,907 1,903,105 Preferred stock 30,450 30,450 Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely debentures of the Company 200,000 - Long-term debt 1,979,368 1,749,024 ----------- ---------- Total Capitalization 4,161,725 3,682,579 Current Liabilities Long-term debt due currently 129,989 119,140 Short-term debt 273,853 286,859 Accounts payable 162,182 187,452 Accrued liabilities 87,720 88,510 Other 64,802 53,219 ---------- ---------- Total Current Liabilities 718,546 735,180 Deferred Credits and Other Liabilities Accumulated deferred income taxes 582,080 570,750 Other 354,226 373,248 ---------- ---------- Total Deferred Credits and Other Liabilities 936,306 943,998 ---------- ---------- Total Capitalization and Liabilities $5,816,577 $5,361,757 ========== ========== The accompanying notes as they relate to Wisconsin Energy Corporation are an integral part of these financial statements. WISCONSIN ENERGY CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) Six Months Ended June 30 ------------------------ 1999 1998 ---- ---- (Thousands of Dollars) Operating Activities Net income $102,414 $77,902 Reconciliation to cash Depreciation and amortization 131,399 122,021 Nuclear fuel expense - amortization 11,843 6,465 Conservation expense - amortization 11,249 11,249 Debt premium, discount & expense - amortization 1,702 2,266 Deferred income taxes - net (4,741) 4,341 Investment tax credit - net (2,296) (2,350) Allowance for other funds used during construction (2,445) (1,592) Change in - Accounts receivable (23,680) (8,085) Inventories 14,920 10,819 Accounts payable (25,270) (7,193) Other current assets 30,274 26,837 Other current liabilities 10,793 1,395 Other (27,415) 10,611 --------- --------- Cash Provided by Operating Activities 228,747 254,686 Investing Activities Construction expenditures (237,256) (170,703) Acquisition of power plants (276,792) - Allowance for borrowed funds used during construction (4,305) (3,955) Nuclear fuel (10,945) 20,283 Nuclear decommissioning trust (18,718) (17,912) Other (24,685) (2,634) --------- --------- Cash Used in Investing Activities (572,701) (174,921) Financing Activities Sale of - Common stock 36,848 61 Long-term debt 254,207 184,687 Mandatorily redeemable trust preferred securities - net 193,700 - Retirement of long-term debt (18,427) (16,198) Change in short-term debt (13,006) (166,349) Dividends on stock - Common (90,602) (87,471) --------- --------- Cash Provided by (Used in) Financing Activities 362,720 (85,270) --------- --------- Change in Cash and Cash Equivalents 18,766 (5,505) Cash and Cash Equivalents at Beginning of Period 16,603 19,607 --------- --------- Cash and Cash Equivalents at End of Period $35,369 $14,102 ======= ======= Supplemental Information - Cash Paid For Interest (net of amount capitalized) $72,389 $64,778 Income taxes 66,796 49,213 The accompanying notes as they relate to Wisconsin Energy Corporation are an integral part of these financial statements. WISCONSIN ELECTRIC POWER COMPANY CONDENSED INCOME STATEMENT (Unaudited) Three Months Ended Six Months Ended June 30 June 30 ----------------- ----------------- 1999 1998 1999 1998 ---- ---- ---- ---- (Thousands of Dollars) Operating Revenues $469,906 $461,771 $997,745 $972,452 Operating Expenses Fuel 75,305 80,201 146,040 154,102 Purchased power 33,964 35,799 65,017 72,390 Cost of gas sold 27,746 31,105 96,606 103,406 Other operation and maintenance 163,182 174,489 336,634 330,285 Depreciation and amortization 60,167 56,970 124,617 119,243 Property and revenue tax 16,779 14,607 33,610 30,383 -------- -------- -------- -------- Total Operating Expenses 377,143 393,171 802,524 809,809 -------- -------- -------- -------- Pretax Operating Income 92,763 68,600 195,221 162,643 Other Income and Deductions Interest income 5,559 5,562 11,231 11,020 Allowance for other funds used during construction 1,461 877 2,445 1,592 Other 1,945 (1,245) 7,469 4,133 -------- -------- -------- -------- Total Other Income and Deductions 8,965 5,194 21,145 16,745 Interest Charges Interest expense 28,452 27,840 56,849 55,952 Allowance for borrowed funds used during construction (718) (446) (1,199) (821) -------- -------- -------- -------- Total Interest Charges 27,734 27,394 55,650 55,131 Income Taxes 25,562 15,029 56,323 42,590 -------- -------- -------- -------- Net Income 48,432 31,371 104,393 81,667 Preferred Stock Dividend Requirement 300 300 601 601 -------- -------- -------- -------- Earnings Available for Common Stockholder $48,132 $31,071 $103,792 $81,066 ======= ======= ======== ======= Note: Earnings and dividends per share of common stock are not applicable because all of Wisconsin Electric Power Company's common stock is owned by Wisconsin Energy Corporation. The accompanying notes as they relate to Wisconsin Electric Power Company are an integral part of these financial statements. WISCONSIN ELECTRIC POWER COMPANY CONDENSED BALANCE SHEET (Unaudited) June 30, December 31, 1999 1998 -------- ------------ (Thousands of dollars) Assets ------ Property, Plant and Equipment Electric utility $4,939,126 $4,820,239 Gas utility 532,298 523,187 Steam utility 62,934 62,832 Common utility 386,885 420,750 Other property 7,376 7,511 Accumulated provision for depreciation (3,059,402) (2,975,749) ---------- ---------- 2,869,217 2,858,770 Construction work in progress 129,834 109,412 Leased facilities - net 130,167 133,007 Nuclear fuel - net 94,373 87,660 ---------- ---------- Net Property, Plant and Equipment 3,223,591 3,188,849 Investments 616,489 573,859 Current Assets Cash and cash equivalents 11,528 14,183 Accounts receivable 165,807 166,648 Accrued utility revenues 91,134 129,463 Materials, supplies and fossil fuel 180,325 198,015 Prepayments and other assets 62,726 59,813 ---------- ---------- Total Current Assets 511,520 568,122 Deferred Charges and Other Assets Accumulated deferred income taxes 196,400 190,114 Other 257,087 247,998 ---------- ---------- Total Deferred Charges and Other Assets 453,487 438,112 ---------- ---------- Total Assets $4,805,087 $4,768,942 ========== ========== Capitalization and Liabilities ------------------------------ Capitalization Common stock $713,582 $713,582 Retained earnings 998,903 984,896 ---------- ---------- Total Common Stock Equity 1,712,485 1,698,478 Preferred stock 30,450 30,450 Long-term debt 1,525,250 1,512,531 ---------- ---------- Total Capitalization 3,268,185 3,241,459 Current Liabilities Long-term debt due currently 119,253 112,454 Short-term debt 240,215 219,289 Accounts payable 141,967 169,503 Accrued liabilities 83,313 80,908 Other 60,403 46,574 ---------- ---------- Total Current Liabilities 645,151 628,728 Deferred Credits and Other Liabilities Accumulated deferred income taxes 570,847 559,574 Other 320,904 339,181 ---------- ---------- Total Deferred Credits and Other Liabilities 891,751 898,755 ---------- ---------- Total Capitalization and Liabilities $4,805,087 $4,768,942 ========== ========== The accompanying notes as they relate to Wisconsin Electric Power Company are an integral part of these financial statements. WISCONSIN ELECTRIC POWER COMPANY STATEMENT OF CASH FLOWS (Unaudited) Six Months Ended June 30 ------------------------ 1999 1998 ---- ---- (Thousands of Dollars) Operating Activities Net income $104,393 $81,667 Reconciliation to cash Depreciation and amortization 124,617 119,243 Nuclear fuel expense - amortization 11,843 6,465 Conservation expense - amortization 11,249 11,249 Debt premium, discount & expense - amortization 1,340 2,066 Deferred income taxes - net (4,757) 4,359 Investment tax credit - net (2,263) (2,345) Allowance for other funds used during construction (2,445) (1,592) Change in - Accounts receivable 841 (4,561) Inventories 17,690 10,854 Accounts payable (27,536) (5,624) Other current assets 35,416 34,337 Other current liabilities 16,234 2,889 Other (17,477) 40,087 --------- --------- Cash Provided by Operating Activities 269,145 299,094 Investing Activities Construction expenditures (183,234) (148,058) Allowance for borrowed funds used during construction (1,199) (821) Nuclear fuel (10,945) 20,283 Nuclear decommissioning trust (18,718) (17,912) Other (5,604) (180) --------- --------- Cash Used in Investing Activities (219,700) (146,688) Financing Activities Sale of long-term debt 29,444 147,903 Retirement of long-term debt (12,083) (7,145) Change in short-term debt 20,926 (205,161) Dividends on stock - Common (89,786) (89,215) Preferred (601) (601) --------- --------- Cash Used in Financing Activities (52,100) (154,219) --------- --------- Change in Cash and Cash Equivalents (2,655) (1,813) Cash and Cash Equivalents at Beginning of Period 14,183 10,100 ------- ------ Cash and Cash Equivalents at End of Period $11,528 $8,287 ======= ====== Supplemental Information - Cash Paid For Interest (net of amount capitalized) $64,046 $61,716 Income taxes 62,136 48,273 The accompanying notes as they relate to Wisconsin Electric Power Company are an integral part of these financial statements. WISCONSIN ENERGY CORPORATION WISCONSIN ELECTRIC POWER COMPANY NOTES TO FINANCIAL STATEMENTS (Unaudited) 1. The accompanying unaudited consolidated financial statements for Wisconsin Energy Corporation and the unaudited financial statements for Wisconsin Electric Power Company should be read in conjunction with the companies' combined 1998 Annual Report on Form 10-K. In the opinion of management, all adjustments, normal and recurring in nature, necessary to a fair statement of the results of operations and financial position of Wisconsin Energy and Wisconsin Electric, have been included in the accompanying income statements and balance sheets. The results of operations for the six months ended June 30, 1999 are not, however, necessarily indicative of the results which may be expected for the year 1999 because of seasonal and other factors. 2. Due to recent acquisitions by Wisconsin Energy, described below in Note 4, that have increased the size of Wisconsin Energy's non-utility operations and assets, Wisconsin Energy has modified its income statement and balance sheet presentations. The primary income statement modification includes reclassifying the results of non-utility operations from Other Income and Deductions to the various lines within operating income. This modification does not change net income. The primary balance sheet modification includes reclassifying non-utility property, plant and equipment and related accumulated provision for depreciation from Investments to inclusion with utility Property, Plant and Equipment. Prior year financial statements have been reclassified to the current year presentation of non- utility results of operations and financial position. 3. Effective May 31, 1998, Wisconsin Energy acquired ESELCO, Inc. ("ESELCO") in a tax-free reorganization accounted for as a pooling of interests. Due to the immaterial nature of the transaction, Wisconsin Energy has not restated any historical financial or statistical information. Instead, Wisconsin Energy combined ESELCO's May 31, 1998 balance sheet with Wisconsin Energy's. For additional information, see Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations in Part I of this report. 4. In April 1999, Wisvest-Connecticut, LLC, a wholly owned subsidiary of Wisvest Corporation which is in turn a wholly owned subsidiary of Wisconsin Energy, acquired two fossil-fueled power plants in the State of Connecticut for $277 million from The United Illuminating Company, an unaffiliated investor-owned utility in New Haven, Connecticut. Pursuant to the agreement, Wisvest-Connecticut, LLC purchased the Bridgeport Harbor Station, which has an active generating capacity of 590 megawatts, as well as the New Haven Harbor Station, which has an active generating capacity of 466 megawatts. Wisvest-Connecticut, LLC financed the acquisition through the issuance of $195 million of long-term, nonrecourse notes; an equity contribution of $105 million from Wisconsin Energy; $30 million of working capital arrangements and a $25 million letter of credit facility. Wisvest-Connecticut, LLC has entered into an interest rate swap agreement to exchange fixed rate payment obligations for variable rate receipt rights without exchanging the underlying notional amounts. This agreement, which expires on December 31, 2005, serves to convert variable rate debt under Wisvest-Connecticut, LLC's long-term nonrecourse notes to fixed rate debt to reduce the impact of interest rate fluctuations. See Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - "Factors Affecting Results of Operations" in Part I of this report for further information. 