SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K(Mark(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
[X] | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 1999
2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
[ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ________________ to --------------- ---------------
Commission Registrant; State of Incorporation IRS Employer
file number Address; and Telephone Number Identification No.
- ----------- ---------------------------------- ------------------
1-11337 WPS RESOURCES CORPORATION 39-1775292
(A Wisconsin Corporation)
700 North Adams Street
P. O. Box 19001
Green Bay, WI 54307-9001
920-433-4901
1-3016 WISCONSIN PUBLIC SERVICE CORPORATION 39-0715160
(A Wisconsin Corporation)
700 North Adams Street
P. O. Box 19001
Green Bay, WI 54307-9001
800-450-7260
___________________
Commission | Registrant; State of Incorporation | IRS Employer |
1-11337 | WPS RESOURCES CORPORATION |
|
1-3016 | WISCONSIN PUBLIC SERVICE CORPORATION |
|
Securities registered pursuant to Section 12(b) of the Act:
- -----------------------------------------------------------
Title of Name of each exchange
each class on which registered
---------- ---------------------
WPS RESOURCES CORPORATION Common Stock, New York Stock Exchange
$1 par value
Rights to purchase New York Stock Exchange
Common Stock pursuant
to Rights Agreement
dated December 12, 1996
| Name of each exchange | |
WPS RESOURCES CORPORATION | Common Stock, | New York Stock Exchange |
Rights to purchase | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
- -----------------------------------------------------------
WISCONSIN PUBLIC SERVICE CORPORATION
Preferred Stock, Cumulative, $100 par value
Act:
WISCONSIN PUBLIC SERVICE CORPORATION | |
| |
5.00% | |
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
State the aggregate market value of the voting stock held by
nonaffiliates of the Registrant.
- --------------------------------
WPS RESOURCES CORPORATION
$621,719,414 as of March 10, 2000
WISCONSIN PUBLIC SERVICE CORPORATION
None
Number of shares outstanding of each class of common stock, as of
December 31, 1999
- -----------------------------------------------------------------
WPS RESOURCES CORPORATION Common Stock, $1 par value,
26,851,045 shares
WISCONSIN PUBLIC SERVICE CORPORATION Common Stock, $4 par value,
23,896,962 shares.
WPS Resources Corporation is
the sole holder of Wisconsin
Public Service Corporation
Common Stock.
State the aggregate market value | |
WPS RESOURCES CORPORATION | $917,213,337.04 as of February 15, 2001 |
WISCONSIN PUBLIC SERVICE CORPORATION | None |
Number of shares outstanding of each class | |
WPS RESOURCES CORPORATION | Common Stock, $1 par value, |
WISCONSIN PUBLIC SERVICE CORPORATION | Common Stock, $4 par value, |
DOCUMENTS INCORPORATED BY REFERENCE
(1) Definitive proxy statement for the WPS Resources Corporation Annual Meeting of Shareholders on May 11, 20003, 2001 is incorporated into Parts I and III.
WPS RESOURCES CORPORATION
and
WISCONSIN PUBLIC SERVICE CORPORATION
FORM 10-K
ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION
For the Year Ended December 31, 1999
2000
TABLE OF CONTENTS
PART
Page | ||||
1. | BUSINESS | 1 | ||
A. | GENERAL | 1 | ||
1 | ||||
1 | ||||
1 | ||||
2 | ||||
2 | ||||
2 | ||||
2 | ||||
B. | 3 | |||
Electric Operations | 3 | |||
Generating Capacity | 3 | |||
Kewaunee Nuclear Power Plant | 4 | |||
General | 4 | |||
Future Ownership | 4 | |||
Steam Generator Replacement | 5 | |||
Formation of a Nuclear Management Company, LLC | 5 | |||
Plant Regulation | 5 | |||
Low-Level Radioactive Waste Storage | 6 | |||
Depreciation and Decommissioning | 6 | |||
Fuel Supply | 7 | |||
Electric Generation Mix | 7 | |||
Fuel Costs | 7 | |||
Coal | 7 | |||
Nuclear Fuel Cycle | 8 | |||
Spent Nuclear Fuel Disposal | 9 | |||
Funding Decontamination and Decommissioning of | 9 | |||
Formation of American Transmission Company | 10 | |||
Regulatory Matters in the Wisconsin Jurisdiction | 10 | |||
Industry Restructuring | 10 | |||
Independent System Operator | 11 | |||
Electric Supply Issues | 12 | |||
Customer Rate Matters | 12 | |||
Regulatory Matters in the Michigan Jurisdiction | 13 | |||
Industry Restructuring | 13 | |||
Customer Rate Matters | 13 | |||
Regulatory Matters in the Federal Energy Regulatory | 13 | |||
Customer Rate Matters | 13 | |||
Open Access Transmission Tariff | 14 | |||
Regional Transmission Organizations | 14 | |||
Hydroelectric Licenses | 15 | |||
Other Matters | 15 | |||
Research and Development | 15 | |||
Customer Segmentation | 15 | |||
16 | ||||
Wisconsin Public Service Corporation | 16 | |||
Upper Peninsula Power Company | 17 | |||
C. | 18 | |||
Wisconsin Public Service Corporation's Gas Market | 18 | |||
Gas Supply | 19 | |||
General | 19 | |||
Pipeline Capacity and Storage | 19 | |||
Supply Contracts | 20 | |||
Regulatory Matters in the Wisconsin Jurisdiction | 20 | |||
Industry Restructuring | 20 | |||
Cost Recovery Mechanism | 21 | |||
Gas Supply Plan | 21 | |||
Customer Rates | 21 | |||
Regulatory Matters in the Michigan Jurisdiction | 21 | |||
Industry Restructuring | 21 | |||
Gas Cost Recovery Plan | 22 | |||
Customer Rates | 22 | |||
Regulatory Matters in the Federal Energy Regulatory Commission Jurisdiction | 22 | |||
Merger Activity | 23 | |||
24 | ||||
Wisconsin Public Service Corporation | 24 | |||
D. | 25 | |||
E. | 27 | |||
F. | 28 | |||
G. | 29 | |||
H. | 30 | |||
2. | 31 | |||
A. | UTILITY | 31 | ||
Wisconsin Public Service Facilities | 31 | |||
Upper Peninsula Power Facilities | 32 | |||
B. | NONREGULATED | 33 | ||
3. | 33 | |||
Spent Nuclear Fuel Disposal | 33 | |||
Funding Decontamination and Decommissioning of | 33 | |||
Environmental | 34 | |||
4. | 35 | |||
4A. | 35 | |||
A. | EXECUTIVE OFFICERS OF WPS RESOURCES CORPORATION | 35 | ||
B. | EXECUTIVE OFFICERS OF WISCONSIN PUBLIC SERVICE CORPORATION | 37 | ||
5. | MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS | 39 | ||
WPS Resources Corporation Common Stock Two-Year Comparison | 39 | |||
Dividend Restrictions | 39 | |||
Common Stock | 39 | |||
6. | 40 | |||
WPS Resources Corporation Comparative Financial Statements and Financial Statistics (1996 to 2000) | 40 | |||
Wisconsin Public Service Corporation Comparative Financial Statements and Financial Statistics (1998 to 2000) | 41 | |||
7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 42 | ||
WPS Resources Corporation | 42 | |||
58 | ||||
7A. | 64 | |||
8. | ||||
WPS RESOURCES CORPORATION | ||||
A. | Consolidated Statements of Income, Comprehensive Income, | 67 | ||
B. | Consolidated Balance Sheets | 68 | ||
C. | Consolidated Statements of Capitalization | 70 | ||
D. | Consolidated Statements of Cash Flows | 71 | ||
E. | 72 | |||
F. | 98 | |||
G. | Consolidated Statements of Income and Comprehensive Income | 99 | ||
H. | Consolidated Balance Sheets | 100 | ||
I. | Consolidated Statements of Capitalization | 102 | ||
J. | Consolidated Statements of Cash Flows | 103 | ||
K. | Consolidated Statements of Retained Earnings | 104 | ||
L. | 105 | |||
M. | 111 | |||
9. | CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE | 112 | ||
PART III | |||
10. | 112 | ||
11. | 112 | ||
12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT | 112 | |
13. | 112 | ||
PART IV | |||
14. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K | 113 | |
Description of Documents | 113 | ||
122 | |||
A. | Report of Independent Public Accountants | 123 | |
B. | Statements of Income and Retained Earnings | 124 | |
C. | Balance Sheets | 125 | |
D. | Statements of Cash Flows | 126 | |
E. | Notes to Parent Company Financial Statements | 127 | |
EXHIBITS | |||
2A-2 | Asset Sale Agreement Between Sierra Pacific Power Company and WPS Northern Nevada, LLC for the Tracy/Pinon Asset Bundle, dated as of October 25, 2000. | ||
2A-3 | Asset Contribution Agreement between American Transmission Company LLC and Wisconsin Electric Power Company, Wisconsin Power and Light Company, Wisconsin Public Service Corp, Madison Gas & Electric Co., Edison Sault Electric Company, South Beloit Water, Gas and Electric Company, dated as of December 15, 2000. | ||
2A-4 | Operating Agreement of American Transmission Company LLC dated as of January 1, 2001. | ||
3B-1 | By-Laws of WPS Resources Corporation as in effect February 8, 2001. | ||
3B-2 | By-Laws of Wisconsin Public Service Corporation as in effect February 8, 2001. | ||
10H-1 | Copy of Amendment to Key Executive Employment and Severance Agreement entered into between WPS Resources Corporation and each of the following: Daniel P. Bittner, Phillip M. Mikulsky, Patrick D. Schrickel, and Larry L. Weyers. | ||
10H-2 | Copy of Amendment to Key Executive Employment and Severance Agreement entered into between WPS Resources Corporation and each of the following: Ralph G. Baeten, Diane L. Ford, Richard E. James, Thomas P. Meinz, Wayne J. Peterson, Charles A. Schrock, and Bernard J. Treml. | ||
10H-3 | WPS Resources Corporation Deferred Compensation Plan to be effective January 1, 2001. | ||
10H-4 | WPS Resources Corporation 2001 Omnibus Incentive Compensation Plan to be effective January 1, 2001. | ||
10H-5 | WPS Resources Corporation Non-Employee Director Deferred Compensation and Deferred Stock Unit Plan to be effective January 1, 2001. | ||
10H-6 | WPS Resources Corporation Short-Term Variable Pay Plan effective January 1, 1999. | ||
10I-1 | Equity Contribution Agreement Between WPS Resources Corporation and WPS Northern Nevada, LLC, dated October 25, 2000 | ||
10I-2 | Guaranty Agreement Between WPS Resources Corporation and WPS Northern Nevada, LLC, dated October 25, 2000 | ||
10I-3 | Transitional Power Purchase Agreement By and Between Sierra Pacific Power Company and WPS Northern Nevada, LLC, dated October 25, 2000 | ||
10J-2 | Credit Agreement dated as of April 14, 2000 among Sunbury Generation, LLC, as Borrower, Bayerische Landesbank Girozentrale, Cayman Islands Branch, as WC Lender, the Term Lenders Party Hereto From Time to Time and Bayerische Landesbank Girozentrale, New York Branch, as Administrative Agent. | ||
12 | WPS Resources Corporation Ratio of Earnings to Fixed Charges and Ratio of Earnings to Fixed Charges and Preferred Dividends | ||
| 21 | Subsidiaries of the Registrant | ||
| 23 | Consent of Independent Public Accountants | ||
| 24 | Powers of Attorney | ||
Item 1. BUSINESS............................................................1
A. BUSINESS
GENERAL
WPS Resources Corporation...................................1 Wisconsin Public Service Corporation........................1 Upper Peninsula Power Company...............................2 WPS Resources Capital Corporation...........................2 WPS Energy Services, Inc....................................2 WPS Power Development, Inc..................................2 Regulatory Oversight........................................2 An Overview of Industry Restructuring.......................3 General..................................................3 Effect on Operations.....................................3 Regional Merger Activities..................................3 Y2K Compliance..............................................4 Forward-Looking Statements..................................4 B. ELECTRIC UTILITY MATTERS Electric Operations.........................................4 Generating Capacity.........................................5 Kewaunee Nuclear Power Plant................................5 General..................................................5 Ownership................................................6 Steam Generator Replacement..............................6 Formation of a Nuclear Management Company................7 Low-Level Radioactive Waste Storage......................7 Depreciation and Decommissioning.........................7 Fuel Supply.................................................8 Electric Generation Mix..................................8 Fuel Costs...............................................8 Coal.....................................................8 Nuclear Fuel Cycle.......................................9 Spent Nuclear Fuel Disposal.............................10 Funding Decontamination and Decommissioning of Federal Facilities....................................10 Regulatory Matters in the Wisconsin Jurisdiction ..........11 Industry Restructuring..................................11 Independent System Operator.............................12 Utility Businesses and Affiliate Interest Standards.....12 Electric Supply Issues..................................12 Customer Rate Matters...................................13 Regulatory Matters in the Michigan Jurisdiction............13 Industry Restructuring..................................13 Customer Rate Matters...................................14 iRegulatory Matters in the FERC Jurisdiction................14 Customer Rate Matters...................................14 Wholesale Status........................................14 Regulatory Compliance...................................14 Regional Transmission Organizations.....................15 Hydroelectric Licenses..................................15 Other Matters..............................................16 Research and Development................................16 Technology..............................................16 Customer Segmentation...................................16 Contracted Construction Project.........................16 Electric Financial Summary.................................17 Electric Operating Statistics..............................18 Wisconsin Public Service Corporation....................18 Upper Peninsula Power Company...........................19 C. GAS UTILITY MATTERS Wisconsin Public Service Corporation's Gas Market..........20 Gas Supply.................................................21 General.................................................21 Pipeline Capacity and Storage...........................21 Supply Contracts........................................22 Regulatory Matters in the Wisconsin Jurisdiction...........22 Industry Restructuring..................................22 Cost Recovery Mechanism.................................22 Gas Supply Plan.........................................23 Customer Rates..........................................23 Regulatory Matters in the Michigan Jurisdiction ...........23 Industry Restructuring..................................23 Gas Cost Recovery Plan..................................23 Customer Rates..........................................23 Regulatory Matters in the Federal Energy Regulatory........23 Commission Jurisdiction....................................23 Gas Financial Summary......................................25 Gas Operating Statistics...................................25 Wisconsin Public Service Corporation....................25 D. NONREGULATED BUSINESS ACTIVITIES General....................................................26 WPS Energy Services, Inc...................................26 WPS Power Development, Inc.................................27 Technology..............................................28 E. ENVIRONMENTAL MATTERS General....................................................28 Air Quality................................................29 Water Quality..............................................30 Gas Plant Cleanup..........................................31 Ash Disposal...............................................31 F. CAPITAL REQUIREMENTS..........................................32 G. EMPLOYEES.....................................................32 2. PROPERTIES.........................................................34 A. UTILITY.......................................................34 Wisconsin Public Service Facilities........................34 Upper Peninsula Power Facilities...........................35 B. NONREGULATED..................................................36 ii3. LEGAL PROCEEDINGS..................................................36 Spent Nuclear Fuel Disposal.....................................36 Funding Decontamination and Decommissioning of Federal Facilities...........................................36 Environmental...................................................36 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................36 4A. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.................37 A. EXECUTIVE OFFICERS OF WPS RESOURCES CORPORATION...............37 B. EXECUTIVE OFFICERS OF WISCONSIN PUBLIC SERVICE CORPORATION....39 PART II 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS........................................41
WPS Resources was incorporated in Wisconsin in 1993. WPS Resources is a holding company for regulated utility and nonregulated business units. Principal operating subsidiaries and their approximate percentages of revenues and assets are:
Percent of Percent of
Revenues Assets
---------- ----------
Percent of | Percent of Net Income | Percent of | |
Wisconsin Public Service Corporation | 43% | 105% | 53% |
Upper Peninsula Power Company | 3% | 4% | 4% |
WPS Energy Services, Inc. | 49% | 3% | 33% |
WPS Power Development, Inc. | 7% | 1% | 8% |
WPS Resources Corporation | - | -13% | 3% |
Wisconsin Public Service, Corporation 65% 77%
Upper Peninsula Power Company 6% 7%
WPS Energy Services, Inc. 27% 4%and WPS Power Development Inc. 3% 10%are all Wisconsin corporations. Upper Peninsula Power is a Michigan corporation. The other listed
subsidiaries are Wisconsin corporations. Wisconsin Public Service and Upper Peninsula Power are both regulated utilities.
WISCONSIN PUBLIC SERVICE CORPORATION
Wisconsin Public Service Corporation
Wisconsin Public Service is a regulated electric and gas utility serving an 11,000 square-milesquare mile service territory in northeastern Wisconsin and a portion of the Upper Peninsula of Michigan. In 19992000, Wisconsin Public Service served 388,390395,063 electric retail customers and 229,905235,470 gas retail customers. Wholesale electric service is provided to various customers including municipal utilities, electric cooperatives, energy marketers, other investor-owned utilities, and a municipal joint action agency.
1999 Operating Revenues were:
State Wisconsin 96% Michigan 4%
Customers Electric 73% Gas 27%
Electric
Jurisdiction Retail 89% Wholesale 11%
Gas
Jurisdiction Retail 100% Wholesale 0%
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UPPER PENINSULA POWER COMPANY
In 1999,
2000 Operating revenues were: | ||||
| State | Wisconsin | 95% | Michigan | 5% |
| Customers | Electric | 69% | Gas | 31% |
| Electric | Retail | 89% | Wholesale | 11% |
| Gas | Retail | 100% | Wholesale | 0% |
Upper Peninsula Power is a regulated utility providedproviding electric service to a 4,500 square-milesquare mile area of Michigan's Upper Peninsula. Electric service was provided to 48,63650,272 retail customers. Wholesale electric service was provided to various municipal utilities, electric cooperatives, and other investor-owned utilities. Total revenues consisted of 92%91% retail sales and 8%9% wholesale sales.
WPS RESOURCES CAPITAL CORPORATIONResources Capital Corporation
WPS Resources Capital Corporation was created in 1999 as an intermediate holding company for the nonregulated subsidiaries of WPS Resources. Financing
for most nonregulated projects is expected to be obtained through nonrecourse
project financing. WPS Resources Capital Corporation will provide the equity for these projects.the nonregulated subsidiaries of WPS Resources. At the end of 1999,2000, WPS Resources Capital Corporation had total assets of $59.1$108.6 million, consisting mainly of its investments in WPS Energy Services and WPS Power Development.
WPS ENERGY SERVICES, INC.Energy Services, Inc.
WPS Energy Services is a nonregulated subsidiary of WPS Resources.Resources Capital Corporation. WPS Energy Services provides energy and related products and services in the nonregulated energy market throughout the Midwest and eastern United States. WPS Energy Services had revenues of $292$955.6 million in 1999.
2000. Revenues in 2000 have risen significantly over 1999 due to growth in sales volume and the large increase in the cost of natural gas experienced in 2000.
WPS POWER DEVELOPMENT, INC.Power Development, Inc.
WPS Power Development is also a nonregulated subsidiary of WPS Resources.Resources Capital Corporation. Energy-related services provided by WPS Power Development include project development, engineering and management services, and operations and maintenance services. WPS Power Development currently owns, through subsidiaries, electric generation facilities in Wisconsin, Maine, Pennsylvania, and New Brunswick, Canada. Synthetic fuel processing and steam production facilities are located in Alabama,Kentucky, Arkansas and Oregon. Energy-related
services provided by WPS Power Development, include acquisition and investment
analysis of generation facilities, engineering and management services, and
operations and maintenance services. WPS Power Development had revenues of $35$128.1 million in 1999.
REGULATORY OVERSIGHT
WPS Resources is exempt from registration under the Public Utility
Holding Company Act of 1935. We are subject to various requirements and
prohibitions of the Wisconsin Public Utility Holding Company Act.
The Public Service Commission of Wisconsin regulates the Wisconsin
retail utility operations of Wisconsin Public Service. The Michigan Public
Service Commission regulates Michigan retail utility operations of
Upper Peninsula Power and Wisconsin Public Service. Both utility companies
are subject to regulation of their wholesale electric rates, hydroelectric
projects, and certain other matters by the Federal Energy Regulatory
Commission. In addition, both are subject to limited regulation by local
authorities. Each utility follows Statement of Financial Accounting Standards
No. 71, "Accounting for the Effects of Certain Types of Regulation." Their
financial statements and the consolidated financial statements of
WPS Resources reflect the different ratemaking principles of various
jurisdictions. The operation of the Kewaunee Nuclear Power Plant is subject
to the jurisdiction of the Nuclear Regulatory Commission.
Hydroelectric projects operated by WPS Power Development, in the State
of Maine are also regulated by the Federal Energy Regulatory Commission.
-2-
There is no comparable Canadian regulation on the hydroelectric facilities
operated in Canada.
AN OVERVIEW OF INDUSTRY RESTRUCTURING
GENERAL
In April 1994, the Federal Energy Regulatory Commission issued Order 888
on open access electric transmission and stranded cost recovery due to
wholesale competition. Order 888 directs the creation of power pools and
independent system operators to meet the open access requirements and
principles.
An independent system operator is an independent third party that would
regulate the operation of the transmission systems in a defined geographic
area. Independent system operators would monitor the generation, transmission
and distribution systems, direct the operations of transmission facilities,
administer open access transmission tariffs, and direct generation. In an
independent operator system, the transmission system assets may be retained by
the electric utilities.
In 1999 Wisconsin enacted the Reliability 2000 Act. This law requires a
utility holding company to have its Wisconsin utility subsidiary contribute
its transmission assets to the Wisconsin Transmission Company in exchange for
relief from the asset cap limitation on non-utility investments by its parent
holding company. The Wisconsin Transmission Company would be a member of the
Midwest Independent System Operator. The Wisconsin Transmission Company would
own the transmission assets contributed. The Federal Energy Regulatory
Commission has jurisdiction in setting rates for both independent system
operators and independent transmission companies.
In April 1994, the Federal Energy Regulatory Commission also issued
Order 889 which requires public utilities to develop a system to communicate
information about their transmission systems and services electronically to
all potential customers at the same time. Wisconsin Public Service is
included in the system created by the Mid-America Interconnected Network, one
of the existing electric reliability regions in the United States.
EFFECT ON OPERATIONS
Industry restructuring will create competitive markets which could make
the recovery of investment dollars in customer rates less certain. We believe
that the cost of our utility assets will continue to be recoverable in the new
competitive environment.
We expect that increased competition in a deregulated environment will
put greater emphasis on managing costs and put pressure on operating margins
at the utility companies.
REGIONAL MERGER ACTIVITIES
Industry restructuring has been accompanied by merger activity in the
region, impacting the competitive environment. We anticipate that mergers and
acquisitions will continue to be one means to gain an advantage in a
competitive environment.
-3-
Y2K COMPLIANCE
The beginning of the new year proved to be uneventful for WPS Resources
and its subsidiaries. No significant problems were experienced with our
operational or management systems entering the year 2000.
FORWARDING-LOOKING STATEMENTS
Except for historical data and statements of current fact, the information contained in this Annual Report constitutes forward-looking statements.statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Any references made to plans, goals, beliefs, or expectations in respect to future events and conditions or to estimates are forward-looking statements. We believe our expectations are based on reasonable assumptions. Forward-looking statements are inherently uncertain and subject to risks. Such statements should be viewed with caution. Actual results or experience could differ materially from the forward-looking statements as a result of many factors. Forward-looking statements in this report include, but are not limited to statements regarding:
1) expectations regarding future revenues,
2) estimated future capital expenditures,
3) the expected costs of purchased power in the future,
4) the costs of decommissioning nuclear generating plants,
5) future cleanup costs associated with gas plant sites, and
6) statements in the Management Discussion and Analysis of
Financial Condition and Results of Operations regarding trends
or estimates.
We cannot predict the course of future events or anticipate the interaction of multiple factors beyond our control and their effect on revenues, project timing and costs. Some risk factors that could cause results different from any forward-looking statement include:
1) the speed and degree to which competition enters the electric
and natural gas industries,
2) state and Federal legislation, regulation, interpretation, or
enforcement,
3) regulatory initiatives,
4) economic climate,
5) industrial, commercial, and residential growth,
6) environmental regulation,
7) weather,
8) timing and extent of changes in commodity prices,
9) interest rates,
10) capital markets, and
11) opportunities for expansion in nonregulated energy markets.
We make no commitment to disclose any revisions to the forward-looking statements as a result of, facts, events, or circumstances after the date of this report.
B. ELECTRIC UTILITY MATTERS
ELECTRIC OPERATIONS
Electric Operations
In Wisconsin, the largest communities served by Wisconsin Public Service at the electric retail level are the cities of Green Bay, Oshkosh, Wausau, and Stevens Point. In Michigan, the largest community served at the electric retail level is the area of Houghton/Hancock, which is served by Upper Peninsula Power.
-4-
GENERATING CAPACITY
Generating Capacity
In 1999,2000, Wisconsin Public Service reached a firm net design peak of 1,7511,793 megawatts on July 30 between 10 a.m. and 3 p.m.the afternoon of August 31. The summer time period is the most relevant for capacity planning purposes. During the actual peak,
there were firm purchases of 15 megawatts and firm sales of 110 megawatts.
Planned generatorgeneration capability for the 19992000 summer period was 1,9791,980 megawatts. Future supply reserves are estimatedexpected to be abovemeet the minimum 18% planning criteria for 20002001 and 2001.2002.
For additional information regarding our generation facilities, see "UTILITY" in Part I, Item 2, PROPERTIES.
In 1997, the Public Service Commission of Wisconsin authorized the
construction of a 179-megawatt combustion turbine generating facility by
De Pere Energy LLC, an affiliate of SkyGen LLC, an independent power producer.
The facility was completed and placed in service in early June 1999.
Effective June 1, 1999, Wisconsin Public Service entered into a 25-year
contract to purchase capacity and energy from the facility. This contract is
accounted for as a capital lease. Under the terms of the contract, the
De Pere Energy Center will be converted to a combined-cycle unit with a summer
rating of 233 megawatts sometime after the year 2003. A combined-cycle unit
recovers heat from hot exhaust gases to produce steam that drives a steam
turbine generator to produce approximately one-third of the power generated.
Wisconsin Public Service will furnish natural gas for the facility under
existing gas tariffs. The energy center will be operated by
De Pere Energy LLC. See NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,
Note 13, Commitments and Contingencies regarding "Long-Term Power Supply."
In 1999,2000, Upper Peninsula Power purchased 86%89% of its total energy requirements. Remaining energy requirements were supplied by hydroelectric and combustion turbine facilities owned by Upper Peninsula Power. During 1999, 502000, 65 megawatts of firm power were purchased from Commonwealth Edison and
15 megawatts were purchased from Wisconsin Public Service. Upper Peninsula Power also purchased non-firm power from Wisconsin Public Service and Wisconsin Power and Light CompanyAlliant Energy Corporation among others. The purchasepurchases from Commonwealth EdisonWisconsin Public Service represented 45%75% of Upper Peninsula Power's total energy requirements in 1999. These purchase contracts were effective through
December 31, 1999.2000. Upper Peninsula Power has contracted for 65 megawatts of capacity and energy from Wisconsin Public Service for the years 2000, 2001 and 2002.
In 2000, Wisconsin Public Service completed constructionpurchased Consolidated Water Power Company's ownership interest in Wisconsin River Power Company increasing the ownership interest of a 9-megawatt wind
facility in 1999. The facility includes 14 wind turbines installed on private
farmlands located in the Town of Lincoln in Kewaunee County, Wisconsin. The
plant became operational in June 1999 at a cost of $10.3 million. Wisconsin Public Service ownsfrom 33.1% to 66.88% of the outstanding capital stock of Wisconsin River Power. Wisconsin River Power Company,is the owner and operator of two dams and related hydroelectric plants on the Wisconsin River having an aggregate installed capacity of approximately 39 megawatts. KEWAUNEE NUCLEAR POWER PLANT
GENERALThe acquisition was effective January 1, 2001. Wisconsin Power and Light Company has an option to purchase 50% of the additional capital stock of Wisconsin River Power acquired by Wisconsin Public Service in 2000. Wisconsin Power and Light must file with the Securities and Exchange Commission by March 31, 2001 to exercise this option. Upon exercise of this option, Wisconsin Public Service and Wisconsin Power and Light would each own 50% of Wisconsin River Power.
Kewaunee Nuclear Power Plant
General
The Kewaunee plant is a pressurized water reactor plant with a nameplate capacity of 562 megawatts. ItCurrently, it is currently jointly owned by Wisconsin Public Service (41.2%), Wisconsin Power and Light Company (41.0%), and Madison Gas and Electric Company (17.8%). SeeWPS Resources owns a 20% interest in Nuclear Management Company LLC, the discussion on ownership below for
-5-
information on the future ownership of the Kewaunee plant. Wisconsin Public
Service is the plantplant's current operator. The plant's operating license expires in 2013.
OWNERSHIP
Future Ownership
On September 29, 1998, Wisconsin Public Service and Madison Gas and Electric Company entered into an agreement to transfer Madison Gas and Electric's 17.8% share of the Kewaunee plant to Wisconsin Public Service. The closing of this agreement isremains contingent upon regulatory approvals.approvals from the Nuclear Regulatory Commission. After the transfer, ourWisconsin Public Service will have a 59% ownership interest in the plant will be 59.0%.plant. The remaining co-owner, Wisconsin Power and Light Company, will retain its 41.0%41% ownership interest in the plant.
