Eselco Inc – ‘10-K405’ for 12/31/97

As of:  Tuesday, 3/31/98   ·   For:  12/31/97   ·   Accession #:  1047469-98-13067   ·   File #:  0-17736

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Annual Report — [x] Reg. S-K Item 405   —   Form 10-K
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K405     Annual Report -- [x] Reg. S-K Item 405                48    218K 
 2: EX-21       Subsidiaries of the Registrant                         1      4K 
 3: EX-23       Consent of Experts or Counsel                          1      5K 
 4: EX-27       Financial Data Schedule (Pre-XBRL)                     2      6K 

10-K405   —   Annual Report — [x] Reg. S-K Item 405
Document Table of Contents

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FORM 10-K   

SECURITIES AND EXCHANGE COMMISSION

 Washington, D. C. 20549

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT

 OF 1934

 For the fiscal year ended December 31, 1997

OR

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES        
EXCHANGE ACT OF 1934

For the transition period from          to          
                              --------    --------

Commission File Number 0-17736        Name of Registrant ESELCO, INC.           

MICHIGAN                                 38-2785176               
---------------------                     ---------------------                 
State of Incorporation                       (I.R.S. Employer                   
                          Identification Number)

725 East Portage Avenue 
Sault Ste. Marie, Michigan 49783  
----------------------------------------
(Address of principal executive offices)

Registrant's telephone number, including area code          (906) 632-2221      

Securities registered pursuant to Section 12(b) of the Act: None                

Securities registered pursuant to Section 12(g) of the Act: Common Stock -      
                                                      $.01 Par Value
                                                      --------------
                                                      Title of Class

 Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities           
Exchange Act of 1934 during the preceding 12 months (or for such shorter        
period that the registrant was required to file such reports), and (2) has      
been subject to such filing requirements for the past 90 days. Yes  X   No      
                                                                ---    ---

     Indicated by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained     
herein, and will not be contained, to the best of registrant's knowledge, in    
definitive proxy or information statements incorportated by reference in Part   
III of this Form 10-K or any amendment to this From 10-K [ X ]                  

      The aggregate market value of voting stock (being Common Stock, $.01
Par Value) held by non-affiliates, is computed at $65,917,823 based on          
1,593,180 shares held by non-affiliates and the average of the bid and ask      
prices for such stock of $40.75 and $42.00, respectively, on March 20, 1998.    

     Number of shares outstanding of each of the Registrant's classes of
Common Stock, as of the date of this report: 1,593,180 shares of Common         
Stock, $.01 Par Value.                                                          

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Documents incorporated by reference - none.                   

PART I

ITEM 1. BUSINESS                                                                

Cautionary Factors                                                              

When used in this document, "anticipate,"believe," "estimate,"
"expect," "objective," "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       
items described in Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL    
CONDITION AND RESULTS OF OPERATIONS - "CAUTIONARY FACTORS."                     

General                                                                         

      The Registrant ESELCO, Inc. is a non-operating holding company which
has three subsidiaries, Edison Sault Electric Company (Company); Northern       
Tree Service, Inc. (NTS); and ESEG, Inc. (ESEG).                                

  NTS was founded in May 1990 to provide tree trimming services to
both the Company and to outside parties. Edison Sault Electric Company is the   
principal operating subsidiary of ESELCO and accounts for the vast majority     
of ESELCO's total assets, revenue, and income. Therefore, the following         
discussion and analysis deals primarily with the operations of Edison Sault     
Electric Company.                                                               

      ESEG began operations in December of 1997 when it purchased a 138 KV
submarine circuit from Consumers Energy Company. ESEG leases this circuit to    
Edison Sault Electric Company under a FERC approved operating lease.            

      The Company is a public utility engaged in the generation, purchase,
transmission, distribution, and sale of electric energy in the Eastern Upper    
Peninsula of Michigan.                                                          

      The Company is a Michigan corporation organized in 1891. Its address
is 725 East Portage Avenue, Sault Ste. Marie, Michigan 49783.                   

    The Company supplies electricity in the Eastern Upper Peninsula of
Michigan. This area includes the cities of Sault Ste. Marie, Manistique, St.    
Ignace, and Mackinac Island. On December 31, 1988, the Company acquired         
approximately 1,900 customers from Wisconsin Electric Power Company. This       
acquisition increased its service territory to over 2,000 square miles with a   
population of approximately 55,000 people.                                      

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   Large industrial accounts located within the Company service area
are Manistique Papers, Inc., located in Manistique, which produces primarily    
newsprint; Lakehead Pipeline Company, which operates a crude oil pipeline       
through the Company's service area; Michigan Limestone Operation Limited        
Partnership's limestone quarry operation located in Cedarville, Michigan; and   
Specialty Minerals Inc.'s (formerly Inland Steel operation) limestone quarry    
operation at Gulliver, Michigan.                                                

  Wholesale electric energy is supplied to the Cloverland Electric
Cooperative, Inc., an R.E.A. cooperative, serving adjoining rural areas.        

      Government facilities in the Company service area are the U.S. Coast
Guard area headquarters located in Sault Ste. Marie and a base in St. Ignace;   
the U.S. Corps of Engineers, Soo Locks complex on the St. Marys River; and      
the U.S. Immigration and Custom Services located at the International Bridge    
Plaza in Sault Ste. Marie. The State of Michigan maintains correctional         
facilities at Kinross and Manistique and Lake Superior State University, a      
four year university in Sault Ste. Marie.                                       

    Recreation and tourism are important factors in the economy of the
Company's service area. Lake Superior borders on the north of the Eastern       
Upper Peninsula of Michigan, with the St. Marys River on the east and Lake      
Huron and Lake Michigan on the south. In addition, there are a number of        
inland lakes and rivers that provide extensive recreation areas along with      
national, state, and private parks and campgrounds serving the public. The      
recreation business is a year around activity, with winter sports from skiing   
to snowmobiling, spring fishing, summer water activities, and the fall colors   
and hunting. The famous resort center, Mackinac Island, located in the          
Straits of Mackinac, is served by submarine cable from the Company's St.        
Ignace Division.                                                                

Competition                                                                     

   The Company's electric business is substantially free from direct
competition from other electric utilities or commissions, but has competition   
from other forms of energy, such as natural gas, coal, wood, oil, and other     
energy sources.                                                                 

Employees                                                                       

 The Company had 88 full-time employees as of December 31, 1997.
Employees, other than officers, supervisors, and non-union clerical staff,      
are represented by the United States Steel Workers of America, Local 13547.     
The Company and Union signed a three-year contract in September, 1995.          
Management considers its relations with its employees to be satisfactory. The   
Company has reduced full-time employment from 115 in 1980 to the present 88.    
The Company has no full-time professional employees engaged in research and     
development activities.                                                         

Regulation                                                                      

   The Company is subject to the jurisdiction of the Michigan Public
Service Commission (MPSC) with respect to rates, standards of service,          
accounting, and other matters. The Company is also subject to the               
jurisdiction of the Federal Energy Regulatory Commission (FERC) under the       
Federal Power Act with respect to rates, service, interconnections,             
accounting, and other matters in connection with its purchases and sales of     
electricity for resale. The MPSC has jurisdiction over the issuance of          
long-term securities and the FERC has jurisdiction over short-term securities.  

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Rates                                                                           

Approximately 86% of the Company's revenues for 1997 were from
retail sales of electricity and 14% from sales of electricity for resale and    
other miscellaneous revenue.                                                    

   The last electric rate increase, effective November 17, 1982, was
authorized on November 16, 1982, by the MPSC in Case No. U-7235. This MPSC      
Order granted a return on rate base of 9.30% which included a return on         
common equity of 14%.                                                           

    Under Michigan law, the Company (until 1996) filed an annual power
supply cost recovery plan to recover anticipated fuel and purchased power       
costs for the following year. In addition to allowing the Company to recover    
its power costs, this law provides for a return of over-collection or a         
surcharge for under-collection of power costs at the close of the year, both    
with interest.                                                                  

    On September 21, 1995, the MPSC approved the Company's application
for authority to implement price cap regulation. The Company implemented the    
price cap order on January 1, 1996. For a description of the MPSC's approval    
and the ensuing litigation, see Item 3(a) below ("Legal Proceedings,") which    
description is incorporated herein by reference.                                

    The MPSC, in Case No. U-10662, prescribed depreciation rates to be
used by the Company to determine its annual accrual for depreciation. The       
order in this case was issued November 10, 1994, effective for a period of      
five years beginning January 1, 1995, and continuing through December 31,       
1999.                                                                           

 The Company has FERC approved wholesale contracts for resale of
electric energy with Cloverland Electric Cooperative, Inc.                      

     On October 31, 1997, Edison Sault Electric Company ("Edison Sault")
received authorization from the Federal Energy Regulatory Commission ("FERC")   
to issue: (i) not more than $10 million of unsecured short-term notes during    
the period of January 1, 1998 through December 1999, with a final maturity      
date of not later than December 31, 2000, and (ii) not more than $4 million     
of unsecured debt under a loan agreement, with a final maturity date not        
later than December 31, 1999. Proceeds of the short-term notes are and will be  
used for regular and recurring costs of additions to and extensions of Edison   
Sault's utility plant on an interim basis as well as general construction       
projects. The interest rates on the short-term notes vary based on the terms    
of the individual notes and the economic market at the time the notes are       
issued. Proceeds of the $4 million in unsecured debt will be used for           
contribution to an environmental remediation project in Manistique, Michigan.   
The rate of interest on the $4 million unsecured debt is a variable rate        
determined by the New York Consensus Prime.                                     

      On December 29, 1997, ESEG, Inc. received authorization from FERC to
issue a promissory note in the principal amount of up to $4 million with a      
maturity date of not later than five years from the date of issuance of the     
note. The proceeds of this financing will be used for the purchase of certain   
public facilities located along the Straits of Mackinac, including single       
phase submarine cables along with additional cables, terminus structures and    
associated equipment. It is anticipated that the $4 million will be borrowed    
at a fixed rate of either New York Consensus Prime or 9.25% and will be         
amortized over 20 years. It is also anticipated that a first lien will be       
granted to the lender covering two submarine cables and all assets, plus the    
assignment of the lease with Edison Sault.                                      

Seasonal                                                                        

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 The business of the Company is seasonal due to shorter daylight
hours and colder temperatures in the winter resulting in greater overall        
electric consumption during that time.                                          

Environmental                                                                   

      See Note I of the Notes to Financial Statements in Item 14, Part (a)
1, herein. Edison Sault filed an action on February 4, 1997, in the Circuit     
Court for the County of Schoolcraft, Michigan, against certain insurance        
carriers to recover unreimbursed defense costs and expenses associated with     
defending this matter of approximately $350,000 and indemnification for its     
costs of approximately $3.2 million in settling the matter with the U.S. EPA    
and obtaining a release of the property damage claims asserted by the U.S.      
EPA. The certainty and magnitude of any insurance recovery is unknown at this   
time. On April 28, 1997, Michigan Mutual Insurance Company filed a              
counterclaim for approximately $1.7 million for previously paid defense         
costs. Legal counsel for Edison Sault believes, based on the information        
currently available, that the counterclaims lacks merit.                        

Franchises - Service Area                                                       

    The Company has 24 township and village franchises in the counties
of Chippewa, Delta, Mackinac, and Schoolcraft, all in the State of Michigan.    
The Company has franchises with the following cities in the service area, as    
listed below, with their expiration date for electric service.                  

                                                                [Download Table]


                                                                  

Franchise                   Type of Service        Expiration Date
---------------             ---------------        ---------------
Manistique                  Electric               June 9, 2008   
Mackinac Island             Electric               January 1, 2019
St. Ignace                  Electric               April 20, 2001 


 The Company operates under a perpetual franchise in the City of
Sault Ste. Marie by virtue of Act. No. 264, Public Acts of Michigan, 1905.      

        The Company's distribution system and services are, for the most part,
located on or under public streets, alleys, avenues, highways, and other public 
places, or on private property not owned by the Company, with the permission or 
consent, except to an inconsequential extent, of the individual owners. The     
Company's distribution system located on or under public streets and other      
public places were all installed under valid franchises granted by appropriate  
local authorities.                                                              

Sources and Availability of Raw Materials                                       

Please see Item 2 below - "Properties."                       

ITEM 2. PROPERTIES                                                              

      Registrant's only material asset is the common stock of the Company.

     The Company's major source of power is its hydroelectric generating
plant located on the St. Marys River in Sault Ste. Marie, Michigan. In          
addition, the Company owns and operates a diesel peaking station in its         
service area.                                                                   

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  Hydro generation is also purchased by the Company under contract
from the U.S. Corps of Engineers hydroelectric plant located within the Soo     
Locks complex in Sault Ste. Marie. This contract, which was modified in 1996,   
has a tenure to November 1, 2040, and cannot be terminated by the government    
prior to November 1, 2030.                                                      

     The Company also owns a 138 KV submarine transmission cable circuit
which interconnects with Consumers Power Company in the Lower Peninsula of      
Michigan. The Company owns and maintains two 138 KV substations which connect   
a 46 mile 138 KV transmission line owned and maintained by Cloverland           
Electric Cooperative. This line and the remainder of the transmission           
facilities of both companies are operated under a Joint Transmission            
Agreement dated May 1, 1977.                                                    

    The Company's electric transmission system extends from Sault Ste.
Marie to Manistique, approximately 130 miles to the southwest, and to St.       
Ignace, approximately 50 miles to the south. Additional transmission lines      
extend to Cedarville, some 40 miles to the southeast. In total, the Company     
has 279 miles of transmission line in service as of December 31, 1997. Also,    
to serve its customers, the Company maintains 792 miles of primary              
distribution lines. Service is rendered to its customers through                
approximately 8,600 line transformers and 22,400 meters.                        