5. Wisconsin Energy, a holding company with subsidiaries in utility and non- utility businesses, has two reportable operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly in deciding how to allocate resources or in assessing performance. Wisconsin Energy's reportable operating segments include a utility segment and a non-utility segment. Wisconsin Energy has changed its reportable operating segments as of June 30, 1999 as a result of a material increase in non-utility energy assets and revenues. This increase is due to the acquisition of generating assets from The United Illuminating Company as described in Note 4 above. The reportable utility segment includes Wisconsin Energy's two utility subsidiaries, Wisconsin Electric Power Company and Edison Sault Electric Company. This segment derives its revenues from electric, gas and steam operations. Electric operations engage in the generation, transmission, distribution and sale of electric energy in southeastern (including Metropolitan Milwaukee), east central and northern Wisconsin and in the Upper Peninsula of Michigan. Gas operations engage in the purchase, distribution and sale of natural gas to retail customers and the transportation of customer-owned gas in four service areas in southeastern, east central, western and northern Wisconsin. Steam operations engage in the production, distribution and sale of steam to space heating and processing customers in the Milwaukee area. The reportable non-utility segment derives its revenues from energy activities including independent power production and energy marketing, services and trading. The following table summarizes the reportable operating segments of Wisconsin Energy. <TABLE> <CAPTION> Energy ------------------------------ Wisconsin Energy Utility Non-Utility Subtotal Other (a) Total ---------------- ------- ----------- -------- --------- ----- (Thousands of Dollars) <S> <C> <C> <C> <C> <C> Three Months Ended June 30, 1999 Operating Revenues $477,899 $55,750 $533,649 $5,359 $539,008 Pretax Operating Income (Loss) (b) 94,669 8,305 102,974 (943) 102,031 Six Months Ended June 30, 1999 Operating Revenues $1,014,619 $69,789 $1,084,408 $11,317 $1,095,725 Pretax Operating Income (Loss) (b) 198,985 4,324 203,309 (962) 202,347 Segment Assets at June 30, 1999 $4,877,513 $529,009 $5,406,522 $331,568 $5,738,090 Three Months Ended June 30, 1998 Operating Revenues $464,967 $6,244 $471,211 $4,365 $475,576 Pretax Operating Income (Loss) (b) 69,169 (272) 68,897 (1,114) 67,783 Six Months Ended June 30, 1998 Operating Revenues $975,649 $7,569 $983,218 $8,035 $991,253 Pretax Operating Income (Loss) (b) 163,212 (1,441) 161,771 (1,404) 160,367 Segment Assets at June 30, 1998 $4,670,435 $105,639 $4,776,074 $268,787 $5,044,861 (a) Other includes non-utility real estate investment and development and non-utility investments in recycling technology. (b) Income tax expense, interest income and interest expense are not included in segment pretax operating income. </TABLE> Wisconsin Electric, Wisconsin Energy's principal subsidiary, has organized its operating segments according to how it is currently regulated. Wisconsin Electric's reportable operating segments include electric, gas and steam utility segments. The following table summarizes the reportable operating segments of Wisconsin Electric. <TABLE> <CAPTION> Wisconsin Electric Electric Gas Steam Total ------------------ -------- --- ----- ----- (Thousands of Dollars) <S> <C> <C> <C> <C> Three Months Ended June 30, 1999 Operating Revenues (a) $416,437 $49,496 $3,973 $469,906 Pretax Operating Income (Loss) (b) 95,034 (2,062) (209) 92,763 Six Months Ended June 30, 1999 Operating Revenues (a) $814,111 $171,479 $12,155 $997,745 Pretax Operating Income (b) 167,554 25,208 2,459 195,221 Three Months Ended June 30, 1998 Operating Revenues (a) $405,540 $52,414 $3,817 $461,771 Pretax Operating Income (Loss) (b) 72,156 (3,175) (381) 68,600 Six Months Ended June 30, 1998 Operating Revenues (a) $789,180 $171,825 $11,447 $972,452 Pretax Operating Income (b) 139,258 20,579 2,806 162,643 (a) Wisconsin Electric accounts for intersegment revenues at a tariff rate established by the Public Service Commission of Wisconsin ("PSCW"). Intersegment revenues are not material. (b) Income tax expense, interest income and interest expense are not recorded by segment to determine segment pretax operating income. </TABLE> 6. In March 1999, WEC Capital Trust I, a Delaware business trust of which Wisconsin Energy owns all of the outstanding common securities, issued $200 million of 6.85% trust preferred securities to the public. The sole asset of WEC Capital Trust I is $206 million of 6.85% junior subordinated debentures due March 31, 2039, issued by Wisconsin Energy. The terms and interest payments on these debentures correspond to the terms and distributions on the trust preferred securities. Wisconsin Energy used the proceeds from the sale of its junior subordinated debentures to fund a capital contribution of approximately $105 million to Wisvest-Connecticut, LLC for acquisition in mid-April 1999 of two fossil-fueled power plants from The United Illuminating Company (see Note 4 above) and for repayment of short-term borrowings. WEC Capital Trust I has been consolidated into Wisconsin Energy's financial statements. The interest payments, which are tax deductible by Wisconsin Energy, are reflected as distributions on preferred securities of the subsidiary trust in Wisconsin Energy's Consolidated Condensed Income Statement. Wisconsin Energy may elect to defer interest payments on the debentures for up to 20 consecutive quarters, causing corresponding distributions on the trust preferred securities to also be deferred. In case of a deferral, interest and distributions will continue to accrue, along with quarterly compounding interest on the deferred amounts. Wisconsin Energy may redeem all or a portion of the debentures after March 25, 2004, requiring an equal amount of trust preferred securities to be redeemed at face value plus accrued and unpaid distributions. Wisconsin Energy has entered into a limited guarantee of payment of distributions, redemption payments and payments in liquidation with respect to the trust preferred securities. This guarantee, when considered together with Wisconsin Energy's obligations under the related debentures and indenture and the applicable declaration of trust, provide a full and unconditional guarantee by Wisconsin Energy of amounts due on the outstanding trust preferred securities. 7. In July 1999, a jury decided against Wisconsin Electric and awarded the plaintiffs $4.5 million as actual damages and $100 million in punitive damages in a lawsuit alleging that Wisconsin Electric had placed contaminated wastes at two sites in the City of West Allis, Wisconsin. Wisconsin Electric is preparing to file post trial motions in August 1999 on the grounds that the jury verdict is not supported by the evidence or the law and that the award of punitive damages was unwarranted and, in the opinion of management based in part on the advice of legal counsel, should be reversed. As such, Wisconsin Electric has recorded no reserve for potential damages from this suit. Post trial motions are scheduled to be heard in October 1999. For further information, see Item 1. Legal Proceedings - "Environmental Matters" in Part II of this report. 8. On June 27, 1999, Wisconsin Energy and WICOR, Inc., a Wisconsin corporation ("WICOR"), entered into an Agreement and Plan of Merger providing for a strategic business combination of Wisconsin Energy and WICOR. The transaction is intended to qualify as a tax-free reorganization to the extent that shares of Wisconsin Energy Common Stock are issued in the merger and will be accounted for as a purchase transaction. The merger agreement has been approved by the boards of directors of Wisconsin Energy and WICOR. Consummation of the merger is subject to the satisfaction of certain closing conditions including approval by the shareholders of Wisconsin Energy and WICOR and by federal and state regulators. The regulatory approval process is expected to be completed in time for the transaction to be consummated by the Spring of 2000. Under the terms of the merger agreement, Wisconsin Energy will acquire all of the outstanding shares of WICOR Common Stock for a fixed price of $31.50 for each WICOR share. At least 40% of the price will be paid in Wisconsin Energy Common Stock, and Wisconsin Energy has the option to increase the percentage to 60%; the balance will be paid in cash. The exchange ratio for the Wisconsin Energy Common Stock will be set based upon the average closing prices of Wisconsin Energy stock immediately prior to closing. If the average is less than $22.00 per share, Wisconsin Energy may elect to pay all cash. Each WICOR shareholder will be able to elect to receive cash, stock, or a combination thereof, subject to proration. For additional information, see Item 5. Other Information - "Merger Agreement With WICOR, Inc." in Part II of this report. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Wisconsin Energy Corporation is a holding company whose principal subsidiary is Wisconsin Electric Power Company, an electric, gas and steam utility. Unless qualified by their context, the terms "Wisconsin Energy" or the "Company", refer to the holding company and all of its subsidiaries when used in this document. During the first six months of 1999, approximately 91% of Wisconsin Energy's consolidated operating revenues and 96% of Wisconsin Energy's consolidated pretax operating income were attributable to Wisconsin Electric. As of June 30, 1999, approximately 83% of Wisconsin Energy's consolidated total assets were attributable to Wisconsin Electric. The following discussion and analysis of financial condition and results of operations includes both Wisconsin Energy and Wisconsin Electric unless otherwise stated. See Note 2 above in Item 1. Financial Statements - "Notes to Financial Statements" for information concerning the reclassification of certain amounts in Wisconsin Energy's prior year financial statements to the current year presentation of non-utility operations. CAUTIONARY FACTORS: A number of forward-looking statements are included in this document. When used, the terms "anticipate," "believe," "estimate," "expect," "objective," "plan," "possible," "potential," "project" and similar expressions are intended to identify forward-looking statements. Forward- looking statements are subject to certain risks, uncertainties and assumptions which could cause actual results to differ materially from those that are described, including the factors that are noted in "Factors Affecting Results of Operations" and "Cautionary Factors" below. ACQUISITION OF ESELCO, INC.: Effective May 31, 1998, Wisconsin Energy acquired ESELCO in a tax-free reorganization accounted for as a pooling of interests. Due to the immaterial nature of the transaction, Wisconsin Energy has not restated any historical financial or statistical information. For additional information, see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - "Factors Affecting Results of Operations" in Part II of Wisconsin Energy's and Wisconsin Electric's combined Annual Report on Form 10-K for the year ended December 31, 1998. ESELCO was the parent company of Edison Sault Electric Company ("Edison Sault"), an electric utility which serves approximately 21,000 residential, commercial and industrial customers in Michigan's eastern Upper Peninsula. Where appropriate, discussions as well as financial or statistical information of Wisconsin Energy include Edison Sault's operations since June 1, 1998. RESULTS OF OPERATIONS - 1999 SECOND QUARTER EARNINGS During the second quarter of 1999, Wisconsin Energy's consolidated net income and earnings per share of common stock were $49 million and $0.42, respectively, compared to $29 million and $0.25, respectively, during the second quarter of 1998. For the same periods, Wisconsin Electric's earnings increased to $48 million during 1999 compared to $31 million during 1998. A summary of contributions to Wisconsin Energy's earnings per share (basic and diluted) as well as a review of operating results during the comparative periods by the utility and non-utility business segments follows. Three Months Ended June 30 -------------------------- Earnings Per Share - Wisconsin Energy 1999 1998 % Change ------------------------------------- ---- ---- -------- Utility Operations $0.421 $0.275 53.1% Non-Utility Operations Energy 0.022 (0.008) 375.0% Other (0.024) (0.013) (84.6%) ------- ------- Total $0.419 $0.254 65.0% ======= ======= UTILITY OPERATING RESULTS During the second quarter of 1999, Wisconsin Energy's pretax utility operating income increased $26 million or 36.9% and Wisconsin Electric's pretax operating income increased $24 million or 35.2%. An increase in electric utility gross margin as well as lower other operation and maintenance expenses contributed in large part to these increases compared to the second quarter of 1998. Electric Utility Revenues, Gross Margins and Sales WISCONSIN ENERGY: Primarily due to an increase in total electric kilowatt-hour sales, total electric operating revenues increased by $16 million or 3.8% during the second quarter of 1999 compared to the second quarter of 1998. The gross margin on electric operating revenues (electric operating revenues less fuel and purchased power expenses) increased by $21 million or 7.1%. The following table summarizes Wisconsin Energy's total electric operating revenues, gross margin and electric kilowatt-hour sales during the second quarters of 1999 and 1998. <TABLE> <CAPTION> Three Months Ended June 30 -------------------------- Electric Utility Operations-Wisconsin Energy 1999 1998 % Change ---------------------------------------------- ---- ---- -------- <S> <C> <C> <C> Electric Gross Margin ($000) Electric Operating Revenues $424,395 $408,737 3.8% Fuel & Purchased Power 112,453 117,456 (4.3%) -------- -------- Gross Margin $311,942 $291,281 7.1% ======== ======== Total Electric Sales (Megawatt-hours) 7,786,654 7,213,018 8.0% The following discussion reflects Wisconsin Electric's contribution to Wisconsin Energy's second quarter electric utility revenues, gross margin and sales. WISCONSIN ELECTRIC: Wisconsin Electric's total electric operating revenues increased by $11 million or 2.7% during the second quarter of 1999 compared to the second quarter of 1998, and the gross margin on electric operating revenues increased by $18 million or 6.1%. Wisconsin Electric attributes these increases to lower fuel and purchased power expenses and to an increase in total electric kilowatt-hour sales during the second quarter of 1999. </TABLE> <TABLE> <CAPTION> Three Months Ended June 30 -------------------------- Electric Utility Operations-Wisconsin Electric 1999 1998 % Change ---- ---- -------- <S> <C> <C> <C> Electric Gross Margin ($000) Electric Operating Revenues $416,437 $405,540 2.7% Fuel & Purchased Power 109,269 116,000 (5.8%) -------- -------- Gross Margin $307,168 $289,540 6.1% ======== ======== </TABLE> As a result of higher availability of low cost generation during the second quarter of 1999, especially at its Point Beach Nuclear Plant, Wisconsin Electric reduced its total fuel and purchased power expenses by $7 million or 5.8% compared to the second quarter of 1998. Even with higher electric sales noted below and a 12% increase in net generation, Wisconsin Electric was able to substitute