Under the terms of the agreement, Wisconsin Public Service will pay Madison Gas and Electric an amount equal to its depreciated book value for its share of the Kewaunee plant at the ownership transfer date. The ownership transfer date is contingent upon installation of new steam generators at the Kewaunee Nuclear Plant. Shutdown of the plant for installation of the steam generators is anticipated to be in the fall of 2001. Madison Gas and Electric will not participate in the costs related to the installation. Madison Gas and Electric will also provide to Wisconsin Public Service:
1) its qualified decommissioning trust at the date of the ownership change,
2)
accessa commitment to dedicate funds available in its nonqualified trust for decommissioning, and3) a commitment to make annual
futuredecommissioning contributions of $8,091,000 through the year 2002.
These funds and contributions are expected to fully fund Madison Gas and Electric's share of total expected plant decommissioning costs.
Wisconsin Public Service will then assume responsibility for 59.0%59% of the costs of decommissioning the plant. Madison Gas and Electric will retain its obligation for its share of the costs for final disposal of spent nuclear fuel created up to the time of ownership transfer. Madison Gas and Electric will be provided with an option to purchase power from Wisconsin Public Service, at a fixed price, for two years following the date of the ownership transfer. The amount of potential power to be provided is approximately equal to Madison Gas and Electric's current share of the power generated by the plant.
STEAM GENERATOR REPLACEMENT
Steam Generator Replacement
On April 7, 1998, the Public Service Commission of Wisconsin approved the Wisconsin Public Service application for replacement of the two steam generators at the Kewaunee plant. The total cost of replacing the steam generators is estimated to be approximately $113$120 million. After the acquisition of Madison Gas &and Electric's interest in the Kewaunee Plantplant our share of the cost is estimated to be $66.7$70.8 million. Madison Gas and Electric will not be responsible for any portion of the costs of the steam generator
replacement as a result of the change in ownership discussed above. Due to delays in the manufacture of the new steam generators, the replacement is now planned for the scheduled forrefueling outage in the fall of 2001 and willis expected to take approximately 60 days.
On November 27,April 21, 2000, the Kewaunee plant was shut down for the scheduled spring 2000 refueling outage. The plant had operated continuously since startup from the 1998 refueling outage for a total of 511 days. On June 2, 2000, the plant returned to service from the 19982000 planned maintenance and refueling outage. Inspection of the plant's two steam generators showed that the repairs made to the tubes in 1997previous outages were holding up well and few additional repairs were needed.well. A major overhaul was also performed on the main turbineelectrical generator. The next shutdown for refueling and
maintenance is scheduled for the spring of 2000. The Kewaunee plant completed
1999ended year 2000 with 100% availability.
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FORMATION OF THE NUCLEAR MANAGEMENT COMPANY206 days of continuous operation since startup from the 2000 refueling outage.
Formation of Nuclear Management Company, LLC
On February 25, 1999, Northern States Power Company, Wisconsin Electric Power Company, and Wisconsin Public Service announced the formation of Nuclear Management Company. Subsequently, Alliant Energy Corporation also became a participant in Nuclear Management Company. Combined, the four utilities operate seven nuclear generating units at five locations for a combined generating capacity of approximately 3,760 megawatts. This represents between 12% and 25% of the electricity generated by the individual utilities. In 2000 Consumers Power announced that it will join Nuclear Management Company upon the receipt of regulatory approvals.
Nuclear Management Company was formed to sustain long-term safety, optimize reliability, and improve the operational performance of the individual nuclear generating plants. Overall plant operations will continue to be staffed by the same plant personnel. Initially, theThe utilities will continue to own their respective plants, be entitled to energy generated at the plants, and retain the financial obligations for their safe operation, maintenance, and decommissioning. Each utility will obtainof the current Nuclear Management Company participants has received the required state and Federal regulatory approvals priorapprovals. All non-union Kewaunee plant employees of Wisconsin Public Service were transferred to its participation in Nuclear Management Company.
LOW-LEVEL RADIOACTIVE WASTE STORAGE
On June 26, 1997,Company on January 1, 2001.
Plant Regulation
The Kewaunee plant has been implementing a plan over the Midwest Compactlast several years to make improvements to plant processes and procedures. Assessments performed by Nuclear Management Company and Kewaunee staff, the Nuclear Regulatory Commission, halted developmentthe Institute of Nuclear Plant Operations, and others have reinforced the need to continue this improvement.
In 2000, the Nuclear Regulatory Commission Revised Oversight Process was issued which lowered the requirements defining when a six-state regional disposal facility for low-level radioactive waste storage
in Ohio.formal investigative process needed to be initiated at a nuclear plant. As a result, processes at the Kewaunee plant need to be revised. The Midwest Compactimprovements necessitated by the Nuclear Regulatory Commission establishedRevised Oversight Process have increased the urgency to implement process improvements currently underway at the Federal
Low Levelplant. In addressing these needed improvements, the Nuclear Regulatory Commission acknowledged the safety record of the Kewaunee plant and its ability to continue operations. However, management believes that the Kewaunee plant must proceed with the current process improvement project to continue operations.
In order to address the concerns raised by the Nuclear Regulatory Commission, it is estimated that additional costs will be incurred in 2001 of $23.8 million over that requested in the most recent rate case filings of Wisconsin Public Service and the other plant co-owners. The Wisconsin Public Service share of the $23.8 million may be as much as $14 million. Nuclear Management Company has requested approval of the Kewaunee co-owners to spend up to $3.6 million to allow the Kewaunee plant staff to continue to address these issues over the next three months while further definition of the project is developed.
Additional incremental operating costs for these improvements over the period of 2002 through 2005 are estimated to be $51.7 million and will be included in future rate requests of the Kewaunee co-owners. The Kewaunee co-owners have submitted to the Public Service Commission of Wisconsin a request for deferral of the 2001 and 2002 incremental costs associated with this issue.
Total additional capital costs associated with these improvements, over the 2001 through 2003 period are estimated to be $4.9 million.
Low-Level Radioactive Waste Policy Act of 1980, cited dwindling regional waste
volumes, continued access to existing disposal facilities, and potentially
high development costs as the primary reasons for the decision.Storage
The Midwest Compact Commission continues to monitor the availability of disposal facilities for the low-level radioactive waste created by all Midwest generators. A site at Barnwell, South Carolina, has been available for the storage of low-level radioactive waste from the Kewaunee plant in the past. The availability of this site for future waste storage is uncertain. As a result of technology advances, waste compaction, and the reduction of waste generated, the Kewaunee plant has on-site low-level radioactive waste storage capacity sufficient to store the amount ofall low-level waste expected at the plant over the next 10-year period.
DEPRECIATION AND DECOMMISSIONING10-years.
Depreciation and Decommissioning
In 1997, the Public Service Commission of Wisconsin directed the owners of the Kewaunee plant to develop depreciation and decommissioning cost projections based on full cost recovery of the estimated obligation by the end of 2002. PreviousPreviously, cost estimates werehad been based on full collection of funds required for decommissioning by 2013, the year in which the operating license expires. The order was prompted by uncertainty regarding the expected useful life of the plant without steam generator replacement. In 1998, after the
approvalThis method of the project to replace the steam generators, therecovery was discontinued on December 31, 2000 as a result of a recent Public Service Commission of Wisconsin ruled that, untilrate order for 2001 and 2002. This rate order requires the replacementinvestment in the new steam generators are
installed, we should continue to depreciate and collect decommissioning funds
at rates sufficient to fully recover costs by 2002. Oncebe recovered using the replacementsum-of-the-years-digits depreciation method over an 8.5 year period beginning with completion of the new steam generators are installed,installation. The unrecovered plant investment at the Public Service Commissionend of Wisconsin has
directed Wisconsin Public Service to depreciate and collect decommissioning
funds sufficient to recover remaining costs2000 will be recovered over a period ending 8.5 years after the installation of approximately 8.5
years. An accelerated depreciation method will be utilized for calculating
depreciation expense. Thethe steam generators are scheduledusing a straight-line remaining life depreciation methodology. The order further provides for replacement in
the fall of 2001. A review of the depreciation andfunding period for decommissioning costs and
their rate of recovery will be considered during the next rate case in 2000
for rates to be effective in 2001.
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At December 31, 1999,2000, the net carrying amount of our investment in Kewaunee was approximately $28.2$52.5 million. The current cost for our share of the estimated costs to decommission Kewaunee is $200.7$211.4 million. DecommissioningWisconsin Public Service decommissioning trust assets at December 31, 19992000 totaled $198.1$207.2 million.
Wisconsin and Michigan retail customers of Wisconsin Public Service are
responsible for approximately 91% of our share of the plant's costs.
During 1999, $8.32000, $8.9 million of depreciation expense related to unrecovered plant investment was recognized compared with $8.2$8.3 million recognized in 1998.1999. The 19992000 decommissioning funding level was $9.2$8.9 million compared with $17.2$9.2 million in 1998, largely due to good investment return reflected1999. Beginning in 2001, the
1998 decommissioning funding plan. Customer rates, which became effective inlevel will be $2.6 million based on the Wisconsin jurisdiction on January 15, 1999, are designed to recoverextension of the accelerated plant depreciation and provide funds for decommissioning.funding period.
Additional discussion of Kewaunee plant matters is included in MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION and the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Notes 1(i),
1(k), 1(l), and 13.
FUEL SUPPLY
ELECTRIC GENERATION MIX
Electric Generation Mix
Wisconsin Public ServiceService's electric generation mix for 2000 and 1999 and 1998 was:
1999 1998
---- ----
Energy Sources
Coal 64.0% 69.2%
Nuclear 14.5% 12.5%
Hydro 2.0% 1.7%
Natural gas/fuel oil 2.2% 1.8%
Purchased power 17.3% 14.8%
2000 1999 Energy Sources Coal 63.3% 64.0% Purchased power 19.4% 17.3% Nuclear 12.0% 14.5% Natural gas/fuel oil 3.4% 2.2% Hydro 1.9% 2.0%
Purchased power represents short-term energy purchases.
FUEL COSTS
Fuel Costs
Wisconsin Public ServiceService's fuel costs for 2000 and 1999 and 1998 were:
1999 1998
---- ----
Fuel Source
2000 1999 Fuel Sources ($ per million Btus) Coal $1.08 $1.08 Nuclear 0.45 0.45 Natural gas 4.42 3.05 Fuel oil 6.46 4.03 Propane - 4.98
Coal $1.08 $1.04
Nuclear 0.45 0.42
Natural gas 3.05 2.59
Fuel oil 4.03 3.89
Propane 4.98 N/A
Costs presented above are measured in dollars per million Btus.
COAL
Coal is the primary fuel source for Wisconsin Public Service, most of which is from the Powder River Basin mines located in Wyoming and Montana. Powder River Basin coal is very low in sulfur and meets the standards of the 1990 Clean Air Act for the Year 20002001 and beyond. This coal has been our least-cost coal source from any of the subbituminous coal-producing regions in the United States.
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Wisconsin Public Service is testingcontinues to test alternative coal sources for its Pulliam and Weston plants. Alternative sources could provide more competitive market pricing and higher Btu content. Coal with higher Btu content will increase generation output and provide flexibility in meeting peak electric demands.
Wisconsin Public Service purchases most of the coal for its wholly ownedwholly-owned plants and the jointly-owned Edgewater and Columbia plants under relatively short-term contracts of up to three years duration. Historically, Wisconsin Public Service has purchased the subbituminous coal directly from the producer. For 2001 to 2003, approximately 23% of the coal requirements for the wholly-owned plants and 8% for the jointly-owned plants have been awarded to a marketer. One long-term contract covers approximately 16%24% of total requirements and has take-or-pay obligations totaling $94.2$89.2 million for the years 20002001 through 2016.
Coal transportation for these plants is purchased under contracts of up to five years duration. Over 90% of our coal transportation is under competitive transportation agreements which are expected to continue to contribute to competitive fuel costs. Union Pacific Railroad Company is the exclusive provider of coal transportation for the jointly-owned Edgewater plant. The plant operator, Wisconsin Power and Light, Company, filed a complaint with the Surface Transportation Board on December 30, 1999 claiming the tariff charged by Union Pacific for unit train service between the Powder River Basin and the Edgewater plant is unreasonably high. The Surface Transportation Board is currently reviewing the complaint and is expected to issue a decision in the latter portion of 2001.
See NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Note 13, COMMITMENTS AND CONTINGENCIES regarding "Coal Contracts."
NUCLEAR FUEL CYCLE
Nuclear Fuel Cycle
Wisconsin Public Service purchases uranium concentrates, conversion services, enrichment services, and fabrication services for nuclear fuel assemblies at the Kewaunee plant. Approximately one-third1/3 of the 121 fuel assemblies are removed from the reactor every 18 months and replaced with new assemblies. Removed assemblies are placed in storage at the plant site pending permanent disposal by the United States Department of Energy.
Uranium concentrates, conversion services, and enrichment services are purchased either on the spot market, through a bidding process, or using existing contracts.
The uranium inventory policy of Wisconsin Public Service requires that sufficient inventory be maintained for two reactor refuelings. As of December 31, 1999,2000, approximately 983,000884,000 pounds of yellowcake (a processed form of uranium ore), or its equivalent, were held in inventory for the plant. Inventory includes uranium under contract.
Conversion services are complete for the nuclear fuel reloads scheduled in 2000, 2001 and 2003.
A fixed quantity of enrichment services has been contracted through the year 2004. Wisconsin Public Service has the option of purchasing future enrichment services under an existing contract or by purchasespurchasing from the spot market.
Wisconsin Public Service has contracts in place for fuel fabrication services for the next decade. These contracts contain force majeure and
termination for convenience provisions.
If, for any reason, the Kewaunee plant was forced to suspend operations permanently, the maximum exposure related to fuel contracts wouldis not be expected to exceed $274,000.$6,500,000. The increased exposure is due to a new long- term fuel fabrication contract with Westinghouse. No financial penalties associated with the present uranium supply, conversion service, and enrichment agreements exist. -9-
The fuel fabrication contract contains force majeure and termination for
convenience provisions. Uranium inventories could be sold on the spot market.
SPENT NUCLEAR FUEL DISPOSAL
Spent Nuclear Fuel Disposal
The Federal government has the responsibility to dispose of or permanently store spent nuclear fuel. Legislation is being considered on the Federal level to provide for the establishment of an interim storage facility. Spent nuclear fuel is currently being stored at the Kewaunee plant. With minorMinor plant modifications planned for
2001,being made to the spent fuel pools are almost complete. Upon completion, the Kewaunee plant should have sufficient fuel storage capacity until the end of its licensed life in 2013. Legislation is being considered on
In July 1996, the Federal level to provideUnited States Court of Appeals for the establishmentDistrict of Columbia had ruled that the Department of Energy had an interim storage facility.unconditional obligation to begin accepting, transporting, and disposing of spent nuclear fuel by January 31, 1998. Wisconsin Public Service has joined other utilities in a motion to enforce the July 1996 ruling. On January 31, 1998, the United States Department of Energy failed to comply with its obligation to begin removing spent nuclear fuel from plant sites as required by the Nuclear Waste Policy Act of 1982. Wisconsin Public
Service joined other utilities in a motion to enforce the July 1996 mandate of
the United States Court of Appeals for the District of Columbia. The Court
had ruled that the Department of Energy had an unconditional obligation to
begin accepting, transporting, and disposing of spent nuclear fuel by
January 31, 1998. On May 5, 1998, the United States Court of Appeals for the District of Columbia issued a decision denying the motion to enforce the Court's 1996 mandate. The denial centered on the question of whether the Department of Energy could properly use the Nuclear Waste Fund as a source to pay damages. The Court also ruled that the question is not ready for review. The Court indicated that compelling the Department of Energy to submit a detailed program for disposing of spent fuel from utilities and declaring that the utilities are relieved of their obligation to pay fees to the Nuclear Waste Fund falls outside the scope of the Court's authority. The scope of the Court's mandate was limited to defining the nature of the Department of Energy's statutory obligations and did not extend to requiring the Department of Energy to perform under its contracts with the utilities. Our current recourse is to request reimbursement from the Department of Energy for expansion of disposal facilities. Litigation on this issue continues in the industry and we continue to monitor its progress.
FUNDING DECONTAMINATION AND DECOMMISSIONING OF FEDERAL FACILITIES
Funding Decontamination and Decommissioning of Federal Facilities
A surcharge imposed by the Energy Policy Act of 1992 requires nuclear power companies to fund the decontamination and decommissioning of Department of Energy facilities relating to the processing of nuclear fuel. As a result, we are required to pay a surcharge onfor uranium enrichment services purchased from the Federal government prior to October 23, 1992. On an inflation adjusted basis, our portion of the obligation related to the Kewaunee plant is approximately $600,000 per year through the year 2007. Madison Gas and Electric has agreed to continue to pay its portion of this annual assessment after the transfer of their ownership interest in the plant to Wisconsin Public Service.
Wisconsin Public Service and a number of other nuclear power companies sued the Department of Energy in the United States Court of Federal Claims seeking a refund of the previously paid decontamination and decommissioning surcharge payments. This claim continues in the Court of Federal Claims pending the settlement of other litigation. On August 13, 1998, 22 utilities filed a complaint in the U.S. District Court for the Southern District of New York seeking a declaratory judgement that certain sections of the Energy Policy Act are unconstitutional. As of December 1999,2000, the Department of Energy and the utilities continue legal proceedings in both the Court of Federal Claims and the United States District Courts. No final rulings have been issued.
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REGULATORY MATTERS IN THE WISCONSIN JURISDICTION
INDUSTRY RESTRUCTURING
Formation of American Transmission Company
In 2000, Wisconsin Public Service along with Alliant Energy, Madison Gas and Electric, Wisconsin Electric, and Wisconsin Public Power Inc. formed American Transmission Company, LLC, as required by Wisconsin Act 9 to be eligible for holding company asset cap relief. American Transmission Company is a regulated transmission company that will construct, operate, maintain and expand transmission facilities in eastern Wisconsin, the Upper Peninsula of Michigan, and a portion of Illinois. American Transmission Company will provide service to all customers, in an effort to support an effective competitive energy market. The member utilities transferred ownership of their transmission assets to American Transmission Company on January 1, 2001 in return for equity interests in the company. Wisconsin Public Service transferred approximately $70.8 million of its transmission assets in exchange for a 12.1 % equity interest in American Transmission Company. As provided by Wisconsin Act 9, as a result of transferring these transmission assets WPS Resources is no longer subject to the asset cap limitation on nonregulated investments of the Wisconsin Holding Company Act. Upper Peninsula Power intends to transfer its transmission assets in exchange for an ownership interest in American Transmission Company in the first half of 2001. American Transmission Company is a member of the Midwest Independent System Operator.
Regulatory Matters in the Wisconsin Jurisdiction
Industry Restructuring
As was the case since 1997, electric reliability continuescontinued to be the primary issue for the Public Service Commission of Wisconsin during 2000 and the state's legislature.into 2001. Industry restructuring and retail generation open access remain secondary issues in the state. The priorities of the Public Service Commission of Wisconsin's top priorities forWisconsin in 2000 were:
1) the
past two years have beencompletion of a Market Power study,2) the completion of dockets and orders required to
develop the utility infrastructure necessary to assure reliable electric service and remove the barriers to competition at the wholesale level. Laws addressing reliability issues were passed in 1998 and 1999. The Statelaunch American Transmission Company,3) completion of
Wisconsin 1999 Budget Act included a major package of energy reforms affecting utilities and utility holding companies. The package of energy reforms is generally referred to as "Reliability 2000." The law: - Changes the asset cap for nonutility investments for three investor-owned utility holding companies, including WPS Resources,dockets to allowinvestmentsutility membership inenergyMidwest Independent System Operator,4) continuation of dockets to approve the construction of the Weston to Arrowhead transmission line, and
energy-related business which would be exempt5) completion of orders to transfer the responsibility of conservation, load management, and public benefits from the
asset cap calculation, - Requiresutilities to the Wisconsin Department of Administration with utilitysubsidiariescustomer financing.
The hearings related to the Weston to Arrowhead transmission line are anticipated to be completed in 2001. The Weston to Arrowhead transmission line is a 250-mile 345-kilovolt transmission line from Wausau, Wisconsin to Duluth, Minnesota to be constructed by Wisconsin Public Service and Minnesota Power and Light Company. Wisconsin Public Service has an option to transfer its portion of these three utility
holding companiesthe construction project to place their transmission assets into
a statewide transmission company,the American Transmission Company, for completion, in exchange for anadditional equity interest in American Transmission Company. WPS Resources would continue to fund the construction of the line by American Transmission Company. Commission consideration of generation ownership and construction proposals from Wisconsin Electric Power, Customer's First (a group of environmental and customer groups), municipal utilities, and cooperative energy providers will also be addressed in 2001.
The Public Service Commission of Wisconsin hired a consultant to perform a market power analysis for Wisconsin and the Upper Peninsula of Michigan electric markets as part of the requirements of Reliability 2000 legislation. The consultant completed a study of the market conditions in Wisconsin, which was then published for comment. The Commission received comments and in December of 2000 issued a "Report to the Legislature on Horizontal Market Power in Wisconsin Electric Markets." The Commission concludes that the study "provides a useful starting point for the analysis of potential horizontal market power problems in Wisconsin." The Commission concurred with numerous comments it received, including those of Wisconsin Public Service, that complete and immediate wholesale and retail deregulation as simulated in the study is not in the public interest, especially in light of the developments in California. The Commission agreed with the conclusions in the study that more transmission company,is needed and contracts between generators and customers may be an effective form of market power mitigation. Finally, the Commission indicated that horizontal market power issues are a complex subject that will require further study before actions to mitigate market power are considered.
Independent System Operator
The Midwest Independent System Operator plans to become operational in the fall of 2001 after being granted status as a condition of applying the new asset cap provisions,
- Increases targets for retail electricity sales from
renewable resources. Targets would begin at 1/2% of
total energy salesRegional Transmission Organization by the endFederal Energy Regulatory Commission after a January 2001 compliance filing. As required by Wisconsin Act 9, Wisconsin Public Service, Wisconsin Electric, Madison Gas and Electric, Northern States Power Company - Wisconsin, and Wisconsin Power and Light have all filed and received Public Service Commission of 2001Wisconsin and increaseFederal Energy Regulatory Commission approval to 2.2% of total energy sales by the end of 2011,join and - Increases, by 50%, the amount of ratepayer funding for
public benefits spending used for low-income energy
assistance, conservation, and renewable energy research.
The statewide transmission company will be owned by those utilities
transferring transmission assets into the new company. Other Wisconsin public
utilities and electric cooperatives may acquire an equity interest in the
transmission company by transferring transmission assets to the transmission
company. The transferring utility is required to provide operation and
maintenance of these assets for a three-year period. The transmission company
is required to apply for membership inhave joined the Midwest Independent System Operator. These legislative changes do not require any public utility to
contribute its transmission facilities to the transmission company. The bill
only requires such a transfer as a conditionDuring 2000, three major members of granting relief to a public
utility holding company from the asset cap.
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INDEPENDENT SYSTEM OPERATOR
A major regulatory concern in a restructured electric industry is the
establishment of independent system operators. An independent system operator
is an independent third party that would regulate, on a "real-time" basis, the
operation of the transmission systems in a defined geographic area. The
system operator would:
1) monitor the generation, transmission, and distribution systems,
2) direct the operations of transmission facilities,
3) administer open access transmission tariffs,
4) manage parallel path flows,
5) monitor generation and transmission maintenance schedules, and
6) manage congestion on the transmission system.
The Wisconsin 1998 Reliability Act requires all eastern Wisconsin
utilities with transmission systems to join the Midwest Independent System Operator, by June 30, 2000. The Reliability 2000 Act also provides utility
holding companies reliefDynergy, Commonwealth Edison, and Ameren, requested approval from the Wisconsin Holding Company Act asset cap
limitation on nonutility investments if their utility subsidiaries contribute
their transmission assetsFederal Energy Regulatory Commission to this statewide transmission company. The
legislation requires one zone for pricing transmission services in eastern
Wisconsin. The result will be one transmission rate for all transmission
owners in eastern Wisconsin. The rate will be based on the average revenue
requirements of the member utilities.
Thewithdraw from Midwest Independent System Operator. Other Midwest Independent System Operator is currently workingmembers, including Wisconsin Public Service, have filed notifications that they will withdraw from Midwest Independent System Operator if one or more of the original three withdrawals are approved. The withdrawal of Dynergy, Commonwealth Edison, and Ameren will reduce the Midwest Independent System Operator region to Wisconsin and Minnesota, reducing its service territory to a size insufficient to be an effective Regional System Operator.
In addition to Midwest Independent System Operator another organization, Alliance Regional Transmission Organization, has filed with the Federal Energy Regulatory Commission to determine transmission rates.for Regional Transmission Organization status in the Midwest. Alliance is made up of a number of utilities serving portions of Michigan, Ohio, Virginia, West Virginia, and a small portion of Pennsylvania. The Federal Energy Regulatory Commission has approvedthree companies requesting withdrawal from the Midwest Independent System Operator rate methods, although several conditions are being contested.have indicated a desire to join Alliance. The Federal Energy Regulatory Commission is still considering a uniform
authorized allowed returnexpected to take action on equitythe withdrawal requests in early 2001 as well as the requests for each member transmission owner.
UTILITY BUSINESSES AND AFFILIATE INTEREST STANDARDS
In 1998,Regional Transmission Organization status of Midwest Independent System Operator and Alliance. Intervenors in this withdrawal case, including Wisconsin Public Service, have suggested to the WisconsinFederal Energy Regulatory Commission opened a docket to reviewthat the types of
services that a regulated utilityMidwest Independent System Operator and Alliance should be allowedrequired to provide. Participants
inmerge and provide one regional transmission organization for the Midwest. As a result, it is likely that this docket include all Wisconsin utilities; a heating, ventilating and air
conditioning contractor trade association; several power marketers; and
various special interest groups. The trade association is recommending
regulated utilities be limited towill delay the delivery of natural gas and electricity.
Any other services would need to be provided by the utility's unregulated
affiliates. The utilities are recommending that they be allowed to provide
services that are related to their core services, such as gas appliance
service. The record in this docket was closed in February 1999. The
Wisconsin Commission has taken no action on this docket and there are no
published plans to do so in the near future. The Wisconsin Commission will
open the second phase of this docket to determine the appropriate affiliate
interest requirements when a decision is reached in the first phaseoperations date of the docket regardingMidwest Independent System Operator. Until a Midwest Regional Transmission Organization is operational, the types of services a regulated utility may offer.
ELECTRIC SUPPLY ISSUESAmerican Transmission Company will operate the eastern Wisconsin transmission system.
Electric Supply Issues
The summer of 1999 provided a number2000 was generally cooler than normal, thus relieving much of challenges to maintaining the stress regarding reliability of the electricregional system that was experienced in 1999. In preparation for the region. In late July, Wisconsin
experienced somesummer of the highest temperature and humidity conditions in the
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last 105 years. These extreme conditions resulted in higher electric loads
than anticipated in the state and region, resulting in significant stress on
generation availability, transmission capacity, capacity prices and energy
prices. Price spikes reached $5,000 per megawatt hour in the region.2000, Wisconsin Public Service and other utilities in the other state, in accordance with Act 9 filed customer buyback tariffs which allow utilities met energy demands
through this period with no interruptionsto shed load during peak demand periods for customers willing to sell back all or a portion of firm customers and limited
financial consequences. A number of large interruptible customers on our
system experienced very high buy-through prices during this period. Due to
the high prices, many of these customers decided to temporarily shut down
operations during this period.
CUSTOMER RATE MATTERS
In 1999, the Edison Electric Institute reportedtheir supply. Wisconsin Public Service to bedeveloped and filed five tariffs, and the low-cost electric provider in the StatePublic Service Commission of Wisconsin among
investor-owned utilities. 1999approved four of them just prior to the summer season. Wisconsin Public Service opened the closed commercial and industrial direct load control program to more customer participation. In 2000, Wisconsin Public Service leased a number of portable diesel generators and installed them on various parts of the system for extra peaking capability.
Customer Rate Matters
In 2000, Wisconsin Public Service electric rates were 89%91% of the state average for some residential rates, 77%82% for commercial rates, and 80% for large industrial rates.
In 2000, Wisconsin Public Service filed for an electric rate increase effective for 2001. Wisconsin Public Service also had somefiled for a reopener for year 2002 with an additional increase of electric rates. Primary reasons for the rate increase were the cost of improvements to the electric transmission and generation infrastructure, improvements to the customer information system and the facilities system, the continuation of the lowest natural gas ratesautomated meter reading installation project, and the cost of fuel and purchased power.
On December 21, 2000, the Commission issued its order in Wisconsin in 1999. 1999 rates were 99% of the state average for
residential rates, 94% for commercial rates, and 72% for large industrial
rates.
The 1999this rate order forcase providing Wisconsin Public Service provided forwith an electric increase of $27.2 million, or 5.4%. The Commission did not order a rate
case reopener to resolve several issues for the year 2000. A2002 but indicated that Wisconsin Public Service could file for one if needed. The Commission order approved the request of Wisconsin Public Service for a
change in rates was filed under this reopener provision. The issues addressed
include:
1) construction of a combustion turbine for Madison Gas and
Electric Company,
2) deferral of 1998 costs related to tubing repairs at the
Kewaunee plant,
3) recovery of deferred Pulliam Unit 3 costs, and
4) changes in fuel transportation contracts and purchased power
costs.
Requests for approximately a $23.4 million increase in electric rates
were filed in 1999. No change in natural gas pricing was requested. The
resulting rate order maintained the current return on equity rate of 12.1% and granted a $21.1 million, or 4.6%, increasethe continuation of the installation of the automated meter reading system in the remainder of the Wisconsin Public Service gas and electric system. The new rates for 2000.
REGULATORY MATTERS IN THE MICHIGAN JURISDICTION
INDUSTRY RESTRUCTURINGbecame effective on January 1, 2001.