     During 1997, the Company generated 26% of its total electric energy
requirements in its own hydro plant and purchased the remaining 74% as shown    
below:                                                                          

                                                                [Download Table]


                                                                    

                                                 Megawatt Hours     
                                             Generated and Purchased
                                             -----------------------
Company Generation                                 219,910          
Purchases -                                                         

    U.S. Corps of Engineers-Hydro                  134,345          
    Consumers Power Company                        319,990          
    American Electric Power Company                167,934          
    Upper Peninsula Power Company                    3,312          
    Cloverland Electric Cooperative                      0          
                                                   -------          
          Total                                    845,491          
                                                   -------          
                                                   -------          

  Hydro Megawatt hours generated and purchased provided 42% of the
total energy requirements.                                                      

    All of the purchased power was delivered under firm contracts. The
Company's transmission system is directly interconnected with the systems of    
Consumers Power Company and Cloverland Electric Cooperative. The                
interconnection with Consumers Power Company has a capacity of 130,000 KW.      
The Company purchases power from Consumers Power Company and American           
Electric Power Company over this interconnection. Under contract with the       
U.S. Corps of Engineers, the Company purchases the entire hydroelectric         
generation from the St. Marys River plant, less Corps use, for approximately    
17,400 KW of power. Again under contract a certain amount of the capacity is    
delivered to other government installations in the area. The Company was        
assigned a contract between Wisconsin Electric Power Company and Upper          
Peninsula Power Company (UPPC) to purchase power from UPPC to serve a portion   
of the customers acquired from Wisconsin Electric Power Company on December     
31, 1988.                                                                       

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 The Company's total average generating capability is 34,600 KW,
consisting of the Edison Sault Hydro Plant with 29,800 KW and 4,800 KW from     
the diesel generating plant. The water for the Company's hydroelectric          
generating plant is leased under a contract with the U.S. Corps of Engineers    
with a tenure to December 31, 2050. However, the Secretary of the Army has      
the right to terminate the contract subsequent to December 2025 by providing    
at least a five-year termination notice. No such notice can be given prior to   
December 31, 2020. Starting January 1, 1986, the Company began paying for all   
water taken at predetermined rates with a minimum annual payment of $100,000    
per year. The total flow of water out of Lake Superior, which in effect is      
the volume of water in the St. Marys River, and is under the direction and      
control of the International Joint Commission. The International Joint          
Commission was created by the Boundary Water Treaty of 1909 between the         
United States of America and Great Britain, now represented by Canada. This     
Commission has placed limitations on the flow of water from Lake Superior       
during certain months of 1973, 1977, and from 1981 through 1995. During any     
limited flow months, it is necessary for the Company to purchase additional     
power from other electric utilities and increase the use of the Company         
diesel generation.                                                              

      The principal electric plants and properties are held subject to the
lien of the Company's Mortgage securing its First Mortgage Bonds.               

ITEM 3. LEGAL PROCEEDINGS                                                       

     On August 22, 1995, Edison Sault filed an application with the MPSC
for authority to implement price cap regulation. In the application the         
Company proposed that its base rates be capped at present levels, that its      
existing Power Supply Cost Recovery (PSCR) factor be rolled into base rates,    
and that its existing PSCR Clause be suspended. The Company published the       
required notice of opportunity to comment or request a hearing. We received     
no comments, and on September 21, 1995, the MPSC approved the Company's         
application subject to the modification that the Company gives thirty days      
notice rather than two weeks notice for rate decreases. The Company will file   
an application by October 1, 2000, to address its experience under the price    
cap mechanism. With the latter modification the price cap authorization         
represents an experimental regulatory mechanism. The order also allows Edison   
Sault to file an application seeking an increase in rates only under            
extraordinary circumstances.                                                    

     On October 23, 1995, the Attorney General for the State of Michigan
filed an intervention and petition for rehearing in the Company's Price Cap     
Order. The Attorney General's intervention was based on the grounds that the    
MPSC did not have authority to approve price cap regulation. On December 21,    
1995, the MPSC rejected the Attorney General's petition for rehearing. On       
January 19, 1996, the Attorney General filed an appeal with the Michigan        
Court of Appeals.                                                               

 On January 21, 1998, the Michigan Court of Appeals rejected the
Attorney General's appeal, affirming the MPSC Order. The Attorney General has   
asked the Michigan Supreme Court to review the lower court's ruling.            

During 1997, the Company reached a settlement agreement with  
Consumers Energy Company on several contractual issues related to its           
purchase of power and transmission service from Consumers. The agreement        
which has received approval from FERC staff and the FERC Administrative Law     
Judge is awaiting a FERC final order. Based on the terms of the settlement,     
Edison Sault recorded a receivable and a corresponding decrease to purchased    
power expense in the amount of approximately $1.2 million.                      

   The Company is also currently intervening in the Consumers Energy
Open Access Transmission Tariff proceeding before FERC. The ultimate outcome    
of this proceeding is unknown at                                                

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this time and, accordingly, the Company has not recorded anything in            
anticipation of a resolution to this matter.                                    

   Because of the Price Cap Order and other potential changes in the
industry, the Company continually reviews the applicability of accounting       
under SFAS 71. As previously stated, the Price Cap Order is a five-year         
experimental regulatory mechanism containing language allowing Edison Sault     
to seek rate relief for costs incurred under extraordinary circumstances.       
Based on a current evaluation of the factors affecting the applicability of     
SFAS 71, the Company has determined that it is currently appropriate to         
continue accounting according to SFAS 71.                                       

    In the event the Company was to stop accounting under SFAS 71, the
accounting impact would be an extraordinary after-tax non-cash charge to        
earnings in an amount represented largely by any unamortized net regulatory     
assets existing then. The Company's regulatory assets and liabilities are       
shown in Note B to the Financial Statements.                                    

(b)  See Part I, Item 1. - Business - Environmental.          

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                     

On October 7, 1997, ESELCO, Inc., held a special meeting of   
shareholders for the purpose of asking shareholders to approve an Amended and   
Restated Agreement and Plan of Reorganization dated as of May 13, 1997, as      
amended and restated as of July 11, 1997, including the related Plan of         
Merger (together, the "Reorganization Agreement"), which provides for the       
merger (the "Merger") of ESL Acquisition, Inc. (Acquisition), a wholly owned    
subsidiary of Wisconsin Energy Corporation ("Wisconsin Energy"), with and       
into ESELCO.                                                                    

   This plan was approved by the Shareholders by a vote of 1,220,687
shares FOR and 14,755 shares AGAINST such approval. There were 1,658            
abstentions and no broker non-votes with respect to such matter.                

     Of the 1,593,180 shares of common stock outstanding and entitled to
vote on the record date of August 27, 1997, 78% of the shares were              
represented at the meeting.                                                     

 PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK                                
AND RELATED SECURITY HOLDER MATTERS                             

    The stock of ESELCO, Inc. is traded on the NASDAQ stock market and
is available through most stock brokers. The stock is named as ESELCO (NASDAQ   
ticker symbol EDSE) and is listed in the "E" section of the OTC daily stock     
transactions.                                                                   

As of February 1, 1998, based on the number of ESELCO, Inc.,  
stockholder accounts, there were 1,360 registered stockholders.                 

 Dividends on ESELCO, Inc. common stock are generally payable to
shareholders of record on the first business day of February, May, August,      
and November unless the proposed merger of Wisconsin Energy Corporation and     
ESELCO, Inc., is consummated on or before any aforementioned                    

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dates.                                                                          

DIVIDENDS DECLARED PER SHARE  
(adjusted for stock dividends)

                                                                [Download Table]


Quarter      1st             2nd              3rd              4th 
-------      ---             ---              ---              --- 
                                                                   
 1997       $0.27           $0.28            $0.28            $0.28
 1996       $0.26           $0.26            $0.26            $0.26


    The range of high and low bid information as regularly quoted in the
automated quotation system of a registered securities association for the       
periods indicated.                                                              

COMMON STOCK  
HIGH and LOW TRADES 
(in dollars)

                                                                [Download Table]


Quarter                  1997                           1996     
                                                                 
  1st                $39.81-$25.24                  $24.74-$21.68
  2nd                $41.00-$35.00                  $27.91-$24.52
  3rd                $40.75-$38.50                  $25.97-$23.30
  4th                $40.75-$39.13                  $25.24-$23.30


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ITEM 6. SELECTED FINANCIAL DATA                                                 

    Set forth below is selected financial data from the ESELCO, Inc. and
its subsidiaries. The information set forth below should be read in             
conjunction with ESELCO, Inc.'s financial statements and notes thereto set      
forth in Items 8 and 14 hereof.                                                 

                                                        [Enlarge/Download Table]


                                                                        for the Year Ended December 31              
                                                                             (Thousands of Dollars)                 
                                                   1997                                                             
                                                PRO-FORMA                                                           
                                                    (1)        1997       1996         1995         1994       1993 
                                                                                                                    
OPERATING REVENUES                               $38,131     $37,511    $37,500      $36,845      $35,260    $33,573
                                               ---------   ---------  ---------    ---------    ---------  ---------
OPERATING EXPENSES:                                                                                                 
   Purchased power                                18,129      18,129     18,851       19,531       18,279     17,051
   Other operations and maintenance expenses       9,528      12,838      8,886        8,148        8,511      8,506
   Depreciation and amortization                   2,735       2,735      2,614        2,499        2,308      2,171
   Property and other taxes                        1,721       1,707      1,556        1,560        1,470      1,568
   Income taxes                                    1,365         367      1,247        1,117          983        766
                                               ---------   ---------  ---------    ---------    ---------  ---------
     Total Operating Expenses                     33,478      35,776     33,154       32,855       31,551     30,062
                                               ---------   ---------  ---------    ---------    ---------  ---------
     Net Operating Income                          4,653       1,735      4,346        3,990        3,709      3,511
OTHER DEDUCTIONS - NET                             1,640       1,640      1,548        1,625        1,509      1,513
                                               ---------   ---------  ---------    ---------    ---------  ---------
NET INCOME AVAILABLE FOR COMMON STOCK             $3,013         $95     $2,798       $2,365       $2,200     $1,998
                                               ---------   ---------  ---------    ---------    ---------  ---------
                                               ---------   ---------  ---------    ---------    ---------  ---------

COMMON STOCK: (2)                                                                                                   

   Average Shares Outstanding                  1,592,141   1,592,141  1,556,742    1,514,947    1,492,683  1,464,225
                                               ---------   ---------  ---------    ---------    ---------  ---------
                                               ---------   ---------  ---------    ---------    ---------  ---------
   Earnings Per Share                              $1.89       $0.06      $1.80        $1.56        $1.47      $1.36
                                               ---------   ---------  ---------    ---------    ---------  ---------
                                               ---------   ---------  ---------    ---------    ---------  ---------
   Year End Shares Outstanding                 1,593,180   1,593,180  1,586,427    1,526,939    1,503,163  1,480,665
                                               ---------   ---------  ---------    ---------    ---------  ---------
                                               ---------   ---------  ---------    ---------    ---------  ---------
   Book Value of Common Stock                     $13.92      $12.09     $12.76       $12.03       $11.36     $10.45
                                               ---------   ---------  ---------    ---------    ---------  ---------
                                               ---------   ---------  ---------    ---------    ---------  ---------
ANNUAL DIVIDENDS DECLARED PER SHARE (2)            $1.11       $1.11      $1.04        $0.97        $0.91      $0.88
                                               ---------   ---------  ---------    ---------    ---------  ---------
                                               ---------   ---------  ---------    ---------    ---------  ---------
SELECTED BALANCE SHEET DATA:                                                                                        
   Net Utility Plant                             $47,407     $47,407    $44,983      $43,481      $42,692    $40,828
                                               ---------   ---------  ---------    ---------    ---------  ---------
                                               ---------   ---------  ---------    ---------    ---------  ---------
   Total Assets                                  $61,530     $59,929    $57,156      $55,322      $51,070    $47,900
                                               ---------   ---------  ---------    ---------    ---------  ---------
                                               ---------   ---------  ---------    ---------    ---------  ---------
   Capitalization:                                                                                                  

     Common Equity                               $22,175     $19,257    $20,235      $18,364      $17,071    $15,470
     Long-Term Debt (Less Current Maturities)     17,378      17,378     16,898       13,936       12,566     13,607
                                               ---------   ---------  ---------    ---------    ---------  ---------
       Total                                     $39,553     $36,635    $37,133      $32,300      $29,637    $29,077
                                               ---------   ---------  ---------    ---------    ---------  ---------
                                               ---------   ---------  ---------    ---------    ---------  ---------
   Long-Term Deferred Tax Credits                 $4,140      $4,049     $5,328       $4,140       $4,021     $3,847
                                               ---------   ---------  ---------    ---------    ---------  ---------
                                               ---------   ---------  ---------    ---------    ---------  ---------
   Notes Payable                                  $3,652      $3,864     $1,119       $3,652       $4,495     $3,475
                                               ---------   ---------  ---------    ---------    ---------  ---------
                                               ---------   ---------  ---------    ---------    ---------  ---------
   Capitalization Percentages:                                                                                      
     Common Equity                                   56%         53%        54%          57%          58%        53%
     Long-Term Debt (Less Current Maturities)        44%         47%        46%          43%          42%        47%
                                               ---------   ---------  ---------    ---------    ---------  ---------
       Total                                        100%        100%       100%         100%         100%       100%
                                               ---------   ---------  ---------    ---------    ---------  ---------
                                               ---------   ---------  ---------    ---------    ---------  ---------
RETURN ON AVERAGE COMMON EQUITY                    14.2%        0.5%      14.5%        13.3%        13.5%      13.6%
                                               ---------   ---------  ---------    ---------    ---------  ---------
                                               ---------   ---------  ---------    ---------    ---------  ---------
RETURN ON YEAR-END COMMON EQUITY                   13.6%        0.5%      13.8%        12.9%        12.9%      12.9%
                                               ---------   ---------  ---------    ---------    ---------  ---------
                                               ---------   ---------  ---------    ---------    ---------  ---------

(1) Results prior to the early retirement and merger related costs and          
unbilled revenue adjustment.                                            

(2) Retroactively adjusted for stock dividends.                                 

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF                                 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS                   

When used in this document, "anticipate," "believe," "estimate,"
"expect," "objective," "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       
items described in Item 7.                                                      

Corporate Structure                                                             

    ESELCO, Inc. (ESELCO), is the parent holding company of Edison Sault
Electric Company (Edison Sault); ESEG, Inc. (ESEG); and Northern Tree           
Service, Inc. (NTS). Edison Sault (Company) is engaged in the generation,       
purchase, transmission, and sale of electric energy. NTS, its tree trimming     
subsidiary, began operation in May of 1990. ESEG began operations in December   
of 1997 when it purchased a 138 KV submarine circuit from Consumers Energy      
Company. ESEG leases this circuit to Edison Sault Electric Company under a      
FERC approved operating lease. Edison Sault is the principal operating          
subsidiary of ESELCO and accounts for the major share of ESELCO's total         
assets, revenues, and income. Therefore, the following discussion and           
analysis deal primarily with the operations of Edison Sault Electric Company.   