lower cost per unit generation during the three months ended June 30, 1999 for the higher cost per unit generation and power purchases used to meet its demand for electric energy during the three months ended June 30, 1998. During the second quarter of 1999, Wisconsin Electric reduced its fuel costs by 6.1%, its megawatt-hours of power purchases by 23.4% and its purchased power expenses by 5.1% compared to the same period during 1998. Wisconsin Electric's total electric sales increased 6.9% between the comparative periods. <TABLE> <CAPTION> Three Months Ended June 30 -------------------------- Electric Utility Operations - Wisconsin Electric 1999 1998 % Change ------------------------------------------------ ---- ---- -------- <S> <C> <C> <C> Electric Sales (Megawatt-hours) Residential 1,716,795 1,666,559 3.0% Small Commercial/Industrial 1,957,467 1,898,768 3.1% Large Commercial/Industrial 2,945,578 2,825,904 4.2% Other-Retail/Municipal 313,631 324,390 (3.3%) Resale-Utilities 704,485 432,002 63.1% --------- --------- Total Electric Sales 7,637,956 7,147,623 6.9% ========= ========= </TABLE> Electric energy sales to the Empire and Tilden ore mines, Wisconsin Electric's two largest electric retail customers, increased 12.6% during the second quarter of 1999 compared to the second quarter of 1998. Excluding the Empire and Tilden ore mines, total electric sales increased 6.4% and sales to the remaining large commercial/industrial customers increased 2.0%. Sales for resale to other utilities increased 63.1% primarily due to higher opportunity sales during the second quarter of 1999. Gas Utility Revenues, Gross Margins and Sales Due to an increase in higher margin residential gas sales during the second quarter of 1999, Wisconsin Electric's gross margin on gas operating revenues (gas operating revenues less cost of gas sold) increased by $0.4 million or 2.1% compared to the second quarter of 1998. Three Months Ended June 30 ----------------------------- Gas Utility Operations-Wisconsin Electric 1999 1998 % Change ------------------------------------------ ---- ---- -------- Gas Gross Margin ($000) Gas Operating Revenues $49,496 $52,414 (5.6%) Cost of Gas Sold 27,746 31,105 (10.8%) ------- ------- Gross Margin $21,750 $21,309 2.1% ======= ======= Despite an increase in total gas sales, the cost of gas sold decreased by $3 million or 10.8% during the second quarter of 1999 due to a decrease in the per unit cost of purchased gas. Because changes in the cost of natural gas purchased at market prices are included in customer rates through the purchased gas adjustment mechanism, gas operating revenues change at the same rate as the cost of gas sold and gross margin is unaffected by such changes. The following table summarizes Wisconsin Electric's comparative gas sales and total therm deliveries during the three months ended June 30, 1999 and 1998. Three Months Ended June 30 ----------------------------- Gas Utility Operations-Wisconsin Electric 1999 1998 % Change - ------------------------------------------- ---- ---- -------- Gas Deliveries (000's of Therms) Residential 43,707 38,331 14.0% Commercial/Industrial 26,583 28,634 (7.2%) Interruptible 3,882 4,798 (19.1%) ------- ------- Total Gas Sales 74,172 71,763 3.4% Transported Customer Owned Gas 75,561 82,991 (9.0%) Other-Interdepartmental 17,482 26,662 (34.4%) ------- ------- Total Gas Deliveries 167,215 181,416 (7.8%) ======= ======= Between the comparative periods, total natural gas therm deliveries decreased 7.8% due to a significant decrease in deliveries of transported customer owned gas and in interdepartmental deliveries. However, total retail gas sales increased 3.4% during the second quarter of 1999 as a result of a 14.0% increase in higher margin sales to residential customers. Residential sales increased due to a combination of an increase in the number of residential customers and an increase in sales per residential customer. During the second quarter of 1999, a 28.1% decrease in therm deliveries to the Whitewater Cogeneration Facility, owned by an unaffiliated independent power producer, contributed to much of the 9.0% decrease in transported customer owned gas deliveries. The Whitewater Cogeneration Facility, a gas-fired electric cogeneration plant, went into commercial operation in September 1997. Wisconsin Electric purchases the majority of the electricity generated by the Whitewater Cogeneration Facility under a long-term power purchase contract. Also during the second three months of 1999, total interdepartmental therm deliveries decreased 34.4%. Most interdepartmental therm deliveries are to company-owned, gas-fired generating facilities. As noted above, higher availability of company-owned, low cost generation during the second quarter of 1999, especially at Point Beach Nuclear Plant, allowed Wisconsin Electric to change its power supply mix during the second quarter of 1999 away from higher cost per unit power purchases from the Whitewater Cogeneration Facility and away from higher cost per unit company-owned, gas-fired generating facilities. Excluding deliveries to the Whitewater Cogeneration Facility as well as total interdepartmental therm deliveries, total gas deliveries increased 0.6% during the three months ended June 30, 1999 compared to the same period in 1998. Weather was not a factor between the comparative periods. As measured by heating degree days, the second quarter of 1999 was only 0.1% colder than the second quarter of 1998. However the second quarters of 1999 and 1998 were both significantly warmer than normal. Utility Operating Expenses OTHER OPERATIONS AND MAINTENANCE: Compared to the second quarter of 1998, other operation and maintenance expenses in Wisconsin Energy's utility business segment decreased by $10 million or 6.0% during the second quarter of 1999, including an $11 million or 6.5% decrease at Wisconsin Electric. At Wisconsin Electric, nuclear non-fuel expenses decreased $21 million while administrative and general expenses increased $7 million and steam power generation expenses increased $2 million. Administrative and general expenses increased during 1999 primarily as a result of efforts to prepare for Year 2000 technology issues, various other corporate technology improvement efforts, and increased staffing. For further information, see "Year 2000 Technology Issues" below in "Factors Affecting Results of Operations." Steam power generation expenses increased during 1999 as a result of an increase in the number of maintenance outages at Wisconsin Electric's fossil-fuel power plants in anticipation of higher electric demand during the summer of 1999. DEPRECIATION AND AMORTIZATION: As a result of an increase in decommissioning expenses at Wisconsin Electric due to higher decommissioning trust fund earnings during the second quarter of 1999, Wisconsin Energy's utility depreciation and amortization expense increased by $4 million or 6.6% and Wisconsin Electric's depreciation and amortization increased by $3 million or 5.6% compared to the second quarter of 1998. NON-UTILITY OPERATING RESULTS Primarily due to the mid-April 1999 acquisition of two fossil-fueled power plants in the State of Connecticut by Wisvest-Connecticut, LLC, Wisconsin Energy's pretax non-utility operating income increased by $9 million or 631.2% during the second quarter of 1999 compared to the second quarter of 1998. Three Months Ended June 30 ------------------------------- Non-Utility Operations ($000) 1999 1998 % Change ----------------------------- ---- ---- -------- Operating Revenues Independent Power Production $36,097 $ - - Energy Marketing, Trading & Services 16,776 4,100 309.2% Other 8,236 6,509 26.5% ------- ------- Total Operating Revenues 61,109 10,609 476.0% Operating Expenses Fuel and Purchased Power 34,797 4,214 725.7% Other 18,950 7,781 143.5% ------- ------- Total Operating Expenses 53,747 11,995 348.1% ------- ------- Pretax Operating Income $7,362 ($1,386) 631.2% ======= ======= For further information concerning Wisvest-Connecticut, LLC's recent power plant acquisitions, see Item 1. Financial Statements - "Notes To Financial Statements" in Part I of this report. OPERATING REVENUES: Following their acquisition, operation of the Wisvest- Connecticut, LLC power plants resulted in $36 million of operating revenues during the second quarter of 1999 through the sale of 960,000 megawatt-hours of net generation to customers in the New England region. Increased activity during the second quarter of 1999 by Griffin Energy Marketing LLC, another wholly owned subsidiary of Wisvest Corporation ("Griffin"), contributed to a $13 million increase in operating revenues for energy marketing, trading and services compared to the second quarter of 1998. OPERATING EXPENSES: Fuel and purchased power expenses increased $31 million during the second quarter of 1999 as a result of electric generation at Wisvest- Connecticut, LLC's newly acquired power plants and increased activities by Griffin. Other operating expenses increased $11 million primarily as a result of operation of Wisvest-Connecticut, LLC's plants since mid-April 1999. OTHER ITEMS OTHER INCOME AND DEDUCTIONS: Due to the gain on the sale of certain properties at Wisconsin Electric, Wisconsin Energy's and Wisconsin Electric's other net other income and deductions increased by $3 million during the second quarter of 1999 compared to the second quarter of 1998. INTEREST CHARGES AND OTHER: Wisconsin Energy's interest expense increased by $5 million between the comparative periods of which $3 million is related to the acquisition of the Wisvest-Connecticut, LLC power plants in mid-April 1999. INCOME TAXES: Compared to the second quarter of 1999, Wisconsin Energy's income taxes increased $12 million primarily due to increased pretax income at Wisconsin Electric during the second quarter of 1999. RESULTS OF OPERATIONS - 1999 YEAR-TO-DATE EARNINGS During the first half of 1999, Wisconsin Energy's consolidated net income and earnings per share of common stock were $102 million and $0.88, respectively, compared to $78 million and $0.69, respectively, during the first half of 1998. For the same periods, Wisconsin Electric's earnings increased to $104 million during 1999 compared to $81 million during 1998. A summary of contributions to Wisconsin Energy's earnings per share (basic and diluted) as well as a review of operating results during the comparative periods by the utility and non-utility business segments follows. Six Months Ended June 30 ---------------------------- Earnings Per Share - Wisconsin Energy 1999 1998 % Change ------------------------------------- ---- ---- -------- Utility Operations $0.909 $0.718 26.6% Non-Utility Operations Energy (0.005) (0.017) 70.6% Other (0.023) (0.013) (76.9%) ------- ------- Total $0.881 $0.688 28.1% ======= ======= UTILITY OPERATING RESULTS During the first half of 1999, Wisconsin Energy's pretax utility operating income increased $36 million or 21.9% and Wisconsin Electric's pretax operating income increased $33 million or 20.0%. An increase in electric and gas utility gross margins contributed in large part to these increases compared to the first half of 1998. Electric Utility Revenues, Gross Margins and Sales WISCONSIN ENERGY: Primarily due to an increase in total 1999 electric kilowatt-hour sales and, to a lesser extent, to a Wisconsin Electric retail electric increase effective May 1, 1998 in the Wisconsin jurisdiction, total electric operating revenues increased by $39 million or 4.9% during the first half of 1999 compared to the first half of 1998. The gross margin on electric operating revenues (electric operating revenues less fuel and purchased power expenses) increased by $48 million or 8.6%. The following table summarizes Wisconsin Energy's total electric operating revenues, gross margin and electric kilowatt-hour sales during the first halves of 1999 and 1998. Six Months Ended June 30 ------------------------------- Electric Utility Operations - Wisconsin Energy 1999 1998 % Change - ---------------------------------------------- ---- ---- -------- Electric Gross Margin ($000) Electric Operating Revenues $830,950 $792,376 4.9% Fuel & Purchased Power 218,173 227,948 (4.3%) -------- -------- Gross Margin $612,777 $564,428 8.6% ======== ======== Total Electric Sales (Megawatt-hours) 15,179,859 14,170,452 7.1% The following discussion reflects Wisconsin Electric's contribution to Wisconsin Energy's first half electric utility revenues, gross margin and sales. WISCONSIN ELECTRIC: Compared to the first half of 1998, Wisconsin Electric's total electric operating revenues increased by $25 million or 3.2% during the first half of 1999 and the gross margin on electric operating revenues increased by $40 million or 7.2%. Wisconsin Electric attributes these increases to lower fuel and purchased power expenses, to an increase in total electric kilowatt- hour sales during the first half of 1999 and, to a lesser extent, to a retail electric increase, effective May 1, 1998 in the Wisconsin jurisdiction. Six Months Ended June 30 --------------------------- Electric Utility Operations - Wisconsin Electric 1999 1998 % Change ----------------------------------------------- ---- ---- -------- Electric Gross Margin ($000) Electric Operating Revenues $814,111 $789,180 3.2% Fuel & Purchased Power 211,057 226,492 (6.8%) -------- -------- Gross Margin $603,054 $562,688 7.2% ======== ======== As a result of the higher availability of lower cost generation during the first half of 1999 noted above, especially at its Point Beach Nuclear Plant, Wisconsin Electric reduced its total fuel and purchased power expenses by $15 million or 6.8% compared to the first half of 1998. Even with the higher electric sales noted below and a 12% increase in net generation, Wisconsin Electric was able to substitute lower cost per unit generation during the six months ended June 30, 1999 for the higher cost per unit generation and power purchases used to meet its demand for electric energy during the six months ended June 30, 1998. During