<PAGE>

                                      FORM 10-Q

                          SECURITIES AND EXCHANGE COMMISSION
                               Washington, D. C.  20549


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

                    For the quarterly period ended March 31, 1998

                                          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

                                     ESELCO, INC.                     
                ------------------------------------------------------
                (Exact name of registrant as specified in its charter)
 
     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)
                                      (Zip Code)

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


     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 / /
                                                      
             1,593,180 shares of Common Stock, par value $.01 per share,
                           outstanding as of June 30, 1997

<PAGE>


                                     ESELCO, INC.

                                       Item 2.    

                        MANAGEMENT'S DISCUSSION AND ANALYSIS 
                   OF FINANCIAL CONDITION AND RESULTS OF OPERATION

RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 1998 AND 1997

     Operating revenues for the first three months of 1998 were 5% lower than 
last year, while total kilowatthour sales decreased 4%.  Residential and 
commercial sales were down 8%, and  4%, respectively, from last year, 
reflecting warmer weather in 1998.  Heating degree days in the first quarter 
of 1998 were 17% below the same period in 1997.  Industrial sales were down 
2% based on decreased sales to three of our four industrial customers.

     Purchased power expense decreased 8% due to lower energy rates and 
transmission costs. 

     Other operating and maintenance expenses increased 4% during the first 
three months of 1998 due to an increase in payroll and pension expense.

     Interest expense increased 25%, primarily due to an increase in 
short-term borrowings related to the Company's construction expenditures 
which include a new transmission interconnection project. 

     Based on the above changes, net income available for common stock 
decreased 32% from last year.

TWELVE MONTHS ENDED MARCH 31, 1998 AND 1997

     Operating revenues during the current twelve month period were 2% lower 
than a year ago.  The current period revenues decreased as a result of a 1997 
adjustment to unbilled revenues.  Total electric sales were equal to the 
prior year period.   Residential sales were down 3% during the period while 
commercial sales were slightly higher than last year.  Industrial sales 
increased 3% while resale sales were down 3% for the period.

     Purchased power expense decreased 4% due to lower costs associated with 
a new purchased power contract. 

     Other operating and maintenance expenses were up 43% during the current 
twelve month period primarily due to costs related to the Company's early 
retirement program and costs associated with ESELCO's proposed merger with 
Wisconsin Energy Corporation.


<PAGE>

     Depreciation and amortization expenses increased 5% due to the Company's 
ongoing construction program.

LIQUIDITY AND CAPITAL COMMITMENTS

INVESTING ACTIVITIES     

     ESELCO invested $1,724,000 in property, plant, and equipment in the 
three-month period ending March 31, 1998.  For the same period in 1997, 
ESELCO invested approximately $635,000 in property, plant, and equipment.

     Investment expenditures during both periods included costs associated 
with the planned construction of a new 138 KV interconnection with Wisconsin 
Electric Power Company.  This project has a planned completion date of 
mid-1999.  The Company's projected share of the cost of this project is $10.5 
million.  

     In December 1997,  ESEG purchased a 138 KV submarine circuit across the 
Straits of Mackinac from Consumers Energy Company.   The Company had leased 
these cables at an annual net lease cost of approximately $466,000.  ESEG had 
been an inactive subsidiary of ESELCO.  ESEG is leasing the cables to Edison 
Sault Electric Company, a wholly-owned subsidiary of ESELCO, under an 
operating lease arrangement.  The cost of the purchase was approximately $3.7 
million.

CASH PROVIDED BY OPERATING AND FINANCE ACTIVITIES

     Cash provided by operating activities for the three-month period ending 
March 31, 1998, and March 31, 1997, totaled $2,115,000 and $2,177,000, 
respectively.  Dividend payments for the three months ending March 31, 1998 
totaled $446,000, which represented a 90% payout ratio.  For the same period 
in 1997, dividends totaled $433,000, which represented a 60% dividend payout 
ratio.

     During 1997, ESEG borrowed $3.7 million under a bank term loan agreement 
for its acquisition of the 138 KV submarine cables described above.  

     During 1998, Edison Sault secured a construction line of credit in the 
amount of $11 million for the new 138 KV interconnection discussed above.

     Edison Sault has authority to issue up to $10 million in short-term 
obligations.  Included in this authority is a line of credit in the amount of 
$6 million 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 revenue resulting from cycle billing, and 
capital expenditures until permanently financed.