Regulatory Matters in the Michigan Jurisdiction
Industry Restructuring
On June 29, 1999,2, 2000, legislation was passed in Michigan, providing all electric customers of investor-owned and cooperative utilities the Michigan Supreme Court found that the Michigan
Public Service Commission didright to choose their generation supplier by January 1, 2002. This law is best characterized as industry restructuring rather than deregulation, since it does not have the statutory authority to order retailderegulate generation open access in Michigan. Following that decision, the Michigan
Commission determined that it had the authority to regulate open access
programs if the utilities volunteered to implement them. Detroit Edison and
Consumers Energy volunteered to implement open access programs previously
orderedservice provided by the current utilities even after January 1, 2002 when customers will be able to choose their electric supplier.
In addition to customer choice, the law includes a rate reduction and freeze for utilities serving more than 200,000 customers in Michigan, Commission and retail open access is in progressa mechanism to reduce market power in the Lower Peninsula of Michigan. A numberMichigan, a requirement that a market power study of parties have initiated
challengesthe market in the Upper Peninsula of Michigan Courtbe conducted, stranded cost and transition cost recovery mechanisms, an affiliate interest code of Appealsconduct, a customer education mechanism, and Supreme Court questioningvarious rules on customer and supplier business practices.
The Commission and the Michigan Commission's authorityutilities have started the process of developing the systems needed to approve voluntaryimplement the law. The Commission has opened generic dockets on code of conduct, customer education, stranded cost recovery, slamming and cramming protections, and bill disclosure of generation environmental effects, and has opened individual cases for each utility to develop the open access programs.
The Michigan Supreme Court has refused to hear this case until the Court of
Appeals has made its determination.
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In 1999, the Michigan Chamber of Commerce organized a coalition of
utilities, energy marketers, customers,tariffs and customer groups to develop
consensus legislation for generation open access. The effort produced several
versions of legislation over a 10-month period. The legislation was
negotiated with Consumers Energy and Detroit Edison and was introduced in
January 2000. This proposal is to be considered by the Michigan legislature
in early 2000.
CUSTOMER RATE MATTERS
In 1999,business practices. Wisconsin Public Service wasand Upper Peninsula Power are parties in all of these cases. Preliminary tariffs are expected in the lowest costfirst quarter of 2001.
Customer Rate Matters
In 2000, Wisconsin Public Service continued to be the lowest-cost provider of electric service in Michigan for all customer classes. Our electricclasses, although one other Upper Peninsula utility has equally low rates for residential and small commercial customers. Wisconsin Public Service rates were 79%72% of the state average for residential rates, 81%73% for commercial rates, and 78%86% for large industrial rates. We
Wisconsin Public Service and Upper Peninsula Power each have a one-for-one recovery mechanism for electric fuel and purchased power. Although a number of utilities froze their one-for-one recovery mechanisms during the 1990s, Wisconsin Public Service and Upper Peninsula Power did not request a freeze. In the current volatile electric energy market, it is felt that passing through these one-for-one costs of energy send the proper price signals to customers. This also had some ofhelps preserve the lowest natural gas
ratescompetitive markets that have been developing in Michigan in 1999. Our gas rates were 77% of the state average for
residential rates, 88% for commercial rates, and 61% for large industrial
rates.state.
Other than power supply and gas cost recovery adjustments, Wisconsin Public Service has not had a Michigan electric rate increase since 1987 or a
gas rate increase since 1986. Wisconsin Public Service anticipates filing a
rate request1987.
Regulatory Matters in Michigan in early 2000.
REGULATORY MATTERS IN THE FERC JURISDICTION
CUSTOMER RATE MATTERSthe Federal Energy Regulatory Commission Jurisdiction
Customer Rate Matters
Other than a transmission open access tariff casecases, ancillary service rates, and an adjustmentadjustments for a fuel buyout,buyouts, Wisconsin Public Service has not had a full Federal Energy Regulatory Commission wholesale rate case since 1987.
WHOLESALE STATUS
Open Access Transmission Tariff
Wisconsin Public Service continuesturned over its transmission system to participateAmerican Transmission Company in exchange for an ownership share of this single purpose transmission company based on the wholesale
electric market primarily with municipal electric utilities and electric
distribution cooperatives. In 1999,net book value of its transmission assets on January 1, 2001. Wisconsin Public Service entered intofiled a three-year contractnew transmission open access tariff with Upper Peninsula Power to supply 65 megawatts of
baseload energy beginning January 1, 2000. Although the future of wholesale
electric sales within the regulated utility is uncertain, we continue to serve
customers under existing contracts.
In 1999, Wisconsin Public Service provided 31 wholesale electric
customers with either all or a portion of their power supply needs.
Wholesale customers in 1999 included 7 municipal customers, 3 electric
cooperatives, 9 investor-owned utilities, 11 marketers, and 1 municipal joint
action agency. Total wholesale sales for resale in 1999 were approximately
1.95 million megawatts of firm sales and various levels of interruptible and
non-firm service. Total wholesale sales for resale represented 16.4% of
Wisconsin Public Service's electric sales volume in 1999 compared with 17%
in 1998.
The wholesale electric market continues to be influenced by the
availability of transmission, reliable and economic capacity, and energy.
Changing markets, state and Federal regulatory and legislative agendas and
uncertainties regarding deregulation continue to impact the wholesale market
and how WPS Resources and its subsidiaries will participate in the future.
REGULATORY COMPLIANCE
An issue in a 1997 complaint on transmission use in Wisconsin was the
use of Capacity Benefit Margin by several Wisconsin utilities including
-14-
Wisconsin Public Service in determining available transmission capacity.
Capacity Benefit Margin is the use of the transmission system to provide
reserve generation capacity for reliability of the system. Wisconsin Public
Power, Inc. and Madison Gas and Electric maintain that this reservation of
transmission capacity is inappropriate and restricts available capacity for
their use. In 1998, the Federal Energy Regulatory Commission ordered
Wisconsin Public Service to provide additional information on the economics
and reliabilityas part of this provision. Additional data was suppliedprocess to support
the use of Capacity Benefit Margin to provide reliability toeliminate the Wisconsin Public Service transmission provisions which are now a part of the American Transmission Company open access transmission tariff. The remaining portions of the Wisconsin Public Service tariff are the Upper Peninsula Power Company transmission tariff, ancillary service territory.provisions, and distribution service provisions of Wisconsin Public Service. The Federal Energy Regulatory Commission openedaccepted this tariff for filing effective on January 1, 2001 subject to refund and set it for hearing. An agreement in principle has been reached with intervenors which could settle this case.
Wisconsin Public Service also filed for:
1) a
generic docketnew reactive ancillary service rate in this tariff which the Federal Energy Regulatory Commission accepted and made effective onthis issue in 1999January 1, 2001, andheld hearings to collect additional information.2) new style Regulation and Operating Reserve ancillary service rates which the Federal Energy Regulatory Commission accepted and made effective on July 1, 2000.
The Federal Energy Regulatory Commission issuedaccepted the American Transmission Company's tariff and implemented it on January 1, 2001 subject to refund and set it for hearing. The Commission identified 4 issues that were not approved as filed: a preliminary partial orderreturn on Capacity Benefit Marginequity of 12.2%, recovery of start-up costs, costs to be included in this generic docket. The preliminary partial order
requires all utilities that use Capacity Benefit Margin to:
1) come to a regional agreement on how Capacity Benefit Margin
will be calculated,
2) determine how entities can access Capacity Benefit Margin,
3) document these methods, and
4) post the resulting values on their Open Access Sametime
Information System ("OASIS") or internet web pages.
Wisconsin Public Service, the Mid-America Interconnected Network,rate formula, and the Wisconsin Upper Michigan System utilities complied withphase-in mechanism. The prehearing for this order by the
required date of August 27, 1999.case was held in January 2001. The Federal Energy Regulatory Commission has yetwill hold hearings in October 2001 if the issues are not settled prior to rule regarding whether Capacity Benefit Margin is appropriate.
REGIONAL TRANSMISSION ORGANIZATIONSthat date.
Regional Transmission Organizations
The Federal Energy Regulatory Commission initiatedOrder 2000 required all jurisdictional utilities to submit a Notice of Proposed
Rule Making in 1999 regardingcompliance filing by October 2000, indicating their plans for joining a Regional Transmission Organizations, which
include independent system operators as well as independent transmission
companies. In this rule making process,Organization or the Commission took comments from
over 100 participants including utilities, customers, state regulatory
commissions, and marketers. After considering participant comments thereasons that they have no plans to join. The Federal Energy Regulatory Commission issued Order 2000 identifyingalso required all existing organizations that plan to become Federal Energy Regulatory Commission authorized Regional Transmission Organizations to complete their compliance filings, matching the minimum
conditions a regional transmission organization must meet. Thisrequirements of the order, will
not have a significant effect in Wisconsin.by January 16, 2001.
Wisconsin law requires Wisconsin
utilities to joinPublic Service and Upper Peninsula Power joined the Midwest Independent System Operator byin June 30, 2000. The Midwest Independent System Operator is already approved by theintends to become a Federal Energy Regulatory Commission as a regional transmission organizationRegional Transmission Organization. It filed in October 2001 indicating that Wisconsin Public Service and Upper Peninsula Power, among others, were members of the Midwest Independent System Operator and would be included in the Midwest area including Wisconsin. The final Federal Energy Regulatory
Commission approval of rates forIndependent System Operator January 16, 2001 compliance filing.
Hydroelectric Licenses
All the regional transmission organization is
expected in 2000.
HYDROELECTRIC LICENSES
All Federal Energy Regulatory Commission hydroelectric facility licenses held by Wisconsin Public Service are current. With the exception of the licenses for Bond Falls and Dead River, all hydroelectric facility licenses held by Upper Peninsula Power are also current. The Wisconsin River Power licenses for Petenwell and Castle Rock are pending.
In 1998, Upper Peninsula Power reached a settlement agreement with Federalfederal and state agencies and special interest groups regarding its Bond Falls license. Signing of the agreement, by all parties, is expectedoccurred early in 2000. The agreement will beis the basis for a new license from the Federal
-15-
early
in 2001. The license will have a term of 4030 to 50 years from the date it is granted.
Licensing of the Dead River project is also progressing. During 1999, a
long-term water power easement agreement waseasements were obtained from adjacent landowners providing flowage rights required by the Federal Energy Regulatory Commission and the Clean Water Act. Issuance of the license is expected in 2001. The license will have a 40-year30 to 50-year term beginning in August 1991, the date the Federal Energy Regulatory Commission claimed jurisdiction over the Dead River Project.
OTHER MATTERS
RESEARCH AND DEVELOPMENTproject.
The Wisconsin River Power license application process for the Petenwell and Castle Rock plants has been completed and receipt of new licenses of 30 to 50-year terms are anticipated in mid 2001.
Other Matters
Research and Development
Electric research and development expenditures for Wisconsin Public Service totaled $1.8 million for 2000, $1.7 million for 1999, and $1.5 million for 1998, and $1.3 million
for 1997.1998. These expenditures were primarily charged to electric operations.
TECHNOLOGY
Wisconsin Public Service will be the first utility in the country to use
superconducting magnetic energy storage units to increase the stability of its
transmission grid during periods of transmission system disturbances. Six
portable units have been purchased and will be connected to key points on the
Wisconsin Public Service transmission grid. The units will boost local
voltages during the first critical moments of system disturbances. The
superconducting magnetic energy storage units will provide an immediate
temporary solution for Wisconsin Public Service while a long-term transmission
solution is pursued.
CUSTOMER SEGMENTATION
Twenty-eight
Customer Segmentation
Twenty-nine paper mills account for 12% of Wisconsin Public ServiceService's electric revenues. There is no single customer, or small group of customers, the loss of which would have a materially adverse effect on the electric business of Wisconsin Public Service in the current regulatory environment.
CONTRACTED CONSTRUCTION PROJECT
Wisconsin Public Service has agreed to construct and operate for Madison
Gas and Electric an 83-megawatt combustion turbine at the West Marinette site
of Wisconsin Public Service. The combustion turbine is scheduled for
completion in the second quarter of 2000. Wisconsin Public Service will
supply gas to this unit pursuant to existing gas tariffs.
-16-
WISCONSIN PUBLIC SERVICE CORPORATION
==============================================================================
1999 1998 1997
- ------------------------------------------------------------------------------
Operating revenues (Thousands)
Residential and farm $183,163 $164,961 $163,766
Small commercial and industrial 151,275 141,203 138,949
Large commercial and industrial 127,056 119,601 120,312
Resale and other 66,428 61,575 56,361
- ------------------------------------------------------------------------------
Total $527,922 $487,340 $479,388
==============================================================================
Kilowatt-hour sales (Thousands)
Residential and farm 2,747,659 2,627,496 2,565,432
Small commercial and industrial 3,135,669 3,004,134 2,876,832
Large commercial and industrial 4,053,153 3,977,829 3,943,275
Resale and other 1,983,667 1,990,705 1,873,788
- ------------------------------------------------------------------------------
Total 11,920,148 11,600,164 11,259,327
==============================================================================
Customers served (End of period)
Residential and farm 345,962 339,881 334,134
Small commercial and industrial 41,394 40,247 39,400
Large commercial and industrial 220 211 197
Resale and other 875 853 836
- ------------------------------------------------------------------------------
Total 388,451 381,192 374,567
==============================================================================
Annual average use (Kilowatt-hours)
Residential and farm 8,020 7,803 7,751
Small commercial and industrial 76,804 75,537 74,082
Large commercial and industrial 18,808,135 18,978,191 606,984
==============================================================================
Average kilowatt-hour price (Cents)
Residential and farm 6.67 6.28 6.38
Small commercial and industrial 4.82 4.70 4.83
Large commercial and industrial 3.13 3.01 3.05
==============================================================================
Production capacity (Summer - kilowatts)
Steam 1,326,100 1,307,800 1,326,000
Nuclear 208,000 205,200 212,200
Hydraulic 53,400 53,000 53,000
Combustion turbine 382,736 206,340 205,930
Other 8,600 7,800 7,800
Purchased capacity 14,900 14,750 14,750
- ------------------------------------------------------------------------------
Total system capacity 1,993,736 1,794,890 1,819,680
==============================================================================
Generation and purchases
(Thousands of kilowatt-hours)
Steam 8,055,350 8,513,537 8,213,518
Nuclear 1,823,147 1,526,702 973,485
Hydraulic 250,306 212,607 351,034
Purchases and other 2,435,409 1,994,826 2,327,334
- ------------------------------------------------------------------------------
Total 12,564,212 12,247,672 11,865,371
==============================================================================
Steam fuel costs
(Cents per million Btu)
Fossil 109.101 105.353 110.124
Nuclear 45.298 41.565 43.174
Total 97.378 95.735 103.093
- ------------------------------------------------------------------------------
System peak - firm (kilowatts) 1,751,000 1,685,000 1,607,000
==============================================================================
Annual load factor 77.71% 78.35% 79.42%
==============================================================================
-18-
2000 | 1999 | 1998 | |
Operating revenues (Thousands) |
|
|
|
Residential and farm | $195,370 | $183,163 | $164,961 |
Small commercial and industrial | 164,095 | 151,275 | 141,203 |
Large commercial and industrial | 134,331 | 127,056 | 119,601 |
Resale and other | 82,155 | 66,428 | 61,575 |
Total | $575,951 | $527,922 | $487,340 |
Kilowatt-hour sales (Thousands) |
|
|
|
Residential and farm | 2,797,596 | 2,747,659 | 2,627,496 |
Small commercial and industrial | 3,257,034 | 3,135,669 | 3,004,134 |
Large commercial and industrial | 4,117,663 | 4,053,153 | 3,977,829 |
Resale and other | 2,234,624 | 1,983,667 | 1,990,705 |
Total | 12,406,917 | 11,920,148 | 11,600,164 |
Customers served (End of period) |
|
|
|
Residential and farm | 351,440 | 345,962 | 339,881 |
Small commercial and industrial | 42,570 | 41,394 | 40,247 |
Large commercial and industrial | 225 | 220 | 211 |
Resale and other | 890 | 875 | 853 |
Total | 395,125 | 388,451 | 381,192 |
Average kilowatt-hour price (Cents) |
|
|
|
Residential and farm | 6.98 | 6.67 | 6.28 |
Small commercial and industrial | 5.04 | 4.82 | 4.70 |
Large commercial and industrial | 3.26 | 3.13 | 3.01 |
Production capacity (Summer - kilowatts) |
|
|
|
Steam | 1,303,200 | 1,326,100 | 1,307,800 |
Nuclear | 204,200 | 208,000 | 205,200 |
Hydraulic | 40,700 | 53,400 | 53,000 |
Combustion turbine | 386,200 | 382,736 | 206,340 |
Other | 7,600 | 8,600 | 7,800 |
Purchased capacity | 14,900 | 14,900 | 14,750 |
Total system capacity | 1,956,800 | 1,993,736 | 1,794,890 |
Generation and purchases |
|
|
|
(Thousands of kilowatt-hours) |
|
|
|
Steam | 8,295,098 | 8,055,350 | 8,513,537 |
Nuclear | 1,565,612 | 1,823,147 | 1,526,702 |
Hydraulic | 249,747 | 250,306 | 212,607 |
Purchases and other | 2,926,876 | 2,435,409 | 1,994,826 |
Total | 13,037,333 | 12,564,212 | 12,247,672 |
Steam fuel costs |
|
|
|
(Cents per million Btu) |
|
|
|
Fossil | 109.990 | 109.101 | 105.353 |
Nuclear | 45.241 | 45.298 | 41.565 |
Total | 99.766 | 97.378 | 95.735 |
System peak - firm (kilowatts) | 1,793,000 | 1,751,000 | 1,685,000 |
Annual load factor | 80.05% | 77.71% | 78.35% |
|
|
|
|
ELECTRIC OPERATING STATISTICS
UPPER PENINSULA POWER COMPANY
==============================================================================
1999 1998 1997
- ------------------------------------------------------------------------------
Operating revenues (Thousands)
Residential and farm $25,109 $21,894 $22,626
Small commercial and industrial 19,035 16,688 16,611
Large commercial and industrial 10,809 9,773 9,271
Resale and other 7,483 14,310 11,694
- ------------------------------------------------------------------------------
Total $62,436 $62,665 $60,202
==============================================================================
Kilowatt-hour sales (Thousands)
Residential and farm 263,742 241,517 252,897
Small commercial and industrial 239,698 223,282 223,040
Large commercial and industrial 226,913 225,565 222,143
Resale and other 147,281 148,153 147,297
- ------------------------------------------------------------------------------
Total 877,634 838,517 845,377
==============================================================================
Customers served (End of period)
Residential and farm 43,309 42,783 42,551
Small commercial and industrial 5,304 5,286 5,254
Large commercial and industrial 9 9 8
Resale and other 183 194 190
- ------------------------------------------------------------------------------
Total 48,805 48,272 48,003
==============================================================================
Annual average use (Kilowatt-hours)
Residential and farm 6,113 5,646 5,945
Small commercial and industrial 45,296 42,239 42,454
Large commercial and industrial 25,212,556 25,062,778 26,708,834
==============================================================================
Average kilowatt-hour price (Cents)
Residential and farm 9.57 9.07 8.95
Small commercial and industrial 7.95 7.48 7.45
Large commercial and industrial 4.78 4.34 4.17
==============================================================================
Production capacity (Summer - kilowatts)
Steam 17,700 17,700 17,700
Hydraulic 30,000 30,000 30,000
Combustion turbine 55,000 55,000 55,000
Purchased capacity 65,000 55,000 65,000
- ------------------------------------------------------------------------------
Total system capacity 167,700 157,700 167,700
==============================================================================
Generation and purchases
(Thousands of kilowatt-hours)
Steam (451) 4,029 (298)
Hydraulic 126,146 97,988 138,923
Purchases and other 846,088 845,426 795,599
- ------------------------------------------------------------------------------
Total 971,783 947,443 934,224
==============================================================================
Steam fuel costs
(Cents per million Btu)
Fossil - 2.67943 -
- ------------------------------------------------------------------------------
System peak - firm (kilowatts) 149,300 137,000 138,600
==============================================================================
Annual load factor 68.65% 74.44% 73.23%
==============================================================================
-19-
2000 | 1999 | 1998 | |
Operating revenues (Thousands) |
|
|
|
Residential and farm | $26,329 | $25,109 | $21,894 |
Small commercial and industrial | 20,968 | 19,035 | 16,688 |
Large commercial and industrial | 10,830 | 10,809 | 9,773 |
Resale and other | 8,627 | 7,483 | 14,310 |
Total | $66,754 | $62,436 | $62,665 |
Kilowatt-hour sales (Thousands) |
|
|
|
Residential and farm | 269,314 | 263,742 | 241,517 |
Small commercial and industrial | 259,445 | 239,698 | 223,282 |
Large commercial and industrial | 203,500 | 226,913 | 225,565 |
Resale and other | 178,313 | 147,281 | 148,153 |
Total | 910,572 | 877,634 | 838,517 |
Customers served (End of period) |
|
|
|
Residential and farm | 44,460 | 43,309 | 42,783 |
Small commercial and industrial | 5,446 | 5,304 | 5,286 |
Large commercial and industrial | 12 | 9 | 9 |
Resale and other | 386 | 183 | 194 |
Total | 50,304 | 48,805 | 48,272 |
Average kilowatt-hour price (Cents) |
|
|
|
Residential and farm | 9.78 | 9.57 | 9.07 |
Small commercial and industrial | 8.08 | 7.95 | 7.48 |
Large commercial and industrial | 5.32 | 4.78 | 4.34 |
Production capacity (Summer - kilowatts) |
|
|
|
Steam | 17,700 | 17,700 | 17,700 |
Hydraulic | 30,000 | 30,000 | 30,000 |
Combustion turbine | 55,000 | 55,000 | 55,000 |
Purchased capacity | 65,000 | 65,000 | 55,000 |
Total system capacity | 167,700 | 167,700 | 157,700 |
Generation and purchases |
|
|
|
(Thousands of kilowatt-hours) |
|
|
|
Steam | 524 | (451) | 4,029 |
Hydraulic | 104,144 | 126,146 | 97,988 |
Purchases and other | 890,156 | 846,088 | 845,426 |
Total | 994,824 | 971,783 | 947,443 |
Steam fuel costs |
|
|
|
(Cents per million Btu) |
|
|
|
Fossil | 933.630 | - | 267.943 |
System peak - firm (kilowatts) | 146,100 | 149,300 | 137,000 |
Annual load factor | 71.47% | 68.65% | 74.44% |
|
|
|
|
C. GAS UTILITY MATTERS
WISCONSIN PUBLIC SERVICE CORPORATION'S GAS MARKET
Wisconsin Public Service Corporation's Gas Market
As of December 31, 1999,2000, Wisconsin Public Service provided natural gas distribution service to 224,674230,174 customers in 225 cities, villages, and townsmunicipalities in northeastern and central Wisconsin, and 5,2315,296 customers in and around the city of Menominee, Michigan, for a total of 229,905235,470 gas distribution customers. This represents an increase of 5,8475,565 customers, or 2.6%2.4%, compared to December 31, 1998.1999. The principal cities served include Green Bay, Oshkosh, Sheboygan, Two Rivers, Marinette, Stevens Point, and Rhinelander, in Wisconsin, and the city of Menominee in Michigan.
The gas distribution business of Wisconsin Public Service has a significant seasonal component and is impacted by varying weather conditions from year-to-year. In 1999, 65.5%the calendar year 2000, 66.3% of its gas sales and 58.5%59% of its total gas system throughput occurred during the five winter months of November through March. Total gas throughput includes gas sales and gas delivered for transportation customers. Competition with other forms of energy exists in varying degrees, particularly for large commercial and industrial customers who have the ability to switch between natural gas and alternate fuels. Wisconsin Public Service offers interruptible gas sales and gas transportation service for these customers to enable them to reduce their energy costs through the use of natural gas. There are currently 330368 gas transportation customers on our system. These customers purchase their gas from other suppliers and contract with Wisconsin Public Service to transport the gas from interstate natural gas pipelines to their facilities. Additionally, 121131 customers still purchase their gas commodity directly from Wisconsin Public Service, but have elected to do so on an interruptible basis. These customers continue to switch from firm system supply to either interruptible system supply or transportation service each year as the economics and service options become attractive for them.
Gas operations also provide interruptible gas service to Wisconsin Public Service electric operations for power generation in combustion turbine peaking generators and for start-up, flame stabilization, and peaking use at the Weston and Pulliam coal-fired plants. Wisconsin Public Service also provides gas service to the 179-megawatt combustion turbine generation facility owned and operated by De Pere Energy LLC, an affiliate of Calpine Corporation, an independent power producer.
Gas sales for customer-owned power generation use are provided on an interruptible basis, with the power plants maintaining alternate fuel capability.
In 1999,2000, Wisconsin Public Service began to provide interruptible gas supplies to the De Pere Energy Center. Wisconsin Public Service will also
provide interruptible gas supplies to aan 83-megawatt combustion turbine owned by Madison Gas and Electric Company upon its completionElectric.
Gas supply has been adequate in 2000.Wisconsin, with the only significant constraints being created by the demand of generation peakers. The cost of natural gas has increased four fold during the winter of 2000-2001 due to tight supplies nationwide. Wisconsin Public Service gas customers have absorbed the entire impact of these increases due to the purchased gas adjustment clause, which allows Wisconsin Public Service to pass changes in gas prices directly to customers.
Total gas deliveries in 19992000 for Wisconsin Public Service, including customer-owned gas transported, were 66,397,06470,264,635 dekatherms, an 8.9%a 5.8% increase over 1998.1999. A dekatherm is equivalent to 10 therms or 1 million BtuBtus of energy. Gas transported for end-user transport customers made up approximately 43.7%41.9% or 28,974,78429,454,364 dekatherms of natural gas delivered. Winter weather in 1999 was
still warmer than the 20-year average benchmark generally used by Wisconsin
Public Service and the Public Service Commission of Wisconsin.
Peak day gas throughput in 1999for 2000 occurred on Tuesday,Wednesday, December 216, 2000, with 414,055a total of 414,176 dekatherms total gas throughput at an average Green Bay temperature of minus 1.29.2 degrees Fahrenheit. This compares with the previously reported 1998 record gas system throughput of 432,928 dekatherms set on February 2, 1996 at an average Green Bay temperature of minus 23.8-23.8 degrees Fahrenheit.
-20-
GAS SUPPLY
GENERAL
Since the implementation of the Federal Energy Regulatory Commission
Order 636 in November 1993, Wisconsin Public Service has had full
responsibility for the design, acquisition, and management of gas supplies and
the pipeline transportation and storage services required to meet the varying
daily, seasonal, and annual load requirements of its customers.
Gas Supply
General
Wisconsin Public Service manages a portfolio of gas supply contracts, pipeline transportation services, and storage services designed to meet its varying load pattern at the lowest reasonable cost.
PIPELINE CAPACITY AND STORAGE
Pipeline Capacity and Storage
The service territory of Wisconsin Public Service is directlyprimarily served by a single interstate pipeline;pipeline, ANR Pipeline Company. Through ANR's system, Wisconsin Public Service directly or indirectly accesses threewill access North American natural gas supplies from these major gas-
producing areas of North America:
gas-supply areas:
1) Oklahoma, the
Gulf of Mexico,Texas panhandle, and western Kansas through ANR's Southwest system,2) the
mid-continent areasprovince ofKansas, Texas,Alberta, Canada through the pipelines of NOVA to the Alberta border, TransCanada Pipelines to Emerson, Manitoba, Viking Gas Transmission to Marshfield, Wisconsin, andOklahoma,then into ANR's system, and3) the
Province of Alberta in western Canada.Chicago area through ANR's Joliet Hub.
Wisconsin Public Service holds firm long-term transportation capacity on the pipeline in roughly equal proportions from each of these three supply areas until November 2000. After November 2000, Wisconsin Public Service will
restructure its transportation services portfolio by eliminating
transportation capacity from the Gulf of Mexico and adding transportation
capacity from the developing Chicago Hub. The term for these restructured
services will extend through November 2010. Wisconsin Public Service holds firm transportation capacity with Viking Gas Transmission Company, to deliver gas on a firm basis from theirits interconnection with TransCanada Pipelines at Emerson, in the Canadian Province of Manitoba, to the interconnection with ANR at Marshfield, Wisconsin. These Canadian gas suppliers hold firm capacity on TransCanada Pipelines from Emerson back into the production areas in Alberta, Canada.
Because of the substantial daily and seasonal swings in gas usage in our service territory, Wisconsin Public Service also has contracted with ANR for firm underground storage capacity located in Michigan. There are no known geological formations in Wisconsin capable of being developed into underground storage facilities.
Besides providing the ability to manage significant changes in daily gas demand, storage also provides the ability to purchase gas from the production areas at high load factors, thus minimizing supply costs. During the summer, gas purchased in excess of market demand is injected into storage. During the winter, gas is withdrawn from storage and combined with gas purchased in the production areas to meet the increased winter demand. Gas from storage provides up to 65%55% of our supply on winter peak days, approximately 34%26% of our winter sales volumes, and approximately 23%17% of our total annual sales volumes. Our total firm storage capacity with ANR is 11.39.2 million dekatherms.
For winter peak day needs, Wisconsin Public Service also contracts with third-party suppliers for high deliverability storage in production areas
during the winter.areas. This high deliverability storage capacityservice provides a back-up supply of natural gas for our transportation contracts when other supplies cannot be delivered due to
-21-
SUPPLY CONTRACTS
Supply Contracts
Wisconsin Public Service contracts for fixed termfixed-term firm supplies with approximately 12 to 16 suppliers each year for gas produced in each of the three production areas. Due to the current uncertainty regarding the future role of gas utilities in continuing the gas supply function, Wisconsin Public Service has continued the practice ofto pursue contracting for domestic gas supplies for terms of one-yearone year or less. This will minimize potential stranded gas supply contract costs if retail gas deregulation should proceed quickly in Wisconsin. Our supply portfolio, as of December 31, 1999,2000, contained contracts with remaining terms ranging from three months to fourthree years.