the first half of 1999, Wisconsin Electric reduced its fuel costs by 5.2%, its megawatt-hours of power purchases by 23.7% and its purchased power expenses by 10.2% compared to the same period during 1998. Wisconsin Electric's total electric sales increased 5.4% between the comparative periods. <TABLE> <CAPTION> Six Months Ended June 30 ------------------------ Electric Utility Operations - Wisconsin Electric 1999 1998 % Change - ------------------------------------------------ ---- ---- -------- <S> <C> <C> <C> Electric Sales (Megawatt-hours) Residential 3,509,047 3,475,279 1.0% Small Commercial/Industrial 3,905,902 3,744,137 4.3% Large Commercial/Industrial 5,706,218 5,515,395 3.5% Other-Retail/Municipal 622,871 651,112 (4.3%) Resale-Utilities 1,119,984 719,134 55.7% ---------- ---------- Total Electric Sales 14,864,022 14,105,057 5.4% ========== ========== </TABLE> Electric energy sales to the Empire and Tilden ore mines increased 10.3% during the first half of 1999 compared to the first half of 1998. Excluding the Empire and Tilden ore mines, total electric sales increased 4.9% and sales to the remaining large commercial/industrial customers increased 1.7%. Sales for resale to other utilities increased 55.7% primarily due to higher opportunity sales during the first half of 1999. Gas Utility Revenues, Gross Margins and Sales Due to an increase in higher margin gas sales during the first half of 1999, Wisconsin Electric's gross margin on gas operating revenues (gas operating revenues less cost of gas sold) increased by $6 million or 9.4% compared to the first half of 1998. Six Months Ended June 30 ---------------------------- Gas Utility Operations - Wisconsin Electric 1999 1998 % Change ------------------------------------------- ---- ---- -------- Gas Gross Margin ($000) Gas Operating Revenues $171,479 $171,825 (0.2%) Cost of Gas Sold 96,606 103,406 (6.6%) -------- -------- Gross Margin $ 74,873 $ 68,419 9.4% ======== ======== Despite an increase in total gas sales, the cost of gas sold decreased by $7 million or 6.6% during the first half of 1999 due to a decrease in the per unit cost of purchased gas. Because changes in the cost of natural gas purchased at market prices are included in customer rates through the purchased gas adjustment mechanism, gas operating revenues change at the same rate as the cost of gas sold and gross margin is unaffected by such changes. The following table summarizes Wisconsin Electric's comparative gas sales and total therm deliveries during the six months ended June 30, 1999 and 1998. Six Months Ended June 30 ------------------------ Gas Utility Operations - Wisconsin Electric 1999 1998 % Change - ------------------------------------------ ---- ---- -------- Gas Deliveries (000's of Therms) Residential 195,441 172,160 13.5% Commercial/Industrial 120,816 112,449 7.4% Interruptible 10,495 12,509 (16.1%) ------- ------- Total Gas Sales 326,752 297,118 10.0% Transported Customer Owned Gas 183,761 182,187 0.9% Other - Interdepartmental 21,968 35,154 (37.5%) ------- ------- Total Gas Deliveries 532,481 514,459 3.5% ======= ======= Compared to the same period in 1998, total natural gas therm deliveries increased 3.5% during the first half of 1999 due in part to colder winter weather. As measured by heating degree days, the winter months of January through March 1999 were 10.8% colder than the same period in 1998. However, the winter months of 1999 were still 4.1% warmer than normal. Increased therm deliveries during the first half of 1999 were primarily to residential and commercial customers, who are more sensitive to weather variations and who contribute higher margins to earnings than other customer classes. During the first half of 1999, therm deliveries to the Whitewater Cogeneration Facility, owned by an unaffiliated independent power producer, decreased 3.4% compared to the first half of 1998. Also during the first six months of 1999, total interdepartmental therm deliveries decreased 37.5%. As noted above, higher availability of company-owned low cost generation during the first half of 1999 allowed Wisconsin Electric to change its power supply mix during the first half of 1999 away from higher cost per unit power purchases from the Whitewater Cogeneration Facility and away from higher cost per unit company- owned, gas-fired generating facilities. Excluding deliveries to the Whitewater Cogeneration Facility as well as total interdepartmental therm deliveries, total gas deliveries increased 7.4% during the six months ended June 30, 1999 compared to the same period in 1998. Utility Operating Expenses OTHER OPERATIONS AND MAINTENANCE: Compared to the first half of 1998, other operation and maintenance expenses in Wisconsin Energy's utility business segment increased by $9 million or 2.7% during the first half of 1999, including a $6 million or 1.9% increase at Wisconsin Electric. At Wisconsin Electric, nuclear non-fuel expenses decreased $17 million while administrative and general expenses increased $16 million and steam power generation expenses increased $4 million. Administrative and general expenses increased during 1999 primarily as a result of efforts to prepare for Year 2000 technology issues, various other corporate technology improvement efforts, and increased staffing. For further information, see "Year 2000 Technology Issues" below in "Factors Affecting Results of Operations." Steam power generation expenses increased during 1999 as a result of an increase in the number of maintenance outages at Wisconsin Electric's fossil-fuel power plants in anticipation of higher electric demand during the summer of 1999. DEPRECIATION AND AMORTIZATION: As a result of an increase in amortizable software during 1999 at Wisconsin Electric, partially offset by a decrease in decommissioning expenses at Wisconsin Electric due to lower decommissioning trust fund earnings during the first half of 1999, depreciation and amortization expense in Wisconsin Energy's utility business segment increased by $7 million or 5.6% and Wisconsin Electric's depreciation and amortization increased by $5 million or 4.5% compared to the first half of 1998. NON-UTILITY OPERATING RESULTS Primarily due to the mid-April 1999 acquisition of the two fossil-fueled power plants in the State of Connecticut by Wisvest-Connecticut, LLC noted above, Wisconsin Energy's pretax non-utility operating income increased by $6 million or 218.2% during the first six months of 1999 compared to the first six months of 1998. Six Months Ended June 30 ------------------------ Non-Utility Operations ($000) 1999 1998 % Change ----------------------------- ---- ---- -------- Operating Revenues Independent Power Production $36,097 $ - - Energy Marketing, Trading & Services 30,782 5,317 478.9% Other 14,227 10,287 38.3% ------- ------- Total Operating Revenues 81,106 15,604 419.8% Operating Expenses Fuel and Purchased Power 49,472 5,444 808.7% Other 28,272 13,005 117.4% ------- ------- Total Operating Expenses 77,744 18,449 321.4% ------- ------- Pretax Operating Income $ 3,362 ($2,845) 218.2% ======= ======= OPERATING REVENUES: Following their acquisition, operation of the Wisvest- Connecticut, LLC power plants resulted in $36 million of operating revenues during the first half of 1999 through the sale of 960,000 megawatt-hours of net generation to customers in the New England region. Increased activity during the first half of 1999 by Griffin contributed to a $25 million increase in operating revenues for energy marketing, trading and services compared to the first half of 1998. OPERATING EXPENSES: Fuel and purchased power expenses increased $44 million during the first half of 1999 as a result of electric generation at Wisvest- Connecticut, LLC's newly acquired power plants and increased activities by Griffin. Other operating expenses increased $15 million primarily as a result of operation of Wisvest-Connecticut, LLC's plants since mid-April 1999. OTHER ITEMS OTHER INCOME AND DEDUCTIONS: Due to the gain on the sale of certain properties at Wisconsin Electric, Wisconsin Energy's and Wisconsin Electric's other net other income and deductions increased by $3 million during the first half of 1999 compared to the first half of 1998. INTEREST CHARGES AND OTHER: Wisconsin Energy's interest expense increased by $7 million between the comparative periods, of which $3 million was related to the acquisition of the Wisvest-Connecticut, LLC power plants in mid-April 1999. INCOME TAXES: Compared to the first half of 1999, Wisconsin Energy's income taxes increased $14 million primarily due to increased pretax income at Wisconsin Electric during the first half of 1999. FACTORS AFFECTING RESULTS OF OPERATIONS ETSM PROPERTY / CITY OF WEST ALLIS LAWSUITS See Item 1. Legal Proceedings - "Environmental Matters" below in Part II of this report for information concerning a July 1999 jury verdict against Wisconsin Electric awarding the plaintiffs $4.5 million of actual damages and $100 million in punitive damages in a lawsuit alleging that Wisconsin Electric had placed contaminated wastes at two sites in the City of West Allis, Wisconsin. INDUSTRY RESTRUCTURING AND COMPETITION MPSC ELECTRIC RESTRUCTURING: In 1998, the Michigan Public Service Commission ("MPSC") continued to move toward implementation of direct access for retail markets beginning on January 1, 2002. In February 1998, the MPSC issued an order clarifying restructuring issues and directing Detroit Edison and Consumers Energy, the two largest utilities in the State of Michigan, to file tariff sheets and draft implementation plans for direct access. Following company submittals in late February 1998, the MPSC staff held several public meetings to discuss the plans with stakeholders. In June 1998, the two companies filed revised implementation plans reflecting some of the issues raised during the meetings. In June 1999, the Michigan Supreme Court ruled that the MPSC did not have the authority to mandate direct access plans. Detroit Edison and Consumers Energy have since indicated their willingness to proceed on a voluntary basis with commencement of a phase-in of direct access in late 1999 that will result in full access by January 1, 2002. Following meetings with the MPSC staff and the opening of dockets to begin the process of electric restructuring for smaller Michigan utilities, these smaller utilities, including Wisconsin Electric and Edison Sault, filed proposals with the MPSC for implementing retail direct access on January 1, 2002 without a phase-in program. On February 2, 1999, the MPSC issued an order closing the above dockets, citing the progress made to date. Issues requiring further resolution will be the subject of future dockets for the smaller companies. Following the Michigan Supreme Court decision noted above, the MPSC requested that the smaller Michigan utilities provide comments in August 1999 on the court decision and on implementation of direct access programs. The MPSC is expected to address access programs for smaller utilities in late 1999. RATES AND REGULATORY MATTERS See Item 1. Legal Proceedings -"Rates and Regulatory Matters" in Part II of this report for information concerning 1999 test year information for Wisconsin Electric that was filed with the PSCW in July 1999 and for information concerning the non-utility asset cap to which Wisconsin Energy is subject under provisions of the State of Wisconsin's public utility holding company law. YEAR 2000 TECHNOLOGY ISSUES The Company is working to resolve the potential impact of the Year 2000 on its ability to operate critical systems and to accurately process information that may be date sensitive. YEAR 2000 PROJECT: During 1997, the Company created Year 2000 program teams, overseen by executives of the Company, to address its Year 2000 issues. The teams, comprised of representatives with subject matter expertise, are addressing business applications, voice and data infrastructure, process control and embedded systems, and supplier readiness. The Year 2000 teams are following a structured process of inventorying and assessing potential Year 2000 problems, of remediating, testing, and certifying Year 2000 readiness and of developing and implementing Year 2000 risk management contingency plans. Although additional systems or processes may be identified as the program winds down, the Company has substantially completed an inventory of potential Year 2000 problems across all operating areas and completed its assessment of critical areas in the fourth quarter of 1998. The remediation and testing phases are currently in progress and contacts with critical third party suppliers are ongoing. Based upon an initial assessment of critical supplier Year 2000 readiness that was completed in the third quarter of 1998, the Company is continuing to implement supplier risk mitigation actions. Contact with significant customers to evaluate the potential impact of their Year 2000 actions on Wisconsin Energy will continue throughout 1999. The Company has structured its Year 2000 program to identify, prioritize, and address critical business functions within the Company. With the exception of those projects that are dependent upon activities such as vendor delivery of upgrades or scheduled power plant maintenance outages later in 1999, the Company's core, critical business functions are "Year 2000 Ready." However, additional refinements and testing will continue through the end of 1999. Based upon the Nuclear Energy Institute's standard definition, which has been adopted by Wisconsin Energy, "Year 2000 Ready" systems or applications will be suitable for continued use into the Year 2000 even though the system or application may not be fully "Year 2000 Compliant." Wisconsin Electric participates in monthly reporting conducted by the North American Electric Reliability Council ("NERC"). As of June 30, 1999, Wisconsin Electric reported to NERC the readiness of those critical systems needed to support the generation, transmission and distribution of electricity with minor exceptions consisting of previously