Merger                                                                          

On May 13, 1997, ESELCO and Wisconsin Energy Corporation (WEC)  
entered into an Agreement and Plan of Reorganization. The Agreement provides    
for a merger of ESELCO and WEC.                                                 

   The transaction is intended to be a tax-free exchange of shares and
will be accounted for as a pooling of interests. On October 7, 1997,            
stockholders of ESELCO voted to approve the transaction.                        

   The merger is subject to the approval of various federal regulatory
agencies, including the Federal Energy Regulatory Commission (FERC). ESELCO     
and WEC filed a merger application with FERC on October 22, 1997. ESELCO is     
unable to predict with certainty when FERC will rule on the transaction, but    
is hopeful that a ruling will be received in the first half of 1998.            

ESELCO's 1997 earnings reflect merger related costs of $981,000.

Sales, Expenses, and Income                                                     

  For the year 1997, total kilowatthour sales decreased 1% and total
operating revenues increased 1%. Included in these figures is an adjustment     
to both KWH sales and revenue which reflects a write-down of the Company's      
unbilled revenue to an amount which more appropriately estimates this asset     
in the Company's statement of financial position. The revenue adjustment        
results in a decease to revenue of $620,000. Excluding the effect of this       
adjustment, total operating revenues would have increased 2% and KWH sales      
would have increased by 1%.                                                     

  Residential revenues and KWH sales decreased 5% in 1997. Excluding
the effects of the unbilled revenue adjustment, revenues and KWH sales would    
have decreased 1% from 1996 due to warmer temperatures as measured by degree    
days, which were 7% lower in 1997.                                              

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  Commercial revenues and KWH sales were approximately equal to 1996
figures. Excluding the effects of the unbilled revenue adjustment, revenues     
would have increased 2% while sales would have increased 1% from 1996.          

   Industrial sales increased 4% in 1997. Sales to Specialty Minerals,
Michigan Limestone, and Manistique Papers increased 11%, 9%, and 6%             
respectively. Sales in 1997 to Lakehead Pipe Line, Inc., decreased 5%. Total    
1997 revenue from the industrial customers was 3% above 1996.                   

  During 1996, kwh sales and operating revenues increased 3% and 2%,
respectively, over 1995. Sales to the industrial customer class increased 1%,   
while sales to the commercial and residential customer classes increased 2%     
during this period. Total revenue increased because of the net increase in      
sales, partially offset by a rate reduction for one of the industrial           
customers during 1996.                                                          

Total hydro plant output decreased 1% in 1997 due to lower water
supplies. Purchases from other utilities increased 2% due to the lower hydro    
output and increased requirements.                                              

 Purchased power expense decreased 4% in 1997 due to new power and
transmission agreements with Consumers Energy Company.                          

     During 1996, power purchased from other utilities increased 2% due to
increased requirements. Purchased power expense decreased 3% in 1996 because    
of purchases from a lower cost supplier for part of the Company's               
requirements.                                                                   

  Other operations and maintenance expenses increased 44% over 1996,
primarily due to merger and early retirement costs. Early retirement costs      
reflect the cost of enhanced pension and other post-employment benefits for     
those employees meeting certain age and service requirements, which qualify     
them for an early retirement. Merger related costs, which are not deductible    
for tax purposes, include legal and consulting fees associated with ESELCO's    
plan of merger with WEC.                                                        

 Administrative and general expenses increased 42% in 1997. During
1997, the Company incurred legal expenses related to its new power contract     
with Consumers Energy Company and other FERC regulatory matters.                
Administrative and general expenses also reflect amortization of costs          
related to the settlement of the Manistique Harbor environmental matter         
discussed in the Environmental Matters section of this discussion. The 1997     
expenses also include an accrual for the Directors' Pension Liability.          

     Depreciation and amortization increased 5% in 1997 due to an increase
in depreciable assets. Income taxes decreased 54% in 1997 because of lower      
taxable income, reflecting the early retirement costs.                          

  During 1996, other operation and maintenance expenses increased 9%
from 1995 figures. Payroll and associated benefit costs increased 9% in 1996    
due to increases in employee benefit costs. Major maintenance and fuel and      
water expenses increased 20% and 16%, respectively. Depreciation and            
amortization expense increased 5% during 1996 due to an increase in             
depreciable assets. Income taxes increased 12% in 1996 because of higher        
taxable income.                                                                 

    Based on the previously described changes, earnings per common share
restated for stock dividends were $.06 in 1997, as compared to $1.80 in 1996    
and $1.56 in 1995. Excluding the effects of merger related expenses, early      
retirement costs, and the adjustment to unbilled revenue, earnings per common   
share restated for stock dividends would have been $1.89, or an increase of     
5% for 1997, as compared with a 15% increase for 1996.                          

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Rates and Regulatory Matters                                                    

   On August 22, 1995, Edison Sault filed an application with the MPSC
for authority to implement price cap regulation. In the application the         
Company proposed that its base rates be capped at present levels, that its      
existing Power Supply Cost Recovery (PSCR) factor be rolled into base rates,    
and that its existing PSCR Clause be suspended. The Company published the       
required notice of opportunity to comment or request a hearing. We received     
no comments, and on September 21, 1995, the MPSC approved the Company's         
application subject to the modification that the Company gives thirty days      
notice rather than two weeks notice for rate decreases. The Company will file   
an application by October 1, 2000, to address its experience under the price    
cap mechanism. With the latter modification the price cap authorization         
represents an experimental regulatory mechanism. The order also allows Edison   
Sault to file an application seeking an increase in rates only under            
extraordinary circumstances.                                                    

   On October 23, 1995, the Attorney General for the State of Michigan
filed an intervention and petition for rehearing in the Company's Price Cap     
Order. The Attorney General's intervention was based on the grounds that the    
MPSC did not have authority to approve price cap regulation. On December 21,    
1995, the MPSC rejected the Attorney General's petition for rehearing. On       
January 19, 1996, the Attorney General filed an appeal with the Michigan        
Court of Appeals.                                                               

On January 21, 1998, the Michigan Court of Appeals rejected the 
Attorney General's appeal, affirming the MPSC Order. The Attorney General has   
asked the Michigan Supreme Court to review the lower court's ruling.            

During 1997, the Company reached a settlement agreement with    
Consumers Energy Company on several contractual issues related to its           
purchase of power and transmission service from Consumers. The agreement        
which has received approval from FERC staff and the FERC Administrative Law     
Judge is awaiting a FERC final order. Based on the terms of the settlement,     
Edison Sault recorded a receivable and a corresponding decrease to purchased    
power expense in the amount of approximately $1.2 million.                      

 The Company is also currently intervening in the Consumers Energy
Open Access Transmission Tariff proceeding before FERC. The ultimate outcome    
of this proceeding is unknown at this time and, accordingly, the Company has    
not recorded anything in anticipation of a resolution to this matter.           

 Because of the Price Cap Order and other potential changes in the
industry, the Company continually reviews the applicability of accounting       
under SFAS 71. As previously stated, the Price Cap Order is a five-year         
experimental regulatory mechanism containing language allowing Edison Sault     
to seek rate relief for costs incurred under extraordinary circumstances.       
Based on a current                                                              

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evaluation of the factors affecting the applicability of SFAS 71, the Company   
has determined that it is currently appropriate to continue accounting          
according to SFAS 71.                                                           

  In the event the Company was to stop accounting under SFAS 71, the
accounting impact would be an extraordinary after-tax non-cash charge to        
earnings in an amount represented largely by any unamortized net regulatory     
assets existing then. The Company's regulatory assets and liabilities are       
shown in Note B to the Financial Statements.                                    

Liquidity and Capital Commitments                                               

Investing Activities:                                                           

   ESELCO invested $8,070,000 in net property, plant, and equipment in
1997. Included in this amount is approximately $3,662,000 related to the        
acquisition of a 138 KV submarine circuit at the Straits of Mackinac from       
Consumers Energy Company and approximately $1,402,000 for the construction of   
the new transmission line discussed below. Besides investments in net           
property, plant, and equipment, $3,510,000 was spent in 1996 to resolve the     
environmental issue discussed under Environmental Matters.                      

     For the three-year period ending December 31, 1997, ESELCO made a net
investment of $15,777,000 in property, plant, and equipment.                    

Capital Requirements:                                                           

  In October 1994, Edison Sault entered a construction and joint use
agreement with Wisconsin Electric Power Company, Upper Peninsula Power          
Company, and Cloverland Electric Cooperative. This agreement specifies each     
party's responsibility in the construction of a new transmission line from      
Arnold, Michigan, to Manistique, Michigan. Edison Sault commenced               
construction of this new line during 1997. This project has an expected         
completion date of mid-1999. Edison Sault expects that its share of the cost    
of this project will be approximately $10.5 million with approximately $1.9     
million of this being spent through December 31, 1997. The Company expects to   
invest $4 million in this project during 1998 and $4.6 million in 1999.         

     ESELCO's capital requirements for maturing long-term debt and sinking
funds total $16.8 million for the five-year period 1998 - 2002. See Note C-     
Long-term Debt in the Notes to the Financial Statements.                        

Cash Provided by Operating and Financing Activities:                            

For the year ended December 31, 1997, cash provided by operating
activities totaled $4,904,000. After payment of dividends, internal sources     
of funds provided 56% of the capital requirements for the three-year period     
ending December 31, 1997. In 1997, ESELCO paid dividends of $1,772,000 which    
exceeded its net income by a substantial margin. However, adjusting net         
income for non-recurring merger, early retirements costs, and the unbilled      
revenue adjustment, the dividend payout ratio would have been 59%. The          
dividend payout ratio in 1996 and 1995 was 58% and 62%, respectively.           

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 During 1996, Edison Sault borrowed $3.2 million under a bank term
loan agreement. The proceeds of this loan were used for payment to the U.S.     
Environmental Protection Agency in settlement of the issue discussed under      
environmental matters. In December of 1997, ESEG borrowed $3.7 million under    
a bank secured term loan agreement for the acquisition of a 138 KV submarine    
circuit from Consumers Energy Company. To date, the Company has used its        
short-term line of credit to meet capital requirements related to the new       
transmission line construction project. The Company is in the process of        
securing construction financing for this project.                               

Edison Sault has FERC authority to issue up to $10 million in   
short-term obligations. Included in this authority is a bank line of credit     
at the prime rate. In addition, Edison Sault has authority to issue             
short-term thrift notes to Michigan residents. The Company's short-term         
financing requirements relate primarily to financing customer accounts          
receivable, unbilled revenues resulting from cycle billing, and capital         
expenditures until permanently financed. At December 31, 1997, the Company      
had approximately $4.7 million of unused bank line of credit and additional     
energy thrift note authority. These two sources of short-term financing have    
been sufficient to meet the Company's short-term capital requirements.          

   ESELCO's shareholders reinvested approximately $207,000 through the
Dividend Reinvestment Plan (DRP) in 1997. ESELCO suspended its DRP with the     
announcement of its planned merger with WEC, thus the funds received            
represent dividends reinvested for just the first quarterly dividend payment    
in 1997. During 1996 and 1995, ESELCO shareholders reinvested $711,000 and      
$536,000, respectively.                                                         

Edison Sault also has authority to issue up to $10 million in   
Long-term Energy Thrift Notes to Michigan residents. At December 31, 1997,      
there were $6,424,000 of Long-term Energy Thrift Notes outstanding, of which    
$4,744,000 are classified as long-term debt on the statement of financial       
position.                                                                       

At December 31, 1997, the Company's long-term debt from First   
Mortgage Bonds totaled $6,170,000. The First Mortgage Bonds are secured by      
the utility plant of Edison Sault. At December 31, 1997, there was              
approximately $11.7 million of unutilized bond financing capability resulting   
from plant additions and bond retirements.                                      

At December 31, 1997, there was approximately $15.3 million of  
long-term credit available under the Company's First Mortgage Bond Indentures   
and long-term Energy Thrift Note authorization.                                 

Capital Structure:                                                              

    ESELCO has historically maintained a relatively high ratio of common
equity to total capitalization because of its earnings growth, dividend         
reinvestment plan, and low payout ratio. With the non-recurring merger, early   
retirement charges, and unbilled revenue adjustment during 1997, and the        
increase in short-term borrowings, common equity represented 43% of total       
capitalization as compared to 49% in both 1996 and 1995.                        

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The capital structure of ESELCO is illustrated below:           

                                                        [Enlarge/Download Table]

Capitalization at December 31st:                    1997             1996            1995       
                                               ---------------- --------------- ----------------
                                                                                                

Common Equity                                        43%             49%              49%       
Long-term Debt (Including current maturities)        48%             48%              41%       
Short-term Debt                                      9%               3%              10%       
                                               ---------------- --------------- ----------------

         Total                                      100%             100%            100%       

 With ESELCO's unutilized short and long-term financing sources,
ESELCO believes it is well positioned to finance its future capital             
requirements.                                                                   

Environmental Matters                                                           

Edison Sault, in 1993, received notification from the U.S.    
Environmental Protection Agency (U.S. EPA) that they were naming it a           
"Potentially Responsible Party" at the Manistique River/Harbor Area of          
Concern (AOC) in Manistique, Michigan. There were many other potentially        
responsible parties, some of whom the U.S. EPA has notified.                    

  The U.S. EPA, with the Michigan Department of Natural Resources,
identified the Manistique River and Harbor as an "Area of Concern" (AOC) due    
to PCBs that have been found in that area. We submitted an Environmental        
Engineering/Cost Analysis (EECA) to the U.S. EPA that provided an analysis of   
various methods of remediation for the harbor. The EECA presented six           
alternatives of remediation action and ultimately recommended a remediation     
method of in-place capping. Management believed this to be the most prudent     
course of action. Although the total ultimate cost of specific remedial         
action and Edison Sault's potential liability were not known then, management   
had estimated Edison Sault's minimum cost of this remedy to be $2.9 million.    
That figure represented an increase of $1.9 million from the amount recorded    
during 1994. We incurred certain other expenditures for investigation of any    
necessary remedial action that are reflected in the accompanying financial      
statements. Future costs related to this issue are not expected to have a       
material impact on Edison Sault's financial position or future results of       
operations.                                                                     

During 1995 and 1996, the U.S. EPA agreed to allow the PRPs to
remediate the harbor through in-place capping at a total cost of $6.4           
million, with the Edison Sault portion costing $3.2 million. Through further    
negotiations, the U.S. EPA and the PRPs agreed to a cash-out settlement under   
which the PRPs would pay to the U.S. EPA the $6.4 million cost of capping for   
the right to be absolved from any future legal actions concerning PCB           
pollution. To effect this settlement, all parties in December 1996 executed     
an Administrative Order on Consent with payments made to the U.S. EPA before    
year-end 1996.                                                                  

    To date, Edison Sault has incurred a total cost of $3.6 million in
this project. Edison Sault has retained legal assistance to start a process     
of recovering these costs through several insurance entities. The certainty     
and magnitude of insurance recovery are unknown at this time.                   