<PAGE>

     At March 31, 1998, the Company had approximately $5 million of unused 
bank line of credit and additional energy thrift notes.  These two sources of 
short-term financing should be sufficient to meet the Company's short-term 
capital requirements.

     ESELCO's shareholders reinvested approximately $207,000 through the 
dividend reinvestment plan (DRP) in the first three months of 1997.  

     Effective March 24, 1997, the Board of Directors of ESELCO, Inc. 
declared the suspension of the Dividend Reinvestment Plan.  The Dividend 
Reinvestment Plan has been suspended pending the potential acquisition of 
ESELCO, Inc. by Wisconsin Energy Corporation.

     At March 31, 1998, the long-term portion of first mortgage bonds totaled 
$5,870,000, a decrease of $300,000 from the December 31, 1997, amount.  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.

     Edison Sault also has authority to issue up to $10 million in long-term 
energy thrift notes to Michigan residents.  At March 31, 1998, the long-term 
portion of energy thrift notes outstanding was $5,128,000, which is an 
increase of $384,000 over the December 31, 1997, amount.

PART II - OTHER INFORMATION

Item 1.   Legal Proceedings

     See Note 4 of the Notes to Financial Statements in Item 1 Part I herein. 

Item 4.   Submission of Matters to a Vote of Security Holders.

          None.     

<PAGE>

Item 6.   Exhibits and Reports on Form 8-K

     (a)  List of Exhibits.

<TABLE>
<CAPTION>

Exhibit                                                                   Filed 
  No.           Description of Exhibit                             Herewith By Reference
-------   -------------------------------------------              ---------------------
<S>       <C>                                                      <C>
(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

(3)       (a)  Articles of Incorporation as filed
               on January 6, 1989                                                    *

          (b)  Amendment to Articles of Incorporation as 
               filed on August 7, 1997                                               *

          (c)  Bylaws                                                                *

(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)                              *


<PAGE>

(10)      (a)  Form of Executive Severance Agreement                                 *

          (b)  1996 ESELCO, Inc. Restricted Stock  Bonus Plan                        *

          (c)  ESELCO, Inc. Director's Retirement Plan, as 
               amended January 1, 1995                                               *

          (d)  Edison Sault Electric Company Director's Fee 
               Deferral Plan, October 1, 1989                                        *

          (e)  Edison Sault Electric Company ESELCO Director's 
               Fee Deferral Plan, January 1, 1986                                    *

          (f)  Supplemental Executive Retirement Plan of Edison 
               Sault Electric Company, as amended as of 
               August 17, 1995                                                       *

(27)      Financial Data Schedule                                                    *

</TABLE>

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.


Item 6. (b) Reports on Form 8-K

           None.