Additional supplies are purchased on the monthly spot market as required to supplement supplies from fixed term firm contracts. Wisconsin Public Service has been an active spot market purchaser since 1985 and has contracts in place with a number of suppliers of spot market gas.
REGULATORY MATTERS IN THE WISCONSIN JURISDICTION
INDUSTRY RESTRUCTURING
The
Wisconsin Public Service Commissionwill acquire the gas supply and transportation contracts of Wisconsin Fuel and Light after the acquisition of Wisconsin Fuel and Light is continuing to implement
its plan to deregulatecompleted. Completion of this acquisition is expected in April 2001. Because Wisconsin Public Service and Wisconsin Fuel and Light hold similar gas supply and transportation contracts, the gas market in Wisconsin. In June 1997,acquisition of the Wisconsin Commission decidedFuel and Light contracts is expected to move incrementallyhave no significant impact on gas deregulation and
accommodate competition. Six working groups are to be formed to develop
policy recommendations regarding:
1) pipeline capacity,
2) market-based pricing for interruptible customers,
3) legislative changes,
4) marketer certification,
5) end user price reporting, and
6) consumer protection and essential services.
With the exceptioncombined company's cost of gas.
Regulatory Matters in the issuance of the work group's report on
consumer standards and essential services, littleWisconsin Jurisdiction
Industry Restructuring
Little progress has been made on gas deregulation in Wisconsin over the last year. The timing and details of implementation could have an impact on Wisconsin Public Service because of potential stranded costs associated with interstate pipeline capacity contracts. It is expected that the Wisconsin Commission will allow for stranded cost recovery from customers or direct assignment of stranded contracts should deregulation progress.
The Wisconsin Public Service has taken
positive stepsrate order for 1999 and 2000 required a study to reduceprovide open access to gas suppliers for small commercial customers in the next rate case. In the 2001-2002 rate application, Wisconsin Public Service proposed to facilitate customer choice of natural gas suppliers through the use of its exposurenew automated meter reading system. Wisconsin Public Service began installation of the automated meter reading system on a test basis in 1999. The 2001-2002 rate request proposed expansion to stranded interstate pipeline capacity
costs.
COST RECOVERY MECHANISMthe rest of the system in the 2001-2002 time period. This program was approved by the Commission to provide customer choice of gas suppliers for commercial customers in the 20,000 to 75,000 therms per year customer class beginning November 1, 2001. Wisconsin Public Service anticipates expanding this program to all customers as the automated meter reading system is installed on the whole system.
Cost Recovery Mechanism
Wisconsin Public Service implemented a Modified One-for-One Gas Cost
Recovery Mechanismmodified one-for-one gas cost recovery mechanism in January 1999, in response to Public Service Commission of Wisconsin requirements. This method allows for the recovery of all gas supply costs provided those costs meet index-based benchmarks and are not deemed imprudent. Under this method, Wisconsin Public Service has been authorized to recover all gas commodity costs incurred through November 1999.
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GAS SUPPLY PLAN
As a requirement of the 05-GI-106 order, on July 1, 1999to date.
Gas Supply Plan
On June 30, 2000, Wisconsin Public Service filed a Three-Year Gas Supply Planthree-year gas supply plan with the Public Service Commission of Wisconsin
Commission detailing its plans to purchase and transport the necessary gas supplies for the period November 19992000 through October 2002.2003. The Gas Supply Plan was approved in October 1999.
CUSTOMER RATES2000.
Customer Rates
On January 14, 1999,December 21, 2000, the Public Service Commission of Wisconsin Commission granted Wisconsin Public Service a $10.3$4.3 million, or 5.1%1.5%, increase in its retail natural gas rates. The rates were effective January 15, 1999. The 19991, 2001. Wisconsin Public Service 2000 gas rates were very competitive in Wisconsin. Rates were 99%98% of the state average for residential rates 94%and 77% of the state average for commercial rates, and 73% for large industrial rates.
Regulatory Matters in the Michigan Jurisdiction
Industry Restructuring
In Michigan, as in Wisconsin, Public Service anticipates filing an application with the Wisconsin Commission on April 1, 2000majority of the largest gas customers have a choice of their natural gas commodity supplier. Gas restructuring for new retailsmaller customers in Michigan has been in a pilot phase since 1998 when the three largest utilities in the state voluntarily initiated pilot programs to offer choice of gas rates for the yearssuppliers to all customer classes. These pilot programs included frozen gas cost recovery mechanisms and are scheduled to conclude in 2001 and 2002.
REGULATORY MATTERS IN THE MICHIGAN JURISDICTION
INDUSTRY RESTRUCTURING
In 2000, the Michigan Public Service Commission staff opened an informal docket to determine how best to continue the customer choice of gas suppliers after the large-company pilot programs terminated. After several rounds of comments, a consensus was reached regarding permanent customer choice of gas suppliers for the largest utilities in the state. The Michigan Public Service Commission and one of the three largest Michigan utilities have agreed to implement the customer choice proposal developed. Approval for a second utility is investigatingexpected shortly.
Early in 2001, the deregulationCommission staff opened a similar informal docket to move to a consensus on how to provide customer choice of retailnatural gas markets and expansion of gas transportation service in Michigan.
The Michigan Commission decided it would be appropriate to conduct a series of
pilot projects to test the development of competitive retail gas markets in
Michigan. The Michigan Commission contacted Michigan's four largestsuppliers for all customer classes for medium-sized natural gas utilities regarding development and implementation of pilot programs.
Because ofin the small size and limited number of customers in its
Michigan service territory, a pilot transportation program wasstate. This does not conducted
byinclude Wisconsin Public Service. GAS COST RECOVERY PLANThe process is to involve all interested parties and be completed in the third quarter of 2001 with a consensus method to include the medium-sized utilities in those offering customer choice of natural gas suppliers to all customers.
The small natural gas utilities in the state, including Wisconsin Public Service, are to propose a customer choice program for all customer classes when it is in the best interests of each utility and its customers. There is no timetable for moving this process to the smaller utilities in the state, such as Wisconsin Public Service, but we intend to provide for customer choice of gas suppliers for all customers following our automated meter reading system implementation in Michigan.
Gas Cost Recovery Plan
As required, on December 28, 199926, 2000, Wisconsin Public Service filed a five-year Gas Cost Recovery Plan with the Michigan Public Service Commission detailing its plan to purchase and transport the necessary gas supplies for the April 20002001 through March 20052006 period. This Gas Cost Recovery Plan is expected to be approved by the Michigan Public Service Commission byin May 2001.
Customer Rates
Wisconsin Public Service had some of the lowest natural gas rates in Michigan during 2000. CUSTOMER RATESIts rates were 93% of the state average for residential rates and 73% of the state average for commercial and industrial rates.
Wisconsin Public Service has not had a natural gas rate case in Michigan since 1986.
REGULATORY MATTERS IN THE FEDERAL ENERGY REGULATORY COMMISSION JURISDICTION
Regulatory Matters in the Federal Energy Regulatory Commission Jurisdiction
The involvement of Wisconsin Public Service involvement in Federalfederal regulatory activities in the natural gas area has been through the Wisconsin Distributor Group. This group is made up of several Wisconsin gas utilities. Over the past several
years, the Wisconsin Distributor Group has participated in numerous dockets
filed by ANR Pipeline Company, Viking Gas Transmission Company, and the
Federal Energy Regulatory Commission. Although members may file individual interventions, most interventions have been done through the Wisconsin Distributor Group. Past successes in various Federal Energy Regulatory Commission dockets have resulted in substantial refunds for natural gas customers in Wisconsin as well as lower pipeline transportation rates charged -23-
Due to
Orders 637, 637-A, and 637-B are the volumeculmination of comments received, the Federal Energy Regulatory CommissionCommission's Notice of Proposed Rule MakingRulemaking on the Regulation of Short-term Natural Gas Transportation Services and the Notice of Inquiry on the Regulation of Interstate Natural Gas Transportation Services tookServices. Along with other parties, the majorityWisconsin Distributor Group requested clarification from the Commission on various aspects of these orders. Overall, these orders aligned with the Wisconsin Distributor Group's approach on various topics. The Wisconsin Distributor Group is still pursuing the portion of the group's effortsorder eliminating the right of first refusal for customers of pipelines that have discounted rates. It is the position of the Wisconsin Distributor Group that discounts may be the result of a small window of opportunity and do not necessarily reflect ongoing competitive options. Therefore, customers with discounts may still be subject to the market power of the pipeline and may still need the regulatory protection offered by the right of first refusal.
Other dockets in 1999. The issue of greatest interest for
participantswhich the Wisconsin Distributor Group has participated relate to the compliance filings made by ANR Pipeline Company and Viking Gas Transmission Company in response to Orders 637, 637-A, and 637-B. These dockets are still being worked on by various parties and orders from the Notice of Proposed Rule Making wasCommission are not expected until late in 2001.
Also during the past year the Federal Energy Regulatory Commission proposalinitiated Docket No. PL00-1-000, concerning natural gas transportation policies needed to market unused pipeline capacity through an
auction process.facilitate development of competitive natural gas markets. The Commission scheduled a number of conferences to gather input from natural gas industry participants. The Wisconsin Distributor Group and Wisconsin Public Service
do not supportattended the auction process and instead believe that increased
reporting and disclosure requirements may be enough to meetfirst conference held in September 2000 concerning the goalliquidity of stimulating competition. In the Notice of Inquiry, the Wisconsin Distributor
Group and Wisconsin Public Service support efforts to formulate pro-
competitive, long-term pricing policies to ensure that the Federal Energy
Regulatory Commission continues to fulfill its statutory obligation to protect
consumers while also encouraging the evolution of a competitive natural gas industry. The Federal Energy Regulatory Commission has not yet issued a final
order on the Notice of Proposed Rule Making and Notice of Inquiry.
Another docket that drew the attention of the Wisconsin Distributor
Group was the Viking rate case. The Wisconsin Distributor Group was able to
reach a settlement with Viking and other shippers on Viking's system. An
agreement was also reached with other parties on a phase-in of recent
expansion costs on Viking's system. The phased-in approach greatly benefited
customers of Wisconsin Public Service as compared to an immediate roll-in of
all expansion costs. Also included in the Viking settlement was a refund of
approximately $48,000 to our customers, which appeared as a credit on Viking's
April 1999 invoice.market.
On-going activities in which Wisconsin Public Service will be participating as a member of the Wisconsin Distributor Group include:
include the:
1)
the continuation ofpipeline compliance filings made in response to Federal Energy Regulatory Commission Orders 637, 637-A and 637-B,2) the Federal Energy Regulatory
Commission NoticeCommission's continued efforts in Docket No. PL00-1-000, concerning natural gas transportation policies needed to facilitate development ofProposed Rule Makingcompetitive natural gas markets, andthe Notice of Inquiry and 2)3) continued monitoring of various dockets filed by ANR Pipeline Company and Viking Gas Transmission Company at the Federal Energy Regulatory Commission.
Along with our participation
Merger Activity
Industry restructuring has been accompanied by merger activity in the Wisconsin Distributor Group,region, which could impact the competitive environment. During 2000, Wisconsin Public Service has begun to takeannounced a more active rolemerger with Wisconsin Fuel and Light, a gas distribution company serving approximately 50,000 customers in the American
Gas Association'sManitowoc and Wausau areas of Wisconsin. Hearings before the Public Service Commission of Wisconsin were held in December 2000. It is anticipated that the Public Service Commission of Wisconsin will approve this merger in March of 2001, and the merger will be implemented shortly thereafter. In 2000, Wisconsin Fuel and Light had $56.6 million in revenues and $2.4 million in net income. Wisconsin Fuel and Light has over 1,100 miles of gas mains and approximately 120 employees.
GAS OPERATING STATISTICS
WISCONSIN PUBLIC SERVICE CORPORATION
2000 | 1999 | 1998 | |
Operating revenues (Thousands) |
|
|
|
Residential | $147,413 | $114,610 | $ 96,223 |
Small commercial and industrial | 28,912 | 21,922 | 19,333 |
Large commercial and industrial | 64,766 | 43,980 | 37,482 |
Other | 23,428 | 11,009 | 12,073 |
Total | $264,519 | $191,521 | $165,111 |
Therms delivered (Thousands) |
|
|
|
Residential | 203,383 | 190,797 | 172,007 |
Small commercial and industrial | 45,083 | 42,457 | 38,104 |
Large commercial and industrial | 123,657 | 112,528 | 103,226 |
Other | 34,427 | 27,085 | 29,182 |
Total therm sales | 406,550 | 372,867 | 342,519 |
Transportation | 294,544 | 289,748 | 265,573 |
Total | 701,094 | 662,615 | 608,092 |
Customers served (End of period) |
|
|
|
Residential | 213,976 | 208,975 | 203,665 |
Small commercial and industrial | 18,285 | 17,647 | 17,656 |
Large commercial and industrial | 2,840 | 2,952 | 2,454 |
Other | 1 | 1 | 1 |
Transportation customers | 368 | 330 | 282 |
Total | 235,470 | 229,905 | 224,058 |
Average therm price (Cents) | |||
Residential | 72.48 | 60.07 | 55.94 |
Small commercial and industrial | 64.13 | 51.63 | 50.74 |
Large commercial and industrial | 52.38 | 39.08 | 36.31 |
WPS Power Development develops, owns, and operates nonregulated electric generation facilities and provides services to the electric power generation industry nationwide. Services include project development, engineering and management services, and operation and maintenance services. WPS Power Development has expertise in cogeneration, distributed generation, generation from renewables, and generation plant repowering projects. As of December 31, 2000, WPS Power Development had 163 employees, the majority of which are members of the International Brotherhood of Electrical Workers Local 1600 Union.
WPS Power Development owns:
- two-thirds of the Stoneman Power Plant, a 53 megawatt coal-fired merchant steam plant located in southwestern Wisconsin.
- 92 megawatts of hydro and fossil-fueled generation assets located in northern Maine and New Brunswick, Canada,
- the 460-megawatt coal-fired Sunbury Generation Station in Pennsylvania,
- the 30-megawatt Westwood Generating Station, which burns waste anthracite coal material, i.e., culm, located in Pennsylvania,
- two-thirds of a facility in Kentucky which produces synthetic fuel from coal fines which can be burned in boilers,
- steam boilers in Arkansas and Oregon, and
- landfill and wood waste gas generating facilities in Wisconsin.
WPS Power Development reached agreement in 2000 with Sierra Pacific Resources to acquire its 545-megawatt natural gas- and oil-fired Tracy/Pinon Power Station. The sale of Tracy/Pinon, which is subject to approval and review by various regulatory agencies, is expected to close some time in the year 2001. Under the agreement, Sierra Pacific will buy energy and ancillary services from WPS Power Development at agreed-upon prices, subject to a collar, over an as yet undetermined time frame. After this period, energy sales become subject to the Federal Energy Regulatory Commission Regulatory Committee.
Twogeneration tariff until WPS Power Development receives approval of the issues being addressed through the Committee are the Federal Energy Regulatory Commission's rule that shippers must have titleCommission to gas being
transported and their policyapply market-based rates.
The annual coal requirements for WPS Power Development owned plants is estimated at 1.2 million tons. Of this amount, approximately 50% will be met through the burning of coal silt. In 2000, WPS Power Development purchased all of its coal supplies on the certificationspot market. In 2001, WPS Power Development expects to supply approximately 60% of natural gas pipeline
expansions.its annual coal needs through annual coal contracts and its reserves of coal and coal silt. WPS Power Development has approximately a 10 year reserve of coal silt. The rule requiringremaining coal requirements will be purchased through the spot market. Various reserves of coal silt were acquired with the Sunbury power plant acquisition.
In 2001, coal transportation for approximately 25% of annual coal requirements will be supplied under a shipper to have title provides that anyone who
holds contracted capacity on an interstate pipeline must have title toone-year contract with Norfolk Southern Railroad.
All the gas
that is moved on that capacity. In a deregulated natural gas industry, this
rule will bog down transactions between capacity holders and owners of natural
gas who wish to use the capacity, by requiring title transfer agreements or
capacity release agreements in order to transport gas for customers. The
elimination of this rule would greatly enhance the efficiency of a deregulated
natural gas market.
The new Federal Energy Regulatory Commission policyhydroelectric facility licenses held by WPS Power Development are current. The 33-megawatt hydroelectric facility owned in New Brunswick, Canada is not subject to licensing.
Although identifiable price peaks do not occur at any certain time of the year, WPS Power Development believes the nonregulated energy market is subject to seasonal impacts. Generally in the summer months, the demand for electric energy is high which increases the price at which energy can be sold. In periods of high fuel consumption, generally the winter months, the purchase price of coal and natural gas increases.
Equity and working capital requirements of WPS Power Development are generally financed through the holding company, WPS Resources. Project nonrecourse debt financing has been put in place for the generation plants owned by WPS Power Development.
Of WPS Power Development's approximately 650 megawatts of existing capacity, fixed price contracts are in place to sell approximately 350 megawatts. Of this, 250 megawatts are firm commitments. The remainder of the energy production of WPS Power Development is sold on pipeline
certification may make it more difficultthe spot market.
Although WPS Power Development operates in the nonregulated energy market, the existence of various long-term out-take contracts entered into as part of the generation asset acquisition agreements mitigates some of the impact of spot market competition.
WPS Power Development's synthetic coal facility was moved successfully from Alabama to Kentucky, in 2000, and is producing coal briquettes according to expectations. In order to realize optimum benefits from this project, WPS Power Development intends to sell part of its interest in the facility to realize the full economic potential of the project. This action has been slowed due to issues currently being raised by the Internal Revenue Service with respect to synthetic fuel projects in general. In 2000, WPS Power Development recognized a deferred tax asset of approximately $11.0 million reflecting tax credits from this project and a few other small projects that will be carried forward to reduce the regular tax liability of WPS Resources in future years. Current plans call for new pipelinesa closer match of the facility's production levels with our ability to use the tax credits each year until WPS Power Development sells a portion of the project.
WPS Power Development has reached an agreement to build and operate a 50-megawatt electric cogeneration facility adjacent to a paper manufacturing plant located in Combined Locks, Wisconsin. The natural gas-fired combustion turbine, with a heat recovery boiler, will provide electricity to the wholesale electric marketplace through WPS Energy Services. Process steam will also be built. This
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concernsubsidiary of WPS Power Development.
The generation assets of WPS Power Development are subject to regulations on sulfur dioxide and nitrogen oxide emissions similar to those that apply to Wisconsin Public Service because its service territory is
currently served by only one pipeline. IfService. In addition, the new policy permanently stops
the constructionSunbury generation facilities of new pipelines or the expansion of existing pipelines,
other than that of ANR, to its service territory, Wisconsin Public Service
customers may never see the benefits of true competition in pipeline services.
GAS FINANCIAL SUMMARY
The following table sets forth the amounts of revenues, net income, and
assets attributable to gas utility operations:
GAS UTILITY OPERATIONS (WISCONSIN PUBLIC SERVICE)
==============================================================================
(Thousands) Year Ended December 31
- ------------------------------------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------
Consolidated Gas Operating Revenues $191,521 $165,111 $211,090
Net Income $ 11,246 $ 5,912 $ 7,878
Total Assets $267,356 $246,365 $246,842
==============================================================================
See Note 15 in Notes to Consolidated Financial Statements.
WPS Energy Services is a competitivediversified nonregulated energy company providing energy and
energy related productssupply and services to the nonregulated energy market place.
It targets retail energy markets in the mid-western and eastern United States
serving commercial, industrial, and residential customers. Principal offices
are locatedcompany with principal operations in Illinois, Maine, Michigan, Ohio, and Wisconsin. WPS Energy Services operates in the retail and wholesale nonregulated energy marketplace. Emphasis is on servicing commercial, industrial, and wholesale customers in the northeast quadrant of the United States. Wholesale products are provided on a nationwide basis. WPS Energy Services provides electric,individualized energy supply options and strategies that allow customers to manage energy needs while capitalizing on opportunities resulting from deregulation. WPS Energy Services provides natural gas, electric, and alternate fuel products, real-time energy management services, energy information management,utilization consulting, and project management and energy utilization consulting.
WPS Energy Service's target wholesale market region encompasses that of
its retail customers, and includes the natural gas producing regions important
to those retail markets. Primary production regions include the United States
Gulf and mid-continent regions and Canada. WPS Energy Services opened an
office in Maine in 1999 to market the energy and capacity of the generation
assets acquired by WPS Power Development into the deregulated electric
marketplace, scheduled to open March 2000. The retail marketing efforts of
this office will generate electric revenue for WPS Energy Services while
securing a market for the output of the WPS Power Development generation
assets.
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Nonregulated gas markets are highly volatile commodity markets.management. WPS Energy Services has instituted various processes to manage its exposure in
these markets. Risk and credit guidelines, daily mark-to-market analysis, and
value-at-risk assessments have been instituted to continually evaluate
financial exposures in market commitments. Speculative trading in electric
energy markets has been minimized. See NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS, SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Note 1(e) and Note 10
regarding "Price Risk Management Activities."
Revenues at WPS Energy Services were $292.2 million in 1999 compared
with $351.3 million in 1998, a decrease88 employees as of 16.8%. This decrease is the result
of lower overall gas prices experienced in 1999, and a deliberate change in
wholesale product mix focusing on the development of higher value, lower risk
wholesale products rather than high volume, low margin transactions common in
1998. Revenues in 1999, have not benefited from retail electric sales, as
electric retail access has been slow to develop in target market areas.
WPS Energy Services' strategy is to introduce electric products and services
to current gas customers, as the regulatory environment changes to allow
consumer choice. Beginning in MarchDecember 31, 2000.
During 2000, WPS Energy Services will serve as a
"standard offer"expanded its operations in Maine to include retail electric service and was selected to be the standard offer provider to electric customers in northern Maine.Maine for a three-year period beginning on March 1, 2001. WPS Energy Services worksalso reached agreement with WPS Power Development to establish controlpurchase 50 megawatts of physicalelectric energy from the Sunbury generation assets that will be able to servestation for resale into the needs of the developing
nonregulatedPJM energy market. In January 2001, WPS Energy Services experienced a losscontracted with Alternative Energy Inc. for 37 megawatts of $3.5 millionelectric supply from its biomass plant in 1999 compared
with a loss of $6.9 million in 1998, an improvement of 49.3%. The primary
reasons for the increased earnings atAshland, Maine. WPS Energy Services were the eliminationalso has contracted with its sister company, WPS Power Development, for 50 megawatts of speculative trading losses that occurred in 1998, and an increase in gas
margins. The improved trading performance on reduced trading volume is the
result of a deliberate shift in focus to emphasize capturing present
opportunities in the market rather than taking a position in anticipation of a
future market movement.
In the fourth quarter of 1999,supply.
WPS Energy Services opened an officewill be the majority owner in
Traverse City, Michigan. The office is focusing on wholesale gas
transactions, and is expected to make an immediate contribution to net income
in 2000.
WPS Energy Services is in the process of developing a natural gas storage facility that it is developing in Michigan. The facility, is expected to be operational in the second quarter of 2000, and2001, will have a capacity of 3 billion cubic feet of natural gas. AdditionalThis additional storage capacity will allow increased supply reliability to customers in Michigan and greater flexibility in meeting peak day energy requirements. This facility is not expected to have a material effect on
earnings in 2000.
WPS POWER DEVELOPMENT, INC.
WPS Power Development develops and owns electric generation projects and
provides services to the electric power generation industry nationwide.
Services include acquisition and investment analysis, project development,
engineering and management services, and operations and maintenance services.
An emerging trend in the restructuring of the electric utility industry is the
divestiture of generation facilities. WPS Power Development is continually
monitoring and assessing investment opportunities in this area. In addition,
WPS Power Development concentrates on cogeneration, distributed generation,
generation from renewable energy sources, new generation facilities and
generation plant repowering projects. WPS Power Development is currently
operating projects in six states and Canada.
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ECO Coal Pelletization #12, LLC is a WPS Power Development investment that
produces synthetic fuel from coal fines. The project began operation in June
1998 and is eligible to receive Federal tax credits as the processed coal fines
qualify as a synthetic fuel. The project has addressed operational problems
throughout much of 1999. Project earnings improved in 1999. Management
expects further improvement in the year 2000.
WPS Power Development was the successful bidder for the purchase of
approximately 92 megawatts of hydroelectric and oil-fired facilities in Maine
and New Brunswick, Canada from Maine Public Service Company. The acquisition
was finalized in June of 1999.
WPS Power Development was the successful bidder for the purchase of the
Sunbury generation assets in Pennsylvania from PP&L Resources Inc. The
generation assets acquired have a total nameplate generating capacity of
472 megawatts. Final approvals were received and the transaction was
concluded in November 1999.
WPS Power Development experienced a loss of $3.8 million in 1999
compared with a $2.4 million loss in 1998, a change of 58.3%. The increased
loss was primarily due to additional expenses incurred in 1999 for the start
up and operation of newly acquired facilities and the pursuit of new projects.
TECHNOLOGY
WPS Resources has invested $1.5 million for a 40% interest in a fiber
optic communication network. The network is a competitive local exchange with
approximately 60 miles of fiber optic facilities in the City of Green Bay.
The project also has a communication link to approximately 50 miles of fiber
optic facilities in the City of Appleton.
WPS Energy Services hasis actively involved in the electric and gas commodities market. WPS Energy Services enters into market transactions rather than specific purchase agreements to secure energy resources in order to meet energy commitments. The majority of commitments to deliver energy are addressed through long-term transactions and enhanced through spot market purchases.
WPS Energy Services markets and uses its patented an energy management system called DENet TM.DENet. DENet provides customers the capability to manage their energy consumption on a real timereal-time basis and generate reports on historical energy use through the Internet. The System'sDENet's flexibility allows a customer to monitor utility and process parameters related to gas, electricity, water, steam, temperature, and production output. WPS Energy Services uses DENet allowsto remotely control the operation of WPS Power Development to
coordinate the operation of its plants through an integrated computer network.its 24-hour marketing desk. Employees in numerous locations have access to plant operations through the system.
WPS Energy Services believes that its business, in the aggregate, is not seasonal. Certain of its products do sell more heavily in some seasons than in others. Sales of natural gas generally peak in the winter months, while sales of electric energy generally peak in the summer months.
Capital requirements of WPS Energy Services are financed through the holding company, WPS Resources.
Although WPS Energy Services is not dependent on any one customer, a significant percentage of its retail sales volume is derived from the paper and forest products industry. Management does not feel that this situation poses any significant risk to the ongoing operation of WPS Energy Services.
WPS Energy Services operates in nonregulated energy markets. Its competitors consist of regulated utilities, large energy traders, and other energy marketers. WPS Energy Services competes with other energy providers on the basis of price, service, consumer convenience, performance, and reputation.
WPS Energy Services is not directly subject to any significant environmental regulations at this time.
See MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION at page 53 for additional information regarding nonregulated operations.
E.
F. ENVIRONMENTAL MATTERS
GENERAL
We
WPS Resources and its subsidiaries are subject to Federal,federal, state, and local regulations regarding environmental impacts of ourtheir operations on air and water quality and solid waste. The application of Federalfederal and state restrictions to protect the environment can involve review, certification, or issuance of permits by various Federalfederal and state authorities, including the United States Environmental Protection Agency and the various states' environmental agencies, including the Wisconsin Department of Natural Resources. These restrictions may limit, prevent, or substantially increase the cost of the operation of generatinggeneration facilities and may require substantial investments in new equipment at existing installations. Such restrictions may require substantial additional investments for new projects and may delay or prevent completion of projects. We cannot forecast the effects of such regulation on our generation, transmission, and other facilities or -28-
operations but we believe that Wisconsin Public Service, Upper Peninsula
Power, and WPS Power Development are presently meeting existing requirements.
AIR QUALITY
Wisconsin Public Service generation plants are in compliance with all
current sulfur dioxide, nitrogen oxide, and particulate emission standards.
The Federal Clean Air Act required reductions in sulfur dioxide in 1995
to meet limitations based on an emission rate of 2.5 pounds per million Btu
multiplied by a historical generation baseline for Pulliam Unit 8 and
Edgewater Unit 4 generation units. The Clean Air Act requires further
reductions beginning in the year 2000. The year 2000 limits are based on an
emission rate of 1.2 pounds per million Btu multiplied by a historical
generation baseline for all generation units. Our generation facilities met
the year 2000 standard in 1995. Compliance with Wisconsin and Federal sulfur
dioxide emission limitations were met by switching to low sulfur coal.
The Clean Air Act created an emission allowance system. Our early compliance
with the Clean Air Act requirements produced surplus allowances. The surplus
allowances aided in the compliance with the year 2000 requirements. We will
consider the sale of any allowances available in excess of our own needs. The
Wisconsin Commission has ordered that profits from the sale of allowances be
passed on to customers.
The Clean Air Act requires the installation of low nitrogen oxide
burners on several of our generating units. Low nitrogen oxide burners were
installed at Pulliam Unit 8 early in 1994. The Clean Air Act allows units
smaller than 100 megawatts, such as Pulliam Unit 7, to elect to comply with
the 1995 emission standards, thus building up sulfur dioxide credits. Having
made this election, low nitrogen oxide burners were installed on Pulliam
Unit 7 in 1994. Low nitrogen oxide burner equipment was installed on Weston
Unit 2 in 1999. Nitrogen oxide emissions from Pulliam Units 3 through 8 and
Weston Units 1 through 3 are averaged together to reach compliance
requirements under the Clean Air Act.