     Edison Sault believes that the costs discussed above, including the
payment to the U.S. EPA                                                         

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to be relieved of future liability, is a legitimate cost of doing business      
and would be recoverable through utility rates. Further, in November 1993,      
the MPSC issued an order authorizing Edison Sault to defer and amortize, over   
a period not to exceed ten years, environmental assessment and remediation      
costs associated with the Manistique River AOC. Therefore, Edison Sault has     
recorded a regulatory asset for $3.2 million, and unreimbursed cost of          
$300,000, for a total of $3.5 million, which the Company began amortizing in    
1997.                                                                           

In late 1997, Edison Sault was notified by the U.S. EPA that  
investigations were being conducted on a separate site (Trinity Chemicals) in   
Kansas City, Missouri, to which Edison Sault may have shipped PCB related       
materials during the 1980s under legal, appropriate, and accepted industry      
standards. While Edison Sault is in the process of answering various U.S. EPA   
interrogatories, preliminary data show that the Company appears to have been    
a very minor contributor to this site.                                          

Year 2000                                                                       

     The Company has evaluated the impact that the year 2000 issue would
have on its existing reporting systems and has determined that the most cost    
effective solution will be realized with the acquisition of new systems,        
which are year 2000 compliant, and consolidation of some systems with those     
of Wisconsin Energy Corporation.                                                

     The Company does not believe the cost of implementing this solution
will have a material adverse financial impact on its financial position or      
future results of operations.                                                   

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                            

     The financial statements are included in Part IV of this report and
are incorporated herein by reference.                                           

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                     

(a)      Identification of directors.                                           

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      The following directors of ESELCO have been elected for three years,
terms expiring on the years indicated below.                                    

                                                        [Enlarge/Download Table]


--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------

           Name, Position with the Company                       Director     Amount and Nature of      Percent     
           and Business Experience During                        Since (1)    Beneficial Ownership         of       
               the Past Five Years (1)                  Age                   February 1, 1998 (2)        Class     
--------------------------------------------------------------------------------------------------------------------
(term expiring in 2000)                                                                                             
--------------------------------------------------------------------------------------------------------------------
                                                                                                                    
WILLIAM R. GREGORY, Director                             58        1972                43,047 Shares      2.7%      
President of the ESELCO, Inc., and                                                                                  
   Edison Sault                                                                                                     
Director - First of America, Michigan NA                                                                            
Sault Ste. Marie,  Michigan                                                                                         
--------------------------------------------------------------------------------------------------------------------
JAMES S. CLINTON, Director                               57        1975                 9,210 Shares     (3)(4)     
Chairman, President, & CEO Leggoons, Inc.                                                                           
   (Consumer Products Manufacturer)                                                                                 
Omaha, Nebraska                                                                                                     
--------------------------------------------------------------------------------------------------------------------
(Term Expiring in 1998)                                                                                             
--------------------------------------------------------------------------------------------------------------------
THOMAS S. NURNBERGER, Chairman                           79        1977                34,909 Share s     2.2%      
Chairman of the Board of ESELCO, Inc., and                                                                          
   Edison Sault Electric Company                                                                                    
Montague, Michigan                                                                                                  
--------------------------------------------------------------------------------------------------------------------
ALLAN L. GRAUER, Vice Chairman                           67        1986                 4,812 shares       (3)      
Vice Chairman of  ESELCO, Inc., and Edison                                                                          
   Sault Electric Company                                                                                           
Counsel to the firm of Kutak Rock                                                                                   
Omaha, Nebraska                                                                                                     
--------------------------------------------------------------------------------------------------------------------
(Term expiring in 1999)                                                                                             
--------------------------------------------------------------------------------------------------------------------
DAVID K. EASLICK, Director                               77        1986                 2,740 shares       (3)      
Director of Michigan Bell Telephone Company                                                                         
North Naples, Florida                                                                                               
--------------------------------------------------------------------------------------------------------------------
All Directors and Officers as a Group ( 13 persons)                                   179,728 Shares  11.3%(5) (6)  
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------

(1) Includes time as Director and Officer of subsidiary and predecessor         
- Edison Sault.                                                         
(2) Inclusive of the individual's beneficial interest in common                 
shares held by the Employee Incentive                                   
Investment and Stock Ownership Plan because the individuals have the    
right to vote such shares. Mr. Hubbard, Vice President - Finance of     
the Company, has the power to vote and the power to sell all 28,150     
held in the Bargaining Unit Savings Plan as Trustee. The shares held    
in the Bargaining Unit Savings Plan are not included in this table.     
(3) Less than 1%.                                                               
(4) Includes 6,051 shares in C.E. Clinton Family Trust stock account for which  
Mr. Clinton is the trustee.                                             
(5) Includes the Vice President - Engineering, Vice President -                 
Operations, Assistant Vice President Operations, and Assistant Vice     
President - Information Systems, who are officers of Edison Sault,      
but are not officers of the Company, who collectively own 24,557        
shares of Company stock, which includes shares vested to their          
accounts in the Employee Incentive Investment and Stock Ownership       
Plan.                                                                   
(6) Includes shares administered and awarded through the Restricted             
Stock Bonus Plan approved by shareholders at the 1996 ESELCO, Inc.,     
Annual Meeting.                                                         

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(b)      Identification of executive officers.                

    The following officers of the Company were elected for one year or
until their successors have been elected and have qualified at the annual       
Organizational Meeting of the Board of Directors last held in May 1997. All     
executive officers except Messrs. Beedy, Maas, Jirikovic, and Schemanski hold   
identical positions with Registrant.                                            

                                                                [Download Table]


       Name           Age  Since  Position  with  Company               
--------------------  ---  -----  -----------------------               
                                                                        
Thomas S. Nurnberger   79  1980   Director - Chairman of the Board      

William R. Gregory     58  1972   Director - President                  

James L. Beedy         59  1986   Vice President - Engineering          

David R. Hubbard       58  1977   Vice President - Finance              

Donald Sawruk          50  1994   Executive Vice President              
                           1989   Vice President                        
                           1987   Secretary                             

Steven L. Boeckman     43  1993   Vice President                        
                           1991   Treasurer                             

Donald C. Wilson       42  1995   Secretary                             

Ernest H.  Maas        41  1997   Vice President - Operations           
                           1996   Assistant Vice President - Engineering

David H.  Jirikovic    45  1996   Assistant Vice President  - Operations

Paul A.  Schemanski    34   1996  Assistant Vice President - Information
                                  Systems                               


(c)      Identification of certain significant employees.     

None.                                       

(d)      Family relationships.                                

           There is no family relationship between any director or
                 executive officer and any other director or executive officer
of the Company.                             

(e)      Business experience.                                 

See Item 10 (a) and (b).                    

(f)      Involvement in certain legal proceedings.            

          There have been no events under any bankruptcy act, no
                  criminal proceedings, and no judgments or injunctions material
                  to the evaluation of the ability and integrity of any director
    or executive officer during the past five years.

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ITEM 11. EXECUTIVE COMPENSATION AND TRANSACTIONS                                

    The Company has three subsidiaries - Edison Sault Electric Company
("Edison Sault"); Northern Tree Service, Inc.; and ESEG, Inc. ESELCO, Inc. is a 
holding company and does not engage in any business on its own. Officers'       
salaries and Directors' fees are paid by Edison Sault only. Therefore, the      
following information is provided with respect to Edison Sault.                 

        The base compensation for 1997 for each person whose cash compensation
exceeded $100,000 and for all executive officers as a group was as follows:     

                                                        [Enlarge/Download Table]


                                         SUMMARY COMPENSATION TABLE                                                   

                                    Annual Compensation                        Awards                 Payout          

                                                                                      Securities          All         
                                                       Other Annual    Restricted     underlying   LTIP   Other       
    Name and Principal         Salary        Bonus     Compensation      Stock         Options/   Payout  Compensation
         Position       Year     ($)          ($)         ($)(1)     Award(s)($)(2)    SARs (#)    ($)       ($)      
            (a)          (b)     (c)          (d)           (e)           (f)            (g)       (h)       (i)      
                                                                                                                      
William R. Gregory      1997  $176,244          -0-    $ 26,891(i)        $ 9,000           -0-    -0-        -0-     
President & CEO                                                                                                       

William R. Gregory      1996  $167,077          -0-       $ 19,790       $222,960           -0-    -0-        -0-     
President & CEO                                                                                                       

William R. Gregory      1995  $159,903          -0-       $ 18,103            -0-           -0-    -0-        -0-     
President & CEO                                                                                                       

Donald Sawruk           1997  $123,532      $10,000   $ 15,474(ii)         $9,000           -0-    -0-        -0-     
Exec. V.P. & COO                                                                                                      

Donald Sawruk           1996  $116,538          -0-        $10,637       $222,960           -0-    -0-        -0-     
Exec. V.P. & COO                                                                                                      

Donald Sawruk           1995  $106,538          -0-        $10,923            -0-           -0-    -0-        -0-     
Exec. V.P. & COO                                                                                                      

David R. Hubbard        1997  $101,927          -0-    $14,553(ii)         $3,600           -0-    -0-        -0-     
V.P. - Finance                                                                                                        

David R. Hubbard        1996   $98,615          -0-        $12,075        $83,610           -0-    -0-        -0-     
V.P. - Finance                                                                                                        

David R. Hubbard        1995   $94,615          -0-        $11,022            -0-           -0-    -0-        -0-     
V.P. - Finance                                                                                                        


(1) Other includes life insurance, transportation allotment, and contributions  
to savings plans.                                                               

(1) (ii) Of William R. Gregory's other compensation totaling $26,891 for 1997, a
vehicle allotment in an amount of $9,197 and an amount of $16,269 in            
contributions to his savings plans are included in the total other annual       
compensation.                                                                   

(1)(ii) Of Donald Sawruk and David R. Hubbard's other compensation of $15,474   
and $14,553, respectively, amounts of $11,373 and $9,558 in contributions to    
their savings plans are included in the total other annual compensation.        

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(2) The dollar value of shares listed in the table was based upon the number of 
shares multiplied by the market value of the shares on the date of award. The   
dollar value of the shares awarded to Messrs. Gregory and Sawruk, as of December
31, 1997, was $328,611, and for Mr. Hubbard the dollar value was $123,229.      

  Employees of Edison Sault not covered by a collective bargaining
contract may become participants in the Pension Plan. To become a participant,  
such an employee has also to complete one year of continuous service of at least
1,000 hours of service as a permanent full-time employee of Edison Sault. Under 
the plan's current benefit formula, which applies to services beginning December
31, 1991, the annual normal retirement allowance payable to a member on his     
normal retirement date will be equal to 1.2% of the member's final average      
compensation, multiplied by his years of credit service up to 35 years          
(including pre-1991 service) and .75% of the member's final average compensation
multiplied by his years of service over 35 years. Benefits attributable to      
service prior to December 31, 1991, were calculated under the prior formula and 
required transition rules for the 1989-1990 plan years will reflect changes in  
the final average compensation prior to retirement. The final average           
compensation means the average of the highest five full years of compensation   
paid to the member. For a member who retires with less than five years of       
compensation, such final average compensation shall be the average of the       
compensation for those lesser number of years. The compensation covered by the  
Plan is the regular remuneration paid to an employee for services rendered to   
Edison Sault during a Plan year, excluding any bonuses, pay for overtime, and   
special pay. The normal retirement allowance is payable monthly to the member   
during his life. After the member's death, an allowance of one-half the         
unreduced normal retirement allowance is payable to the member's spouse under   
most circumstances.                                                             

    Edison Sault also maintains an unfunded non-qualified Supplemental
Executive Retirement Plan which covers all executive officers. The              
Supplemental Plan provides three layers of benefits. The first layer pays the   
difference, if any, between the maximum allowable benefit and the Pension       
Plan benefit. The second layer preserves the benefit levels produced by the     
Pension Plan formula in effect prior to December 31, 1991. The third layer      
provides up to five years of prior service credit for related employment        
prior to joining Edison Sault. Messrs. Nurnberger, Gregory, Hubbard, Beedy,     
Sawruk, Boeckman, Wilson, Maas, Jirikovic, and Schemanski are covered by the    
Supplemental Plan. The following table contains maximum annual total            
projected pension benefits for Supplemental Plan participants retiring at age   
62.                                                                             

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                                                        [Enlarge/Download Table]


-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
                                    Pension Benefits Payable at Age 62                                     
-----------------------------------------------------------------------------------------------------------
    Final Average                                                                                          
     Compensation                                   Years of Credited Service                              
-----------------------------------------------------------------------------------------------------------
                                20                   25                   30                   35          
-----------------------------------------------------------------------------------------------------------
                                                                                                           
              $ 60,000          $ 19,200             $ 22,800             $ 26,400             $ 30,000    
-----------------------------------------------------------------------------------------------------------
                75,000            24,000               28,500               33,000               37,500    
-----------------------------------------------------------------------------------------------------------
                90,000            28,800               34,200               39,600               45,000    
-----------------------------------------------------------------------------------------------------------
               120,000            38,400               45,600               52,800               60,000    
-----------------------------------------------------------------------------------------------------------
               150,000            50,100               59,600               69,200               78,700    
-----------------------------------------------------------------------------------------------------------
               200,000            70,000               83,500               97,000              110,500    
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------


       Edison Sault has an Employee Incentive Investment and Stock Ownership
Plan which is a qualified plan for federal tax purposes. The purposes of the    
Plan are to stimulate interest in the improvement and progress of Edison Sault  
by encouraging ownership of the Company Common Stock and to permit tax deferred 
employee contributions under Section 401(k) of the Internal Revenue Code.       