<PAGE>

PART I. - FINANCIAL INFORMATION
     ITEM 1. - FINANCIAL STATEMENTS

                                 E S E L C O, INC.
                      CONSOLIDATED STATEMENT OF FINANCIAL POSITION

<TABLE>
<CAPTION>
                                                              March 31,  December 31,
                                                               1 9 9 8      1 9 9 7
ASSETS:                                                      ----------   ----------
<S>                                                       <C>            <C>
  ELECTRIC PLANT, at original cost                          $81,733,996   $80,034,217
     Less - Accumulated depreciation                         33,373,016    32,627,532
                                                           ------------  ------------
                                                            $48,360,980   $47,406,685
  CURRENT ASSETS:                                          ------------  ------------
     Cash                                                      $248,826      $282,441
     Accounts receivable, less reserve of $40,527
       and $32,000 respectively                               4,224,550     3,854,789
     Unbilled revenue                                           860,793     1,145,572
     Materials and supplies, at average cost                  1,166,905     1,156,667
     Prepayments                                              1,948,424     2,303,447
                                                           ------------  ------------
                                                             $8,449,498    $8,742,916
  OTHER ASSETS:                                            ------------  ------------
     Debt expense, being amortized                              $19,652       $21,152
     Regulatory asset                                         2,986,440     3,164,400
     Other                                                      589,806       594,255
                                                           ------------  ------------
                                                             $3,595,898    $3,779,807
                                                           ------------  ------------
                                                            $60,406,376   $59,929,408
                                                           ============  ============
STOCKHOLDERS' INVESTMENT AND LIABILITIES:
  CAPITALIZATION (See Statement):
     Common equity                                          $19,808,103   $19,257,039
     Preferred stock                                                  0             0
     Long-term debt (less current portion)                   17,300,179    17,378,321
                                                           ------------  ------------
                                                            $37,108,282   $36,635,360
  OTHER NONCURRENT LIABILITIES:                            ------------  ------------
  CURRENT LIABILITIES:
     Notes payable                                           $4,623,000    $3,863,500
     Current portion of long-term debt                        3,194,611     4,033,177
     Accounts payable                                         2,800,624     2,199,204
     Dividends declared                                         446,090       446,090
     Accrued taxes                                            1,629,604     2,361,277
     Current deferred income taxes                              208,620       205,020
     Accrued interest                                           376,839       159,260
     Other                                                      191,233       245,657
                                                           ------------  ------------
                                                            $13,470,621   $13,513,185
  DEFERRED CREDITS:                                        ------------  ------------
     Deferred income taxes                                   $3,242,972    $3,242,976
     Net regulatory liability                                 1,048,614     1,085,514
     Unamortized investment tax credit                          789,921       806,421
     Other                                                    4,745,966     4,645,952
                                                           ------------  ------------
                                                             $9,827,473    $9,780,863
                                                           ------------  ------------
                                                            $60,406,376   $59,929,408
                                                           ============  ============
</TABLE>


<PAGE>
                              E S E L C O, INC.

                  CONSOLIDATED STATEMENT OF CAPITALIZATION

<TABLE>
<CAPTION>

                                                                                    March 31,          December 31,
                                                                                     1 9 9 8               1 9 9 7
                                                                                -----------------     ----------------
                                                                                 AMOUNT       %         AMOUNT      %
                                                                                --------     ----     ----------  ----

<S>                                                <C>            <C>          <C>           <C>    <C>           <C>
COMMON EQUITY:
   COMMON STOCK, par value $.01 per share

                                                      1998           1997
                                                   ---------      ---------
         Authorized shares                         9,840,000      9,840,000
                                                   =========      =========
         Outstanding shares                        1,593,180      1,593,180    $    15,932          $    15,932
                                                   =========      =========
   Capital surplus                                                              19,256,710           19,256,710

   Retained earnings                                                               835,134              787,037

   Unearned compensation - ESOP and
        Restricted Stock Bonus Plan                                               (299,673)            (802,640)
                                                                               -----------          -----------
                                                                               $19,808,103    53%   $19,257,039    53%
                                                                               -----------          -----------

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 F, 10.31%, due 2001                                               $   900,000         $    900,000
      Series G, 10.25%, due 2009                                                 4,070,000            4,070,000
      Series H,  7.90%, due 2002                                                   900,000            1,200,000

   Energy Thrift Notes, 6.55%-8%, due 1999-2008                                  5,128,000            4,744,000

   Equipment Loan, Floating Rate, due 2003                                          41,384                    0

   ESOP Loans of the Corporation,
      floating rate, due 2000-2001                                                       0              126,502
   Term Loan, floating rate, due 1999-2002                                       6,260,795            6,337,819
                                                                               -----------          -----------
                                                                               $17,300,179    47%   $17,378,321    47%
                                                                               -----------   ---    -----------   ---

         TOTAL CAPITALIZATION                                                  $37,108,282   100%   $36,635,360   100%
                                                                               ===========   ===    ===========   ===

</TABLE>

<PAGE>

                          E S E L C O, INC.

                 CONSOLIDATED STATEMENT OF INCOME

<TABLE>
<CAPTION>

                                                       The Three Months             The Twelve Months
                                                       Ended March 31,                Ended March 31,
                                                 --------------------------     -------------------------
                                                     1998           1997           1998           1997
                                                  ----------     ----------     ----------     ----------
<S>                                              <C>            <C>            <C>            <C>
   OPERATING REVENUES                             $9,431,913     $9,915,335    $37,028,027    $37,638,014
                                                 -----------    -----------    -----------    -----------
   OPERATING EXPENSES:
     Operation - Purchased power                  $4,586,165     $4,974,117    $17,740,797    $18,503,896
               - Early retirement costs                    0              0      2,330,053              0
               - Merger related costs                      0              0        980,787              0
               - Other                             2,030,668      1,914,244      7,443,212      6,969,443
     Maintenance                                     489,399        517,105      2,172,558      2,049,089
     Depreciation and amortization                   744,889        700,209      2,779,926      2,645,709
     Property and other taxes                        422,470        400,754      1,729,058      1,588,137
     Income taxes                                    210,672        305,200        272,260      1,329,396
                                                 -----------    -----------    -----------    -----------
       Total operating expenses                   $8,484,263     $8,811,629    $35,448,651    $33,085,670
                                                 -----------    -----------    -----------    -----------