tested upgrades scheduled for implementation during fall maintenance activities. POTENTIAL RISKS AND CONTINGENCY PLANNING: The Company is continuing an ongoing process of assessing potential Year 2000 risks and uncertainties. Internal and external risks are included in the Company's assessment and identification of mitigation strategies. Wisconsin Energy expects to successfully mitigate its controllable internal Year 2000 problems. For its core operation, Wisconsin Energy also relies upon third parties such as other power providers to and operators of the integrated electric transmission and distribution grid, fuel suppliers, producers of natural gas and suppliers of interstate natural gas transportation services, and providers of external infrastructure such as telecommunications, municipal sewer and water as well as emergency services. Failure of these critical third parties to identify and remediate their Year 2000 problems could have a material impact on the Company's operation and financial condition. The Company's Year 2000 program is structured to identify, assess and mitigate these third party risks where possible. At this time, Wisconsin Energy believes that mitigation efforts will be successful. As part of its normal business practice, the Company maintains and periodically initiates various contingency plans to maintain and restore its energy services during emergency circumstances, some of which could arise from Year 2000 related problems. During 1999, Wisconsin Energy is using this experience as a basis for the development and implementation of Year 2000 related contingency and business continuity plans. As part of this effort, the Company is coordinating its Year 2000 readiness program with various trade associations and industry groups and is working with the Mid-America Interconnected Network, Inc. ("MAIN"), NERC, the Wisconsin Reliability Assessment Organization and the New England Pool ("NEPOOL") to develop and implement regional electric reliability contingency plans. Wisconsin Electric is participating with other utilities in MAIN to develop reasonably likely worst case scenarios for the region. Scenarios that have been jointly identified and assessed are: * Loss or unavailability of some generation. * Partial loss of system monitoring and control functions, including data communication. * Partial loss of voice communications. * Loss of transmission facilities. * Loss of load and/or uncharacteristic loads. Wisconsin Electric agrees with MAIN's assessment that the probability of these scenarios occurring due to Year 2000 is not significantly in excess of normal expectations. The Company's current operating and contingency plans are expected to adequately handle the above scenarios. The Company is reviewing its operating and contingency plans to identify further enhancements or updates specifically addressing Year 2000 issues. FINANCIAL IMPLICATIONS: Wisconsin Energy currently estimates that it will incur $40 million of expenses during 1998 through 2000 for its Year 2000 program of which $26 million has been incurred as of June 30, 1999. In addition, the Company expects to capitalize costs of approximately $18 million to replace certain existing infrastructure and process control systems of which $16 million has been capitalized as of June 30, 1999. For additional information concerning Year 2000 Technology Issues, see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - "Factors Affecting Results of Operations" in Part II of Wisconsin Energy's and Wisconsin Electric's combined Annual Report on Form 10-K for the year ended December 31, 1998 and Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - "Factors Affecting Results of Operations in Part I of Wisconsin Energy's and Wisconsin Electric's combined quarterly Report on Form 10-Q for the period ended March 31, 1999. The discussion above includes many forward looking statements concerning potential schedules, plans, costs, risks and uncertainties facing Wisconsin Energy as a result of the Year 2000 problem. Based upon its activities to date, the Company expects to successfully implement the remaining actions necessary to become "Year 2000 Ready" by the end of 1999. However, the Year 2000 problem has many elements and potential consequences, some of which may not be reasonably foreseeable, and there can be no assurances that every Year 2000 problem will be identified and addressed or that unforeseen consequences will not arise. Unanticipated factors while implementing the changes necessary to mitigate Year 2000 problems, including the ongoing availability and costs of trained personnel, the ability to locate and correct all relevant codes in computer and embedded systems, or the failure of critical third parties to communicate about and to mitigate their Year 2000 problems could result in unanticipated interruptions in certain core business activities or operations of Wisconsin Energy. MARKET RISKS INTEREST RATE RISK: Wisvest-Connecticut, LLC has entered into an interest rate swap agreement to exchange fixed rate payment obligations for variable rate receipt rights without exchanging the underlying notional amounts. This agreement, which expires on December 31, 2005, serves to convert variable rate debt under Wisvest-Connecticut, LLC's long-term nonrecourse notes to fixed rate debt to reduce the impact of interest rate fluctuations. The variable rate debt is based upon a three-month LIBOR rate; the fixed rated debt is 5.99%. The notional amounts parallel a portion of the underlying debt levels and are used to measure interest to be paid or received and do not represent the exposure to credit loss. The notional amount of Wisvest-Connecticut, LLC's interest rate swaps was $77.5 million at June 30, 1999. This notional amount decreases on a quarterly basis over the remaining term of the agreement. The difference between the amounts paid and received under the interest rate swap is accrued as interest rates change and is recorded as an adjustment to interest expense over the life of the hedged agreement. The fair value of the interest rate swap is the amount that Wisvest-Connecticut, LLC would receive or pay to terminate the outstanding contract at the reporting date. Wisvest-Connecticut, LLC would have received $1.2 million to terminate the contract at June 30, 1999. A 10% increase or decrease in the market value of the swap would change this amount by approximately $0.1 million. OUTLOOK EARNINGS: Results during the first half of 1999 indicate that the Company is on course to meet currently anticipated earnings in the range of $1.85 to $2.05 per share during 1999. This earnings forecast is a forward-looking statement subject to certain risks, uncertainties and assumptions. Actual results may materially vary. Factors that could cause actual results to differ materially include, but are not limited to: business and competitive conditions in the energy industry, in general, and in the Company's utility service territories; availability of the Company's generating facilities; changes in purchased power costs; and the economy, weather, the restructuring of the electric and gas utility industries, and unforeseen problems with non-utility diversification efforts. See "Cautionary Factors" below. MERGER AGREEMENT WITH WICOR, INC. On June 27, 1999, Wisconsin Energy and WICOR entered into an Agreement and Plan of Merger providing for a strategic business combination of Wisconsin Energy and WICOR. The transaction is intended to qualify as a tax-free reorganization to the extent that shares of Wisconsin Energy Common Stock are issued in the merger and will be accounted for as a purchase transaction. The merger agreement has been approved by the boards of directors of Wisconsin Energy and WICOR. Consummation of the merger is subject to the satisfaction of certain closing conditions including approval by the shareholders of Wisconsin Energy and WICOR and by federal and state regulators. The regulatory approval process is expected to be completed in time for the transaction to be consummated by the spring of 2000. For additional information, see Item 5. Other Information - "Merger Agreement With WICOR, Inc." in Part II of this report. LIQUIDITY AND CAPITAL RESOURCES OPERATING ACTIVITIES: Cash provided by operating activities totaled $229 million at Wisconsin Energy and $269 million at Wisconsin Electric during the first six months of 1999. This compares to $255 million at Wisconsin Energy and $299 million at Wisconsin Electric during the same period in 1998. INVESTING ACTIVITIES: Net investing activities totaled $573 million at Wisconsin Energy and $220 million at Wisconsin Electric during the first half of 1999 compared to $175 million at Wisconsin Energy and $147 million at Wisconsin Electric during the same period in 1998. In April 1999, Wisvest-Connecticut, LLC completed the acquisition of two fossil-fueled power plants for $277 million from The United Illuminating Company. For additional information, see the "Notes To Financial Statements" above in Part I of this report. Remaining investments during the first half of 1999 included $237 million for the acquisition or construction of new or improved facilities of which $183 million was for a number of projects related to utility plant at Wisconsin Electric. During the first six months of 1999, Wisconsin Electric recorded $19 million of payments to and earnings of the Nuclear Decommissioning Trust Fund for the eventual decommissioning of Point Beach Nuclear Plant and $11 million for the acquisition of nuclear fuel. FINANCING ACTIVITIES: During the first half of 1999, Wisconsin Energy received a net of $363 million through financing activities compared to using a net of $85 million for financing activities during the first half of 1998. Wisconsin Electric used a net of $52 million for financing activities during the first six months of 1999 compared to using a net of $154 million for financing activities during the first six months of 1998. On March 25, 1999, WEC Capital Trust I, a Delaware business trust of which Wisconsin Energy owns all of the outstanding common securities, issued $200 million of 6.85% trust preferred securities due March 31, 2039. WEC Capital Trust I used the proceeds from the sale of the trust preferred securities to purchase corresponding junior subordinated debentures due March 31, 2039 from Wisconsin Energy. Wisconsin Energy used the proceeds from the sale of its junior subordinated debentures to fund a capital contribution of approximately $105 million to Wisvest-Connecticut, LLC for acquisition in mid- April 1999 of the two fossil-fueled power plants from The United Illuminating Company and for repayment of short-term borrowings. For additional information concerning the acquisition of The United Illuminating Company's electric generating plants and related financing, see the "Notes To Financial Statements" above in Part I of this report. During the six months ended June 30, 1999, Wisconsin Energy issued 1,385,878 new shares of common stock which were purchased by participants in the Company's stock plans with cash investments and reinvested dividends aggregating approximately $37 million. CAPITAL REQUIREMENTS AND RESOURCES: Capital requirements for the remainder of 1999 are expected to be principally for construction expenditures and for other investments, for long-term debt maturity and sinking fund requirements and for payments to the Nuclear Decommissioning Trust Fund for the eventual decommissioning of Point Beach Nuclear Plant. These cash requirements are expected to be met through a combination of several of the following resources: internal sources of funds from operations, short-term borrowings, the issuance of intermediate or long-term debt, the issuance of additional trust preferred securities, and proceeds from the sale of new issue common stock under Wisconsin Energy's stock plans. Wisconsin Electric plans to issue up to $150 million of debentures during the remainder of 1999. Wisconsin Energy is reviewing additional non-utility growth opportunities on an ongoing basis, primarily in the areas of power generation development and acquisitions, waste to energy recycling technologies and real estate investments. The Company may make further investments and/or acquisitions from time to time. With respect to the pending acquisition of WICOR, Inc., Wisconsin Energy plans to fund the portion of the WICOR acquisition price not paid with Wisconsin Energy Common Stock from bank borrowing arrangements or from securities to be issued in the capital markets. The amount and timing of bank borrowings and securities to be issued in the capital markets have not yet been determined. For additional information concerning the merger with WICOR, see Item 5. Other Information - "Merger Agreement with WICOR, Inc." in Part II of this report. Wisconsin Electric currently has senior secured debt ratings of AA+ by Standard & Poors Corporation ("S&P") and Duff & Phelps Inc. ("D&P"), Aa2 by Moody's Investors Service ("Moody's") and AA by Fitch Investors Service ("Fitch"). In addition, Wisconsin Electric currently has unsecured debt ratings of AA by S&P and D&P, Aa3 by Moody's and AA- by Fitch. Wisconsin Electric's preferred stock has ratings of AA- by S&P and Fitch, aa3 by Moody's and AA by D&P. Moody's has assigned a rating on Wisconsin Energy Capital Corporation's unsecured debt of A1 and S&P an AA. Wisconsin Energy's and Wisconsin Electric's commercial paper are rated A-1+ by S&P and P-1 by Moody's. D&P has rated Wisconsin Energy and Wisconsin Electric commercial paper D-1 and D-1+, respectively. The Trust Preferred securities of WEC Capital Trust I are rated A by D&P, a1 by Moody's and A+ by S&P. Following the announcement of the proposed merger with WICOR, D&P, Fitch and Moody's affirmed their previous ratings of Wisconsin Energy's and Wisconsin Electric's securities and S&P placed its ratings of certain of Wisconsin Energy's securities on credit watch with negative implications. At June 30, 1999, Wisconsin Energy had $383 million of unused lines