In September 1998, the United States Environmental Protection Agency
required certain states, including Wisconsin, to develop plans to reduce the
emissions of nitrogen oxides from sources within the state by May 2003. On a
preliminary basis, we project potential capital costs of between $61 million
and $112 million to comply with possible future regulations. Wisconsin Public
Service has committed $6.3 million to fund our share of initial costs for
Columbia Unit 2 selective catalytic nitrogen oxide reduction equipment to be
installed in the spring of 2000. The anticipated ozone season operation and
maintenance expenses are $3.6 million per year. The costs will depend on the
state-specific compliance method to be adopted in the future and the
effectiveness of the various technologies available for nitrogen oxide
emission control. Under our current practices, capital costs and the actual
operating costs are anticipated to be recovered through customer rates.
On December 24, 1998, Wisconsin Public Service and five other parties
filed a petition challenging the United States Environmental Protection
Agency's regulations that required Wisconsin to prepare and submit a Nitrogen
Oxide State Implementation Plan (Wisconsin Paper Council v. U.S. Environmental
Protection Agency, Case No. 98-4269 (7th Cir. 1998)). This petition was
consolidated with other similar challenges in the District of Columbia Circuit
Court. On January 22, 1999, the State of Wisconsin moved to intervene in the
litigation and challenged the geographic scope of the rule within Wisconsin
and the time required to implement nitrogen oxide controls in the state.
-29-
On March 3, 2000, the United States Court of Appeals for the District of
Columbia, held that the United States Environmental Protection Agency Nitrogen
Oxide State Implementation Plan call was not appropriately issued to the state
of Wisconsin. The decision is being reviewed by the Wisconsin Department of
Natural Resources, which indicated that reductions in nitrogen oxides may
still be necessary to show continued progress in achieving attainment with the
national ambient air quality standard for ozone. The affect of this ruling on
the company is uncertain at this time.
Toxic air provisions in the Clean Air Act will not be applied until the
United States Environmental Protection Agency determines if those standards
need to be applied to utilities.
Recent air quality modeling by the Wisconsin Department of Natural
Resources revealed that Weston Units 1 and 2 contribute to a modeled deviation
from the sulfur dioxide ambient air quality standard. Wisconsin Public
Service is evaluating options for increasing the stack height and reducing the
sulfur dioxide emission limit to eliminate the modeled deviation. These
options include extending the existing stacks, construction of new stacks, and
reducing the sulfur dioxide emission limit from 3.2 pounds per million Btu to
1.2 pounds per million Btu.
Due to degradation of the electrostatic precipitator at Weston Unit 3,
Wisconsin Public Service is evaluating the installation of a baghouse. A
baghouse is an alternative pollution control device to an electrostatic
precipitator. If the installation proceeds, it is estimated it will cost
approximately $25.7 million.
The Sunbury plant, acquired in November 1999 by WPS Power Development,
currently purchases emission allowances to comply with air regulations.
Additional nitrogen oxide control technology may be required by the year 2003
to comply with clean air regulations. Expenditures for this technology could
be significant.
On November 3, 1999, the United States Environmental Protection Agency
announced that it was pursuing an enforcement initiative against seven
utilities, or their subsidiaries, located in the Midwest and the South as well
as the Tennessee Valley Authority. The enforcement initiative alleges that
the utilities and the Tennessee Valley Authority undertook modifications at
their coal-fired power plants in violation of the Clean Air Act. The United
States Environmental Protection Agency is seeking penalties and the
installation of additional pollution control equipment.
No investigation has been undertaken of our Wisconsin or Pennsylvania
facilities in connection with this enforcement initiative. However, other
industries are being investigated, and we are aware that investigations of
certain operators of coal fired boilers in the pulp and paper industry are
occurring in the State of Wisconsin.
WATER QUALITYoperations.
Wisconsin Public Service is subject to regulation by the United States Environmental Protection Agency and the Wisconsin Department of Natural Resources with respect to thermal and other discharges from its power plants, into Lake Michigan and other waters of Wisconsin. Wastewater discharge permits, with a term of five years, were re-issued by the Wisconsin Department of Natural Resources for ourthe Kewaunee plant in 1995. Similar permits were
re-issued2000. Applications for ourpermit renewals for Wisconsin Public Service's Pulliam and Weston power plantsgeneration facilities were submitted in 1996. No new permit
conditions or associated material costs were imposed as part of the new
permits.2000. Revisions to state water quality rules under the Great Lakes Initiative are not expected to result in any significant changes when -30-
in 2000 for the Kewaunee Nuclear Power Plant
or in 2001 for the Pulliam and Weston plants. Wisconsin Public Service is not aware of any significant changes in future operations at its jointly ownedjointly-owned plants at Columbia or Edgewater as a result of the Great Lakes Initiative.
GAS PLANT CLEANUP
Wisconsin Public Service continues the investigation and cleanup of
eight manufactured gas plant sites previously operated in Green Bay,
Two Rivers, Oshkosh, Marinette, Sheboygan, Stevens Point, and Menominee
Michigan. There are two individual sites in Sheboygan. Wisconsin Public
Service is proceeding with these projects as the designated party responsible
for cleanup. Formal agreements have been executed with the Wisconsin
Department of Natural Resources covering the investigation and restoration
activities of the Sheboygan II and Oshkosh sites. The agreement for
Sheboygan II allows Wisconsin Public Service to work with the State of
Wisconsin on restoration. The site is not associated with the larger
Sheboygan River and Harbor Superfund site. The agreement for Oshkosh was
entered into to resolve a unilateral administrative order that was issued by
the Wisconsin Department of Natural Resources.
Work at the Stevens Point site was substantially completed in 1998 and
we continue to monitor the site. Cleanup costs were within the cost
projections for this site. An independent environmental consultant has
estimated total costs of cleanup for the remaining seven sites to be between
$34 million to $41 million. The estimates assume removal of significantly
contaminated soil, groundwater treatment, and monitoring for up to 25 years,
depending on site conditions. The cost estimates for five of the sites
include removal and disposal of contaminated river sediments. As remedial
feasibility studies and initial remedial activities are completed, cost
estimates may be adjusted significantly. Other factors that can affect these
estimates are changes in remedial technology and regulatory requirements.
Expenditures for gas plant site cleanup are expected for the next
31 years. An initial liability for cleanup of $41.7 million had been
established with an offsetting regulatory asset. A regulatory asset is a
Commission approved deferral of a current expense which is to be recovered
through rates at a later time. Expenditures have reduced the liability to
$38.6 million at December 31, 1999. Based on discussions with regulators and
a Wisconsin rate order, management believes that these costs, excluding
carrying costs associated with amounts expensed but not yet recovered, will be
recoverable in future customer rates. Wisconsin Public Service received an
order from the Michigan Public Service Commission authorizing the deferral of
the Michigan portion of these costs, using Wisconsin methods for future cost
recovery.
Cost estimates presented above do not reflect any recovery obtained from
insurance carriers or other third parties. Insurance recoveries are deferred
as a reduction to the regulatory asset. Adjustments to the estimated
liability and insurance recoveries have no immediate impact on net income. We
have received insurance settlements of approximately $12.6 million, reducing
the regulatory asset to $29.0 million at December 31, 1999.
ASH DISPOSAL
The ash disposal site for Upper Peninsula Power's John H. Warden Station was closed in 1993. Subsequent groundwater testing indicated elevated levels of boron and lithium. Supplemental remedial investigations were performed and a revised remedial action plan was developed. The plan was submitted to the Michigan Department of Environmental Quality for approval in 1999. A liability of $1.9$1.5 million and a regulatory asset of $1.9$1.5 million have been
-31-
F.
Other matters pertaining to the environment regarding gas plant cleanup and air quality issues are discussed in Legal Proceedings, Management's Discussion and Analysis of Financial Condition and Results of Operations, and Note 13 to the Financial Statements.
WPS Resources and Wisconsin Public Service makeswill make large investments in capital assets. Construction expenditures are expected to be approximately $530.0$486 million for the period 20002001 through 2002.2003. This includes expenditures for the replacement of the Kewaunee plant steam generators, investment in automated meter reading, and construction of a proposed transmission line from Wausau, Wisconsin to Duluth, Minnesota. Other Wisconsin Public Service capital requirements for the three-year period include Kewaunee decommissioning trust fund contributions of $14.1$7.8 million.
Upper Peninsula Power will incur construction expenditures of approximately $22.0$52 million for the period 20002001 through 2002,2003, primarily for electric distribution improvements.improvements and repairs at hydro facilities.
The $249.8 million purchase of the Tracy/Pinon facilities, by WPS Power Development, may be financed with nonrecourse debt and an equity infusion from WPS Resources. In addition, WPS Power Development is committed to the development of the Combined Locks Energy Center, which is not expected to exceed $50 million. There are no commitments for additional acquisition expenditures for the nonregulated subsidiaries at this time. Future nonregulated projects are
expected towill be financed through nonrecourse project financingfinancings to the extent possible. Additional financing will be obtained through
WPS Resources Capital
Corporation, as needed. This subsidiary was formed in January 1999 for the
purpose of financing future projects. The $107 million purchase of the
Sunbury plant is to be refinanced with nonrecourse debt and equity infusions
from WPS Resources.
WPS Resources will useuses internally generated funds and short-term borrowing to temporarily satisfy most of its capital requirements. WPS Resources may periodically issue additional long-term debt and common stock to reduce short-term debt and maintain desired capitalization ratios.
Specific forms of financing, amounts, and timing will depend on the
availability of projects, market conditions, and other factors.
WPS Resources filed a shelf registration with the Securities and Exchange Commission, which allows the issuance of an aggregate of $400.0$400 million of long-term debt and common stock. Long-term debt of $150.0$150 million was issued under the shelf registration in November 1999 to reduce short-term debt and provide equity infusions to subsidiaries. WPS Resources began issuing new sharesWisconsin Public Service also has a shelf registration providing additional debt capacity of common
stock for the Stock Investment Plan in January 1999. In November 1999,
WPS Resources discontinued issuing new shares.$52 million. In December 1999, we began to purchase shares of WPS Resources common stock on the open market for the Stock Investment Plan. This was discontinued in January 2001, when WPS Resources began issuing new shares for the Stock Investment Plan.
WPS Resources anticipates issuing the following additional debt and equity financing in 2001:
Nonregulated Variable Rate Tax Exempt Bonds | $ 20 - $ 28 million |
In the second quarter 2001 | |
Common Stock | $ 50 - $100 million |
| In the second or third quarter of 2001 | |
Unsecured Debt | $100 - $150 million |
| In the third quarter 2001 | |
Fading Lien Bonds - Wisconsin Public Service | $100 - $150 million |
| In the third or fourth quarter of 2001 |
Specific forms of financing, amounts, and timing may change due to the availability of projects, market conditions, and other factors.
In addition, WPS Resources will issue approximately 1.8 million new shares of common stock in the first half of 2001 for completion of the merger of Wisconsin Fuel and Light into Wisconsin Public Service may expand its leveraged employee stock ownership plan in the
three-year period beginning in the year 2000.Service.
See NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Note 13 regarding "Future Utility Expenditures".
G.Expenditures."
At December 31, 1999,2000, WPS Resources and its subsidiaries employed 2,9003,030 people. Of this number, 2,493 employees2,568 were employed by Wisconsin Public Service and 170165 were employed by Upper Peninsula Power.Power, with the remainder employed by WPS Resources and its remaining subsidiaries.
Of the Wisconsin Public Service employees, 1,9792,044 were electric utility employees and 514524 were gas utility employees. Local 310 of the International Union of Operating Engineers represents 1,2441,246 of these employees. The current collective bargaining agreement with Local 310 expires on October 28, 2000.
-32-
Local 510 of the International Brotherhood of Electrical Workers, AFL-CIO represents 124126 employees of Upper Peninsula Power. The current collective bargaining agreement with Local 510 expires on April 30, 2002.
Local 1600 of the International Brotherhood of Electrical Workers, AFL-CIO represents approximately 100104 employees at the Sunbury generation facilitiesstation owned and operated by subsidiariesa subsidiary of WPS Power Development. The current collective bargaining agreement with Local 1600 expires on May 12, 2002.
-33-
ITEM 2. PROPERTIES
A. UTILITY
WISCONSIN PUBLIC SERVICE FACILITIES
Wisconsin Public Service Facilities
The following table summarizes information on the electric generation facilities of Wisconsin Public Service, including jointly-owned facilities:
Rated
Capacity (a)
Type Name Location Fuel (Kilowatts)
- ----------- ---------------- ------------- ----------- -------------
Steam Pulliam Green Bay, WI Coal 395,900 (b)
Weston Wausau, WI Coal or Gas 479,300 (c)
Kewaunee Kewaunee, WI Nuclear 205,200 (d)
Columbia -
Units 1 & 2 Portage, WI Coal 322,600 (d)
Edgewater
Unit 4 Sheboygan, WI Coal 105,800 (d)
---------
Total Steam 1,508,800
Hydro Various 51,700 (e)
(15 Plants)
Combustion Various Gas, Oil, 390,760 (f)
Turbine (8 Plants) or Diesel
and Diesel
Wind Lincoln Turbines Wind 1,900
---------
Total System 1,953,160
=========
Type | Name | Location | Fuel | Rated |
Steam | Pulliam | Green Bay, WI | Coal | 395,800 (b) |
Weston | Wausau, WI | Coal and Gas | 491,100 (c) | |
Kewaunee | Kewaunee, WI | Nuclear | 206,200 (d) | |
Columbia - | Portage, WI | Coal | 342,000 (d) | |
Edgewater | Sheboygan, WI | Coal | 105,800 (d) | |
_________ | ||||
Total Steam | 1,540,900 | |||
Hydro | Various | 52,900 (e) | ||
| Combustion Turbine and Diesel | Various | Gas, Oil, or Diesel | 381,340 (f) | |
_________ | ||||
Total System | 1,975,140 |
(a) Based on July
20002001 capacity ratings.(b) This plant has six units.
(c) This plant has three units. Two units burn only coal and the other unit can burn coal or natural gas.
(d) These facilities are jointly-owned by Wisconsin Public Service, Wisconsin Power and Light,
Company,and Madison Gas andElectric Company.Electric. Wisconsin Public Service operates the KewauneeNuclear Power Plant.plant. The Columbia and Edgewater units are operated by Wisconsin Power andLight Company.Light. The capacity indicated is our portion of total plant capacity based on the percent of ownership. The KewauneeNuclear Power Plant'splant's ownership is based on the percent of ownership before the proposed acquisition of Madison Gas andElectric Company'sElectric's share of the plant in late 2001.(e) Includes
12,90012,400 kilowatts purchased from Wisconsin RiverPower Company.Power.(f) Wisconsin Public Service and Marshfield Electric and Water Department jointly own
77,00075,500 kilowatts of-34-combustion turbine summer peaking capacity. Wisconsin Public Service is the operator of these jointly ownedjointly-owned facilities. Included is175,800174,700 kilowatts of summer rated capacity from the De Pere EnergyLLCCenter gas turbine in De Pere. Wisconsin Public Service accounts for the De Pere Energy CenterLLCunit as a capital lease.
As of December 31, 2000, Wisconsin Public Service owns 55owned 57 transmission substations with a transformer capacity of 5,616,1105,730,610 kilovolt-amperes, 111110 distribution substations with a transformer capacity of 3,054,1103,205,810 kilovolt-amperes, 1,5491,563 miles of electric transmission lines, and 19,55620,038 miles of electric distribution lines. Effective January 1, 2001, all transmission property of Wisconsin Public Service was transferred to American Transmission Company.
Gas properties include approximately 4,7745,454 miles of main, 70 gate and city regulator stations, and 209,419219,478 lateral services. All gas facilities are located in Wisconsin except for distribution facilities in and near the city of Menominee, Michigan.
Substantially all of our utility plant is subject to a first mortgage lien.
UPPER PENINSULA POWER FACILITIES
Upper Peninsula Power Facilities
The following table summarizes information on the electric generation facilities of Upper Peninsula Power:
Rated
Capacity (a)
Type Name Location Fuel (Kilowatts)
- ------------ ------------- ------------- -------- ------------
Steam Warden (b) L'Anse, MI Coal/Gas 17,700
Hydro Various
(9 plants)(c) Hydro 37,910
Combustion Portage Houghton, MI Oil 27,500
Turbine Gladstone Gladstone, MI Oil 27,500
-------
Total System 110,610
=======
Type | Name | Location | Fuel | Rated |
Steam | Warden (b) | L'Anse, MI | Coal/Gas | 17,700 |
Hydro | Various | Hydro | 37,910 | |
Combustion Turbine | Portage | Houghton, MI | Oil | 27,500 |
_______ | ||||
Total System | 110,610 |
(a) Based on winter-rated capacity.
(b) The J. H. Warden station is capable of burning any combination of gas and/or coal. The station was taken out of service on January 1, 1994 and is in standby or inactive reserve status.
(c) Included in the nine hydro plants are Escanaba 1, Escanaba 3, and Boney Falls, which generate a total of 7,850 kilowatts. All energy produced at these facilities is sold directly to a paper industry customer located in Escanaba, Michigan.
Upper Peninsula Power owns 806802 miles of electric transmission and 2,753 miles of electric distribution lines.
Substantially all of Upper Peninsula Power's utility plant is subject to a first mortgage lien.
-35-
B. NONREGULATED
The following table summarizes information on the electric generation facilities of WPS Power Development, including jointly-owned facilities:
Rated
Capacity
Type Name Location Fuel (Kilowatts)
- ----------- ---------- ---------------- --------- -----------
Steam Stoneman Cassville, WI Coal 55,000 (a)
Caribou Northern Maine Oil 23,000
Sunbury Shamokin Dam, PA Coal 425,000
Hydro Squa Pan Northern Maine Hydro 1,400
Caribou Northern Maine Hydro 900
Tinker Northern Maine Hydro 33,500
Combustion Various Gas, Oil, 70,400
Turbine (6 Plants) or Diesel
and Diesel
-------
Total System 609,200
=======
Type | Name | Location | Fuel | Rated |
Steam | Stoneman | Cassville, WI | Coal | 55,000 (a) |
Hydro | Squa Pan | Northern Maine | Hydro | 1,400 900 33,500 |
| Combustion Turbine and Diesel | Various | Gas, Oil, | 70,400 | |
| _______ | ||||
Total System | 660,200 |
(a) The Stoneman facility is owned by Mid-American Power, LLC. PDI Stoneman, Inc. (a wholly-owned subsidiary of WPS Power Development, Inc.) and B. M. Stoneman, Inc., (a wholly-owned subsidiary of Burns and McDonnell) own 66-2/3% and 33-1/3%, respectively, of Mid-American Power, LLC.
(b) WPS Power Development owns a 3.3455% interest in the Wyman plant. The plant is an 619-megawatt oil-fired facility.
ITEM 3. LEGAL PROCEEDINGS
SPENT NUCLEAR FUEL DISPOSAL
Spent Nuclear Fuel Disposal
See the section titled Spent Nuclear Fuel Disposal under Part I, Item 1B, ELECTRIC UTILITY MATTERS, Fuel Supply, at page 10 for a description of various proceedings relating to spent nuclear fuel.
FUNDING DECONTAMINATION AND DECOMMISSIONING OF FEDERAL FACILITIES
Funding Decontamination and Decommissioning of Federal Facilities
See the section titled Funding Decontamination and Decommissioning of Federal Facilities under Part I, Item 1B, ELECTRIC UTILITY MATTERS, Fuel Supply, at
page 10 for a description of various proceedings relating to decontamination and decommissioning liabilities.
ENVIRONMENTAL
See Part I, Item 1E, ENVIRONMENTAL MATTERS,
Environmental
On December 14, 2000, Wisconsin Public Service received a request for information from the United States Environmental Protection Agency under Section 114 of the Clean Air Act seeking information on the electric generating facilities owned and operated by Wisconsin Public Service. A response to the information request was filed with the Environmental Protection Agency on January 16, 2001, which included information regarding projects and work performed at page 28 for a description
of various proceedingsthe Weston and J.P. Pulliam power plants, from 1975 to the present costing $250,000 or more. In situations involving other electric generating facilities (not owned or operated by Wisconsin Public Service), the Environmental Protection Agency has initiated enforcement actions relating to environmental matters.
work performed on utility boilers. As set forth in the response to the Section 114 request projects costing $250,000 or more have been undertaken by Wisconsin Public Service for the facilities subject to the Section 114 request. To date, no claims have been made against Wisconsin Public Service. The Environmental Protection Agency is in the process of reviewing the information provided by Wisconsin Public Service.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holderscommon stockholders during the fourth quarter of the fiscal year. -36-
ITEM 4A. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information about outside directors is included in our proxy statement for the Annual Meeting of Shareholders of WPS Resources which is scheduled to be held on May 11, 2000.
3, 2001.
A. EXECUTIVE OFFICERS OF WPS RESOURCES CORPORATION |
| Name and Age | Current Position and Business | Effective | |
Larry L. Weyers | 55 | Chairman, President, and Chief Executive Officer | 02-12-98 |
| President and Chief Executive Officer | 05-01-97 | ||
| President and Chief Operating Officer | 01-01-96 | ||
Patrick D. Schrickel | 56 | Executive Vice President | 12-29-96 |
| Vice President | 12-09-93 | ||
Daniel P. Bittner | 57 | Senior Vice President and Chief Financial Officer | 10-17-99 |
| Vice President and Chief Financial Officer | 05-01-97 | ||
| Vice President | 12-29-96 | ||
| Senior Vice President-Customer Service | 05-09-94* | ||
Thomas P. Meinz | 54 | Senior Vice President-Public Affairs | 12-24-00 |
| Vice President-Public Affairs | 02-12-98 | ||
| Vice President-Power Supply and Engineering | 02-23-97* | ||
| Power Supply and Engineering Executive | 01-14-96* | ||
| Senior Corporate Planning Executive | 05-09-94* | ||
Phillip M. Mikulsky | 52 | Senior Vice | 02-12-98 |
| Vice | 09-01-95 | ||
Bradley W. Andress | 46 | Vice President-Marketing | 01-09-00 |
| Vice President-Marketing | 09-01-98* | ||
| Vice President-Marketing, Lund Holding International | 10-28-95 | ||
| Vice President-Sales, Plastics Inc, Division of Newell | 11-01-94 | ||
Ralph G. Baeten | 57 | Vice President-Treasurer | 10-17-99 |
| Treasurer | 12-09-93 | ||
Diane L. Ford | 47 | Vice President-Controller and Chief Accounting Officer | 07-11-99 |
| Controller and Chief Accounting Officer | 05-01-97 | ||
| Controller | 12-15-93 | ||
Richard E. James | 47 | Vice President-Corporate Planning | 12-29-96 |
| Vice President-Corporate Planning | 08-01-95* | ||
Neal A. Siikarla | 53 | Vice President | 06-01-98 |
| Treasurer, Northern States Power - Wisconsin | 06-01-92 | ||
Bernard J. Treml | 51 | Vice President-Human Resources | 02-12-98 |
| Vice President-Human Resources | 05-09-94* | ||
Glen R. Schwalbach | 55 | Assistant Vice President-Corporate Planning | 12-29-96 |
| Assistant Vice President-Corporate Planning | 07-28-96* | ||
| Assistant Vice President-Gas Engineering and Supply | 06-01-90* | ||
Barth J. Wolf | 43 | Secretary and Manager-Legal Services | 09-19-99 |
| Assistant Secretary and Manager-Legal Services | 07-12-98 | ||
| Manager-Legal and Risk Management | 05-19-96* | ||
| Administrator-Risk Management | 03-01-92* |
George R. Wiesner | 43 | Assistant Controller | 12-15-96 |
| Director-Financial Accounting ESI/PDI | 08-25-96* | ||
| Financial Reporting Supervisor | 05-01-87* |
* Identifies experience with Wisconsin Public Service Corporation. All officers listed above are also officers of Wisconsin Public Service with the exception of Bradley W. Andress, Phillip M. Mikulsky, Richard E. James, Neal A. Siikarla, Glen R. Schwalbach, and George R. Wiesner.
-38-
B. EXECUTIVE OFFICERS OF WISCONSIN PUBLIC SERVICE CORPORATION |
| Name and Age | Current Position and Business | Effective | |
Larry L. Weyers | 55 | Chairman and Chief Executive Officer | 02-12-98 |
President and Chief Executive Officer | 05-04-97 | ||
President and Chief Operating Officer | 01-01-96 | ||
Patrick D. Schrickel | 56 | President and Chief Operating Officer | 02-12-98 |
Executive Vice President | 12-29-96 | ||
| Senior Vice President-Finance and Corporate Services | 05-09-94 | ||
Daniel P. Bittner | 57 | Senior Vice President and Chief Financial Officer | 10-17-99 |
| Senior Vice President-Finance | 05-17-98 | ||
Senior Vice President-Finance and Corporate | 12-29-96 | ||
Senior Vice President-Customer Service | 05-09-94 | ||
Thomas P. Meinz | 54 | Senior Vice President-Public Affairs | 12-24-00 |
Vice President-Public Affairs | 02-12-98 | ||
Vice President-Power Supply and Engineering | 02-23-97 | ||
Power Supply and Engineering Executive | 01-14-96 | ||
Senior Corporate Planning Executive | 05-09-94 | ||
Ralph G. Baeten | 57 | Vice President-Treasurer | 08-01-95 |
Lawrence T. Borgard | 39 | Vice President-Transmission and Engineering | 07-23-00 |
Vice President-Transmission | 07-11-99 | ||
General Manager-Transmission | 04-05-98 | ||
Manager-Transmission Planning & Operations | 04-06-97 | ||
Regulatory Compliance Supervisor | 09-08-96 | ||
Transmission Planning Engineer | 02-11-96 | ||
Electrical Engineer | 11-01-89 | ||
Diane L. Ford | 47 | Vice President-Controller | 07-11-99 |
Controller | 03-01-92 | ||
Wayne J. Peterson | 42 | Vice President-Distribution and Customer Service | 02-12-98 |
Assistant Vice President-Customer Service | 02-23-97 | ||
Manager-System Operations | 10-01-95 | ||
Bernard J. Treml | 51 | Vice President-Human Resources | 05-09-94 |
David W. Harpole | 45 | Assistant Vice President-Energy Supply | 11-12-00 |
Manager-Corporate Services | 04-19-98* | ||
Manager-Power Plant Design and Construction | 03-10-96* | ||
Manager-Power Plant Design and Construction | 07-01-95 | ||
Barth J. Wolf | 43 | Secretary and Manager-Legal Services | 09-19-99 |
| Assistant Secretary and Manager-Legal Services | 07-12-98 | ||
| Manager-Legal and Risk Management | 05-19-96 | ||
| Administrator-Risk Management | 03-01-92 |
| * Identifies experience with WPS Resources Corporation. |
| NOTE: All ages are as of December 31, 2000. None of the executives listed above are related by blood, marriage, or adoption to any of the other officers listed or to any director of the Registrant. Each officer shall hold office until his or her successor has been duly elected and qualified, or until his or her death, resignation, disqualification, or removal. In 2000, Charles A. Schrock, |
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
WPS RESOURCES CORPORATION COMMON STOCK TWO-YEAR COMPARISON
Dividends
Resources Corporation Common Stock Two-Year Comparison
Price Range
- ---------- --------- --------------------
2000
1999
.495
32-1/4
28-3/8
.505
30-11/16
27-13/16
.505
29-1/16
24-1/4
-----
$ .485 33-13/16 32
2nd Quarter .485 34 29-15/16
3rd Quarter .495 35-3/4 31-5/8
4th Quarter .495 37-1/2 33
-----
Total $1.96
DIVIDEND RESTRICTIONS2.00
Dividend Restrictions
WPS Resources' principal subsidiary, Wisconsin Public Service, is restricted by a Public Service Commission of Wisconsin order limiting the payment of normal common stock dividends to no more than 109% of the previous year's common stock dividend, without prior notice to the Wisconsin Commission. Special dividends may be declared in order to maintain utilityWisconsin Public Service's common equity levels consistent with those allowed by the Public Service Commission of Wisconsin. Wisconsin law prohibits Wisconsin Public Service from making loans to WPS Resources and its nonregulated subsidiaries and guaranteeing their obligations.
At December 31, 1999,2000, WPS Resources had $335.4$347.6 million of retained earnings available for dividends.
Upper Peninsula Power's indentures relating to first mortgage bonds contain certain limitations on the payment of cash dividends on common stock. Under the most restrictive of these provisions, approximately $6.4$4.1 million of consolidated retained earnings were available at December 31, 1999,2000, for the payment of common stock cash dividends by Upper Peninsula Power.
-41-
COMMON STOCK
Listed: New York
Common Stock Exchange
Ticker Symbol: WPS
Transfer Agent and Registrar: Firstar Bank, N.A.
P. O. Box 2077
Listed: New York Stock Exchange | |
Ticker Symbol: WPS | |
Transfer Agent and Registrar: | Firstar Bank, N.A. |
As of December 31, 1999,2000, there were 25,02024,029 common stock shareholders of record.