       Net operating income                         $947,650     $1,103,706     $1,579,376     $4,552,344

   OTHER INCOME (DEDUCTIONS), NET                -----------    -----------    -----------    -----------

   ALLOWANCE FOR FUNDS USED                         ($24,937)      ($15,913)      ($37,500)      ($47,089)
    DURING CONSTRUCTION                          -----------    -----------    -----------    -----------

   INTEREST CHARGES:                                 $79,500        $39,900       $121,169        $39,900
                                                 -----------    -----------    -----------    -----------

    Interest on long-term debt                      $418,219       $390,508     $1,594,964     $1,430,833
     Other interest                                   89,806         15,223        201,109        125,192
                                                 -----------    -----------    -----------    -----------
       Total interest charges                       $508,025       $405,731     $1,796,073     $1,556,025
                                                 -----------    -----------    -----------    -----------

   NET INCOME AVAILABLE FOR COMMON  STOCK           $494,188       $721,962      ($133,028)    $2,989,130
                                                 ===========    ===========    ===========    ===========

   EARNINGS PER AVERAGE SHARE OF COMMON STOCK          $0.31          $0.45         ($0.08)         $1.90
                                                       =====          =====          =====          =====
   CASH DIVIDENDS DECLARED PER  SHARE 
    OF COMMON STOCK                                    $0.28          $0.27          $1.12          $1.06
                                                       =====          =====          =====          =====

   AVERAGE COMMON SHARES OUTSTANDING               1,593,180      1,589,804      1,593,180      1,570,790
                                                 ===========    ===========    ===========    ===========

</TABLE>

<PAGE>


                                 E S E L C O, INC.

                         CONSOLIDATED STATEMENT OF CASH FLOW
                 FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997

<TABLE>
<CAPTION>

                                                                    1998           1997
                                                                 ----------     ----------
<S>                                                              <C>            <C>
NET CASH FLOWS FROM (USED BY):
OPERATING ACTIVITIES:
   Net income                                                      $494,188       $721,962
   Noncash expenses, revenue, losses and gains
     included in income
        Depreciation and amortization                               761,322        720,339
        Deferred taxes and charge equivalent to
          investment tax credit, net of amortization                (49,804)       (85,290)
        Net decrease (increase) in receivables and
          unbilled revenue                                          (84,982)      (450,085)
        Net decrease (increase) in materials and
          supplies and prepayments                                  344,785        267,470
        Net increase (decrease) in accounts payable,
          accrued taxes, and other current liabilities             (184,677)       521,541
        Increase (decrease)in interest accrued
          but not paid                                              217,579        248,662
        Other                                                       617,024        232,587
                                                               ------------   ------------
             Net cash from operating activities                  $2,115,435     $2,177,186
                                                               ------------   ------------

INVESTING ACTIVITIES:
   Acquisition of property, plant and equipment                 ($1,724,112)     ($634,748)
   Proceeds from disposals of property, plant
     and equipment                                                    9,995         46,995
                                                               ------------   ------------
             Net cash used by investing activities              ($1,714,117)     ($587,753)
                                                               ------------   ------------

FINANCING ACTIVITIES:
   Proceeds of short-term debt                                   $6,817,500     $1,235,500
   Payments to settle short-term debt                            (6,058,000)    (1,687,500)
   Issuance of long-term debt (net)                                 735,000        287,000
   Payments on long-term debt                                    (1,483,343)      (795,675)
   Proceeds from sale of common stock                                     0        206,844
   Dividends paid                                                  (446,090)      (433,257)
                                                               ------------   ------------
             Net cash used by financing activities                ($434,933)   ($1,187,088)
                                                               ------------   ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS               ($33,615)      $402,345

CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR              282,441        293,883
                                                               ------------   ------------
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD                 $248,826       $696,228
                                                                ===========    ===========

   INTEREST PAID                                                   $286,689       $214,692
                                                                ===========    ===========
   INCOME TAXES PAID                                                     $0             $0
                                                                ===========    ===========

</TABLE>

<PAGE>

                                     ESELCO, INC.