of bank credit on a consolidated basis of which $128 million was at Wisconsin Electric. Effective with the August 1999 renewal of its commercial paper agreement, Wisconsin Energy's unused lines of bank credit totaled $433 million on a consolidated basis with $128 million attributable to Wisconsin Electric. For certain other information which may impact Wisconsin Energy's and Wisconsin Electric's future financial condition or results of operations, see Item 1. Financial Statements - "Notes to Financial Statements" in Part I of this report as well as Item 1. Legal Proceedings and Item 5. Other Information in Part II of this report. CAUTIONARY FACTORS This report and other documents or oral presentations contain or may contain forward-looking statements made by or on behalf of Wisconsin Energy or Wisconsin Electric. Such statements are based upon management's current expectations and are subject to risks and uncertainties that could cause Wisconsin Energy's or Wisconsin Electric's actual results to differ materially from those contemplated in the statements. Readers are cautioned not to place undue reliance on the forward-looking statements. When used in written documents or oral presentations, the terms "anticipate," "believe," "estimate," "expect," "objective," "plan," "possible," "potential," "project" and similar expressions are intended to identify forward-looking statements. In addition to the assumptions and other factors referred to specifically in connection with such statements, factors that could cause Wisconsin Energy's or Wisconsin Electric's actual results to differ materially from those contemplated in any forward- looking statements include, among others, the following: OPERATING, FINANCIAL AND INDUSTRY FACTORS * Factors affecting utility operations such as unusual weather conditions; catastrophic weather-related damage; availability of Wisconsin Electric's, Edison Sault's or Wisvest-Connecticut, LLC's generating facilities; unscheduled generation outages, maintenance or repairs; unanticipated changes in fossil fuel, nuclear fuel, purchased power, gas supply or water supply costs or availability due to higher demand, shortages, transportation problems or other developments; nonperformance by electric energy or natural gas suppliers under existing power purchase or gas supply contracts; nuclear or environmental incidents; resolution of spent nuclear fuel storage and disposal issues; electric transmission or gas pipeline system constraints; unanticipated organizational structure or key personnel changes; collective bargaining agreements with union employees or work stoppages; inflation rates; or demographic and economic factors affecting utility service territories or operating environment. * Regulatory factors such as unanticipated changes in rate-setting policies or procedures; unanticipated changes in regulatory accounting policies and practices; industry restructuring initiatives; transmission system operation and/or administration initiatives; recovery of costs of previous investments made under traditional regulation; required approvals for new construction; changes in the United States Nuclear Regulatory Commission's regulations related to Point Beach Nuclear Plant; changes in the United States Environmental Protection Agency's as well as the Wisconsin or Michigan Department of Natural Resources' regulations related to emissions from fossil-fuel-fired power plants; or the siting approval process for new generation and transmission facilities. * The rapidly changing and increasingly competitive electric and gas utility environment as market-based forces replace strict industry regulation and other competitors enter the electric and gas markets resulting in increased wholesale and retail competition. * Consolidation of the industry as a result of the combination and acquisition of utilities in the Midwest, nationally and globally. * Restrictions imposed by various financing arrangements and regulatory requirements on the ability of Wisconsin Electric or other subsidiaries to transfer funds to Wisconsin Energy in the form of cash dividends, loans or advances. * Changes in social attitudes regarding the utility and power industries. * Customer business conditions including demand for their products or services and supply of labor and material used in creating their products and services. * The cost and other effects of legal and administrative proceedings, settlements, and investigations, claims and changes in those matters. * Factors affecting the availability or cost of capital such as changes in interest rates; market perceptions of the utility industry, the Company or any of its subsidiaries; or security ratings. * Federal, state or local legislative factors such as changes in tax laws or rates; changes in trade, monetary and fiscal policies, laws and regulations; electric and gas industry restructuring initiatives; or changes in environmental laws and regulations. * Authoritative generally accepted accounting principle or policy changes from such standard setting bodies as the Financial Accounting Standards Board and the Securities and Exchange Commission. * Unanticipated technological developments that result in competitive disadvantages and create the potential for impairment of existing assets. * Unanticipated developments while implementing the modifications necessary to mitigate Year 2000 compliance problems, including the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes in computer and embedded systems, the indirect impacts of third parties with whom the Company does business and who do not mitigate their Year 2000 compliance problems, and similar uncertainties. * Possible risks associated with non-utility diversification such as competition; operating risks; dependence upon certain suppliers and customers; the cyclical nature of property values that could affect real estate investments; risks associated with international investments, including foreign currency valuations; unanticipated changes in environmental or energy regulations; timely regulatory approval without onerous conditions of potential acquisitions; risks associated with minority investments, where there is a limited ability to control the development, management or operation of the project; and the risk of higher interest costs associated with potentially reduced securities ratings by independent rating agencies as a result of these and other factors. * Legislative or regulatory restrictions or caps on non-utility acquisitions, investments or projects, including the State of Wisconsin's public utility holding company law, which could limit the Company's diversification and growth opportunities or require the Company to divest of certain existing non-utility assets. * Factors affecting foreign non-utility operations including foreign governmental actions; foreign economic and currency risks; political instability; and unanticipated changes in foreign environmental or energy regulations. * Other business or investment considerations that may be disclosed from time to time in Wisconsin Energy's or Wisconsin Electric's Securities and Exchange Commission filings or in other publicly disseminated written documents. BUSINESS COMBINATION FACTORS * Consummation of the merger with WICOR, which will have a significant effect on the future operations and financial position of Wisconsin Energy. Specific factors include: * The ability to obtain the requisite approvals of shareholders. * Regulatory delays or conditions imposed by regulatory bodies in approving the merger, or adverse regulatory treatment of the merger. * Unanticipated costs or difficulties related to the integration of the businesses of Wisconsin Energy and WICOR, or unexpected difficulties or delays in realizing anticipated net cost savings or receiving regulatory authorization to retain the benefit of those savings for the shareholders of the combined company. * Legislative or regulatory restrictions or caps on non-utility acquisitions, investments or projects, including Wisconsin's public utility holding company law, which could limit Wisconsin Energy's or WICOR's diversification and growth opportunities after the merger or require Wisconsin Energy or WICOR to divest of certain existing non- utility assets. Wisconsin Energy and Wisconsin Electric undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK For discussion of an interest rate swap agreement recently entered into by Wisvest-Connecticut, LLC, see Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - "Factors Affecting Results of Operations" in Part I above of this report. For information concerning Wisconsin Energy's and Wisconsin Electric's other market risk exposures, see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - "Factors Affecting Results of Operations - Market Risks" in Part II of Wisconsin Energy's and Wisconsin Electric's combined Annual Report on Form 10-K for the year ended December 31, 1998. PART II - OTHER INFORMATION --------------------------- ITEM 1. LEGAL PROCEEDINGS The following should be read in conjunction with Item 3. Legal Proceedings in Part I of Wisconsin Energy's and Wisconsin Electric's combined Annual Report on Form 10-K for the year ended December 31, 1998 and Item 1. Legal Proceedings in Part II of Wisconsin Energy's and Wisconsin Electric's combined Quarterly Report on Form 10-Q for the period ended March 31, 1999. RATES AND REGULATORY MATTERS 2000 TEST YEAR: The Public Service Commission of Wisconsin requires that rate cases be conducted once every two years. On July 6, 1999, Wisconsin Electric provided the PSCW with its biennial year-end financial information for 1999 and 2000. In that filing, Wisconsin Electric is not seeking any changes in rates for electric, natural gas or steam service. Also in that filing, Wisconsin Electric indicated that by September 1, 1999, should any rate changes be required, it will file rate changes incorporating performance-based measures and incentives as an alternative to cost of service ratemaking. NON-UTILITY ASSET CAP: Wisconsin Energy is subject to certain current restrictions which may limit diversification into non-utility activities. Under a formula included in the provisions of Wisconsin's public utility holding company law, the sum of the assets of all non-utility affiliates in a holding company system may not exceed 25% of the assets of all public utility affiliates. Wisconsin Energy reports to the PSCW regarding the net book value of its non-utility affiliates as of December 31 of each year. At December 31, 1998, the net book value of the assets of Wisconsin Energy's non-utility affiliates was approximately 12% of the net book value of all of Wisconsin Energy's electric utility affiliates. At June 30, 1999 (after acquisition of the United Illuminating generating assets by Wisvest-Connecticut, LLC), the assets of Wisconsin Energy's non-utility affiliates approximated 21% of the assets of its public utility affiliates. Wisconsin Energy is currently working with a broad-based group in an effort to modify the asset cap provisions of Wisconsin's public utility holding company law. Recently, the governor of the State of Wisconsin proposed in his budget that a voluntary state electric transmission company ("Transco") be set up by November 2000 that would be part of the Midwest Independent System Operator ("Midwest ISO"). Under the terms of the proposal, if a utility in a holding company system transferred electric transmission facilities and rights of way to the Transco and committed to certain spending levels for low-income residents and for conservation programs, non-utility entities in the same holding company system could increase certain types of energy-related assets without counting against the asset cap. Asset cap limits would continue to apply to other non- utility operations. The matter is pending in the Wisconsin State Legislature. Wisconsin Electric has indicated that it would transfer its electric transmission assets to such a Transco and is an active participant in the Midwest ISO. However, there can be no assurance that the current asset cap restrictions will be modified or that the restrictions will not affect Wisconsin Energy's future non-utility diversification activities. ENVIRONMENTAL MATTERS ETSM PROPERTY/CITY OF WEST ALLIS LAWSUIT: As previously reported, iron cyanide-bearing wastes, believed to be manufactured gas plant process wastes, were found at two sites in West Allis, Wisconsin. One site is on property formerly owned by Kearney & Trecker Corporation, which was sold to others, including Wisconsin Electric prior to the discovery of the wastes. The other is the "Greenfield Avenue" site owned by the City of West Allis. Several years ago materials were removed from the Kearney & Trecker site, with Wisconsin Electric and the other current owners paying for disposal of materials found on their respective portions of the site. On July 25, 1996, Giddings & Lewis Inc., Kearney & Trecker and the City of West Allis filed an action for damages in the Milwaukee County Circuit Court against Wisconsin Electric, alleging that Wisconsin Electric was responsible for the deposition of the material and liable to the plaintiffs. Investigations into the potential source of the waste lead Wisconsin Electric to believe that it was not the source of this waste. A trial was held and on July 14, 1999, a jury verdict was rendered against Wisconsin Electric awarding the plaintiffs $4.5 million as actual damages for clean-up costs and loss of property value. The jury further awarded the plaintiffs $100 million in punitive damages against Wisconsin Electric. Post-trial motions are scheduled to be heard in October 1999. Wisconsin Electric is preparing to file post trial motions on the grounds that the jury verdict is not supported by the evidence or the law and that the award of punitive damages was unwarranted and, in the opinion of management, based in part on the advice of legal counsel, should be reversed. As such, Wisconsin Electric has recorded no reserve for potential damages from this suit. Wisconsin Electric also intends to take all other actions available to have the verdict overturned. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS WISCONSIN ENERGY CORPORATION At Wisconsin Energy's 1999 Annual Meeting of Stockholders held on June 2, 1999, the board of directors' nominees named below were elected as directors by the indicated votes and percentages cast for each nominee. Directors are elected by a plurality of the votes cast by the shares entitled to vote. Any shares not voted, whether by withheld authority, broker non-votes or otherwise, have no effect in the election of directors. There was no solicitation in opposition to the nominees proposed in the Proxy Statement. Election of Directors for Terms Expiring in 2002 - ------------------------------------------------ Name of Nominee For Withheld --------------- ------ -------- Richard A. Abdoo 95,750,519 (96.8%) 3,185,893 (3.2%) John F. Ahearne 96,507,689 (97.5%) 2,428,723 (2.5%) Julia B. North 96,443,857 (97.5%) 2,492,555 (2.5%) Of 116,295,956 voting shares outstanding as of the March 25, 1999 record date for the annual meeting, 98,936,412 shares (85.1% of the shares outstanding) were represented at the meeting. Further information concerning these matters, including the names of directors whose terms as a director continued after the meeting, is contained in Wisconsin Energy's Proxy Statement dated April 16, 1999 with respect to the 1999 Annual Meeting of Stockholders. WISCONSIN ELECTRIC POWER COMPANY At Wisconsin Electric's 1999 Annual Meeting of Stockholders held on May 26, 1999 for which Wisconsin Electric did not solicit proxies, ten incumbent directors, as listed in Wisconsin Electric's Information Statement dated April 22, 1999, were elected for one year terms. Each director received 33,289,327 votes (100% of votes cast). Directors are elected by a plurality of the votes cast by the shares entitled to vote. Any shares not voted, whether by withheld authority, broker non-votes or otherwise, have no effect in the election of directors. There was no solicitation in opposition to the nominees proposed in the Information Statement. Further information concerning these matters is contained in Wisconsin Electric's Information Statement. ITEM 5. OTHER INFORMATION MERGER AGREEMENT WITH WICOR, INC. As previously reported, on June 27, 1999, Wisconsin Energy and WICOR, Inc., a Wisconsin corporation [NYSE: WIC], entered into an Agreement and Plan of Merger providing for a strategic business combination of Wisconsin Energy and WICOR. WICOR is a diversified holding company with investments in utility and non- utility energy subsidiaries as well as in pump manufacturing subsidiaries. Following the merger, WICOR will become a wholly owned subsidiary of Wisconsin Energy. The merger agreement has been approved by the boards of directors of Wisconsin Energy and WICOR. Under the terms of the agreement, Wisconsin Energy will acquire all of the outstanding shares of WICOR Common Stock for a fixed price of $31.50 for each WICOR share. At least 40% of the price will be paid in Wisconsin Energy Common Stock, and Wisconsin Energy has the option to increase the percentage to 60%; the balance will be paid in cash. The exchange ratio for the Wisconsin Energy Common Stock will be set based upon the average closing prices of Wisconsin Energy stock immediately prior to closing. If the average is less than $22.00 per share, Wisconsin Energy may elect to pay all cash. Each WICOR shareholder will be able to elect to receive cash, stock, or a combination thereof, subject to proration. It is anticipated that Wisconsin Energy will maintain its normal quarterly dividend of $0.39 and dividend payment schedule following completion of the transaction. Both Wisconsin Energy and WICOR will maintain their current dividend policy until the close of the transaction. Following the merger, Mr. Richard A. Abdoo will continue as chairman of the board, president and CEO of Wisconsin Energy, and Mr. George E. Wardeberg, currently chairman and CEO of WICOR, will become vice chairman of the board of Wisconsin Energy. Mr. Wardeberg will continue in this position for 24 months, after which he plans to retire. Following Mr. Wardeberg's retirement, he will remain a member of Wisconsin Energy's board of directors. After closing, in addition to Mr. Wardeberg, one other member of the current WICOR board will join Wisconsin Energy's board of directors. Consummation of the merger is subject to the satisfaction of certain closing conditions including approval by the shareholders of Wisconsin Energy and WICOR, approval by the PSCW, approval by the Securities and Exchange Commission under the Public Utility Holding Company Act of 1935, as amended, and expiration or termination of the waiting period applicable to the merger under the Hart-Scott- Rodino Antitrust Improvements Act of 1976, as amended. The regulatory approval process is expected to be completed in time for the transaction to be consummated by the Spring of 2000. Assuming timely realization of estimated cost savings and avoidances expected to result from the merger, and assuming favorable regulatory treatment, Wisconsin Energy expects the business combination to result in increased earnings per share beginning in the first full year following the merger. While no definitive synergies study has been done, net merger-related cost savings are anticipated to be approximately $35 million annually beginning in the first full year after the merger. Savings are expected from lower costs for fuel, materials and services through enhanced purchasing power, elimination of duplication through attrition, and through sharing of resources. Additional cost savings are anticipated from logical consolidation of common functions over time as well as from savings in areas such as insurance and regulatory costs and legal, audit and consulting fees. In its merger application, Wisconsin Energy has asked the PSCW to permit it to recover the portion of the acquisition premium that Wisconsin Energy will pay in the merger which is attributable to WICOR's regulated utility assets. Recovery of the acquisition premium would not require any increase in rates. Instead, Wisconsin Energy is requesting that it be allowed to retain the anticipated net cost savings that result from the merger over a period of time adequate to recover the acquisition premium it is paying to make those savings possible. On July 2, 1999, an action was filed by a shareholder of WICOR in the Circuit Court of Milwaukee County, Wisconsin against WICOR, all of the members of its board of directors, and Wisconsin Energy. The complaint alleges that the consideration to be received by WICOR shareholders in the proposed merger is inadequate and unfair to WICOR shareholders. The complaint also alleges that Wisconsin Energy aided, abetted and assisted in the alleged breaches of the fiduciary duties of the individual defendants. The complaint seeks certification as a class action on behalf of all WICOR shareholders, an injunction against proceeding with the merger, an auction or open bidding process for the sale of WICOR, and unspecified damages. On August 11, 1999, the shareholder plaintiff filed a motion requesting a preliminary injunction to enjoin a new WICOR, Inc. Shareholder Rights Plan adopted on July 27, 1999. In conjunction with the motion, the shareholder plaintiff is also seeking expedited discovery and an expeditious decision on the motion. WICOR and Wisconsin Energy believe that the complaint and the injunction request are without merit and intend to pursue a vigorous defense. UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION The following unaudited pro forma combined condensed financial information for the combined company after the merger are based upon the historical consolidated financial statements of Wisconsin Energy and WICOR, combined and adjusted to give effect to the merger and related transactions (including the related financing), as described in the notes to this information. Certain amounts in the WICOR financial statements have been reclassified to conform to Wisconsin Energy's presentation. This information should be read in conjunction with the historical financial statements and related notes of Wisconsin Energy and WICOR. The allocation of the estimated cost savings from the merger, net of costs incurred to achieve such estimated cost savings, will be subject to regulatory review and approval. None of the estimated cost savings, the costs to achieve such savings, nor transaction costs (other than estimated debt issue costs) are reflected in the unaudited pro forma combined condensed income statement information. The unaudited pro forma combined condensed income statements for the year ended December 31, 1998 and for the six months ended June 30, 1999 and 1998 present the results for Wisconsin Energy and WICOR as if the merger had occurred on January 1, 1998. The unaudited pro forma combined condensed balance sheet as of June 30, 1999 gives effect to the merger as of that date. We have assumed that the merger consideration will consist of 40% stock and 60% cash and have described in the footnotes the pro forma differences that would occur should the merger consideration consist of either 60% stock and 40% cash or of 100% cash. We have also assumed (a) the exercise prior to the merger of all outstanding options to purchase WICOR Common Stock; and (b) that the exchange ratio is 1.2569 Wisconsin Energy shares per each WICOR share, which is $31.50 divided by the $25.0625 closing price of Wisconsin Energy Common Stock on June 30, 1999. The actual exchange ratio will depend upon the average closing prices of Wisconsin Energy Common Stock on the New York Stock Exchange during a valuation period consisting of the 10 trading days ending with the fifth trading day prior to the merger. Therefore, the actual exchange ratio will not be determined until shortly before the closing. The pro forma adjustments are based upon preliminary estimates, information currently available and assumptions that management believes are reasonable under the circumstances. Wisconsin Energy's actual consolidated financial statements will reflect the results of the merger on and after its effective date rather than the dates indicated above. You should not rely on the unaudited combined condensed pro forma financial data as an indication of the results of operations or financial position that would have been achieved if the merger had taken place earlier nor an indication of the results of operations or financial position of the combined company after completion of the merger. The merger will be accounted for by the purchase method and, therefore, the assets and liabilities of WICOR will be recorded at their fair values. The excess of the purchase price over the fair value of the net assets at the effective time of the merger will be recorded as goodwill. Allocations included in the pro forma information are based upon analysis which is not yet completed. Accordingly, the final allocation of the purchase price may differ, perhaps significantly, from the amounts shown in this pro forma information. <TABLE> WISCONSIN ENERGY CORPORATION UNAUDITED PRO FORMA COMBINED CONDENSED INCOME STATEMENT REFLECTING COMPLETION OF THE MERGER Six Months Ended June 30, 1999 <CAPTION> Wisconsin Pro Forma Pro Forma Energy (a) WICOR Adjustments Combined ---------- ------ ----------- --------- (In Thousands, Except Per Share Amounts) <S> <C> <C> <C> <C> <C> <C> Operating Revenues $1,095,725 $529,573 $ - $1,625,298 Operating Expenses Fuel 164,944 - - 164,944 Purchased power 102,701 - - 102,701 Cost of gas sold 96,606 159,380 - 255,986 Cost of goods sold - 178,788 - 178,788 Other operation and maintenance 360,855 103,599 500 (c) 1,757 (b) 466,711 Depreciation and amortization 131,399 18,313 8,616 (d) 4,350 (e) 162,678 Property and revenue tax 36,873 4,223 (1,757)(b) 39,339 ---------- ------- ---------- --------- Pretax Operating Income 202,347 65,270 (13,466) 254,151 Other Income and Deductions 23,434 (119) - 23,315 Interest Charges and Other (69,514) (8,173) (22,835)(f) (100,522) ---------- ------- --------- --------- Income Before Income Taxes 156,267 56,978 (36,301) 176,944 Provision (Benefit) for Income Taxes 53,853 22,120 (10,520)(g) 65,453 ---------- ------- --------- -------- Net Income $102,414 $34,858 ($25,781) $111,491 ========== ======= ========= ======== Weighted Average Common Shares 116,272 20,348 (h) 136,620 Earnings Per Share (Basic and Diluted) $0.88 $0.82 (i) See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Information. </TABLE> <TABLE> WISCONSIN ENERGY CORPORATION UNAUDITED PRO FORMA COMBINED CONDENSED INCOME STATEMENT REFLECTING COMPLETION OF THE MERGER Six Months Ended June 30, 1998 <CAPTION> Wisconsin Pro Forma Pro Forma Energy (a) WICOR Adjustments Combined ---------- ------ ------------ ---------- (In Thousands, Except Per Share Amounts) <S> <C> <C> <C> <C> <C> <C> Operating Revenues $991,253 $523,206 $ - $1,514,459 Operating Expenses Fuel 154,108 - - 154,108 Purchased power 79,283 - - 79,283 Cost of gas sold 103,406 171,498 - 274,904 Cost of goods sold - 174,818 - 174,818 Other operation and maintenance 340,792 97,770 500 (c) 1,888 (b) 440,950 Depreciation and amortization 122,021 17,404 8,616 (d) 4,350 (e) 152,391 Property and revenue tax 31,276 4,827 (1,888)(b) 34,215 -------- -------- ------- ---------- Pretax Operating Income 160,367 56,889 (13,466) 203,790 Other Income and Deductions 15,824 1,666 - 17,490 Interest Charges and Other (58,964) (8,585) (22,835)(f) (90,384) -------- -------- ------- ---------- Income Before Income Taxes 117,227 49,970 (36,301) 130,896 Provision (Benefit) for Income Taxes 39,325 18,983 (10,520)(g) 47,788 -------- -------- -------- ---------- Net Income $77,902 $30,987 ($25,781) $83,108 ======== ======== ======== ======== Weighted Average Common Shares 113,279 20,348 (h) 133,627 Earnings Per Share (Basic and Diluted) $0.69 $0.62 (i) See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Information. </TABLE> <TABLE> WISCONSIN