         Subject to statutory limits, Plan participants may contribute on either
a pre-tax or a post-tax basis through payroll deduction from 2% to 12% of their 
earnings to be invested at the employee's election among a number of investment 
funds offered by the Plan. For any amount the employee contributes up to 8% of  
earnings, Edison Sault may contribute up to an additional 2.0%, depending on    
profitability. Of the Edison Sault 1997 contributions, $12,037 and $61,398 were 
unconditionally vested in 1997 for Mr. Gregory, and for the executive officers  
as a group, respectively. Directors who are not officers of Edison Sault are    
compensated at the rate of $1,423 per month. During 1997, there were six (6)    
Special Meetings for which the non-employee Directors of the Company were paid a
fee of $1,000. Directors who are officers of Edison Sault receive no fees for   
service on the Board of Directors.                                              

       Directors who are not employees of ESELCO, Inc., or its subsidiaries,
are eligible to participate in the Directors' Retirement Plan. Each eligible    
Director will receive one-twelfth (1/12) of a year of Credited Service for each 
month during which he serves as a Director for at least fifteen (15) days. The  
Directors' Retirement Plan provides each eligible participant with monthly      
retirement payments equal in an amount to the monthly Directors' fee in effect  
on the date that the Director retires, which such monthly retirement payment    
shall continue for a number of months equal to the lesser of: (i) 120 months or 
(ii) the retired Director's months of Credited Service. In lieu of receiving    
these monthly retirement payments, any such Director may elect to receive an    
alternative form of payment of equivalent actuarial value to the total of       
monthly retirement payments that such Director would otherwise receive under the
formula described in the preceding sentence. The Board reserves the right to    
amend or terminate the plan at any time and for any reason.                     

        Effective December 23, 1988, and amended November 12, 1991; August 17,
1995; and August 15, 1996, Edison Sault entered executive severance agreements  
with each of its nine                                                           

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executive officers. Under these agreements, Edison Sault has agreed to make     
certain severance payments to any executive officer in case of change in        
ownership or control of Edison Sault and the executive officer's subsequent     
termination of employment relating to, or resulting from, such change.          

ITEM 12. SECURITY OWNERSHIP OF CERTAIN                                          
BENEFICIAL OWNERS AND MANAGEMENT                              

See item 10(a).                                               

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                         
None.                                                         

 PART IV

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ITEM 14. EXHIBITS, FINANCIAL STATEMENT                                          
SCHEDULES AND REPORTS ON FORM 10-K                            

(a)   1.  Financial Statements                                            

                  ESELCO, INC.
                CONSOLIDATED STATEMENT OF FINANCIAL POSITION

                                                                [Download Table]


                                                         December 31  December 31
                                                            1 9 9 7     1 9 9 6  
                                                         -----------  -----------
                                                                                 

ASSETS:                                                                          

        ELECTRIC PLANT, at original cost                 $80,034,217  $71,802,321
           Less - Accumulated depreciation                32,627,532   29,671,038
                                                         -----------  -----------
                                                         $47,406,685  $42,131,283
           Asset acquired under capital lease                      0    2,851,622
                                                         -----------  -----------
                                                         $47,406,685  $44,982,905
        CURRENT ASSETS:                                                          

           Cash                                             $282,441     $293,883
           Accounts receivable, less reserve of $32,000    3,854,789    2,999,783
           Unbilled revenue                                1,145,572    1,693,826
           Materials and supplies, at average cost         1,156,667    1,148,046
           Prepayments                                     2,303,447    1,966,932
                                                         -----------  -----------
                                                          $8,742,916   $8,102,470
        OTHER ASSETS:                                                            

           Debt expense, being amortized                     $21,152      $28,972
           Regulatory asset                                3,164,400    3,510,181
           Other                                             594,255      531,193
                                                         -----------  -----------
                                                          $3,779,807   $4,070,346
                                                         -----------  -----------
                                                         $59,929,408  $57,155,721
                                                         -----------  -----------
                                                         -----------  -----------
STOCKHOLDERS' INVESTMENT AND LIABILITIES:                                        
        CAPITALIZATION (See Statement):                                          

           Common equity                                 $19,257,039  $20,234,722
           Preferred stock                                         0            0
           Long-term debt (less current portion)          17,378,321   16,898,187
                                                         -----------  -----------
                                                         $36,635,360  $37,132,909
                                                         -----------  -----------
        OTHER NONCURRENT LIABILITIES:                                            

           Obligation under capital lease                         $0   $2,775,905
                                                         -----------  -----------
        CURRENT LIABILITIES:                                                     
           Notes payable                                  $3,863,500   $1,119,000
           Current portion of long-term debt               4,033,177    2,877,323
           Current portion of lease obligation                     0       75,717
           Accounts payable                                2,199,204    2,143,082
           Dividends declared                                446,090      415,960
           Accrued taxes                                   2,361,277    1,754,101
           Current deferred income taxes                     205,020       66,755
           Accrued interest                                  159,260      166,215
           Other                                             245,657      270,116
                                                         -----------  -----------
                                                         $13,513,185   $8,888,269
                                                         -----------  -----------
        DEFERRED CREDITS:                                                        

           Deferred income taxes                          $3,242,976   $4,454,626
           Net regulatory liability                        1,085,514    1,193,526
           Unamortized investment tax credit                 806,421      873,181
           Other                                           4,645,952    1,837,305
                                                         -----------  -----------
                                                          $9,780,863   $8,358,638
                                                         -----------  -----------
                                                         $59,929,408  $57,155,721
                                                         -----------  -----------
                                                         -----------  -----------

See notes to financial statements.                              

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                                   E S E L C O, INC.
                                    CONSOLIDATED STATEMENT OF CAPITALIZATION

                                                        [Enlarge/Download Table]


                                                                           December 31             December 31      
                                                                             1 9 9 7                 1 9 9 6        
                                                                         -------------------  ----------------------
                                                                                                                    
                                                                         AMOUNT            %  AMOUNT              % 

COMMON EQUITY:                                                                                                      
     COMMON STOCK, par value $.01 per share                                                                         

                                              1997        1996                                                      
                                           ---------    ---------                                                   
           Authorized shares               9,840,000    3,000,000                                                   
                                           ---------    ---------                                                   
                                           ---------    ---------                                                   
           Outstanding shares              1,593,180    1,540,592            $15,932               $15,406          
                                           ---------    ---------                                                   
                                           ---------    ---------                                                   
     Capital surplus                                                      19,256,710            17,331,579          

     Retained earnings                                                       787,037             4,204,585          

     Unearned compensation - ESOP and                                                                               

        Restricted Stock Bonus Plan                                         (802,640)           (1,316,848)         
                                                                         ------------         -------------         

                                                                         $19,257,039     53%   $20,234,722       54%
                                                                         ------------         -------------         

PREFERRED STOCK, value $.01 per share,                                                                              
  authorized 160,000 shares                                                       $0      0%            $0        0%
                                                                         ------------         -------------         

LONG-TERM DEBT of Subsidiaries (less current portion) First Mortgage Bonds:                                         

        Series D,  7.00%, due 1998                                                $0              $855,000          
        Series F, 10.31%, due 2001                                           900,000             1,200,000          
        Series G, 10.25%, due 2009                                         4,070,000             4,440,000          
        Series H,  7.90%, due 2002                                         1,200,000             1,500,000          

     Energy Thrift Notes, 6.55%-8%, due 1997-2007                          4,744,000             5,355,000          

     Equipment Loan, floating rate, due 1998                                       0               147,786          

     ESOP Loans of the Corporation,                                                                                 

        floating rate, due 2000 - 2001                                       126,502               421,110          

     Term Loans, floating rate, due 1999-2002                              6,337,819             2,979,291          
                                                                         ------------         -------------         

                                                                         $17,378,321     47%   $16,898,187       46%
                                                                         ------------         -------------         

           TOTAL CAPITALIZATION                                          $36,635,360    100%   $37,132,909      100%
                                                                         ------------   ----  -------------         
                                                                         ------------   ----  -------------         
See notes to financial statements.                                                                                  


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 E S E L C O, INC.
CONSOLIDATED STATEMENT OF CHANGES IN COMMON EQUITY

                                                        [Enlarge/Download Table]


                                                 Common Stock                                                     Total    
                                                                       Capital      Retained     Unearned         Common   
                                                Shares      Amount     Surplus      Earnings    Compensation      Equity   
                                              ---------   ---------  -----------  -----------  -------------   ----------- 
                                                                                                                           
Balance at January 1, 1995                    1,373,138     $13,731  $13,117,216   $4,255,939      ($315,917)  $17,070,969 
     3% Stock Dividend                           41,061         411      887,739     (894,585)                      (6,435)
     Common Stock issued under Dividend Plan     23,776         238      536,143                                   536,381 
     Net income                                                                     2,364,966                    2,364,966 
     Unearned compensation - ESOP                                                                   (126,454)     (126,454)
     Cash Dividends - Common Stock, $.97                                                                                   
       per share (a)                                                               (1,475,429)                  (1,475,429)
                                              ---------   ---------  -----------  -----------  -------------   ----------- 
Balance at December 31, 1995                  1,437,975     $14,380  $14,541,098   $4,250,891      ($442,371)  $18,363,998 
     3% Stock Dividend                           43,129         431    1,202,005   (1,210,551)                      (8,115)
     Common Stock issued under                                                                                             
       Dividend Reinvestment Plan                27,988         280      710,571                                   710,851 
     Net income                                                                     2,798,085                    2,798,085 
     Unearned compensation - ESOP &                                                                                        
       Restricted Stock Bonus Plan               31,500         315      877,905                    (874,477)        3,743 
     Cash Dividends -                                                                                                      
       Common Stock, $1.04 per share (a)                                           (1,633,840)                  (1,633,840)
                                              ---------   ---------  -----------  -----------  -------------   ----------- 
Balance at December 31, 1996                  1,540,592     $15,406  $17,331,579   $4,204,585    ($1,316,848)  $20,234,722 
     3% Stock Dividend                           45,835         458    1,718,355   (1,740,766)                     (21,953)
     Common Stock issued under                                                                                             
       Dividend Reinvestment Plan                 6,753          68      206,776                                   206,844 
     Net income                                                                        94,746                       94,746 
     Unearned compensation - ESOP &                                                                                        
       Restricted Stock Bonus Plan                                                                   514,208       514,208 
     Cash Dividends -                                                                                                      
       Common Stock, $1.11 per share (a)                                           (1,771,528)                  (1,771,528)
                                              ---------   ---------  -----------  -----------  -------------   ----------- 
Balance at December 31, 1997                  1,593,180     $15,932  $19,256,710     $787,037      ($802,640)  $19,257,039 
                                              ---------   ---------  -----------  -----------  -------------   ----------- 
                                              ---------   ---------  -----------  -----------  -------------   ----------- 

(a)   Retroactively adjusted for stock dividends.                               
()    Denotes deduction.                                                        

See notes to financial statements.                                              

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                                 E S E L C O, INC.
                                CONSOLIDATED STATEMENT OF INCOME

                                                        [Enlarge/Download Table]

                                                                for the Year Ended December 31       
                                                        1 9 9 7           1 9 9 6           1 9 9 5  
                                                      -----------       -----------       -----------
                                                                                                     
OPERATING REVENUES                                    $37,511,449       $37,499,931       $36,844,488
                                                      -----------       -----------       -----------
OPERATING EXPENSES:                                                                                  
        Operation - Purchased power                   $18,128,749       $18,851,035       $19,531,448
                  - Early retirement costs              2,330,053                 0                 0
                  - Merger related costs                  980,787                 0                 0
                  - Other                               7,326,788         6,743,273         6,164,031
        Maintenance                                     2,200,264         2,142,159         1,983,348
        Depreciation and amortization                   2,735,246         2,614,395         2,498,773
        Property and other taxes                        1,707,342         1,556,351         1,560,496
        Income taxes                                      366,788         1,247,196         1,116,784
                                                      -----------       -----------       -----------
           Total operating expenses                   $35,776,017       $33,154,409       $32,854,880
                                                      -----------       -----------       -----------
           Net operating income                        $1,735,432        $4,345,522        $3,989,608
                                                      -----------       -----------       -----------
OTHER INCOME (DEDUCTIONS), NET                          ($28,476)         ($47,594)         ($68,773)
                                                      -----------       -----------       -----------
ALLOWANCE FOR FUNDS USED DURING                                                                      
        CONSTRUCTION                                      $81,569                $0                $0
                                                      -----------       -----------       -----------
INTEREST CHARGES:                                                                                    
        Interest on long-term debt                     $1,567,253        $1,367,387        $1,243,954
        Other interest                                    126,526           132,456           311,915
                                                      -----------       -----------       -----------
           Total interest charges                      $1,693,779        $1,499,843        $1,555,869
                                                      -----------       -----------       -----------

NET INCOME                                                $94,746        $2,798,085        $2,364,966
                                                      -----------       -----------       -----------
                                                      -----------       -----------       -----------
BASIC AND DILUTIVE EARNINGS PER                                                                      
  AVERAGE SHARE OF COMMON STOCK (a)                         $0.06             $1.80             $1.56
                                                      -----------       -----------       -----------
                                                      -----------       -----------       -----------
CASH DIVIDENDS DECLARED PER                                                                          

  SHARE OF COMMON STOCK (a)                                 $1.11             $1.04             $0.97
                                                      -----------       -----------       -----------
                                                      -----------       -----------       -----------
AVERAGE COMMON SHARES OUTSTANDING  (a)                  1,592,141         1,556,742         1,514,947
                                                      -----------       -----------       -----------
                                                      -----------       -----------       -----------

(a)       Retroactively adjusted for stock dividends.                                                
( )       Denotes deduction.                                                                         

          See Notes to Financial Statements.                                                         


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ESELCO, INC.
 CONSOLIDATED STATEMENT OF CASH FLOW
for the Year Ended December 31

                                                        [Enlarge/Download Table]


                                                                 1997          1996          1995    
                                                             -----------   -----------   ----------- 
                                                                                                     
NET CASH FLOWS FROM (USED BY):                                                                       
OPERATING ACTIVITIES:                                                                                

        Net income                                               $94,746    $2,798,085    $2,364,966 
        Noncash expenses, revenue, losses and gains                                                  
          included in income                                                                         

             Depreciation and amortization                     2,802,573     2,706,428     2,605,376 
             Deferred taxes and charge equivalent to                                                 
               investment tax credit, net of amortization     (1,248,157)    1,073,606        58,230 
             Net decrease (increase) in receivables and                                              
               unbilled revenue                                 (306,752)      492,259      (805,148)
             Net decrease (increase) in materials and                                                
               supplies and prepayments                         (345,136)     (158,153)     (613,593)
             Net increase (decrease) in accounts payable,                                            
               accrued taxes, and other current liabilities      638,839      (313,050)      181,086 
             Increase (decrease)in interest accrued                                                  
               but not paid                                       (6,955)      (91,758)      (78,833)
             Early retirement costs                            2,330,053             0             0 
             Other                                               945,134       424,411        83,626 
                                                             -----------   -----------   ----------- 
                  Net cash from operating activities          $4,904,345    $6,931,828    $3,795,710 
                                                             -----------   -----------   ----------- 