                            NOTES TO FINANCIAL STATEMENTS


(1)  These consolidated financial statements include the accounts of ESELCO,
     Inc. (ESELCO) and its wholly owned subsidiaries, Edison Sault Electric
     Company (Edison Sault), ESEG, Inc. and Northern Tree Service, Inc.  All
     significant intercompany balances and transactions have been eliminated in
     consolidation.  The consolidated financial statements as of March 31, 1998
     and 1997, included herein, which are unaudited, reflect, in the opinion of
     management, all adjustments (which include only normal recurring
     adjustments) necessary to present fairly the results of operations for the
     periods presented.  Sales of electricity by Edison Sault, ESELCO's major
     subsidiary, are affected to some degree by variations in weather
     conditions, and results of operations for interim periods are not
     necessarily indicative of results to be expected for the entire year.

     Certain information and footnote disclosures normally included in financial
     statements prepared in accordance with generally accepted accounting
     principles have been condensed or omitted pursuant to rules and regulations
     of the Securities and Exchange Commission, although ESELCO believes that
     the disclosures which are made are adequate to make the information
     presented not misleading.  It is suggested that these condensed
     consolidated financial statements be read in conjunction with the financial
     statements and the notes thereto included in ESELCO, Inc. 1997 Annual
     Report on Form 10K, which incorporates by reference the financial
     statements in the 1997 Annual Report to Shareholders.

(2)  On March 4, 1998, the Board of Directors of ESELCO declared a quarterly
     dividend on the common stock of 28CENTS per share, payable May 15, 1998, 
     to stockholders of record at the close of business May 1,1998.  The
     accompanying financial statements for the periods ending March 31, 1998, do
     not reflect this declared dividend.  

(3)  On August 22, 1995, Edison Sault filed an application with the M.P.S.C. 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 M.P.S.C.
     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.  

<PAGE>


     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 M.P.S.C. did not have authority to approve price cap regulation.  On
     December 21, 1995, the M.P.S.C. 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 M.P.S.C. 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.  

(4)  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 

<PAGE>

     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 M.P.S.C. 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.

(5)  On May 14, 1997 ESELCO, Inc. and Wisconsin Energy Corporation (Wisconsin
     Energy) announced that they had entered into a definitive agreement
     regarding the acquisition of ESELCO by Wisconsin Energy.  The terms of the
     definitive agreement were approved by both companies' boards.  On October
     7, 1997, at a special meeting of shareholders of ESELCO, ESELCO's
     shareholders approved the definitive agreement and related transactions.  

     Upon completion of the transaction, all outstanding shares of ESELCO common
     stock would be converted into shares of Wisconsin Energy common stock based
     on a value of 

<PAGE>

     $44.50 for each share of ESELCO common stock in a transaction proposed 
     to be structured as a tax-free reorganization.  The total purchase price 
     would be approximately $71.0 million.  The exact number of shares of 
     Wisconsin Energy common stock to be issued in the transaction would be 
     determined by dividing $44.50 by the average closing price of Wisconsin 
     Energy common stock for the ten trading days immediately preceding the 
     closing date.  Pursuant to the definitive agreement, Wisconsin Energy 
     will be paid a fee of $2.0 million if ESELCO consummates or enters into 
     an agreement with respect to, a business combination with a party 
     unrelated to Wisconsin Energy or ESELCO terminates the definitive 
     agreement to pursue a business combination with a party unrelated to 
     Wisconsin Energy prior to the end of the period specified in the 
     agreement.  

     The transaction is contingent upon several conditions, including receipt of
     all regulatory approvals.  There can be no assurance that the conditions
     will be satisfied or that the transaction will be consummated.  



<PAGE>


                                      SIGNATURES

     Pursuant to the requirements 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)


                                       /s/ Donald Sawruk         
                                       -------------------------------
Date:  May 15, 1998                    DONALD SAWRUK
                                       Its President


                                       /s/ Steven L. Boeckman   
                                       -------------------------------
Date:  May 15, 1998                    STEVEN L. BOECKMAN
                                       Its Vice President/Treasurer