-42-
ITEM 6. SELECTED FINANCIAL DATA
WPS RESOURCES CORPORATION
COMPARATIVE FINANCIAL STATEMENTS AND
FINANCIAL STATISTICS (1995 TO 1999)
A. CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
=================================================================================================
Consolidated Statements of Income and Comprehensive Income
=================================================================================================
Year Ended December 31
(Thousands, except share amounts) 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------
Operating revenues
Electric utility $ 582,471 $ 543,260 $536,885 $548,701 $550,105
Gas utility 191,521 165,111 211,090 211,357 174,693
Nonregulated energy and other 324,548 355,365 187,862 156,391 56,155
- -------------------------------------------------------------------------------------------------
Total operating revenues 1,098,540 1,063,736 935,837 916,449 780,953
=================================================================================================
Operating expenses
Electric production fuels 113,780 110,809 107,988 105,449 105,085
Purchased power 73,619 56,447 63,947 55,844 59,339
Gas purchased for resale 118,889 105,908 147,755 149,388 116,253
Nonregulated energy cost of sales 301,451 346,663 182,863 155,133 53,983
Other operating expenses 194,938 172,876 165,982 183,768 169,067
Maintenance 60,564 52,813 44,325 51,782 54,658
Depreciation and decommissioning 83,744 86,274 83,441 70,762 71,345
Taxes other than income 31,818 31,902 31,375 31,671 30,555
- -------------------------------------------------------------------------------------------------
Total operating expenses 978,803 963,692 827,676 803,797 660,285
=================================================================================================
Operating income 119,737 100,044 108,161 112,652 120,668
- -------------------------------------------------------------------------------------------------
Other income and (deductions)
Allowance for equity funds
used during construction 716 173 154 255 180
Other, net 8,233 2,505 11,952 (903) 5,852
- -------------------------------------------------------------------------------------------------
Total other income and (deductions) 8,949 2,678 12,106 (648) 6,032
=================================================================================================
Income before interest expense 128,686 102,722 120,267 112,004 126,700
- -------------------------------------------------------------------------------------------------
Interest on long-term debt 27,162 23,987 26,273 25,494 26,839
Other interest 8,507 4,827 4,910 3,922 2,677
Allowance for borrowed funds
used during construction (2,901) (177) (167) (299) (80)
- -------------------------------------------------------------------------------------------------
Total interest expense 32,768 28,637 31,016 29,117 29,436
=================================================================================================
Distributions - preferred
securities of subsidiary trust 3,501 1,488 - - -
=================================================================================================
Income before income taxes 92,417 72,597 89,251 82,887 97,264
Income taxes 29,741 23,445 31,106 27,216 33,494
Minority interest - (611) (797) (348) -
Preferred stock dividends of
subsidiary 3,111 3,132 3,133 3,134 3,136
- -------------------------------------------------------------------------------------------------
Net income 59,565 46,631 55,809 52,885 60,634
=================================================================================================
Other comprehensive income - - - - -
=================================================================================================
Comprehensive income $ 59,565 $ 46,631 $ 55,809 $ 52,885 $ 60,634
=================================================================================================
Shares of common stock less
shares in deferred
compensation trust
Outstanding at December 31 26,780 26,502 26,518 26,537 26,551
Average 26,644 26,511 26,527 26,545 26,551
Basic and diluted earnings per
average share of common stock $2.24 $1.76 $2.10 $1.99 $2.28
Dividend per share of
common stock 2.00 1.96 1.92 1.88 1.84
=================================================================================================
-43-
ITEM 6. SELECTED FINANCIAL DATA
WPS RESOURCES CORPORATION
COMPARATIVE FINANCIAL STATEMENTS AND
FINANCIAL STATISTICS (1995 TO 1999)
B. CONSOLIDATED BALANCE SHEETS
=================================================================================================
Consolidated Balance Sheets
=================================================================================================
Assets
- -------------------------------------------------------------------------------------------------
At December 31 (Thousands) 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------
Utility plant
Electric $1,797,832 $1,715,882 $1,685,413 $1,639,490 $1,603,632
Gas 285,048 267,892 251,603 240,791 228,346
Property under capital lease 74,130 - - - -
- -------------------------------------------------------------------------------------------------
Total 2,157,010 1,983,774 1,937,016 1,880,281 1,831,978
Less - Accumulated depreciation
and decommissioning 1,293,354 1,206,123 1,113,142 1,028,266 977,163
- -------------------------------------------------------------------------------------------------
Net 863,656 777,651 823,874 852,015 854,815
Nuclear decommissioning trusts 198,052 171,442 134,108 100,570 82,109
Construction in progress 74,187 42,424 11,776 24,827 18,508
Nuclear fuel, net 15,007 18,641 19,062 19,381 14,275
- -------------------------------------------------------------------------------------------------
Net utility plant 1,150,902 1,010,158 988,820 996,793 969,707
=================================================================================================
Current assets 292,925 240,712 213,453 233,933 202,399
Net nonutility and
nonregulated plant 168,143 41,235 28,188 28,470 9,033
Regulatory and other assets 204,578 218,282 205,343 204,120 212,769
- -------------------------------------------------------------------------------------------------
Total assets $1,816,548 $1,510,387 $1,435,804 $1,463,316 $1,393,908
=================================================================================================
=================================================================================================
Capitalization and Liabilities
- -------------------------------------------------------------------------------------------------
Capitalization
Common stock equity $ 536,300 $ 517,190 $ 518,764 $ 510,642 $ 505,178
Preferred stock of subsidiaries 51,193 51,200 51,645 51,656 51,703
Long-term debt 634,502 393,037 347,015 349,054 350,098
- -------------------------------------------------------------------------------------------------
Total capitalization 1,221,995 961,427 917,424 911,352 906,979
=================================================================================================
Liabilities
Short-term borrowings 90,258 60,293 40,466 63,192 27,425
Deferred income taxes 111,092 122,642 131,197 135,904 141,518
Other liabilities and credits 393,203 366,025 346,717 352,868 317,986
- -------------------------------------------------------------------------------------------------
Total liabilities 594,553 548,960 518,380 551,964 486,929
=================================================================================================
Total capitalization and
liabilities $1,816,548 $1,510,387 $1,435,804 $1,463,316 $1,393,908
=================================================================================================
-44-
ITEM 6. SELECTED FINANCIAL DATA
WPS RESOURCES CORPORATION
COMPARATIVE FINANCIAL STATEMENTS AND
FINANCIAL STATISTICS (1995 TO 1999)
C. FINANCIAL STATISTICS
================================================================================================
Year Ended December 31 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------
Stock price $25-1/8 $35-1/4 $33-13/16 $28-1/2 $34
Book value per share $20.03 $19.52 $19.56 $19.24 $19.03
Return on average equity 11.3% 9.0% 10.8% 10.3% 12.2%
Number of common stock shareholders 25,020 26,319 27,369 27,922 28,416
Number of employees 2,900 2,673 2,902 3,032 3,002
- ------------------------------------------------------------------------------------------------
Capitalization ratios
Common equity including
Employee Stock Ownership Plan 43.9 53.8 56.6 56.0 55.7
Preferred stock of subsidiaries 4.2 5.3 5.6 5.7 5.7
Trust preferred securities
of subsidiary trust 4.1 5.2 - - -
Long-term debt 47.8 35.7 37.8 38.3 38.6
- ------------------------------------------------------------------------------------------------
Weather information
Cooling degree days 481 519 255 352 808
Cooling degree days as
a percent of normal 103.0% 107.0% 53.3% 73.6% 170.1%
Heating degree days 7,273 6,530 8,099 8,566 7,813
Heating degree days as
a percent of normal 91.7% 82.4% 101.6% 107.5% 98.0%
================================================================================================
Common Stock Comparison Dividends
(by quarter) Per Share High Low
- -------------------------------------------------------------------------
1999
1st quarter $ .495 35-3/4 29-1/4
2nd quarter .495 32-1/4 28-3/8
3rd quarter .505 30-11/16 27-13/16
4th quarter .505 29-1/16 24-1/4
-----
$2.00
- -------------------------------------------------------------------------
1998
1st quarter $ .485 33-13/16 32
2nd quarter .485 34 29-15/16
3rd quarter .495 35-3/4 31-5/8
4th quarter .495 37-1/2 33
-----
$1.96
-45-
ITEM 6. SELECTED FINANCIAL DATA
WISCONSIN PUBLIC SERVICE CORPORATION
COMPARATIVE FINANCIAL STATEMENTS AND
FINANCIAL STATISTICS (1997 TO 1999)
D. SELECTED FINANCIAL DATA
===================================================================================
(Millions) 1999 1998 1997
- -----------------------------------------------------------------------------------
Operating revenues $719.4 $652.5 $690.5
Net income 70.2 57.2 64.7
Total assets (at December 31) 1,409.9 1,267.6 1,234.0
Long-term debt, net (at December 31) 373.1 304.0 307.6
===================================================================================
-46-
ITEM 6. SELECTED FINANCIAL DATA
WISCONSIN PUBLIC SERVICE CORPORATION
COMPARATIVE FINANCIAL STATEMENTS AND
FINANCIAL STATISTICS (1997 TO 1999)
E. FINANCIAL STATISTICS
===================================================================================
(Millions) 1999 1998 1997
- -----------------------------------------------------------------------------------
Coverage
- -----------------------------------------------------------------------------------
Times interest earned before income taxes 4.71 4.48 4.48
Times interest earned after income taxes 3.41 3.29 3.30
Times interest and preferred dividends
earned after income taxes 3.08 2.93 2.97
===================================================================================
Capitalization ratios
Common equity including Employee Stock Ownership Plan 55.3 57.6 56.0
Preferred stock 5.4 6.1 6.3
Long-term debt 39.3 36.3 37.7
===================================================================================
Percent long-term debt to net utility plant 35.6 33.5 34.7
===================================================================================
Average rate
Bonds 7.2 7.2 7.0
Preferred stock 6.1 6.1 6.1
===================================================================================
Number of preferred stock shareholders 2,339 2,501 2,734
===================================================================================
Weather information
Cooling degree days 481 519 255
Cooling degree days as a percent of normal 103.0% 107.0% 53.3%
Heating degree days 7,273 6,530 8,099
Heating degree days as a percent of normal 91.7% 82.4% 101.6%
===================================================================================
-47-
ITEM 6. SELECTED FINANCIAL DATA
UPPER PENINSULA POWER COMPANY
COMPARATIVE FINANCIAL STATEMENTS AND
FINANCIAL STATISTICS (1997 TO 1999)
F. SELECTED FINANCIAL DATA
==================================================================================
(Millions) 1999 1998 1997
- ----------------------------------------------------------------------------------
Operating revenues $62.4 $62.7 $60.2
Net income 2.0 3.5 3.7
Total assets (at December 31) 125.2 127.3 131.3
Long-term debt, net (at December 31) 44.8 38.8 38.9
==================================================================================
-48-
ITEM 6. SELECTED FINANCIAL DATA
UPPER PENINSULA POWER COMPANY
COMPARATIVE FINANCIAL STATEMENTS AND
FINANCIAL STATISTICS (1997 TO 1999)
G. FINANCIAL STATISTICS
==================================================================================
(Millions) 1999 1998 1997
- ----------------------------------------------------------------------------------
Coverage
- ----------------------------------------------------------------------------------
Times interest earned before income taxes 1.82 2.31 2.34
Times interest earned after income taxes 1.46 1.81 1.87
Times interest and preferred dividends
earned after income taxes - - 1.87
==================================================================================
Capitalization ratios
Common equity 46.5 47.6 50.4
Preferred stock - - 0.6
Long-term debt 53.5 52.4 49.0
==================================================================================
Percent long-term debt to net utility plant 43.9 38.2 37.9
==================================================================================
Average rate
Bonds 8.9 8.9 8.9
Preferred stock - - 4.9
==================================================================================
Number of preferred stock shareholders - - 48
==================================================================================
-49-
ITEM 6. SELECTED FINANCIAL DATA | |||||
WPS RESOURCES CORPORATION | |||||
COMPARATIVE FINANCIAL STATEMENTS AND | |||||
Year Ended December 31 | 2000 | 1999 | 1998 | 1997 | 1996 |
Total operating revenues | $1,951,574 | $1,098,540 | $1,063,736 | $ 935,837 | $ 916,449 |
Net income | 66,993 | 59,565 | 46,631 | 55,809 | 52,885 |
Total assets | 2,816,141 | 1,816,548 | 1,510,387 | 1,435,804 | 1,463,316 |
Preferred stock of subsidiaries | 51,168 | 51,193 | 51,200 | 51,645 | 51,656 |
Long-term debt | 709,972 | 634,502 | 393,037 | 347,015 | 349,054 |
Shares of common stock less treasury stock |
|
|
|
| |
|
|
|
| ||
Outstanding at December 31 | 26,409 | 26,780 | 26,502 | 26,518 | 26,537 |
Average | 26,463 | 26,644 | 26,511 | 26,527 | 26,545 |
Basic and diluted earnings per average share of common stock | $2.53 | $2.24 | $1.76 | $2.10 | $1.99 |
Dividend per share of common stock | 2.04 | 2.00 | 1.96 | 1.92 | 1.88 |
Stock price | $36-13/16 | $25-1/8 | $35-1/4 | $33-13/16 | $28-1/2 |
Book value per share | $20.55 | $20.03 | $19.52 | $19.56 | $19.24 |
Return on average equity | 12.4% | 11.3% | 9.0% | 10.8% | 10.3% |
Number of common stock shareholders | 24,029 | 25,020 | 26,319 | 27,369 | 27,922 |
Number of employees | 3,030 | 2,900 | 2,673 | 2,902 | 3,032 |
|
|
|
|
| |
ITEM 6. SELECTED FINANCIAL DATA | |||
|
|
|
|
WISCONSIN PUBLIC SERVICE CORPORATION |
|
|
|
COMPARATIVE FINANCIAL STATEMENTS AND |
|
|
|
FINANCIAL STATISTICS (1998 TO 2000) |
|
|
|
|
|
|
|
(Millions) | 2000 | 1999 | 1998 |
|
|
|
|
Operating revenues | $840.5 | $719.4 | $652.5 |
Earnings on common stock | 70.4 | 67.1 | 54.1 |
Total assets (at December 31) | 1,503.2 | 1,409.9 | 1,267.6 |
Long-term debt, net (at December 31) | 370.0 | 373.1 | 304.0 |
Coverage |
|
|
|
Times interest earned before income taxes | 4.40 | 4.71 | 4.48 |
Times interest earned after income taxes | 3.20 | 3.41 | 3.29 |
Times interest and preferred dividends |
|
|
|
earned after income taxes | 2.93 | 3.08 | 2.93 |
Weather information | |||
Cooling degree days | 330 | 481 | 519 |
Cooling degree days as a percent of normal | 70.7% | 103.0% | 107.0% |
Heating degree days | 7,841 | 7,273 | 6,530 |
Heating degree days as a percent of normal | 98.2% | 91.7% | 82.4% |
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
RESULTS OF OPERATIONS - WPS RESOURCES CORPORATION
WPS Resources Corporation is a holding company. Our wholly-owned subsidiaries include two regulated utilities, Wisconsin Public Service Corporation and Upper Peninsula Power Company. Another wholly-owned subsidiary, WPS Resources Capital Corporation, is a holding company for our nonregulated businesses including WPS Energy Services, Inc. and WPS Power Development, Inc. Approximately 83% of our assets at December 31,
2000 Compared with 1999 and
approximately 71% of our 1999 revenues were derived from electric and gas
utility operations. Substantially all of our 1999 net income was derived from
utility operations.
1999 COMPARED WITH 1998
WPS RESOURCES CORPORATION OVERVIEWResources Corporation Overview
WPS Resources' 19992000 and 19981999 results of operations are shown in the following chart:
========================================================================
WPS Resources' Results | 2000 | 1999 | Change |
Consolidated operating revenues | $1,951.6 | $1,098.3 | 78% |
Net income | 67.0 | 59.6 | 12% |
Basic and diluted earnings per share | $2.53 | $2.24 | 13% |
The substantial revenue growth was largely due to increased gas and electric sales at WPS Resources' Results Percent
(Millions, except share amounts) 1999 1998 Change
- ------------------------------------------------------------------------
Consolidated operatingEnergy Services and increased sales at WPS Power Development as we acquire additional customers and expand into new markets. Part of the increase in revenues $1,098.5 $1,063.7 3.3
Netwas a result of the record high unit cost of natural gas experienced in 2000. Gas cost per therm was 43% higher in 2000 than in 1999. The high unit cost of gas is reflected in both revenues and cost of sales, thus having little impact on margin.
The increase in net income 59.6 46.6 27.9
Basic and diluted earnings per share $2.24 $1.76 27.3
========================================================================
The primary reasons forwas the result of higher earningselectric and gas utility margins and increases in WPS Energy Services' electric and gas margins. Additionally, a higher margin on operating activities along with additional tax credits received at WPS Power Development contributed to higher income. Partially offsetting these factors were increased sales volumesincreases in operating and interest expenses, coupled with costs associated with an electric energy contract entered into by WPS Resources as a hedge against potential summer energy price spikes.
Overview of Utility Operations
Utility operations include the electric utility operations at Wisconsin Public Service coupled with the implementation of new Wisconsin
retail electric and gas ratesUpper Peninsula Power, and the elimination of net trading losses at
WPS Energy Services.
OVERVIEW OF UTILITY OPERATIONS (WISCONSIN PUBLIC SERVICE AND UPPER PENINSULA
POWER)
Revenues and earnings for our electric and gas utility operations are
shown in the following chart:
========================================================================
Percent
Results (Millions) 1999 1998 Change
- ------------------------------------------------------------------------at Wisconsin Public Service
- ------------------------
Operating revenues $719.4 $652.5 10.3
Earnings 65.3 52.9 23.4
Upper Peninsula Power
- ---------------------
Operating revenues 62.4 62.7 (0.5)
Earnings 2.0 3.5 (42.9)
========================================================================
-50-
earnings at Wisconsin Public Serviceutility net income were increased sales coupled with the implementation of newa Wisconsin retail electric rate increase and increased gas rates.
ELECTRIC UTILITY OPERATIONS (WISCONSIN PUBLIC SERVICE AND UPPER PENINSULA
POWER)
Oursales volumes as the result of winter weather that was 8% colder in 2000 than in 1999.
Electric Utility Operations
The consolidated electric margins increased $19.1 million, or 5.1%.
This increase was due to increasedutility margin represents electric revenue less cost of sales volume at Wisconsin Public Service
coupled with the January 15, 1999 implementationexclusive of new Wisconsin retail
electric rates. A 6.3% increase in electric rates was authorized by the
Public Service Commission of Wisconsin.
==========================================================================
WPS Resources' Consolidated Electric Utility Results (Thousands)
- --------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------
Revenues $ 582,471 $ 543,260 $ 536,885
Fuel and purchased power 187,399 167,256 171,935
- --------------------------------------------------------------------------
Margin $ 395,072 $ 376,004 $ 364,950
==========================================================================
Sales in kilowatt-hours 12,503,487 12,172,432 11,993,358
==========================================================================intercompany transactions. Our consolidated electric utility revenuesmargin increased $39.2$29.7 million, or 7.2%8%, primarily due to thea 4.6% Wisconsin retail electric rate increase at Wisconsin Public Service.
Also contributingService which became effective on January 1, 2000. This rate increase was primarily intended to higherrecover additional fuel and purchased power costs for the year. The 2000 electric revenues was a 2.8%rate increase in overallalso took into account the expected gain on the sale of utility assets which is discussed under "Other Electric and Gas Utility Expenses/Income."
Electric Utility Results (Thousands) | 2000 | 1999 | 1998 |
Revenues | $623,786 | $582,471 | $543,260 |
Fuel and purchased power | 198,980 | 187,399 | 167,256 |
Margin | $424,806 | $395,072 | $376,004 |
Sales in kilowatt-hours | 12,565,011 | 12,503,487 | 12,172,432 |
Although our consolidated kilowatt-hour sales were only slightly up, partially due to a 31% cooler summer in 2000 than in 1999, consolidated revenues increased 7% due to the Wisconsin retail electric rate increase at Wisconsin Public Service. Included in 1998 electric
revenues, but not in 1999 electric revenues, are surcharge revenues
Our consolidated fuel expense increased $15.7 million, or 14%, due to increased production at Wisconsin Public ServiceService's fossil-fueled and combustion turbine generation plants. In addition, the average cost of $3.8 million related togeneration at the recoverycombustion turbine plants increased 90% largely as a result of the
deferreda higher unit cost of natural gas. Generation costs forat the 1997 Kewaunee Nuclear Power Plant steam generator
repairs.decreased 14% in 2000 due to its scheduled outage for refueling and maintenance in the second quarter of 2000. A similar outage did not occur in 1999. The Kewaunee plant was off-line beginning April 22, 2000 and returned to power on June 2, 2000. During the scheduled outage, nuclear generation was replaced with additional fossil fuel and combustion turbine generation and additional purchased power. Wisconsin Public Service is the operator and 41.2% owner of the Kewaunee plant. Our consolidated electric production fuelpurchased power expense increased
$3.0decreased $4.1 million, or 2.7%, primarily ashowever, largely due to a result of increased generation
requirements at Wisconsin Public Service's combustion turbine and nuclear
generating plants in 1999. Partially offsetting this factor was a5% decrease in production at Wisconsin Public Service's coal-fired generation plants as a
resultthe cost per kilowatt-hour of both scheduled and unscheduled maintenance activities.
Our consolidated purchased power requirements increased $17.2 million,
or 30.4%, primarily due to additional purchase requirements at bothpurchases made by Wisconsin Public Service and Upper Peninsula Power in 2000 compared with 1999. Purchase
requirements increased 20.1% at Wisconsin Public Service due to the lack of
production at its coal-fired generation plants during the time they were
off-line for maintenance in 1999. In addition, the cost of purchases was
12.8% higher in 1999 than in 1998.
The Public Service Commission of Wisconsin allows Wisconsin Public Service the opportunity to adjust prospectively the amount billed to Wisconsin retail customers for fuel and purchased power if costs fall outside a specified range. Wisconsin Public Service is required to file an application to adjust rates either higher or lower when costs are plus or minus 2.0%2% from forecasted costs on an annualized basis. Annual 19992000 fuel costs at December 31, 1999 were within this 2.0%2% window and, accordingly, no adjustment will be made.
-51-
GAS UTILITY OPERATIONS (WISCONSIN PUBLIC SERVICE)was initiated.
Gas Utility Operations
The consolidated gas utility margin represents gas revenues less purchases exclusive of intercompany transactions. The gas utility margin at Wisconsin Public Service increased $5.4 million, or 7%, in 2000 due to an increase in therm sales.
Gas Utility Results (Thousands) | 2000 | 1999 | 1998 |
Revenues | $264,519 | $191,521 | $165,111 |
Purchase costs | 185,143 | 117,582 | 104,608 |
Margin | $ 79,376 | $ 73,939 | $ 60,503 |
Sales in therms | 701,094 | 662,615 | 608,029 |
Winter weather was a factor for Wisconsin Public Service's gas operations in 2000. Weather was 8% colder in 2000 than in 1999; however, weather was 2% warmer than normal in 2000. Wisconsin Public Service's gas revenues increased $73.0 million, or 38%, as the result of a 43% increase in the average unit cost of natural gas coupled with a 6% increase in overall therm sales.
Wisconsin Public Service's gas purchase costs increased $67.6 million, or 57%. This increase resulted from a higher average unit cost of natural gas and higher gas volumes purchased of 10%. The higher unit cost of natural gas is reflected in both revenues and gas purchases, thus having little impact on margin.
Under current regulatory practice, the Public Service Commission of Wisconsin and the Michigan Public Service Commission allow Wisconsin Public Service to pass changes in the cost of gas on to customers through a purchased gas adjustment clause.
Other Electric and Gas Utility Expenses/Income
Utility operation and maintenance expenses increased $22.3 million. Electric utility operation and maintenance expenses increased $18.4 million primarily due to costs associated with the scheduled outage and other maintenance activities at the Kewaunee plant.
Higher earnings of $6.2 million on the Kewaunee plant's nuclear decommissioning fund resulted in increased other income at Wisconsin Public Service in 2000. Due to regulatory practices, this higher income was offset by increased depreciation and decommissioning expense. Other income at Wisconsin Public Service also included a gain of $3.8 million on the sale of a combustion turbine which Wisconsin Public Service constructed for another Wisconsin utility. The Public Service Commission of Wisconsin considered this gain in the Wisconsin retail electric rate adjustment which was effective January 1, 2000.
Overview of Nonutility and Nonregulated Operations
Nonutility operations refer to the activities of Wisconsin Public Service and Upper Peninsula Power which do not fall under utility regulation. Nonregulated operations consist of the gas, electric, and other sales at WPS Energy Services, a diversified energy supply and services company and the operations of WPS Power Development, an electric generation asset development company. Nonregulated operations also include those of WPS Resources and WPS Resources Capital as holding companies and other nonregulated companies.
WPS Energy Services' net income improved to $1.7 million in 2000 compared with a loss of $3.5 million in 1999. Income at WPS Power Development also improved. WPS Power Development's net income was $0.9 million in 2000 compared with a loss of $3.8 million in 1999.
Other nonutility and nonregulated operations experienced a loss of $7.9 million in 2000 compared with a loss of $0.5 million in 1999. The increased loss was primarily due to additional interest expense, increased operating expenses, and a cost of $3.8 million for an electric energy contract entered into by WPS Resources in 2000 as a hedge against potential summer energy price spikes.
Overview of WPS Energy Services
WPS Energy Services' principal business involves nonregulated gas sales. Revenues at WPS Energy Services grew to $955.6 million in 2000 compared with $292.2 million in 1999, an increase of 227%. This increase was the result of additional gas and electric sales volumes coupled with a higher unit cost of natural gas. The higher unit cost of gas is also reflected in cost of sales, thus having little impact on margin. Income increased $5.2 million in 2000 due to a larger increase in electric and gas margins than in the related other operating expenses.
WPS Energy Services' Margins
The consolidated nonregulated gas margin represents nonregulated gas revenues less nonregulated gas cost of sales exclusive of intercompany transactions. The nonregulated gas margin at WPS Energy Services increased $6.7 million largely due to increased sales volumes.
WPS Energy Services Gas Results (Thousands) | 2000 | 1999 | 1998 |
Nonregulated gas revenues | $919,448 | $288,020 | $330,046 |
Nonregulated gas cost of sales | 908,103 | 283,409 | 326,060 |
Margin | $ 11,345 | $ 4,611 | $ 3,986 |
Gas revenues at WPS Energy Services more than tripled in 2000 compared with 1999. This increase was due to sales volumes that doubled as the result of additional sales in the wholesale market and general business growth. In addition, a large portion of the increase was due to a higher unit cost of natural gas in 2000.
WPS Energy Services' gas cost of sales tripled due to additional gas purchases coupled with a higher unit cost of natural gas.
Electric margins at WPS Energy Services increased $4.2 million in 2000. Electric revenues at WPS Energy Services were $33.8 million in 2000 and $3.4 million in 1999. This increase in revenue resulted from additional electric sales in Pennsylvania and Maine associated with the WPS Power Development assets that were acquired in the second and fourth quarters of 1999. Electric purchases increased $26.2 million due to additional sales volumes.
WPS Energy Services' Other Expenses
Other operating expenses at WPS Energy Services increased $4.2 million, or 42%, primarily due to greater payroll and other operational costs associated with business expansion.
Overview of WPS Power Development
Income at WPS Power Development was $0.9 million in 2000 compared with a loss of $3.8 million in 1999. The increase in income was primarily due to a higher margin on operating activities and additional tax credits. Partially offsetting these factors were higher operating and interest expenses.
Tax credits at WPS Power Development increased approximately $16.7 million in 2000. A portion of these tax credits, subject to the limitations of the alternative minimum tax provisions, were used to reduce our current income tax liability. Approximately $11 million of these tax credits have been carried forward to reduce our tax liability in future years.
A large portion of the tax credits at WPS Power Development relate to the operations of the ECO #12 synthetic fuel operation. Production at ECO #12 was higher than anticipated in 2000 despite the physical relocation of the project from Alabama to Kentucky during 2000. ECO #12 was taken out of operation in April 2000 to prepare for relocation, and WPS Power Development began operation of the facilities in the new location on September 1, 2000. In order to receive optimum benefits from this project, WPS Power Development intends to sell part of its interest in ECO #12. This action has been slowed due to issues currently being raised by the Internal Revenue Service with respect to synthetic fuel projects in general. The current plans call for a closer match of the facility's production level with our ability to use the tax credits that are available for the current year until a sale of a portion of the project is finalized.
In addition, WPS Power Development reversed $0.9 million of previously recorded losses in the first quarter of 2000 as a result of an equity contribution to the ECO #12 synthetic fuel project by the minority owner. Prior to this transaction, WPS Power Development had been recording 100% of the operating losses of this project because the minority owner's equity had been reduced to zero; however, it was only allocated 66.7% of the tax credits. Through an agreement with the minority owner, WPS Power Development is receiving 100% of the tax credits and operating results from the project until the minority owner is able to contribute further capital to fund its share of the operating costs.
WPS Power Development's Margin on Operating Activities and Other Expenses
WPS Power Development experienced an increase of $17.2 million in its margin on operating activities in 2000. This increase was largely due to the operation of the electric generation facilities acquired in Maine and Canada in the second quarter of 1999 and those in Pennsylvania in the fourth quarter of 1999. Other operating expenses at WPS Power Development increased $27.2 million in 2000 due to maintenance and higher production costs at its generation plants in Pennsylvania. Costs associated with the investigation and start-up of new projects at WPS Power Development also increased in 2000. Higher interest expense of $6.3 million in 2000 was largely due to nonrecourse debt put in place to finance the plant acquisitions.
Additional costs at the Sunbury generation plant in Pennsylvania lowered results at WPS Power Development, particularly in the fourth quarter of 2000. This included higher production costs, higher maintenance costs (both planned and accelerated) and increased costs of replacement power while the plant was undergoing maintenance. The decision was made to move some maintenance scheduled in future years into 2000 to coincide with other plant downtime. The accelerated maintenance at the Sunbury plant should enhance availability in 2001 and future years.
1999 Compared with 1998
WPS Resources Corporation Overview
WPS Resources' 1999 and 1998 results of operations are shown in the following chart:
WPS Resources' Results | 1999 | 1998 | Change |
Consolidated operating revenues | $1,098.5 | $1,063.7 | 3% |
Net income | 59.6 | 46.6 | 28% |
Basic and diluted earnings per share | $2.24 | $1.76 | 27% |
The primary reasons for the higher earnings were increased sales volumes at Wisconsin Public Service coupled with the implementation of new Wisconsin retail electric and gas rates and the elimination of net trading losses at WPS Energy Services.
Overview of Utility Operations
Net income from electric utility operations was $56.1 million in 1999 and $50.5 million in 1998. Net income from gas utility operations was $11.2 million in 1999 and $5.9 million in 1998. The primary reasons for higher utility net income were increased sales volumes coupled with the implementation of new Wisconsin retail electric and gas rates.