ENERGY CORPORATION UNAUDITED PRO FORMA COMBINED CONDENSED INCOME STATEMENT REFLECTING COMPLETION OF THE MERGER Year Ended December 31, 1998 <CAPTION> Wisconsin Pro Forma Pro Forma Energy (a) WICOR Adjustments Combined --------- ------ ----------- --------- (In Thousands, Except Per Share Amounts) <S> <C> <C> <C> <C> <C> <C> Operating Revenues $2,039,433 $944,183 $ - $2,983,616 Operating Expenses Fuel 308,385 - - 308,385 Purchased power 177,852 - - 177,852 Cost of gas sold 175,475 295,601 - 471,076 Cost of goods sold - 329,248 - 329,248 Other operation and maintenance 691,535 190,674 1,000 (c) 3,295 (b) 886,504 Depreciation and amortization 248,337 35,038 17,232 (d) 8,700 (e) 309,307 Property and revenue tax 63,095 9,039 (3,295)(b) 68,839 ---------- -------- -------- --------- Pretax Operating Income 374,754 84,583 (26,932) 432,405 Other Income and Deductions 26,765 3,706 - 30,471 Interest Charges and Other (121,221) (16,746) (45,669)(f) (183,636) ---------- -------- --------- --------- Income Before Income Taxes 280,298 71,543 (72,601) 279,240 Provision (Benefit) for Income Taxes 92,166 26,048 (21,040)(g) 97,174 ---------- -------- --------- --------- Net Income $188,132 $45,495 ($51,561) $182,066 ========== ======== ======== ========= Weighted Average Common Shares 114,315 20,348 (h) 134,663 Earnings Per Share (Basic and Diluted) $1.65 $1.35 (i) See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Information. </TABLE> <TABLE> WISCONSIN ENERGY CORPORATION UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET REFLECTING COMPLETION OF THE MERGER June 30, 1999 <CAPTION> Wisconsin Pro Forma Pro Forma Energy (a) WICOR Adjustments Combined ---------- ------- ----------- ---------- (In Thousands) <S> <C> <C> <C> <C> <C> Assets ------ Property, Plant & Equipment $3,798,985 $445,976 $87,000 (j) $4,331,961 Other Property and Investments 864,800 - 7,737 (b) 872,537 Current Assets Cash & cash equivalents 35,369 8,752 - 44,121 Accounts receivable-net, including accrued utility revenues 305,882 162,480 - 468,362 Materials, supplies and inventory 209,852 102,915 12,700 (j) 6,798 (b) 332,265 Prepayments and other current assets 79,988 32,939 (6,798) (b) 106,129 ---------- -------- -------- ---------- Total Current Assets 631,091 307,086 12,700 950,877 Deferred Charges and Other Assets Goodwill - 83,024 689,297 (k) 772,321 Regulatory assets 208,384 56,082 - 264,466 Accumulated deferred income taxes 206,010 - 20,056 (b) 226,066 Other assets, including prepaid pension costs 107,307 90,687 54,900 (l) (7,737) (b) 245,157 --------- -------- -------- --------- Total Deferred Charges and Other Assets 521,701 229,793 756,516 1,508,010 ---------- -------- -------- --------- Total Assets $5,816,577 $982,855 $863,953 $7,663,385 ========= ======== ======== ========= Capitalization and Liabilities ------------------------------ Capitalization Common stock equity $1,951,907 $423,826 $80,135 (m) $2,455,868 Preferred stock 30,450 - - 30,450 Long-term debt 1,979,368 204,524 722,062 (m) 2,905,954 Wisconsin Energy obligated redeemable preferred securities of subsidiary trust 200,000 - - 200,000 ---------- -------- -------- ---------- Total Capitalization 4,161,725 628,350 802,197 5,592,272 Current Liabilities Short-term debt, including long-term debt due currently 403,842 19,209 - 423,051 Accounts payable 162,182 73,999 - 236,181 Accrued liabilities and other 152,522 92,451 20,500 (j) 265,473 ---------- -------- -------- ---------- Total Current Liabilities 718,546 185,659 20,500 924,705 Deferred Credits and Other Liabilities Accumulated deferred income taxes 582,080 49,347 68,900 (j) 20,056 (b) 720,383 Regulatory liabilities 142,478 29,553 - 172,031 Other, including postretirement benefit obligation 211,748 89,946 (47,700) (j) 253,994 ---------- -------- -------- ---------- Total Deferred Credits and Other Liabilities 936,306 168,846 41,256 1,146,408 ---------- -------- -------- ---------- Total Capitalization and Liabilities $5,816,577 $982,855 $863,953 $7,663,385 ========== ======== ======== ========== See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Information. </TABLE> WISCONSIN ENERGY CORPORATION NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION (In Thousands) The unaudited pro forma financial information gives effect to the acquisition by Wisconsin Energy of WICOR in a transaction to be accounted for as a purchase. Wisconsin Energy's Unaudited Pro Forma Combined Condensed Financial Information assumes the WICOR acquisition occurred (1) as of January 1, 1998, for purposes of the Unaudited Pro Forma Combined Condensed Income Statements and (2) on June 30, 1999 for purposes of the Unaudited Pro Forma Combined Condensed Balance Sheet. a. Due to recent acquisitions by Wisconsin Energy that have increased the size of Wisconsin Energy's non-utility operations, Wisconsin Energy has modified its income statement and balance sheet presentations. The primary modification includes reclassifying the results of the non-utility operations from Other Income and Deductions to the various lines within operating income (i.e. Operating Revenues and Operating Expenses). This modification does not change net income. The primary balance sheet modification includes reclassifying the non-utility property, plant and equipment and related accumulated provision for depreciation from investments to inclusion with utility property, plant and equipment. This modification does not change total assets. b. Reclassification of amounts to conform the companies' historical presentation. c. Based upon revised actuarial information, WICOR's annual pension income will increase by $1.5 million and will be offset by an additional $2.5 million of annual postretirement benefit expense. d. Amortization of goodwill over 40 years ($689.3 million/40 years = $17.2 million per year or $4.3 million per quarter). e. Additional depreciation resulting from the increased fair value of machinery, equipment and buildings acquired based on estimated useful lives of 10 years ($87 million/10 years = $8.7 million per year or $2.2 million per quarter). f. Incremental interest expense based upon an assumed rate of 6.25% ($722.1 million x 6.25% = $45.1 million per year or $11.3 million per quarter). A 1/8 percent increase (or decrease) in the interest rate would increase (or decrease) annual interest expense by approximately $0.9 million. Estimated debt issue cost of $5.4 million will be amortized over ten years. g. Reduction of income taxes relating to the foregoing adjustments. h. Shares to be issued assuming the purchase price is paid with 40% stock, including outstanding stock options. The closing price of Wisconsin Energy's Common Stock on June 30, 1999 was $25-1/16. i. Assuming the purchase price is paid with 100% cash or 60% stock and 40% cash, pro forma earnings per share for the year ended December 31, 1998 would approximate $1.42 and $1.33 per share, respectively. Assuming the purchase price is paid with 100% cash or 60% stock and 40% cash, pro forma earnings per share would approximate $0.87 and $0.79 for the six months ended June 30, 1999, respectively, and $0.64 and $0.61 per share, respectively, for the six months ended June 30, 1998. j. Adjustments to net assets of WICOR to reflect fair value, purchase accounting adjustments and related tax effects. k. The excess of cost over fair value of net assets acquired resulting from the preliminary purchase price allocation is assumed to be as follows: <TABLE> <S> <C> Pro forma purchase price $1,220,623 Pro forma historical net book value of assets acquired 423,826 ---------- Excess of purchase price over net book value of assets acquired 796,797 Allocated to: Inventories (12,700) Property, plant and equipment (87,000) Prepaid pension asset (49,500) Deferred tax liabilities 68,900 Other current liabilities 20,500 Postretirement obligation (47,700) ---------- Remaining excess of cost over fair value of net assets acquired (goodwill) $689,297 ========== </TABLE> The foregoing preliminary purchase price allocation is based on available information and certain assumptions Wisconsin Energy considers reasonable. The final purchase price allocation will be based upon a determination of the fair value of the net assets acquired at the date of the acquisition. The final purchase price allocation may differ from the preliminary allocation. l. Amount consists of an adjustment of $49.5 million to fair value WICOR's prepaid pension asset and $5.4 million in estimated debt issue costs. m. Purchase price is assumed to be financed with 40% stock and 60% debt. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS The following Exhibits are filed with or incorporated by reference in the applicable Form 10-Q report: Exhibit No. ----------- WISCONSIN ENERGY CORPORATION EXHIBITS (2)-1 Agreement and Plan of Merger, dated as of June 27, 1999, by and among Wisconsin Energy Corporation, WICOR, Inc. and CEW Acquisition, Inc. (Incorporated by reference to Exhibit 2.1 to Wisconsin Energy's Current Report on Form 8-K dated as of June 27, 1999, File No. 1- 9057.) (10)-1 Supplemental Executive Retirement Plan of Wisconsin Energy Corporation (as amended and restated as of June 2, 1999). (10)-2 Executive Deferred Compensation Plan of Wisconsin Energy Corporation effective January 1, 1989, as amended and restated as of June 2, 1999. (10)-3 Short-Term Performance Plan of Wisconsin Energy Corporation effective January 1, 1999, as amended and restated as of June 2, 1999. (10)-4 Senior Officer Change in Control Agreement between Wisconsin Energy Corporation and Richard A. Abdoo effective July 29, 1999. (27)-1 Wisconsin Energy Corporation Financial Data Schedule for the six months ended June 30, 1999. (27)-2 Wisconsin Energy Corporation Restated Financial Data Schedule for the fiscal year ended December 31, 1998, which reflects the reclassification of certain amounts to conform to Wisconsin Energy's current financial statement presentation. (27)-3 Wisconsin Energy Corporation Restated Financial Data Schedule for the six months ended June 30, 1998, which reflects the reclassification of certain amounts to conform to Wisconsin Energy's current financial statement presentation. WISCONSIN ELECTRIC POWER COMPANY EXHIBITS (27)-4 Wisconsin Electric Power Company Financial Data Schedule for the six months ended June 30, 1999. (27)-5 Wisconsin Electric Power Company Restated Financial Data Schedule for the fiscal year ended December 31, 1998, which reflects the reclassification of certain amounts to conform to Wisconsin Electric's current financial statement presentation. (27)-6 Wisconsin Electric Power Company Restated Financial Data Schedule for the six months ended June 30, 1998, which reflects the reclassification of certain amounts to conform to Wisconsin Electric's current financial statement presentation. (b) REPORTS ON FORM 8-K A Current Report on Form 8-K dated as of June 27, 1999 was filed by Wisconsin Energy on June 30, 1999 announcing Wisconsin Energy's merger agreement with WICOR, Inc. and filing as exhibits copies of the merger agreement and a joint press release with respect to the merger agreement. A Current Report on Form 8-K dated as of June 29, 1999 was filed by Wisconsin Energy on June 30, 1999 to disclose presentation materials used at analysts' meetings in connection with the announcement of the merger agreement between Wisconsin Energy and WICOR, Inc. dated June 27, 1999. No other reports on Form 8-K were filed by Wisconsin Energy or by Wisconsin Electric during the quarter ended June 30, 1999. A Current Report on Form 8-K dated as of July 14, 1999 was filed separately by Wisconsin Energy and by Wisconsin Electric disclosing the results of a July 14 jury verdict against Wisconsin Electric in a lawsuit concerning the placement of contaminated wastes on two properties in the City of West Allis, Wisconsin. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, each registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. WISCONSIN ENERGY CORPORATION ---------------------------- (Registrant) /s/ Calvin H. Baker --------------------------------- Date: August 13, 1999 Calvin H. Baker, Treasurer, Chief Financial Officer and duly authorized officer WISCONSIN ELECTRIC POWER COMPANY -------------------------------- (Registrant) /s/ Calvin H. Baker ----------------------------------------- Date: August 13, 1999 Calvin H. Baker, Vice President - Finance, Chief Financial Officer and duly authorized officer WISCONSIN ENERGY CORPORATION FORM 10-Q REPORT FOR THE QUARTER ENDED JUNE 30, 1999 EXHIBIT INDEX The following exhibits are filed with or incorporated by reference in this report: Exhibit No. - ----------- (2)-1 Agreement and Plan of Merger, dated as of June 27, 1999, by and among Wisconsin Energy Corporation, WICOR, Inc. and CEW Acquisition, Inc. (Incorporated by reference to Exhibit 2.1 to Wisconsin Energy's Current Report on Form 8-K dated as of June 27, 1999, File No. 1-9057.) (10)-1 Supplemental Executive Retirement Plan of Wisconsin Energy Corporation (as amended and restated as of June 2, 1999). (10)-2 Executive Deferred Compensation Plan of Wisconsin Energy Corporation effective January 1, 1989, as amended and restated as of June 2, 1999. (10)-3 Short-Term Performance Plan of Wisconsin Energy Corporation effective January 1, 1999, as amended and restated as of June 2, 1999. (10)-4 Senior Officer Change in Control Agreement between Wisconsin Energy Corporation and Richard A. Abdoo effective July 29, 1999. (27)-1 Wisconsin Energy Corporation Financial Data Schedule for the six months ended June 30, 1999. (27)-2 Wisconsin Energy Corporation Restated Financial Data Schedule for the fiscal year ended December 31, 1998, which reflects the reclassification of certain amounts to conform to Wisconsin Energy's current financial statement presentation. (27)-3 Wisconsin Energy Corporation Restated Financial Data Schedule for the six months ended June 30, 1998, which reflects the reclassification of certain amounts to conform to Wisconsin Energy's current financial statement presentation.