INVESTING ACTIVITIES:                                                                                

        Acquisition of property, plant and equipment         ($8,131,391)  ($4,296,974)  ($3,494,997)
        Proceeds from disposals of property, plant                                                   
          and equipment                                           61,236        31,292        53,545 
        E P A payments                                                 0    (3,510,181)            0 
                                                             -----------   -----------   ----------- 
                  Net cash used by investing activities      ($8,070,155)  ($7,775,863)  ($3,441,452)
                                                             -----------   -----------   ----------- 

FINANCING ACTIVITIES:                                                                                

        Proceeds of short-term debt                          $12,608,500   $10,274,000   $16,752,000 
        Payments to settle short-term debt                    (9,864,000)  (12,807,000)  (17,594,500)
        Issuance of long-term debt, net                        4,700,000     5,701,000     2,674,000 
        Payments on long-term debt                            (2,725,448)   (1,409,938)   (1,212,153)
        Proceeds from sale of common stock                       206,844       710,851       536,381 
        Dividends paid                                        (1,771,528)   (1,633,840)   (1,475,429)
                                                             -----------   -----------   ----------- 
                  Net cash (used) provided by                                                        

                     financing activities                     $3,154,368      $835,073     ($319,701)
                                                             -----------   -----------   ----------- 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS            ($11,442)      ($8,962)      $34,557 

CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR           293,883       302,845       268,288 
                                                             -----------   -----------   ----------- 

CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR                $282,441      $293,883      $302,845 
                                                             -----------   -----------   ----------- 
                                                             -----------   -----------   ----------- 

        INTEREST PAID                                         $1,700,542    $1,644,511    $1,637,731 
                                                             -----------   -----------   ----------- 
                                                             -----------   -----------   ----------- 
See notes to financial statements.                                                                   

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 NOTE A - ORGANIZATION

The consolidated financial statements include the accounts of 
ESELCO, Inc. (ESELCO), and its wholly-owned subsidiaries, Edison Sault          
Electric Company (Edison Sault); ESEG, Inc. (ESEG); and Northern Tree           
Service, Inc. (NTS). Edison Sault (Company) is engaged in the generation,       
purchase, transmission, and sale of electric energy in the Eastern Upper        
Peninsula of Michigan. NTS is a tree trimming subsidiary that began operation   
in May of 1990, but accounts for less than one percent of total consolidated    
operating revenues. ESEG began operations in December of 1997 when it           
purchased a 138 KV submarine circuit from Consumers Energy Company. ESEG        
leases this circuit to Edison Sault Electric Company under a FERC approved      
operating lease. On May 13, 1997, ESELCO and Wisconsin Energy Corporation       
(WEC) entered into an Agreement and Plan of Reorganization. The Agreement       
provides for a merger of ESELCO and WEC.                                        

 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     The accounting records of Edison Sault are maintained in accordance
with the Uniform System of Accounts prescribed by the Federal Energy            
Regulatory Commission (FERC) and the Michigan Public Service Commission         
(MPSC). The preparation of financial statements, in conformity with generally   
accepted accounting principles, requires management to make estimates that      
could differ from actual results.                                               

Utility Regulation                                                              

     Edison Sault accounts for the effects of regulation under Statement
of Financial Accounting Standards (SFAS) 71, "Accounting for the Effects of     
Certain Types of Regulations." As a result, the actions of regulators affect    
when revenues,expenses, assets, and liabilities are recognized.                 

 In accordance with SFAS 71, the Company capitalizes as deferred
regulatory assets costs which are expected to be recovered in future utility    
rates. The Company also records as deferred regulatory liabilities costs        
which are to be paid in the future. These consist primarily of amounts          
related to the adoption of SFAS 109, "Accounting for Income Taxes," and the     
environmental matter discussed in Note I.                                       

Rates and Regulatory Matters                                                    

     On August 22, 1995, Edison Sault filed an application with the MPSC
for authority to implement price cap regulation. In the application the         
Company proposed that its base rates be capped at present levels, that its      
existing Power Supply Cost Recovery (PSCR) factor be rolled into base rates,    
and that its existing PSCR Clause be suspended. The Company published the       
required notice of opportunity to comment or request a hearing. We received     
no comments, and on September 21, 1995, the MPSC approved the Company's         
application subject to the modification that the Company gives thirty days      
notice rather than two weeks notice for rate decreases. The Company will file   
an application by October 1, 2000, to address its experience under the price    
cap mechanism. With the latter modification the price cap authorization         
represents an experimental regulatory mechanism. The order also allows Edison   
Sault to file an application seeking an increase in rates only under            
extraordinary circumstances.                                                    

     On October 23, 1995, the Attorney General for the State of Michigan
filed an intervention and petition for rehearing in the Company's Price Cap     
Order. The Attorney General's intervention was based                            

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on the grounds that the MPSC did not have authority to approve price cap        
regulation. On December 21, 1995, the MPSC rejected the Attorney General's      
petition for rehearing. On January 19, 1996, the Attorney General filed an      
appeal with the Michigan Court of Appeals.                                      

 On January 21, 1998, the Michigan Court of Appeals rejected the
Attorney General's appeal, affirming the MPSC Order. The Attorney General       
subsequently requested the Michigan Supreme Court to review the lower court's   
ruling.                                                                         

      During 1997, the Company reached a settlement agreement with
Consumers Energy Company on several contractual issues related to its           
purchase  of power and transmission service from Consumers. The agreement       
which has  received approval from FERC staff and the FERC Administrative Law    
Judge is awaiting a FERC final order. Based on the terms of the settlement,     
Edison Sault recorded a receivable and a corresponding decrease to purchased    
power expense in the amount of approximately $1.2 million.                      

   The Company is also currently intervening in the Consumers Energy
Open Access Transmission Tariff proceeding before FERC. The ultimate outcome    
of this proceeding is unknown at this time and, accordingly, the Company has    
not recorded anything in anticipation of a resolution to this matter.           

   Because of the Price Cap Order and other potential changes in the
industry, the Company continually reviews the applicability of accounting       
under SFAS 71. As previously stated, the Price Cap Order is a five-year         
experimental regulatory mechanism containing language allowing Edison Sault     
to seek rate relief for costs incurred under extraordinary circumstances.       
Based on a current evaluation of the factors affecting the applicability of     
SFAS 71, the Company has determined that it is currently appropriate to         
continue accounting according to SFAS 71.                                       

    In the event the Company was to stop accounting under SFAS 71, the
accounting impact would be an extraordinary after-tax non-cash charge to        
earnings in an amount represented largely by any unamortized net regulatory     
assets existing then.                                                           

     The following regulatory assets and (liabilities) were reflected in
the Consolidated Balance Sheets as of December 31:                              

                                                        [Enlarge/Download Table]


                                                                                                               

         (Thousands of Dollars)                                               1997         1996         1995   
                                                                         ------------  -----------  -----------

SAFS 109 Regulatory assets..............................................     $184         $208         $219    

SAFS 109 Regulatory liability...........................................   (1,270)      (1,401)      (1,512)   
                                                                          -------      -------      -------    

SAFS 109 Net Regulatory liability.......................................  ($1,086)     ($1,193)     ($1,293)   

Environmental Matter Regulatory asset...................................    3,164        3,510        2,850    
                                                                          -------      -------      -------    

Total Net Regulatory Asset (Liability)..................................   $2,078       $2,317       $1,557    
                                                                          -------      -------      -------    
                                                                          -------      -------      -------    

      In accordance with SFAS 71, the Company had recorded a capital lease
on its statement of financial position and had been amortizing the capital      
lease asset over the life of the lease. In December of 1997, ESEG purchased     
the 138 KV circuit that Edison Sault had previously leased from Consumers       
Energy, thus eliminating the capital lease from the Statement of Financial      
Position. If the Company had not accounted for this lease in accordance with    
SFAS 71, the asset value of the capital lease would have been approximately     
$660,000 less than what is reflected on its statement of financial position     
at December 31, 1996.                                                           

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Revenues                                                                        

  Edison Sault records revenue monthly, as billed, on the basis of
meter readings throughout the month and includes an estimate of unbilled        
revenue relative to power consumed from the meter reading date to the end of    
the month in the current month's revenue. The Company's statement of            
financial position includes an estimated amount for revenues accrued but not    
billed as of year-end.                                                          

For the first year presented (1995), Edison Sault was able to 
recover changes in its power supply cost from its residential and commercial    
customers through its Power Supply Cost Recovery Clause. The clause provided    
for an annual reconciliation of actual costs to projected costs and             
settlement of any over or under-collection, both with interest. Edison Sault    
was able, on a monthly basis, to pass on to its industrial customers            
substantially all changes in its power supply costs from its suppliers, as it   
affects these customers.                                                        

As previously discussed, Edison Sault implemented price cap   
regulation January 1, 1996; and, with this change, the PSCR clause was          
suspended.                                                                      

  Revenues resulting from sales to Cloverland Electric Cooperative
represented approximately 14% of total revenues for 1997, 13% for 1996, and     
12% for 1995. Revenues resulting from sales to Manistique Papers, Inc.,         
represented approximately 12% of total revenues for each year presented.        

      Customer receivables, electric sales, and resale revenues arise from
operations of Edison Sault which delivers electric energy to a diversified      
base of residential, commercial, and industrial customers within the eastern    
portion of Michigan's Upper Peninsula. Edison Sault continually reviews its     
customers' credit-worthiness and requests deposits or refunds deposits based    
on that review.                                                                 

Utility Plant - Electric                                                        

  Utility plant is stated at original cost, including engineering,
material, labor, supervision, other related items, and an allowance for funds   
used during construction.                                                       

   Maintenance and repairs are charged to expense as incurred, while
replacements and betterments are capitalized. Upon the sale or retirement of    
an asset, the original cost of the property retired, plus the cost of           
removal, less salvage, is charged to accumulated depreciation.                  

 Edison Sault depreciates the original cost of property over its
estimated useful life by the straight-line method at composite rates approved   
by the MPSC. The composite rate was approximately 3.8% for the years            
presented.                                                                      

Cash and Cash Equivalents                                                       

   ESELCO considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.                     

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Other                                                                           

     In 1995 the FASB issued SFAS 121, "Accounting for the Impairment of
Long-lived Assets and Long-Lived Assets to be Disposed of." This statement      
imposed a stricter criterion for regulatory assets by requiring that such       
assets be probable of future recovery at each balance sheet date. The Company   
adopted this standard on January 1, 1996. Adoption did not have an impact on    
the financial position or results of operations due to the regulatory           
structure set forth in the Price Cap Order previously discussed. This           
conclusion may change in the future as competitive factors influence pricing    
in this industry.                                                               

 NOTE C - LONG-TERM DEBT

         Annual sinking fund requirements on First Mortgage Bonds and maturities
of long-term debt for each of the five years subsequent to December 31, 1997,   
are:                                                                            

                                                                [Download Table]


   (Thousands of Dollars)
                         
 1998            $4,033  
 1999            $4,964  
 2000            $1,805  
 2001            $2,049  
 2002            $3,960  

 Substantially all of Edison Sault's utility plant is pledged as
collateral for the first mortgage bonds.                                        

    Edison Sault has authority to issue up to $10 million of long-term
thrift notes to Michigan residents.                                             

     The provisions of Edison Sault's bond indentures and the short-term
line of credit agreement contain various covenants pertaining to the            
maintenance of debt to equity ratios and the payment of dividends. Under the    
most restrictive of these covenants, the declaration of cash dividends by       
Edison Sault is restricted to $600,000, plus net income available for common    
stock and capital contributions subsequent to January 1, 1992, after            
deducting all dividends paid on common stock. At December 31, 1997,             
$4,500,915 of Edison Sault's retained earnings are available for the            
declaration of dividends. There are no additional restrictions on ESELCO's      
ability to pay dividends.                                                       

 NOTE D - STOCKHOLDERS' INVESTMENT

Earnings Per Share                                                              

         Earnings per average share of common stock are computed on the basis of
the weighted average number of common shares outstanding, after giving          
retroactive effect to the 3% stock dividends in each year presented. Shares     
granted under the Restricted Stock Plan, which is described in Note H, have been
included in the calculation of earnings per share for 1997. In 1997, the FASB   
issued SFAS No. 128 "Earnings Per Share." This statement, which required the    
Company to display basic and diluted earnings per share in its income statement,
had no impact on the Company upon adoption in 1997.                             

NOTE E - SHORT-TERM BORROWING ARRANGEMENTS

Edison Sault has authority to issue up to $10 million in      
short-term obligations. Included in this authority, Edison Sault has            
available a line of credit at the prime rate with a bank in its service area.   
In                                                                              

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addition, Edison Sault has authority to issue short-term thrift notes to        
Michigan residents. These notes mature one year from the date of issue, with    
interest at 2.5% to 3.0% below the New York prime rate, depending on the        
amount of the note. Included in notes payable at December 31, 1997, are         
$2,143,000 in thrift notes to Michigan residents.                               

NOTE F - LEASES AND PURCHASED POWER AGREEMENTS

    Edison Sault's hydroelectric plant at Sault Ste. Marie is operated
by the diversion of surplus waters of the St. Marys River. This surplus water   
is leased under an agreement with the Secretary of the Army, expiring in the    
year 2050. Annual rentals under this lease were $839,000 in 1997, $886,000      
in 1996, and $759,000 in 1995 and are determined based on the amount of water   
used for power generation. Edison Sault also leases certain office and          
computer equipment and vehicles for which gross rentals were $65,000 in 1997,   
$73,000 in 1996, and $99,000 in 1995 under agreements that extend up to six     
years.                                                                          

Edison Sault purchased the output of a government-owned       
hydroelectric station in Sault Ste. Marie, Michigan, under a contract which     
expires in the year 2040. Payments under the contract were $1,914,000           
annually, with modifications to such payments for power outages and the cost    
of designated repairs in excess of the federal share of such costs. Annual      
payments are subject to renegotiation every five years. During 1996, the        
Company renegotiated the annual payment for the five-year period starting in    
November of 1996. The new annual payment is $1,820,000.                         