Electric Utility Operations
Our consolidated electric utility margin increased $19.1 million. This increase was due to increased sales volumes at Wisconsin Public Service coupled with the January 15, 1999 implementation of new Wisconsin retail electric rates. The Public Service Commission of Wisconsin authorized a 6.3% increase in electric rates.
Our consolidated electric utility revenues increased $39.2 million primarily due to the electric rate increase at Wisconsin Public Service. A 3% increase in overall kilowatt-hour sales at Wisconsin Public Service also contributed to higher electric revenues. Included in 1998 electric revenues, but not in 1999 electric revenues, were surcharge revenues at Wisconsin Public Service of $3.8 million related to the recovery of the deferred costs for the Kewaunee plant's 1997 steam generator repairs.
Our consolidated fuel expense increased $3.0 million as a result of increased generation requirements at Wisconsin Public Service's combustion turbine and nuclear generation plants in 1999. Partially offsetting this factor was a decrease in production at Wisconsin Public Service's coal-fired generation plants as a result of both scheduled and unscheduled maintenance activities.
Our consolidated purchased power requirements increased $17.2 million primarily due to additional purchase requirements at both Wisconsin Public Service and Upper Peninsula Power in 1999. Purchase requirements increased 20% at Wisconsin Public Service due to the lack of production at its coal-fired generation plants during the time they were off-line for maintenance in 1999. In addition, the cost of purchases was 13% higher in 1999 than in 1998.
Annual 1999 fuel costs at December 31, 1999 were within the 2% fuel window authorized by the Public Service Commission of Wisconsin and, accordingly, no adjustment was made to electric rates for 1999 fuel costs.
Gas Utility Operations
The consolidated gas utility margin increased $13.4 million in 1999.represents gas revenues less purchases exclusive of intercompany transactions. The gas utility margin at Wisconsin Public Service increased $13.4 million or 22.2%, in 1999. This increase was primarily due to the implementation of a Public Service Commission of Wisconsin rate order which authorized a 5.1% increase in Wisconsin retail gas rates and to an increase in therm sales.
==========================================================================
Wisconsin Public Service's Gas Utility Results (Thousands)
- --------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------
Revenues $191,521 $165,111 $211,090
Purchase costs 117,582 104,608 147,493
- --------------------------------------------------------------------------
Margin $ 73,939 $ 60,503 $ 63,597
==========================================================================
Sales in therms 662,615 608,092 662,008
==========================================================================
Wisconsin Public Service's gas operating revenues increased $26.4 million, or 16.0%.million. This increase was due to the implementation of new Wisconsin retail gas rates and a 9.0%9% increase in overall therm sales as a result of colder weather in 1999. Although the winter weather was 11.4%11% colder in 1999 than in 1998, it was still 8.3%8% warmer than normal.
Note that 1998 gas
Gas utility revenues in 1998 were reduced by $7.5 million for refunds from ANR Pipeline Company which were passed on to Wisconsin Public Service's customers. Gas purchase costs in 1998 were likewise reduced as this $7.5 million refund was credited to gas expense.
Wisconsin Public Service's gas purchase costs increased $13.0 million or 12.4%. This increase was due to increased sales and to a higher unit cost of natural gas. Under current regulatory practice, the Public Service Commission of
Wisconsin
Other Electric and the Michigan Public Service Commission allow Wisconsin Public
Service to pass changes in the cost of gas on to customers through a purchased
gas adjustment clause.
OTHER UTILITY EXPENSES/INCOME (WISCONSIN PUBLIC SERVICE AND UPPER PENINSULA
POWER)Gas Utility Expenses/Income
Other utility operating expenses at Wisconsin Public Service increased $12.6 million or 9.1%, primarily due to higher customer service expenses of $5.1 million related to conservation expenditures, and higher pension costs of $3.4 million due to a change in the assumptions used to calculate this expense. Also contributing to increased operating expenses were higher medical benefit expenses of $1.2 million and higher electric distribution expenses of $1.2 million.
Maintenance expense at Wisconsin Public Service increased $7.2 million
or 14.6%, primarily due to additional costs of $8.0 million at its coal-fired generation plants and $1.6 million at its other power generation plants for both scheduled and unscheduled maintenance activities. Offsetting these costs was a decrease in maintenance expense of $8.5 million at the Kewaunee plant. -52-
1997 Kewaunee plant's 1997 steam generator repairs waswere recognized in 1998. Maintenance of overhead distribution lines increased $4.7 million in 1999 due to additional tree trimming, line clearance, and storm damage repairs.
PRICE RISK MANAGEMENT ACTIVITIES (WISCONSIN PUBLIC SERVICE AND UPPER PENINSULA
POWER)
WPS Resources engages in minimal price risk management activities at its
utility operations because much
Overview of the utility price risk exposure is
recoverable through customer rates.
OVERVIEW OF NONREGULATED AND NONUTILITY OPERATIONSNonutility and Nonregulated operations consist of the gas and electric sales atOperations
WPS Energy Services Inc., a diversified energy supply and services company.
Nonregulated operations also include those of WPS Resources as a holding
company and those of WPS Power Development, Inc., an electric generation asset
development company. Nonutility operations refer to the activities of
Wisconsin Public Service and Upper Peninsula Power which do not fall under
utility regulation.
Nonregulated and nonutility operations experienced a loss of $7.8$3.5 million in 1999 compared with a loss of $9.8$6.9 million in 1998. Losses at WPS Power Development were $3.8 million in 1999 and $2.4 million in 1998. Although margins on nonregulated energy sales continuecontinued to grow, losses are beingwere experienced primarily due to operating expenses associated with new facilities, market expansion, and the pursuit of additional projects. Nonutility operations in 1999 included a one-time special dividend of $0.5 million. This special dividend was related to a land sale from an investment held at Wisconsin Public Service. Nonregulated earnings in 1998 included a one-time dividend of $2.0 million received by WPS Resources from a venture capital investment.
OVERVIEW OF
Overview of WPS ENERGY SERVICES, INC.Energy Services, Inc.
Revenues at WPS Energy Services were $292.2 million in 1999 compared with $351.3 million in 1998, a decrease of 16.8%17%. The revenue decrease iswas attributable to a combination of lower overall natural gas prices experienced in 1999, and a deliberate change in the wholesale product mix. WPS Energy Services experienced an improvement in operating results, reducing net losses by 49.3%49% in 1999. Net losses were $3.5 million in 1999 compared with
$6.9 million in 1998. The primary reason for the decrease in losses was the elimination of trading losses that occurred in 1998. WPS Energy Services implemented a deliberate shift in focus within its trading unit to emphasize capturing present opportunities in the market rather than taking a position in anticipation of a future market movement. While not without risk, this lower-risk approach did yield gains in 1999. WPS Energy Services also experienced an increase in total gas margin due to improved gas procurement operations and processes, and an increased emphasis on creation of wholesale products providing greater value, thus higher margin, to customers in the wholesale marketplace. Partially offsetting these factors was a one-time pretax write-down of $0.7 million related to an investment in a gas production field.
NONREGULATED MARGINS (WPS ENERGY SERVICES)
WPS Energy Services' Margins
Gas margins at WPS Energy Services were $4.6increased $0.6 million in 1999 compared
with $4.0 million in 1998, an increase of 15.0%. Electric margins remained
fairly stable.1999. Gas revenues at WPS Energy Services were $288.0decreased $42.0 million in
-53-
1999 compared with $330.0and gas cost of sales decreased $42.6 million in 1998. This decrease wasas the result of lower overall natural gas market prices and an increased emphasis on higher quality and lower-risk wholesale products rather than a large volume of wholesale transactions with lower margins. Improvements in gas procurement processes also contributed to lower cost of sales.
Electric margins remained fairly stable. Electric revenues were
$3.4decreased $17.1 million in 1999 and $20.5 million in 1998, a decrease of 83.4%. This
decrease wasas the result of WPS Energy Services' efforts to focus participation in the wholesale electric markets where transactions arewere based on physical generation assets controlled by an affiliate of WPS Resources.
WPS Energy Services' cost of sales was $286.6 million in 1999 and
$346.4 million in 1998, a decrease of 17.3%. This decrease was due to
decreased gas purchases of $42.7 million primarily due to lower natural gas
prices and, to a lesser extent, reduced wholesale sales volumes. Also
contributing to the lower cost of sales was continued improvement in gas
procurement processes. Electric purchases decreased $17.1 million due to
decreased sales.
OTHER NONREGULATED EXPENSES/INCOME (WPS ENERGY SERVICES)Other Expenses
Other operating expenses at WPS Energy Services increased $1.0 million
or 11.1%, primarily due to costs of $0.7 million associated with entering into expanded retail customer-choice programs. Improved processes and strategies emphasizing reduced risk at WPS Energy Services resulted in a gas trading gain in 1999 compared with gas trading losses of $4.9 million in 1998. Essentially no electric trading losses were experienced in 1999 compared with a $1.2 million loss in 1998.
PRICE RISK MANAGEMENT ACTIVITIES (WPS ENERGY SERVICES)
WPS Energy Services uses derivative financial and commodity instruments
to reduce market risk associated with the changing prices
Overview of natural gas and
electricity sold at firm prices to customers. WPS Energy Services also uses
derivatives to manage market risk associated with anticipated energy
purchases, as well as trading activities. Derivatives may include futures and
forward contracts, basis swap agreements, or call and put options.
Gains and losses on derivatives are recognized immediately in earnings
when it is no longer probable that the related forecasted transaction will
occur. Each accounting period, WPS Energy Services records gains or losses on
changes in market value of trading derivatives in other income. WPS Energy
Services recorded net trading gains of $0.1 million in 1999 and net trading
losses of $6.1 million in 1998.
At December 31, 1999, WPS Energy Services had outstanding 11.4 million
notional dekatherms of natural gas under futures and option agreements and
5.9 million notional dekatherms of natural gas under basis swap agreements in
order to manage market risk. These financial instruments expire at various
times through October 2001. WPS Energy Services has gas sales commitments
through October 2000 with a range of sale prices from $2.06 to $3.09 per
dekatherm and a range of associated gas purchase costs of $2.05 to $3.00 per
dekatherm.
At December 31, 1999, the fair value of trading instruments included
assets of $7.5 million and liabilities of $6.8 million. Natural gas
derivatives were used for all trading activities in 1999 and 1998, except for
a small amount of electric trading transactions. At December 31, 1999,
WPS Energy Services had outstanding 1.4 million notional dekatherms of natural
gas under futures and option agreements and 1.7 million notional dekatherms of
natural gas under basis swap agreements for trading purposes.
-54-
============================================================================
Derivatives (contract amounts in millions)
- ----------------------------------------------------------------------------
Expected Maturity
-------------------- Fair
2000 2001 2002 Total Value
- ----------------------------------------------------------------------------
Futures NYMEX - hedging
Long (billion cubic feet) 25.3
Weighted average settlement price
(per dekatherm) $2.54
Contract amount $64.4 $64.4 $(5.1)
Short (billion cubic feet) 23.1 0.4
Weighted average settlement price
(per dekatherm) $2.60 $2.80
Contract amount $59.9 $1.1 $61.0 $5.8
- ----------------------------------------------------------------------------
Futures NYMEX - trading
Long (billion cubic feet) 10.3
Weighted average settlement price
(per dekatherm) $2.63
Contract amount $27.2 $27.2 $(3.0)
Short (billion cubic feet) 10.8
Weighted average settlement price
(per dekatherm) $2.63
Contract amount $28.5 $28.5 $3.2
- ----------------------------------------------------------------------------
OTC futures - hedging
Long (billion cubic feet) 7.8 0.7 0.18
Weighted average settlement price
(per dekatherm) $2.36 $2.22 $2.22
Contract amount $18.5 $1.6 $0.4 $20.5 $0.4
Short (billion cubic feet) 3.2
Weighted average settlement price
(per dekatherm) $2.64
Contract amount $8.4 $8.4 $0.9
- ----------------------------------------------------------------------------
OTC futures - trading
Long (billion cubic feet) 0.8
Weighted average settlement price
(per dekatherm) $2.47
Contract amount $2.0 $2.0 $(0.1)
Short (billion cubic feet) 0.5
Weighted average settlement price
(per dekatherm) $2.77
Contract amount $1.4 $1.4 $0.2
- ----------------------------------------------------------------------------
-55-
============================================================================
Derivatives (continued)
- ----------------------------------------------------------------------------
Expected Maturity
-------------------- Fair
2000 2001 2002 Total Value
- ----------------------------------------------------------------------------
Options - hedging
Long calls (billion cubic feet) 2.3
Weighted average strike price
(per dekatherm) $3.03
Contract amount $6.9 $6.9 $(0.5)
Long puts (billion cubic feet) 2.9
Weighted average strike price
(per dekatherm) $2.31
Contract amount $6.6 $6.6 $0.0
Short calls (billion cubic feet) 1.1
Weighted average strike price
(per dekatherm) $3.07
Contract amount $3.4 $3.4 $0.2
Short puts (billion cubic feet) 5.8
Weighted average strike price
(per dekatherm) $2.31
Contract amount $13.3 $13.3 $(0.1)
- ----------------------------------------------------------------------------
Options - trading
Long calls (billion cubic feet) 0.2
Weighted average strike price
(per dekatherm) $2.30
Contract amount $0.3 $0.3 $0.0
Long puts (billion cubic feet) 1.9
Weighted average strike price
(per dekatherm) $2.11
Contract amount $3.9 $3.9 $0.0
Short calls (billion cubic feet) 0.3
Weighted average strike price
(per dekatherm) $2.50
Contract amount $0.6 $0.6 $0.0
Short puts (billion cubic feet) 0.8
Weighted average strike price
(per dekatherm) $2.30
Contract amount $1.7 $1.7 $0.1
- ----------------------------------------------------------------------------
Basis swaps - hedging
Receive fixed (billion cubic feet) 28.9 0.7
Weighted average settlement price
(per dekatherm) $0.11 $0.22
Contract amount $3.3 $0.2 $3.5 $(0.9)
Receive floating
(billion cubic feet) 23.7
Weighted average settlement price
(per dekatherm) $0.12
Contract amount $2.8 $2.8 $(0.1)
- ----------------------------------------------------------------------------
-56-
============================================================================
Derivatives (continued)
- ----------------------------------------------------------------------------
Expected Maturity
-------------------- Fair
2000 2001 2002 Total Value
- ----------------------------------------------------------------------------
Basis swaps - trading
Receive fixed (billion cubic feet) 39.1
Weighted average settlement price
(per dekatherm) $0.18
Contract amount $7.0 $7.0 $(3.7)
Receive floating
(billion cubic feet) 36.3 1.1
Weighted average settlement price
(per dekatherm) $0.19 $0.12
Contract amount $7.0 $0.1 $7.1 $4.0
============================================================================
OVERVIEW OF WPS POWER DEVELOPMENT
Losses at WPS Power Development were $3.8 million in 1999 compared with
$2.4 million in 1998.
The increase in losses in 1999 at WPS Power Development was primarily due to additional costs incurred in 1999 for the development and operation of newly acquired facilities and the evaluation of new projects.
WPS Power Development experienced an increase of $9.5 million in its margin on operating generation facilities in 1999. This increase was due to the operation of the electric generation assets acquired in Maine and Canada on June 8, 1999, and in Pennsylvania on November 1, 1999. Other operating expenses at WPS Power Development increased $10.5 million largely due to operating expenses related to the electric generation assets acquired in Maine
and Canada from Maine Public Service and the Sunbury plant acquired in
Pennsylvania from PP&L Resources.during 1999. Higher operating expenses at the ECO Coal
Pelletization #12 LLCsynthetic fuel operation also contributed to the increase. Partially offsetting increased expenses at ECO #12 was the benefit of tax credits received for these operations. Although ECO #12 experienced problems with materials and customers in the early part of 1999, these problems have beenwere resolved and sales have increased significantly. Additional costs related to the pursuit and development of new projects also contributed to higher operating expenses at WPS Power Development in 1999.
OVERVIEW OF OTHER NONREGULATED AND NONUTILITY OPERATIONS
Overview of Other Nonutility and Nonregulated Operations
A one-time dividend of $0.5 million was received by Wisconsin Public Service in 1999 related to a land sale from an investment. This dividend represented a one cent per share increase to earnings for 1999.
A one-time dividend of $2.0 million was received by WPS Resources in 1998 from a venture capital investment. This dividend represented a four cents per share increase in earnings for 1998.
-57-
1998 COMPARED WITH 1997
BALANCE SHEET - WPS RESOURCES CORPORATION OVERVIEW
WPS Resources' results of operations and financial position for 1998 and
1997 include
2000 Compared With 1999
As the effects of the merger with Upper Peninsula Energy Corporation
which was effective September 29, 1998 and was accounted for as a pooling of
interests. In accordance with the terms of the merger, each of the 2,950,001
outstanding shares of Upper Peninsula Energy Corporation common stock (no par
value) was converted into 0.90 sharesresult of WPS Resources' common stock. The
conversion was subjectEnergy Services marking to adjustment for cash payments for fractional shares.
In conjunction with this merger, we expensed transaction charges of
approximately $1.6 million in 1998 and $2.7 million in 1997. These merger
transaction charges consisted of the following:
=====================================================
Merger Charges (Millions)
-----------------------------------------------------
1998 1997
-----------------------------------------------------
Investment bankers $0.8 $0.9
Legal 0.7 0.9
Accounting - 0.2
Other 0.1 0.7
-----------------------------------------------------
Total $1.6 $2.7
=====================================================
In addition, Upper Peninsula Power, Upper Peninsula Energy Corporation's
primary subsidiary, recorded severance costs of $1.1 million and an additional
$0.5 million in other merger-related expenses in 1998.
WPS Resources' 1998 and 1997 results of operation are shown in the
following chart:
========================================================================
WPS Resources' Results Percent
(Millions, except share amounts) 1998 1997 Change
- ------------------------------------------------------------------------
Consolidated operating revenues $1,063.7 $935.8 13.7
Net income 46.6 55.8 (16.5)
Basic and diluted earnings per share $1.76 $2.10 (16.2)
========================================================================
The primary reasons for the decrease in earnings were the impact of
unusually warm winter weather, the effects of a full year electric rate
decrease at Wisconsin Public Service, higher maintenance expenses at
Wisconsin Public Service, decreased other income, higher other operating
expenses, and a decrease in Wisconsin Public Service's gas margin. Partially
offsetting these factors were an increase in electric utility margins and an
increase in nonregulated margins.
-58-
OVERVIEW OF UTILITY OPERATIONS (WISCONSIN PUBLIC SERVICE AND UPPER PENINSULA
POWER)
Revenues and earnings for our electricmarket its energy contracts and gas utility operations are
shown in the following chart:
========================================================================
Percent
Results (Millions) 1998 1997 Change
- ------------------------------------------------------------------------
Wisconsin Public Service
- ------------------------
Operating revenues $652.5 $690.5 (5.5)
Earnings 52.9 57.5 (8.0)
Upper Peninsula Power
- ---------------------
Operating revenues 62.7 60.2 4.2
Earnings 3.5 3.7 (5.4)
========================================================================storage in 2000, our balance sheet grew by approximately $660.0 million. The primary reasons for the decreasemark-to-market accounting is reflected in earnings at Wisconsin Public
Service were the impact of unusually warm winter weather, increased
maintenance expenses, a decrease in other income, an increase in other
operating expenses,both assets and a decrease inliabilities from risk management activities and the gas margin. Partially offsetting
these factors were an increase in the electric utility margin and a decrease
in interest expense.
The primary reasons for the decrease in earnings at Upper Peninsula
Power were higher maintenancestorage inventory account.
Customer and other operating expenses partially offset by
an increase in the electric margin.
ELECTRIC UTILITY OPERATIONS (WISCONSIN PUBLIC SERVICE AND UPPER PENINSULA
POWER)
Our consolidated electric utility marginsreceivables increased $11.1$185.5 million or
3.0%, primarily due to increased kilowatt-hour sales of 3.0% to
Wisconsin Public Service's customers as a result of warmer summer weather in
1998. Partially offsetting the increase in electric margins in 1998 was the
impact on Wisconsin Public Service of a Public Service Commission of Wisconsin
8.1% retail electric rate decrease which was effective for the entire year in
1998 but was only effective in 1997 for the period after February 21, 1997.
Our consolidated electric utility revenues increased $6.4 million, or
1.2%, largely due to increased revenues of $4.8 million from Wisconsin Public
Service's wholesale customers and $1.5 million from Wisconsin Public Service's
commercial and industrial customers as a result of the warmer summer weather.
Also included in 1998 electric revenues were surcharge revenues at
Wisconsin Public Service of $3.8 million related to the recovery of deferred
costs for the 1997 Kewaunee plant steam generator repairs. Partially
offsetting these factors were the electric rate reduction and a $1.0 million
refund of Wisconsin Public Service's transmission revenues as the result of a
1998 Federaladditional sales volumes at both WPS Energy Regulatory Commission settlement relatedServices and Wisconsin Public Service. The higher unit cost of natural gas experienced, especially in December of 2000, also contributed to open access
transmission tariff rates.
Our consolidated electric production fuel expensethe increased $2.8receivables balance. Likewise, accounts payable increased $230.9 million or 2.6%, primarily as a resultlargely due to the additional sales volumes and the higher unit cost of natural gas.
Long-term debt increased generation expense.
The Kewaunee plant was out of service for the first six months of 1997$76.1 million as the result of an extended outage to repair steam generators, thus, in comparison,
the higher generation expense in 1998.
-59-
Our consolidated purchased power expense decreased $7.5 million, or
11.7%, primarily due to decreased purchase requirements at Wisconsin Public
Service in the first half of 1998. Purchase requirements at Wisconsin Public
Service in the first half of 1997 were higher due to lack of production at the
Kewaunee plant in the first and second quarters of 1997 as a result of an
extended outage. The Kewaunee plant was also off-line in 1998 for a six-week
scheduled refueling outage. Also contributing to lower purchased power
expense at Wisconsin Public Service was a $1.2 million credit to purchased
power expense in the fourth quarter of 1998WPS Power Development obtaining nonrecourse financing related to the settlement of
litigation involving a contract with a power supplier.
GAS UTILITY OPERATIONS (WISCONSIN PUBLIC SERVICE)
The consolidated gas utility margin decreased $4.1 million, or 6.5%, in
1998. This decrease was primarily due to winter weather that was 19.4% warmer
in 1998 than in 1997. The gas utility margin at Wisconsin Public Service
decreased $3.1 million, or 4.9%, in 1998.
Wisconsin Public Service's gas operating revenues decreased
$46.0 million, or 21.8%. This decrease was due to unusually mild winter
weather in 1998 resulting in lower gas therm sales for 1998 of 8.1%.
Note that 1998 gas utility revenues were reduced by $7.5 million for
refunds from ANR Pipeline Company which were passed on to Wisconsin Public
Service's customers. Gas purchase costs in 1998 were likewise reduced as this
$7.5 million refund was credited to gas expense.
Wisconsin Public Service's gas purchase costs decreased $42.9 million,
or 29.1%. This decrease was due to reduced customer demand as a result of the
mild weather during 1998.
OTHER UTILITY EXPENSES/INCOME (WISCONSIN PUBLIC SERVICE AND UPPER PENINSULA
POWER)
Other operating expenses at Wisconsin Public Service increased
$4.1 million, or 3.1%, primarily due to higher benefit costs in 1998.
Other operating expenses at Upper Peninsula Power increased
$0.6 million, or 3.6%, primarily as the result of the accrual of $1.1 million
in merger-related severance expense in 1998. Other operating expenses at
Upper Peninsula Power in 1997 included costs incurred related to the
termination of Upper Peninsula Power's Presque Isle Plant Operating Agreement
with Wisconsin Electric Power Company. Upper Peninsula Power had staffed and
operated Wisconsin Electric's Presque Isle Power Plant through December 31,
1997, at which time the operating agreement was terminated.
Maintenance expense at Wisconsin Public Service increased $7.8 million,
or 18.6%, primarily as a result of increased expenses at the KewauneeSunbury generation plant
during the second and fourth quarters of 1998. This increase was partly due
to the recognition of the deferred expenses for the 1997 Kewaunee plant's
steam generator repairs. The Public Service Commission of Wisconsin approved
deferral of the repairs in 1997, the cost of which had been collected in the second quarter of 1998 through a $3.8 million electric revenue surcharge. In
addition, maintenance expense at the Kewaunee plant2000. Commercial paper increased in the fourth
quarter of 1998 due to a scheduled refueling outage.
Depreciation and decommissioning expenses at Wisconsin Public Service
increased $2.4 million, or 3.1%, due to an increased plant base and to the
accelerated recovery of investment in the Kewaunee plant and accelerated
funding of the Kewaunee plant's decommissioning costs. Accelerated recovery
of investment and funding began on February 21, 1997 and, therefore, was
effective for all of 1998 but only a portion of 1997.
-60-
PRICE RISK MANAGEMENT ACTIVITIES (WISCONSIN PUBLIC SERVICE AND UPPER PENINSULA
POWER)
WPS Resources engages in minimal price risk management activities at its
utility operations because much of the utility price risk exposure is
recoverable through customer rates.
OVERVIEW OF NONREGULATED AND NONUTILITY OPERATIONS
Nonregulated and nonutility operations experienced a loss of
$9.8 million in 1998 compared with a loss of $5.4 million in 1997. Although
nonregulated margins continued to grow, losses were experienced due to gas and
electric trading losses and expenses associated with the expansion of customer
base. Nonutility operations experienced a one-time gain of $4.8 million on
the sale of nonutility property in 1997.
OVERVIEW OF WPS ENERGY SERVICES
Revenues at WPS Energy Services were $351.3 million in 1998 compared
with $189.4 million in 1997, an increase of 85.5%. WPS Energy Services
experienced a loss of $6.9 million in 1998 compared with a loss of
$4.9 million in 1997. The primary reasons for the increased loss at
WPS Energy Services were increased electric and gas trading losses primarily
due to market volatility, and higher operating expenses due to expansion of
the energy trading business. Partially offsetting these factors was an
increase in the gas margin.
NONREGULATED MARGINS (WPS ENERGY SERVICES)
Gas margins at WPS Energy Services were $4.0 million in 1998 compared
with $1.9 million in 1997, an increase of 110.5%. Electric margins at
WPS Energy Services remained fairly stable. Gas revenues at WPS Energy
Services were $330.0 million in 1998 compared with $182.3 million in 1997, an
increase of $147.7 million, or 81.0%. This increase was the result of sales
volume growth and expansion to additional geographic areas. Electric revenues
at WPS Energy Services were $20.5 million in 1998 and $6.4 million in 1997, an
increase of $14.1 million, or 220.3%. This increase was also the result of
sales volume growth.
WPS Energy Services' cost of sales were $346.4 million in 1998 and
$186.6 million in 1997, an increase of $159.8 million, or 85.6%. This
increase was primarily due to increased gas purchases of $145.6 million and
increased purchased power expense of $14.2 million. These increases were the
result of customer growth and higher costs of purchases.
OTHER NONREGULATED EXPENSES/INCOME (WPS ENERGY SERVICES)
Other operating expenses at WPS Energy Services increased $1.1 million,
or 13.6%, due to expansion of the business. WPS Energy Services experienced
gas trading losses of $4.9 million in 1998 and $1.4 million in 1997 largely
due to market volatility. WPS Energy Services also experienced electric
trading losses of $1.2 million in 1998 primarily due to losses in the third
quarter related to the unprecedented market volatility in the electric trading
market.
PRICE RISK MANAGEMENT ACTIVITIES (WPS ENERGY SERVICES)
WPS Energy Services uses derivative financial and commodity instruments
to reduce market risk associated with changing prices of natural gas and
electricity sold at firm prices to customers. WPS Energy Services also uses
derivatives to manage market risk associated with anticipated energy
-61-
purchases, as well as trading activities. Derivatives may include futures and
forward contracts, price swap agreements, or call and put options.
Gains and losses on derivatives are recognized immediately in earnings
when it is no longer probable that the related forecasted transaction will
occur. Each accounting period, WPS Energy Services records gains or losses on
changes in market value of trading derivatives in other income. WPS Energy
Services recorded net trading losses of $6.1 million in 1998 and $1.4 million
in 1997.
At December 31, 1998, WPS Energy Services had outstanding 27.4 million
notional dekatherms of natural gas under futures and option agreements and
0.9 million notional dekatherms of natural gas under basis swap agreements in
order to manage market risk. These financial instruments expire at various
times through August 2000. WPS Energy Services had gas sales commitments
through August 2000 with a range of sale prices from $2.36 to $2.38 per
dekatherm and a range of associated gas purchase costs of $2.29 to $2.31 per
dekatherm.
At December 31, 1998, the fair value of trading instruments included
assets of $29.2 million and liabilities of $30.0 million. Virtually all
trading activities in 1998 and 1997 involved natural gas derivatives, except
for a small amount of electric trading transactions. At December 31, 1998,
WPS Energy Services had outstanding 0.4 million notional dekatherms of natural
gas under futures and option agreements and 2.8 million notional dekatherms of
natural gas under basis swap agreements for trading purposes.