 Edison Sault also purchases power from Consumers Energy Company
(Consumers) under an agreement which expires in 2020, or 2010 under an early    
termination provision. Rates under the agreement provide for capacity and       
energy charges which are approved by the FERC. The cost of power purchased      
from Consumers totaled $12,522,000, $12,875,000, and $17,638,000 for 1997,      
1996, and 1995, respectively.                                                   

     During 1996, Edison Sault reached agreement with Consumers on a new
purchase power agreement which became effective January 1, 1997. Under this     
new agreement, Edison Sault will purchase 35 megawatts of firm power and a      
variable amount of interruptible power for a five-year period. After the        
initial five-year period, Edison is obligated to purchase a minimum of 20       
megawatts of firm power through the contract term which remains the same as     
the previous agreement.                                                         

During 1997, Edison Sault reached a settlement agreement with 
Consumers Energy Company on transmission service for the 1996 purchase power    
agreement. As a result of this settlement, Edison Sault recorded a receivable   
and a corresponding decrease in purchased power expense of approximately $1.2   
million.                                                                        

During 1990, Edison Sault entered a 20-year capital lease with
Consumers Power Company for two 138 KV cables across the Straits of Mackinac.   
In 1997, ESEG purchased these cables from Consumers a cost of $3,662,000.       
ESEG is leasing these cables to Edison Sault under an operating lease           
arrangement. Both the purchase and lease of the cables received FERC approval   
in 1997.                                                                        

   Effective January 1, 1996, Edison Sault began purchasing 20 MW of
firm capacity and energy from American Electric Power Company under the terms   
of two one-year contracts. This purchase replaced a portion of the capacity     
and energy that had been purchased under the wholesale contract with            
Consumers Energy Company. The cost of this power in 1997 and 1996 was           
$3,676,000 and $4,007,000, respectively.                                        

     Commencing January 1, 1998, Edison Sault will purchase 20 megawatts
of firm power from Wisconsin Electric Power Company under the terms of a        
ten-year agreement.                                                             

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NOTES G - INCOME TAXES

   The following summarizes the components of income tax expense and
reconciles the statutory Federal income tax rate to the effective rate.         

                                                        [Enlarge/Download Table]


                                                        Year Ended December 31,              

   (Thousands of Dollars)                                    1997            1996      1995  
                                                           --------       ---------  --------
                                                                                             
Income Taxes - Currently payable                             $1,587           $155     $1,045
                                                           --------        -------   --------
             - Deferred -                                                                    
                          Employee benefit                                                   
                            plans......................    ($1,047)           ($98)       $25
                          EPA matter...................       (118)          1,193          0
                          Property taxes...............          6              15         13
                          Depreciation.................          6              50        103
                                                                 -              --        ---

                                                           ($1,153)         $1,160       $141
                                                            ------          ------       ----

Amortization of deferred investment                                                          

   tax credit..........................................       ($67)          ($68)      ($69)
                                                              ----           ----       ---- 

Income taxes per statement                                                                   
   of income...........................................       $367         $1,247     $1,117 
Allocated to other accounts............................        (42)           (31)       (38)
                                                               ---            ---        --- 

Total Income Taxes.....................................       $325         $1,216     $1,079 
                                                              ----         ------     ------ 

Total Income Taxes Paid................................     $1,130           $645     $1,045 
                                                            ------           ----     ------ 

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                                                        [Enlarge/Download Table]


                                                 Year Ended December 31,                                                        
                                                                                                                                
   (Thousand of Dollars)                           1997                            1996                            1995         
                                          ---------------------------    -------------------------   ---------------------------

                                           Amount              %         Amount              %       Amount               %     
                                           -------         -----         ------          -----      -------           -----     
Federal income tax at                                                                                                           

   statutory rate........................    $143          34.0%         $1,365          34.0%       $1,171           34.0%     

Reduction in taxes                                                                                                              
   resulting from -                                                                                                             
     Capitalized costs deducted                                                                                                 
        currently for tax                                                                                                       
        purposes*........................      (2)         -0.4%            (1)           0.0%           (1)            0.0%    

     Depreciation and pension                                                                                                   
        differences*.....................      40           9.5%             32           0.8%           38             1.1%    

     Amortization of deferred                                                                                                   
        investment tax credit............     (67)         -15.9%           (68)          -1.7%         (69)           -2.0%    

     Refund of excess deferred                                                                                                  
        taxes resulting from                                                                                                    
        reduction in tax rates*..........     (88)         -21.0%           (74)          -1.8%         (43)           -1.3%    

     Merger related costs................      334          79.5%              0           0.0%            0            0.0%    

     Other, net..........................     (35)          -8.3%           (38)          -1.0%         (17)           -0.5%    

Total Income Taxes.......................     $325          77.4%         $1,216          30.3%       $1,079           31.3%    


* Accounting treatment in accordance with regulatory commission policy.         

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        The following summarizes the principal components of ESELCO's deferred
tax assets (liabilities) for the year ended December 31,                        

                                                                [Download Table]


                                                                            
   (Thousands of Dollars)               1997           1996           1995  
                                      -------       -------        -------  

Property....................          ($3,569)       ($3,454)       ($3,305)

E P A Regulatory Asset......           (1,076)        (1,193)             0 

Property taxes..............             (216)          (210)          (196)

Employee benefit plans......            1,402            325            209 

Other.......................               11             11             11 

               Total........          ($3,448)       ($4,521)       ($3,281)

Total Deferred Tax Assets...           $3,253         $2,243         $2,183 

Total Deferred Tax Liabilities         (6,701)        (6,764)        (5,464)

               Total........          ($3,448)       ($4,521)       ($3,281)


NOTE H - PENSION PLAN AND OTHER BENEFITS

 Edison Sault has two trusteed, noncontributory, defined benefit
pension plans, covering substantially all management and bargaining unit        
employees. Annual retirement benefits are based upon the employee's years of    
service and compensation level. Edison Sault's funding policy is to             
contribute amounts to the plans sufficient to meet the minimum funding          
requirements set forth in the Employee Retirement Income Security Act of        
1974, plus such additional amounts as Edison Sault may determine to be          
appropriate from time to time.                                                  

      The weighted average discount rate used in determining the actuarial
present value of the projected benefit obligation for both plans was lowered    
to 7.25% as of December 31, 1997. In addition, the salary scale for the         
Bargaining Unit plan was decreased from 3.5% to 3.0%. These changes increased   
the projected benefit obligation as of December 31, 1997, by $296,000 for       
both plans. The plans' assets are invested primarily in listed debt and         
equity securities and ESELCO's common stock. At December 31, 1997, the          
pension plans held 52,196 shares of ESELCO common stock with a market value     
of $2,323,000. During 1997, $57,000 of dividends were paid on the shares held   
by the plans.                                                                   

During 1997, a special retirement program was offered to both 
Management and Bargaining Unit employees who met certain age and service        
criteria. This offer resulted in curtailment and termination expense of         
$1,300,000.                                                                     

      The plans' funded status and expense at December 31, are as follows:

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                                                        [Enlarge/Download Table]


                                                                                                           
     (Thousands of Dollars)                                                1997         1996        1995   

         Actuarial present value of benefit obligations:                                                   

     Vested Benefit Obligation................................           ($11,010)     ($9,032)            
                                                                         ---------  ------------           
                                                                         ---------  ------------           

     Accumulated Benefit Obligation...........................           ($12,445)     ($9,887)            
                                                                         ---------  ------------           
                                                                         ---------  ------------           
     Projected benefit obligation.............................           ($12,972)    ($10,696)            
Plan assets at fair value.....................................             11,297        9,170             
                                                                         ---------  ------------           
Projected benefit obligation (in excess of) or less than                                                   
   plan assets................................................            ($1,675)     ($1,526)            
Unrecognized net loss.........................................                406          766             
Unrecognized net obligation at January 1, net of                                                           
   amortization...............................................               (144)          634            
Additional Liability..........................................                  0        (592)             
                                                                         ---------  ------------           
Net Pension (liability) Recognized in the Statement of                                                     
   Financial Position.........................................            ($1,413)       ($718)            
                                                                         ---------  ------------           
                                                                         ---------  ------------           

Net pension expense combined for both plans, included the following components:                            

Service cost-benefits earned during the period................               $272         $285        $211 
Interest cost on projected benefit obligations................                814          755         680 
Actual return on plan assets..................................             (2,238)        (623)     (1,237)
Net amortization and deferral.................................              1,529         (32)         619 
Termination benefit expense...................................                523            0           0 
Curtailment loss..............................................                750            0           0 
                                                                          --------     --------    --------
Net Pension Expense...........................................             $1,650         $385        $273 
                                                                          --------     --------    --------
                                                                          --------     --------    --------

Rates used for calculation (%):                                                                            

     Discount rate                                                           7.25%        7.50%       7.00%

     Assumed rate of increase in salary levels                           3.0%-4.0%    3.5%-4.0%   3.5%-4.0%

     Expected long-term return on investments                                 9.0%         9.0%        9.0%

   Edison Sault accrues postretirement benefits (such as health care
benefits) during the years an employee provides services in accordance with SFAS
106.                                                                            

     The 1997 costs were calculated using the health care plan in effect
January 1, 1997. The accumulated postretirement benefit obligation was          
calculated by the actuary as of January 1, 1997, using a discount rate of 7.5%. 
Effective December 31, 1997, the discount rate used for valuing the accumulated 
postretirement benefit obligation was lowered to 7.25%. The health              

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care cost trend rate used by the actuary for both the January 1, 1997,          
and January 1, 1996, valuations was 10.6%, then decreasing gradually to 5.0% by 
the year 2004. A 1% increase in the health care cost trend rate would increase  
the accumulated postretirement benefit obligation as of December 31, 1997, by   
$187,000 and the net periodic postretirement benefit cost for 1997 by $98,000.  

        The special retirement offer discussed above included medical benefits
which resulted in curtailment and termination expense of $612,000 in 1997.      

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The funded status of the postretirement benefit plan is reconciled with the     
recorded liability as follows:                                                  

                                                        [Enlarge/Download Table]


     (Thousands of Dollars)                                       1997        1996        1995   
                                                               ---------   ---------   --------- 
                                                                                                 

Accumulated Postretirement Benefit Obligation (APBO):                                            

     Retirees.................................................   ($1,598)      ($669)      ($629)
     Eligible for retirement..................................        (9)       (209)       (205)
     Not yet eligible.........................................      (205)       (236)       (268)
                                                               ---------   ---------   --------- 
   Total APBO.................................................   ($1,812)    ($1,114)    ($1,102)
     Plan assets at fair value................................         0           0           0 
                                                               ---------   ---------   --------- 
   Total APBO in excess of plan assets........................   ($1,812)    ($1,114)    ($1,102)
     Unrecognized transition obligation.......................       727       1,038       1,103 
     Unrecognized net (gains)/losses..........................         0        (314)       (306)
                                                               ---------   ---------   --------- 
   Net Postretirement Benefit Liability Recognized in                                            
    the Statement of Financial Position at December 31,.......   ($1,085)      ($390)      ($305)
                                                               ---------   ---------   --------- 
                                                               ---------   ---------   --------- 

Net postretirement benefit expense:                                                              

     Service cost.............................................       $13         $15         $14 
     Interest cost............................................        79          78          86 
     Amortization of transition obligation....................        61          65          65 
     Net amortization and deferral............................       (14)        (13)        (13)
     Termination benefit expense..............................        96           0           0 
     Curtailment loss.........................................       516           0           0 
                                                               ---------   ---------   --------- 
   Net Postretirement Benefit Expense.........................      $751        $145        $152 
                                                               ---------   ---------   --------- 
                                                               ---------   ---------   --------- 

Postretirement benefit expense reconciled to the                                                 
   accrued cost:                                                                                 

     Beginning net benefit liability..........................     ($390)      ($305)      ($216)
     Net benefit expense......................................      (751)       (145)       (152)
     Actual premium paid......................................        56          60          63 
                                                               ---------   ---------   --------- 
   Net Postretirement Benefit Liability Recognized in                                            
    the Statement of Financial Position at December 31,.......   ($1,085)      ($390)      ($305)
                                                               ---------   ---------   --------- 
                                                               ---------   ---------   --------- 

       Edison Sault has an employee stock ownership plan (ESOP) which covers
substantially all its non-bargaining unit employees. In accordance with         
applicable accounting rules, ESELCO has recorded the ESOP indebtedness for the  
following loans in current and long-term debt on its balance sheet, with an     
offsetting charge to common stock equity captioned "Unearned compensation - ESOP
and Restricted Stock Bonus Plan."                                               

        In December 1992, the plan borrowed $625,000 to purchase 20,000 shares
of ESELCO, Inc., common stock. Dividends and other income received by the trust 
and used for this debt service in 1997 were approximately $70,000. Interest     
expense on this debt incurred by the trust in 1997 was $8,000.                  

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        In February 1995, the plan borrowed $357,000 to purchase an additional
15,445 shares of ESELCO, Inc., common stock. Dividends and other income received
by the trust and used for this debt service in 1997 were $50,000. Interest      
expense on this debt incurred by the trust in 1997 was $10,000.                 

        In April 1997, the plan borrowed $364,000 to purchase 13,120 shares of
ESELCO, Inc., common stock. Dividends and other income received by the trust and
used for this debt service in 1997 were $254,000. Interest expense on this debt 
incurred by the trust in 1997 was $17,000.                                      

 The market value of the total allocated shares held by the ESOP
amounted to $7,498,000 at December 31, 1997.                                    

   Edison Sault has an unfunded, nonqualified Supplemental Executive
Retirement Plan (SERP) that provides benefits which are integrated with its     
Management Pension Plan. The projected benefit obligation for service rendered  
to date for the plan was $722,000 as of December 31, 1997, and the accrued      
liability of the plan included in ESELCO's Statement of Financial Position at   
December 31, 1997, was $714,000. Expense recognized under the plan in 1997 was  
$381,000, including $272,000 in curtailment and termination expenses.           

   ESELCO has an unfunded, nonqualified Directors' Pension Plan that
provides benefits to retired Directors meeting certain age and service          
requirements. The accrued liability of the Plan included in ESELCO's statement  
of Financial Position at December 31, 1997, was $356,000 which is also the      
amount of expense recognized during 1997.                                       

     In May 1996, stockholders approved adoption of the Restricted Stock
Bonus Plan. Under this plan ESELCO can, from time to time, grant to officers or 
other key employees awards of restricted stock. The maximum number of shares    
reserved for this purpose is 50,000 shares. In 1996, 31,500 shares, with a total
fair market value of $878,000 were granted to the officers of the Company. No   
shares were granted in 1997. Under the terms of agreements with each of the     
recipients, shares are not vested for a five-year period following the grant,   
and the shares are forfeited if a recipient leaves the employment of the Company
prior to the five-year holding period. The Restricted Stock Committee can, at   
their discretion, accelerate the vesting of these shares. In addition, a change 
in control of ESELCO, Inc., would accelerate the vesting. In accordance with    
SFAS 123 - Accounting for Stock Based Compensation, the Company recorded        
compensation expense in the amount of $176,000 in 1997.                         

NOTE I - COMMITMENTS AND CONTINGENCIES

Environmental Matters                                                           

Edison Sault, in 1993, received notification from the U.S.    
Environmental Protection Agency (U.S. EPA) that they were naming it a           
"Potentially Responsible Party" at the Manistique River/ Harbor Area of Concern 
(AOC) in Manistique, Michigan. There were many other potentially responsible    
parties, some of whom the U.S. EPA has notified.                                

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  The U.S. EPA, with the Michigan Department of Natural Resources,
identified the Manistique River and Harbor as an "Area of Concern" (AOC) due to 
PCBs that have been found in that area. We submitted an Environmental           
Engineering/Cost Analysis (EECA) to the U.S. EPA that provided an analysis of   
various methods of remediation for the harbor. The EECA presented six           
alternatives of remediation action and ultimately recommended a remediation     
method of in-place capping. Management believed this to be the most prudent     
course of action. Although the total ultimate cost of specific remedial action  
and Edison Sault's potential liability were not known then, management had      
estimated Edison Sault's minimum cost of this remedy to be $2.9 million. That   
figure represented an increase of $1.9 million from the amount recorded during  
1994. We incurred certain other expenditures for investigation of any necessary 
remedial action that are reflected in the accompanying financial statements.    
Future costs related to this issue are not expected to have a material impact on
Edison Sault's financial position or future results of operations.              

During 1995 and 1996, the U.S. EPA agreed to allow the PRPs to
remediate the harbor through in-place capping at a total cost of $6.4 million,  
with the Edison Sault portion costing $3.2 million. Through further             
negotiations, the U.S. EPA and the PRPs agreed to a cash-out settlement under   
which the PRPs would pay to the U.S. EPA the $6.4 million cost of capping for   
the right to be absolved from any future legal actions concerning PCB pollution.
To effect this settlement, all parties in December 1996 executed an             
Administrative Order on Consent with payments made to the U.S. EPA before       
year-end 1996.                                                                  

         To date, Edison Sault has incurred a total cost of $3.6 million in this
project. Edison Sault has retained legal assistance to start a process of       
recovering these costs through several insurance entities. The certainty and    
magnitude of insurance recovery are unknown at this time.                       

     Edison Sault believes that the costs discussed above, including the
payment to the U.S. EPA to be relieved of future liability, is a legitimate cost
of doing business and would be recoverable through utility rates. Further, in   
November 1993, the MPSC issued an order authorizing Edison Sault to defer and   
amortize, over a period not to exceed ten years, environmental assessment and   
remediation costs associated with the Manistique River AOC. Therefore, Edison   
Sault has recorded a regulatory asset for $3.2 million, and unreimbursed cost of
$300,000, for a total of $3.5 million, which the Company began amortizing in    
1997.                                                                           

In late 1997, Edison Sault was notified by the U.S. EPA that  
investigations were being conducted on a separate site (Trinity Chemicals) in   
Kansas City, Missouri, to which Edison Sault may have shipped PCB related       
materials during the 1980s under legal, appropriate, and accepted industry      
standards. While Edison Sault is in the process of answering various U.S. EPA   
interrogatories, preliminary data show that the Company appears to have been a  
very minor contributor to this site.                                            

Other Commitments and Contingencies                                             

         In October 1994, Edison Sault entered into a construction and joint use
agreement with Wisconsin Electric Power Company, Upper Peninsula Power Company, 
and Cloverland Electric Cooperative. This agreement specifies each party's      
responsibility in the construction of a new transmission line from Arnold,      
Michigan, to Manistique, Michigan. Edison Sault commenced construction of this  
new line during 1997. This project has an expected completion date of mid-1999. 
Edison Sault expects that its share of the cost of this project will be         
approximately $10.5 million with approximately $8.6 million of this being spent 
in 1997 and 1998.                                                               

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ARTHUR ANDERSEN LLP 

Report of Independent Public Accountants

To the Shareholders of ESELCO, Inc.:                                            

We have audited the accompanying consolidated statement of financial position of
ESELCO, Inc., (a Michigan corporation), and subsidiaries as of December 31, 1997
and 1996, and the related consolidated statements of income, changes in common  
equity, and cash flow for each of the three years in the period ended December  
31, 1997. These financial statements are the responsibility of the Company's    
management. Our responsibility is to express an opinion on these financial      
statements based on our audits.                                                 

We conducted our audits in accordance with generally accepted auditing          
standards. Those standards require that we plan and perform the audit to obtain 
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting 
the amounts and disclosures in the financial statements. An audit also includes 
assessing the accounting principles used and significant estimates made by      
management, as well as evaluating the overall financial statement presentation. 
We believe that our audits provide a reasonable basis for our opinion.          

In our opinion, the financial statements referred to above present fairly, in   
all material respects, the financial position of ESELCO, Inc. and subsidiaries  
as of December 31, 1997 and 1996, and the results of their operations and their 
cash flows for each of the three years in the period ended December 31, 1997,   
in conformity with generally accepted accounting principles.                    

                     /s/ Arthur Andersen LLP

Detroit, Michigan                                                               
February 6, 1998.                                                               

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ITEM 14. EXHIBITS, FINANCIAL STATEMENT                                          
SCHEDULES AND REPORTS ON FORM 10-K                            

Report of Independent Public Accountants                      

ARTHUR ANDERSEN LLP 

Report of Independent Public Accountants

To ESELCO, Inc.:                                                                

We have audited in accordance with generally accepted auditing standards, the   
condsolidated financial statements of ESELCO, Inc. included in the Form 10-K,   
and have issued our report dated February 6, 1998. Our audit was made for the   
purpose of forming an opinion on those statements taken as a whole. The         
schedules listed in item 14(a) is the responsibility of the company's           
management and is presentd for purpose of complying with the Securities and     
Exchange Commission's rules and is not part of the basic consolidated financial 
statements. This schedule has been subjected to the auditing procedures         
applied in the audit of the basic financial statements and, in our opinion,     
fairly states in all material respects the financial data required to be set    
forth therein in relation to the basic consolidated fiancial statements taken   
as a whole.                                                                     

                     /s/ Arthur Andersen LLP

Detroit, Michigan                                                               
February 6, 1998.                                                               

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2. Financial Statement Schedules                                      

Included in Part IV of this report:                             

Schedule II - Valuation and Qualifying Accounts         

The Report of Independent Public Accountants on               
Financial Statement Schedules for the three years             
ended December 31, 1997, is on page 42.                       

Schedules I, III and IV are omitted as not                    
applicable because required items or conditions are           
not met.                                                      

3. List of Exhibits                                                 

(See page 46 for Exhibit Index)                               

(b)   The following report on Form 8-K was filed during                         
the last quarter of the period covered by this report:              

                                                                [Download Table]


                                                                        

Item Reported        Financial Statements Files          Date of Report 

Item 5               None                                October 7, 1997


(c) The Exhibits, if any, filed herewith are identified in                      
(a) 3. above.                                                           

(d) The Financial Statement Schedules filed herewith are                        
identified in (a) 2. above.                                             

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SIGNATURES

Pursuant to the requirements of Section 13 of the Securities Exchange   
Act of 1934, the Registrant has duly caused this report to be signed on         
its behalf by the undersigned, thereunto duly authorized.                       

    ESELCO, INC.

    (Registrant)

                  By: /s/ William R. Gregory
                                --------------------------------
                  WILLIAM R. GREGORY
                      Director and President

            Date: March 25, 1998

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

                                                                [Download Table]
                                                                     

/s/ Thomas S. Nurnberger               /s/ David K. Easlick          
------------------------------         ------------------------------
THOMAS S. NURNBERGER                   DAVID K. EASLICK              
Chairman of the Board                  Director                      
Date: March 25, 1998                   Date: March 25, 1998          

/s/ Allan L. Grauer                    /s/ James S. Clinton          
------------------------------         ------------------------------
ALLAN L. GRAUER                        JAMES S. CLINTON              
Director                               Director                      
Date: March 25, 1998                   Date: March 25, 1998          

/s/ William R. Gregory                                               
------------------------------                                       
WILLIAM R. GREGORY                                                   
Director                                                             
Date: March 25, 1998                                                 

/s/ David R. Hubbard                                                 
------------------------------                                       
DAVID R. HUBBARD                                                     
Vice President - Finance                                             
Date: March 25, 1998                                                 


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 EXHIBIT INDEX
 FORM 10-K

1997

                                                        [Enlarge/Download Table]

                                                                                                Filed         

                                                                                                              
Exhibit No.                                                                                           By      
                                     Description of Exhibit                            Herewith      Reference

    (2)     Amended and Restated Agreement and Plan of Reorganization by and among                      *     
            Wisconsin Energy Corporation and ESELCO, Inc., and ESL Acquisition,                               
            Inc., dated as of May 13, 1997, as amended and restated as of July 11,                            
            1997.(6)                                                                                          

    (3)     (a)  Articles of Incorporation as filed on January 6, 1989.(6)                              *     
            (b)  Amendment to Articles of Incorporation as filed on August 7, 1997.(6)                  *     
            (c)  By-laws.(6)                                                                            *     

    (4)     Instruments defining the rights of security holders, including                                    
            indentures:                                                                                       

            (a)  Mortgage and Deed of Trust as of March 1, 1952.(1)                                     *     
            (b)  Supplemental Indenture dated as of February 1, 1957.(1)                                *     
            (c)  Second Supplemental Indenture dated as of January 1, 1964.(1)                          *     
            (d)  Third Supplemental Indenture dated as of February 1, 1968.(1)                          *     
            (e)  Fourth Supplemental Indenture dated as of September 15, 1975.(1)                       *     
            (f)  Fifth Supplemental Indenture dated as of October 1, 1986.(2)                           *     
            (g)  Sixth Supplemental Indenture dated as of April 1, 1989.(4)                             *     
            (h)  Seventh Supplemental Indenture dated as of February 15, 1992.(5)                       *     
            (i)  Debenture Indenture dated as of August 1, 1973.(1)                                     *     
            (j)  Form of Long-term Energy Thrift Note.(3)                                               *     

    (10)    (a)  Form of Executive Severance Agreement.(6)                                              *     
            (b)  1996 ESELCO, Inc., Restricted Stock Bonus Plan.(6)                                     *     
            (c)  ESELCO, Inc., Directors' Retirement Plan, as amended                                   *     
                 January 1, 1995.(6)                                                                          
            (d)  Edison Sault Electric Company Directors' Fee Deferral Plan,                            *     
                 October 1, 1989.(6)                                                                          
            (e)  Edison Sault Electric Company ESELCO Directors' Fee                                    *     
                 Deferral Plan, January 1, 1986.(6)                                                           
            (f)  Supplemental Executive Retirement Plan of Edison Sault                                 *     
                 Electric Company, as amended as of August 17, 1995.(6)                                       

    (21)    Subsidiaries of the Registrant                                                 *                  


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                                                                [Download Table]


                                                  

(23)  Consent of Independent Public Accountants  *

(27)  Financial Data Schedule                    *

Key to Exhibits Incorporated by Reference:                                      

   (1) Filed with the Company's Registration Statement, Form S-16, No.
2-67191, filed April 2, 1980.                           

(2) Filed with the Company's Form 10-K for                      
1986, dated March 30, 1987, File No. 0-1158.            

       (3) Filed with the Company's Registration Statement, Amendment No. 2 to
Form S-3, No. 2-67191, filed February 16, 1988.         

(4) Filed with the Company's Form 10-Q for June 30, 1989, dated 
August 11, 1989, File No.0-17736.                       

        (5) Filed with the Company's Form 10-Q for March 31, 1992, dated May 13,
1992, File No. 0-17736.                                 

(6) Filed with the Company's Form 10-Q for June 30, 1997, dated 
August 11, 1997, File No. 0-17736.                      

      (7) Filed with the Company's Form 10-Q for December 31, 1996, File No.
0-17736                                                 

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ESELCO, INC.

 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

                                                        [Enlarge/Download Table]

                  Column A           Column B           Column C     Column D       Column E  
                                                                    Reserve for               
                                                                   Purposes for               
                                                       Provisions    Which the                
                                Balance Beginning        Charged      Reserve       Balance   
                Description         of Period           to Income  was Provided  End of Period
                                                                                              

                                 YEAR ENDED DECEMBER 31, 1997                                 

Reserve deducted from asset in        $32,000            $76,394      $76,394        $32,000  
     balance sheet                                                                            
                                 YEAR ENDED DECEMBER 31, 1996                                 

Reserve deducted from asset in        $32,000            $69,526      $69,526        $32,000  
     balance sheet                                                                            
                                 YEAR ENDED DECEMBER 31, 1995                                 

Reserve deducted from asset in        $32,000            $52,060      $52,060        $32,000  
     balance sheet                                                                            


48

Dates Referenced Herein   and   Documents Incorporated by Reference

				Referenced-On Page
This ‘10-K405’ Filing		Date		First		Last			Other Filings
		11/1/30		6
		12/31/20		7
		1/1/19		5
		6/9/08		5
		4/20/01		5
		12/31/00		4
		10/1/00		7		29
		12/31/99		4
Filed on:		3/31/98							10-Q
		3/25/98		45
		3/20/98		1
		2/6/98		42		43
		2/1/98		8		18
		1/21/98		7		30
		1/1/98		4		33
For Period End:		12/31/97		1		48			U-3A-2
		12/29/97		4
		10/31/97		4
		10/22/97		11
		10/7/97		8		44			8-K
		8/27/97		8
		8/11/97		47
		8/7/97		46
		7/11/97		8		46
		6/30/97		47					10-Q
		5/13/97		8		46			10-Q,  8-K
		4/28/97		5
		2/4/97		5
		1/1/97		33		38
		12/31/96		30		48			10-K405,  U-3A-2
		8/15/96		22
		1/19/96		7		30
		1/1/96		4		38
		12/31/95		48
		12/21/95		7		30
		10/23/95		7		29
		9/21/95		4		29
		8/22/95		7		29
		8/17/95		22		46
		1/1/95		4		46
		11/10/94		4
		5/13/92		47
		3/31/92		47
		2/15/92		46
		1/1/92		32
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