============================================================================
Derivatives (contract amounts in millions)
- ----------------------------------------------------------------------------
Expected Maturity
-------------------- Fair
1999 2000 Total Value
- ----------------------------------------------------------------------------
Futures NYMEX - hedging
Long (billion cubic feet) 34.8 2.2
Weighted average settlement price
(per dekatherm) $2.26 $2.32
Contract amount $78.8 $5.1 $83.9 $(13.4)
Short (billion cubic feet) 18.4 0.8
Weighted average settlement price
(per dekatherm) $2.18 $2.50
Contract amount $40.0 $2.1 $42.1 $6.2
- ----------------------------------------------------------------------------
Futures NYMEX - trading
Long (billion cubic feet) 33.5
Weighted average settlement price
(per dekatherm) $2.28
Contract amount $76.3 $76.3 $(15.3)
Short (billion cubic feet) 37.0
Weighted average settlement price
(per dekatherm) $2.25
Contract amount $83.2 $83.2 $16.0
- ----------------------------------------------------------------------------
-62-
============================================================================
Derivatives (continued)
- ----------------------------------------------------------------------------
Expected Maturity
-------------------- Fair
1999 2000 Total Value
- ----------------------------------------------------------------------------
OTC futures - hedging
Long (billion cubic feet) 7.2 3.4
Weighted average settlement price
(per dekatherm) $2.21 $2.28
Contract amount $15.9 $7.8 $23.7 $(1.6)
Short (billion cubic feet) 1.5 0.1
Weighted average settlement price
(per dekatherm) $2.12 $2.18
Contract amount $3.1 $0.3 $3.4 $0.4
- ----------------------------------------------------------------------------
OTC futures - trading
Long (billion cubic feet) 6.0
Weighted average settlement price
(per dekatherm) $2.21
Contract amount $13.1 $13.1 $(1.9)
Short (billion cubic feet) 3.1 0.1
Weighted average settlement price
(per dekatherm) $2.15 $1.85
Contract amount $6.8 $0.2 $7.0 $1.0
- ----------------------------------------------------------------------------
Options - hedging
Long calls (billion cubic feet) 0.6
Weighted average strike price
(per dekatherm) $2.46
Contract amount $1.6 $1.6 $(0.1)
Long puts (billion cubic feet) 0.6
Weighted average strike price
(per dekatherm) $1.87
Contract amount $1.1 $1.1 $0.0
Short calls (billion cubic feet) 0.7
Weighted average strike price
(per dekatherm) $2.43
Contract amount $1.7 $1.7 $0.2
Short puts (billion cubic feet) 0.8 0.5
Weighted average strike price
(per dekatherm) $2.25 $2.43
Contract amount $1.8 $1.1 $2.9 $0.0
- ----------------------------------------------------------------------------
-63-
============================================================================
Derivatives (continued)
- ----------------------------------------------------------------------------
Expected Maturity
-------------------- Fair
1999 2000 Total Value
- ----------------------------------------------------------------------------
Options - trading
Long calls (billion cubic feet) 2.2
Weighted average strike price
(per dekatherm) $2.27
Contract amount $5.1 $5.1 $(0.2)
Long puts (billion cubic feet) 5.9
Weighted average strike price
(per dekatherm) $2.05
Contract amount $12.0 $12.0 $0.5
Short calls (billion cubic feet) 1.5
Weighted average strike price
(per dekatherm) $2.17
Contract amount $3.2 $3.2 $0.1
Short puts (billion cubic feet) 5.0 0.5
Weighted average strike price
(per dekatherm) $2.14 $2.30
Contract amount $10.7 $1.0 $11.7 $(0.5)
- ----------------------------------------------------------------------------
Basis swaps - hedging
Receive fixed (billion cubic feet) 12.2 0.9
Weighted average settlement price
(per dekatherm) $0.17 $0.29
Contract amount $2.1 $0.3 $2.4 $(0.9)
Receive floating
(billion cubic feet) 13.5 0.5
Weighted average settlement price
(per dekatherm) $0.20 $0.09
Contract amount $2.7 $2.7 $1.2
- ----------------------------------------------------------------------------
Basis swaps - trading
Receive fixed (billion cubic feet) 80.5 2.6
Weighted average settlement price
(per dekatherm) $0.25 $0.24
Contract amount $20.9 $0.6 $21.5 $(12.1)
Receive floating
(billion cubic feet) 82.1 3.8
Weighted average settlement price
(per dekatherm) $0.25 $0.23
Contract amount $20.4 $0.9 $21.3 $11.6
============================================================================
OVERVIEW OF WPS POWER DEVELOPMENT
Losses at WPS Power Development were $2.4 million in 1998 compared with
$1.9 million in 1997. The increase in losses at WPS Power Development was
primarily due to additional expenses incurred in 1998 for the start-up of new
projects. Other operating expenses at WPS Power Development increased
$1.1 million, or 25.4%, due to higher project expenses.
-64-
OVERVIEW OF OTHER NONREGULATED AND NONUTILITY OPERATIONS
Other income at the WPS Resources holding company in 1998 included a
dividend of $2.0 million on a venture capital investment.
BALANCE SHEET - WPS RESOURCES
1999 COMPARED WITH 1998
Nuclear decommissioning trusts increased $26.6 million due to continued
funding and favorable investment returns. Construction in progress increased
$31.8$39.7 million largely as a result of construction expenditures at
Wisconsin Public Service related to the Kewaunee plant's steam generator
replacement project and the combustion turbine project at West Marinette which
Wisconsin Public Service is building for Madison Gas and Electric Company.
Customer receivables increased $15.1 million primarily as a result of
increased sales at Wisconsin Public Service and WPS Power Development. Net
nonutility and nonregulated plant increased $126.9 million as a result of the
acquisition of additional generation assets at WPS Power Development.
Long-term debt increased $170.6 million and commercial paper increased
$32.3 million as a result of equity infusions to subsidiaries and nonrecourse
financing at WPS Power Development. Cash requirements exceeded internally
generated funds at WPS Resources.
finance capital needs.
FINANCIAL CONDITION - WPS RESOURCES INVESTMENTS AND FINANCING
Nonutility assets of $11.9 million were transferred from
Wisconsin Public Service to WPS Resources in 1999.CORPORATION
Investments and Financing
Special common stock dividends of $25.0$50.0 million were paid by Wisconsin Public Service to WPS Resources in 1999.2000. Equity infusions of $60.0$75.0 million were made by WPS Resources to Wisconsin Public Service in 1999. These2000. The special dividends and equity infusions allowed Wisconsin Public Service's average equity capitalization and its capitalization ratio for ratemaking to remain at itsnear target levellevels as established by the Public Service Commission of Wisconsin in its most recent1999 rate order.
Cash requirements exceeded internally generated funds by $107.5 million in 1999 and new
financing2000. Short-term borrowings through commercial paper increased $39.7 million. Long-term debt increased $76.1 million mainly due to the issuance of $211.5$83.7 million was necessaryof nonrecourse debt related to obtain funds for the acquisition
of generating units from Maine Public Service and the Sunbury generation plant. The Sunbury plant from
PP&L Resources.was originally financed with short-term debt. Our pretax interest coverage, including nonrecourse debt, was 3.202.27 times for the 12 months ended December 31, 1999.2000. See the following table below for WPS Resources' credit ratings.
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========================================================================
Credit Ratings Standard & Poor's Moody's
- ------------------------------------------------------------------------
WPS Resources Corporation
Senior unsecured debt AA Aa3
Commercial paper A1+ P1
Trust preferred securities A+ aa3
WPS Resources Capital Corporation
Unsecured debt * AA Aa3
Wisconsin Public Service Corporation
Bonds AA+ Aa1
Preferred stock AA aa2
Commercial paper A1+ P1
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* No securities currently outstanding.
Credit Ratings | Standard & Poor's | Moody's |
WPS Resources Corporation | ||
Senior unsecured debt | AA | Aa3 |
Commercial paper | A1+ | P1 |
Trust preferred securities | A+ | aa3 |
Wisconsin Public Service Corporation | ||
Bonds | AA+ | Aa1 |
Preferred stock | AA | aa2 |
Commercial paper | A1+ | P1 |
We normally uses internally generateduse internally-generated funds and short-term borrowing to satisfy most of itsour capital requirements. Long-termWe seek nonrecourse debt for funding nonregulated acquisitions. We may periodically issue additional long-term debt and common stock may periodically be issued to reduce short-term debt, and to
maintain desired capitalization ratios.ratios, and fund future growth.
The specific forms of financing, amounts, and timing will depend on the availability of projects, market conditions, and other factors. WPS Resources
In October 1999, we filed a shelf registration with the Securities and Exchange Commission which allowsallowed the issuance of $400.0 million in the aggregate of public long-term debt and common stock. Long-term debt of $150.0 million washas been issued under the shelf registration. Wisconsin Public Service has a shelf registration in November 1999. Newwhich provides $52.0 million of remaining debt financing capacity. During 2000, we repurchased $10.5 million of common stock for our stock option plan and other corporate purposes including our employee stock ownership plan. Effective January 2001, we began issuing new shares of common stock were issued for theour Stock Investment Plan in January through Novemberand for some of 1999. The leveraged
Employee Stock Ownership Plan may also be expanded during the next three
years.our stock-based employee benefit plans.
Wisconsin Public Service makes large investments in capital assets. Construction expenditures for Wisconsin Public Service are expected to be approximately $530.0$486.0 million in the aggregate for the 20002001 through 2002
timeframe.2003 period. This includes expenditures for replacement of the Kewaunee plant's steam generators and construction of a proposed transmission line between
Wausau and Duluth which is estimated to cost between $125.0 million and
$175.0 million.generators. In addition, other capital requirements for Wisconsin Public Service for the three-year period 2000 through 2002 include contributions of approximately $14.1$7.8 million to the Kewaunee plantplant's decommissioning trust fund.
Wisconsin Public Service's agreement to purchase electricity from the
De Pere Energy Center, a gas-fired cogeneration facility, is accounted for as
a capital lease. The De Pere Energy Center lease was capitalized at
$74.1 million on the in-service date, June 14, 1999.
Upper Peninsula Power willis expected to incur construction expenditures of approximately $22.0about $52.0 million in the aggregate for the period 20002001 through 2002,2003, primarily for electric distribution improvements.
On November 1, 1999,improvements and repairs at hydro facilities.
In April 2000, Sunbury Generation, LLC, a subsidiary of WPS Power Development, completedobtained $83.7 million of nonrecourse financing which is secured by the Sunbury generation plant. Sunbury Holdings, LLC, a subsidiary of WPS Power Development, financed its purchase of CinCap VI, LLC with internally generated funds from WPS Resources.
We anticipate issuing the following additional debt and equity financing in 2001:
By | Timeframe | Form of Financing | Amount |
Nonregulated | Second quarter | Variable rate tax exempt bonds | $ 20 - $ 28 million |
WPS Resources | Second/third quarter | Common stock | $ 50 - $100 million |
Wisconsin Public Service | Third quarter | Fading lien bonds | $100 - $150 million |
WPS Resources | Third/fourth quarter | Unsecured debt | $100 - $150 million |
Specific forms of financing, amounts, and timing may change due to the availability of projects, market conditions, and other factors.
Electric Reliability
WPS Resources purchased a 50-megawatt fixed-price physical electric energy contract for the months of June, July, and August of 2000. The contract allowed for the purchase of electricity at a fixed price, and the Sunbury plant from PP&L Resources, Inc.sale of that electricity at a floating or market-based price shortly before delivery. The $107.0 million purchase includescontract was intended for earnings protection against summer energy price spikes in the event of a coal-fired plant and two oil-fired combustion turbines with a total
nameplate capacity of 472 megawatts, coal inventories, and a coal
transshipment facility. The purchase was temporarily financed with debt from
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WPS Resources. This temporary debt will be refinanced with nonrecourse debt
and equity infusions.
WPS Power Development's purchaseloss of generation assets for $37.4 million
from Maine Public Service, whichunits. The summer of 2000 was originally financed with short-term debt
was refinanced with $24.0 millionextremely mild, and we did not experience any of nonrecourse long-term debt and an equity
infusion.
Other investment expenditures for nonregulated projects are uncertain
since there are no firm commitments at this time. Financing for most
nonregulated projects is expected to be obtained through nonrecourse project
financing and/or through a subsidiary, WPS Resources Capital Corporation,
which was formed to obtain funding for those projects.
REGULATORY
Wisconsin Public Service received a rate order in the Wisconsin
jurisdiction on January 15, 1999. The impact is an estimated $26.9 million
increase in electric revenues and an estimated $10.3 million increase in gas
revenues on an annual basis. The new rates are effective for 1999 and 2000.
The Public Service Commission of Wisconsin authorized a 12.1% return on
Wisconsin Public Service's equity for 1999 and 2000.
On July 1, 1999, Wisconsin Public Service filed to reopen this rate
order to consider issues related to the Kewaunee plant, the recovery of
deferred expenses related to the repowering of Pulliam Unit 3, and the fuel
forecast for 2000. Hearings on the rate reopener were held on October 12,
1999.anticipated energy price spikes. As a result, WPS Resources incurred a cost of those hearings,$3.8 million under the electric energy contract.
Regulatory
On December 21, 2000, Wisconsin Public Service received an order from the Public Service Commission of Wisconsin authorizing a 5.4% increase in retail electric rates and a 1.5% increase in retail gas rates for 2001 and 2002. A 12.1% return on December 15, 1999 approving a 4.6% electric rate increase.equity was approved. The new rates were implemented on January 1, 2000.
YEAR2001. The Public Service Commission of Wisconsin did not approve a 2002 rate reopener but acknowledged that pursuant to statutes, Wisconsin Public Service may request a reopener at any time.
On October 13, 2000, COMPLIANCEUpper Peninsula Power filed a $5.7 million rate increase with the Michigan Public Service Commission. A final rate order should be issued in 2001. Upper Peninsula Power has not experienced a rate increase since 1994.
Merger with Wisconsin Fuel and Light Company
On July 13, 2000, we signed a merger agreement with Wisconsin Fuel and Light Company. Under the agreement, Wisconsin Fuel and Light shareholders will receive 1.73 shares of WPS Resources' common stock for each share of Wisconsin Fuel and Light's common stock. The Year 2000 issue arose because software programs, computer hardware,
and equipment that have date sensitive softwareexchange ratio will be adjusted if, at the time of closing the transaction, the market price of WPS Resources' common stock exceeds $33.96 per share or embedded chips may
recognize a date using "00"is less than $27.79 per share. The market price is defined as the year 1900 rather than the year 2000. This
may have resulted in system failures or other disruptions of operations.
WPS Resources and its subsidiary companies were committed to eliminating
or minimizing the adverse effectsaverage of the Year 2000 computer compliance issue
on our business operations, includingclosing price of WPS Resources' common stock during the productsten trading days ending three days immediately preceding the effective date of the merger. The merger remains subject to (i) approval by the Public Service Commission of Wisconsin; (ii) receipt of an opinion of counsel that the exchange of stock qualifies as a tax-free transaction; and services provided(iii) the satisfaction of various other conditions.
A majority of the outstanding preferred shareholders of Wisconsin Public Service approved the merger, allowing Wisconsin Fuel and Light to our customers,merge into Wisconsin Public Service. A majority of the Wisconsin Fuel and to maintaining our reputation as an efficient and reliable
supplier of energy. Our commitment paid off when December 31, 1999 was
non-eventful. No Year 2000 energy problems have been reported throughLight shareholders approved the first eight weeksmerger in November of 2000. In all, no negative reaction was apparent from eitherThe merger will be accounted for under the purchase method of accounting and is expected to be completed in April of 2001.
Acquisition of Generation Facilities
Sunbury Holdings, LLC, a subsidiary of WPS Power Development, purchased CinCap VI, LLC on September 1, 2000. CinCap VI is the owner of the 30-megawatt Westwood generation facility located in Pennsylvania. As of January 1, 2001, CinCap VI, LLC changed its name to WPS Westwood Generation, LLC.
On October 27, 2000, Sierra Pacific Power Company agreed to sell its Tracy/Pinon Power Station located near Reno, Nevada to WPS Power Development. The 545-megawatt facility consists of several natural gas and oil-fired generation units and includes a coal gasification project that had been co-funded by the United States Department of Energy. The arrangement includes a temporary purchase power agreement to sell the power generated by Tracy/Pinon to Sierra Pacific. The purchase price of $249.8 million is subject to taxes and other adjustments at closing. Closing is expected to occur sometime in 2001. We expect to finance a portion of this purchase with non-recourse debt.
WPS Power Development reached an agreement to build and operate a 50-megawatt electric cogeneration facility in Combined Locks, Wisconsin. The facility will provide electricity to wholesale customers or
employees. The large scale communications effort, patterned after our
procedures involvedthrough WPS Energy Services. Construction of the facility is expected to begin in nuclear exercises and drills, was extremely successful.
Fewer expenditures were made for hardware and software than originally
anticipated. Expenditures for the Year 2000 project incurred through
January 31, 2000 were $3.9 million.
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TRENDS - WPSR
ACCOUNTING STANDARDSWPS RESOURCES CORPORATION
Regulatory Standards
Wisconsin Public Service and Upper Peninsula Power follow Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation," and their financial statements reflect the effects of the different ratemaking principles followed by the various jurisdictions regulating each utility. For Wisconsin Public Service these include the Public Service Commission of Wisconsin, 89%90% of revenues; the Michigan Public Service Commission, 2% of revenues; and the Federal Energy Regulatory Commission, 9%8% of revenues. In addition, the Kewaunee plant is regulated by the Nuclear Regulatory Commission. Environmental matters are primarily governed by the United States Environmental Protection Agency and the Wisconsin Department of Natural Resources.
In June 1998, the Financial
Impact of New Accounting Standards Board issuedStandard
We adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities.Activities," on January 1, 2001. This statement requires all derivativesderivative instruments to be measuredrecorded at their fair value and recognized as either assets or liabilities on the balance sheet. Changes in the statementderivative's fair value are to be recognized currently in earnings unless specific hedge accounting criteria are met.
We concluded that the majority of financial position.contracts at our utility subsidiaries and at WPS Power Development for the purchase, sale, and storage of natural gas, electricity, coal, and nuclear fuel do not meet the definition of a derivative as defined under Statement No. 133. The majority of such contracts, therefore, are not subject to the accounting forrequirements of Statement No. 133. Wisconsin Public Service entered into a limited number of commodity contracts that meet the definition of a derivative. We believe that any gains or losses resulting from the settlement of these contracts will be collected from, or refunded to, retail customers. Derivative assets and liabilities that are recorded as a result of these derivative contracts will be offset with corresponding regulatory assets and liabilities. A limited number of other derivative contracts were designated as fair value hedges. Future changes in the fair value of athese derivative depends upon the use of the derivative and its resulting
designation. Unless specific hedge accounting criteria are met,contracts will be recognized in earnings with offsetting changes in the derivative'svalue of the hedged item also recorded in earnings. At January 1, 2001, Wisconsin Public Service recorded a derivative asset and an offsetting regulatory liability of approximately $17 million. The cumulative effect on income was not significant.
WPS Energy Services uses derivative financial and commodity instruments to reduce market risk associated with changing prices of natural gas and electricity sold to customers at firm prices. WPS Energy Services also utilizes derivatives to manage market risk associated with anticipated energy purchases as well as trading activities. Primarily as a result of a change in strategic focus that resulted in a shift in customer mix, WPS Energy Services, in applying Emerging Issues Task Force Issue 98-10, "Accounting for Contracts Involved in Energy Trading and Risk Management Activities," concluded in the first quarter of 2000 that its energy contracts were trading contracts. Accordingly, WPS Energy Services recorded its energy contracts at fair value must beon the balance sheet, with changes in fair value recognized currently in earnings. In
June 1999,Because WPS Energy Services marks to market its energy trading contracts in accordance with Issue 98-10 and does not anticipate designating any derivative contracts as hedges for accounting purposes, the Financial Accounting Standards Board issuedadoption of Statement of
Financial Accounting Standards No. 137. This new statement delays the
effective date of Standard No. 133 is not expected to fiscal periods beginning after June 15,
2000. We will be adopting the requirements of this statement on January 1,
2001. We have inventoried the outstanding contractsa material impact at our utility
subsidiaries. Based on our understanding of the current interpretation of
this statement, we have limited exposure at the utilities at this time.
However, the requirements of this statement could increase volatility in
earnings and other comprehensive income at the nonregulated subsidiaries.
UTILITY RESTRUCTURING
WPS Energy Services.
Electric reliability issues have replaced restructuring and retail
competition issues as the focus of attention in Wisconsin.Utility Restructuring - Wisconsin
Electric reliability continues to be the primary focusissue for the Public Service Commission of Wisconsin and the Wisconsin legislature. The Public Service
Commission of Wisconsin's first priorities are to develop the utility
infrastructure necessary to assure reliable electric service and to remove the
barriers to competition at the wholesale level.Wisconsin. In 1998, the Public Service
Commission of Wisconsin and the major utilities in Wisconsin, including
Wisconsin Public Service, made legislative proposals to address reliability
and restructuring concerns, including market power, among other issues. This
resulted in the 1998 Electric Reliability Act. In 1999, the Public Service
Commission of Wisconsin created three rulemaking projects in response to the
Electric Reliability Act. These projects define the requirements for the
construction of merchant plants in Wisconsin, establish rules for opportunity
sales by regulated utilities, address the asset cap relief provision, and
address issues related to the development of a transmission company. In
addition, a new biennial Strategic Energy Assessment process was defined.
This process replaces the existing Advance Plan process. Also in 1999, Wisconsin enacted the Reliability 2000 Act which addressesaddressed asset cap relief provisions, the transfer of transmission assets into a statewidestate-wide transmission company, targets for retail electric sales from renewable resources, and ratepayer funding of public benefits spending. -68-
On June 5, 1997,The priorities of the Michigan Public Service Commission ordered
utilities under its jurisdictionof Wisconsin in 2000 included:
- a market power study;
- formation of American Transmission Company, LLC;
- utility membership in Midwest Independent System Operator;
- the proposed transmission line between Weston, Wisconsin and Duluth, Minnesota; and
- ratepayer financing of public benefit spending and transferring responsibility for conservation, load management, and public benefits to
filethe Wisconsin Department of Administration.
Market Power Study
A consultant performed a market power analysis of Wisconsin's and the Upper Peninsula of Michigan's electric open access plans and
related tariffs. The Michiganmarkets for the Public Service Commission order called for
generation open accessof Wisconsin. As a result of the analysis, the Commission concluded that complete and immediate deregulation is not in incrementsthe best interest of 2.5%the public, especially given the recent developments in California. The Commission agreed that more transmission capacity is needed and contracts between electric generators and customers may mitigate market power issues. Additionally, the Commission concluded that complex horizontal market power issues will require further study before actions to mitigate market power are considered.
Transmission
On January 1, 2001, all of retail load each year startingthe investor-owned utilities in 1997 and ending in 2001. The Michigan Public Service Commission order
requires full generation open access for retail load in 2002.eastern Wisconsin, including Wisconsin Public Service, transferred their transmission assets to and Upper Peninsula Power submitted plans which
provide full retail open access in 2002. On June 29, 1999, the Michigan
Supreme Court found that the Michigan Public Service Commission did not have
the statutory authority to order retail open access. The Michigan Public
Service Commission then determined that it had the authority to regulate open
access programs ifbecame owners of American Transmission Company. By joining American Transmission Company, the utilities volunteered to implement such programs. This
authority to approve voluntary open access programs is being challenged.
Should electric deregulation occur such that Wisconsin Public Service
and Upper Peninsula Power would no longer qualify to reflect the effects of
ratemaking under Statement of Financial Accounting Standards No. 71 in their
financial statements, we anticipate no impairment of significant recorded
assets or reduction in reported equity. Wisconsin Public Service and
Upper Peninsula Power do not have significant assets which are foreseen as
being potentially stranded and no potential disparity between the depreciable
lives of capital assets and those lives applicable to a competitive
environment has been identified. Increased competition is likely to put
pressure on electric utility margins. At this time, however, we cannot
predict the ultimate results of deregulation.
The 1998 Electric Reliability Act requires all eastern Wisconsin
utilities with transmission systems to join the Midwest Independent System
Operator by June 30, 2000. Under the Reliability 2000 Act, Wisconsin
utilities are also required to join and transfer their assets into the
Wisconsin Transmission Company in order to obtainbecame eligible for relief from the holding company system asset cap limitation on nonutilitynonregulated investments. BothUntil a Regional Transmission Operator is operational, American Transmission Company will own and operate the eastern Wisconsin transmission system. Wisconsin Public Service transferred transmission assets with a net book value of approximately $60 million to $70 million to American Transmission Company for an approximate 12% ownership interest. The ownership interest will fluctuate as additional assets are contributed or more companies join American Transmission Company. We expect income under equity accounting for the investment in American Transmission Company to be similar to Wisconsin Public Service's current earnings on its transmission assets.
Final approval of the proposed transmission line between Weston, Wisconsin and Duluth, Minnesota is expected in 2001. This project will be transferred to American Transmission Company upon completion of hearings with the Public Service Commission of Wisconsin. The hearings are expected to be completed in the first quarter of 2001. WPS Resources will be funding the equity portion of this transmission project and receiving additional ownership interest in American Transmission Company.
Electric Utility Restructuring - Michigan
In June 2000, legislation was enacted which provides electric customers the right to choose their generation supplier by January 1, 2002. Wisconsin Public Service, Upper Peninsula Power, the Michigan Public Service Commission, and other utilities are developing systems to accommodate the new law, develop open access tariffs, and implement business practices. Preliminary tariffs are expected in the first quarter of 2001.
Gas Utility Restructuring - Wisconsin
In its 2001-2002 Wisconsin retail rate application, Wisconsin Public Service proposed to facilitate customer choice of natural gas suppliers through the use of its new automated meter reading system. The proposal was approved by the Public Service Commission of Wisconsin and the Michigan Public
Service Commission continue to review gas industry restructuring. In a
current docket, the Public Service Commission of Wisconsin is addressing gas
restructuring issues including unbundling of rates, pricing of contracted
services in potential gas transportation situations, and the separationwill provide customer choice of gas suppliers for commercial customers beginning on November 1, 2001. This program will be expanded to all customers as the automated meter reading system is installed system-wide.
Gas Utility Restructuring - Michigan
The majority of Michigan's largest gas customers are allowed to choose their natural gas commodity supplier. Gas restructuring for smaller customers remains in a pilot phase. The smaller Michigan natural gas utilities, from their nonregulated gas marketing affiliates. The
Michigan Public Service Commission is conducting pilot studies to test the
development of competitive retail gas markets in Michigan.including Wisconsin Public Service, has historically recovered gas costs throughare to propose a purchased gas adjustment clause. The Public Service Commissioncustomer choice program for all customer classes when it is in the best interests of Wisconsin
has recently allowed utilities to select either an incentive gas cost recovery
mechanism or a modified one-for-one mechanism for gas cost recovery.each utility and its customers. Wisconsin Public Service has selectedintends to provide customer choice to its Michigan customers following the modified one-for-one gas cost
recovery plan, and implementation of its automated meter reading system in that state.
Utility Restructuring - Federal Energy Regulatory Commission
Wisconsin Public Service transferred its electric transmission assets to American Transmission Company on January 1, 2001 in exchange for an ownership interest in the company. American Transmission Company implemented new mechanism, which is similarFederal Energy Regulatory Commission tariffs, subject to refund, on January 1, 2001.
Wisconsin Public Service and Upper Peninsula Power joined the recovery received under the purchased gas adjustment clause previouslyMidwest Independent System Operator in effect, beganJune of 2000. The Midwest Independent System Operator filed to become a Regional Transmission Organization in JanuaryOctober of 1999.
ENVIRONMENTAL2000.
Environmental
Wisconsin Public Service continues to investigate the environmental cleanup of eight manufactured gas plant sites. The cleanup of the Stevens Point manufactured gas plant site has been substantially completed with monitoring of the site continuing. Costs of this cleanup were within the range expected for this site. Future undiscounted investigation and cleanup costs for the remaining seven sites is estimated to be in the range of $34.3$35.7 million to $41.0$42.2 million. These estimates may be adjusted in the future contingent upon -69-
experience gained throughthe assessment of natural resources damages.
Wisconsin Public Service currently has a $37.4 million liability recorded for gas plant cleanup activities.
An initial liability for cleanup of $41.7 million had been established with an offsetting regulatory asset (deferred charge). Expenditures have
reduced the liability to $38.6 million. Management believes that cleanup costs net of insurance recoveries, but not the carrying costs associated with the cleanup expenditures, will be recoverable in current and future customer rates. Wisconsin Public Service has received $12.6 million in insurance recoveries which have been recorded as a reduction in the regulatory asset.
The state of Wisconsin developed a nitrogen oxide reduction plan for Wisconsin's ozone non-attainment area in southern Wisconsin. The nitrogen oxide reductions begin in 2003, and the requirements are gradually increased through 2007. This reduction plan affects Edgewater Unit 4. Wisconsin Public Service owns 31.8% of this unit. A compliance plan for Edgewater Unit 4 was initiated in 2000. The plan includes a combination of combustion optimization and emission trading at a potential cost of approximately $5.0 million. The state of Wisconsin is also seeking voluntary reductions from units outside the ozone non-attainment area which may lead to additional expenditures for nitrogen oxide reductions at other units. Wisconsin Public Service is participating in compliance with both the Phase I and
Phase II sulfur dioxide andvoluntary efforts to reduce nitrogen oxide emissionlevels at the Columbia Energy Center. Wisconsin Public Service owns 31.8% of Columbia. The Public Service Commission of Wisconsin has approved recovery of the costs associated with nitrogen oxide compliance.
The Wisconsin Department of Natural Resources initiated a rulemaking effort aimed at the control of mercury emissions. Coal-fired generation plants are likely to be the target of this effort. A draft of the rule has not been released and the effect on Wisconsin Public Service is not yet known. If restrictive limits established byare adopted, the Federal Clean Air Act Amendments of 1990. Management believes that all costs incurred for additional compliance willcould be recoverable in future customer
rates.
In late September of 1998,significant.
On November 3, 1999, the United States Environmental Protection Agency requiredannounced that it was pursuing an enforcement initiative against seven utilities, or their subsidiaries, located in the Midwest and the South as well as the Tennessee Valley Authority. The enforcement initiative alleges that the utilities may have undertaken projects at certain states, including Wisconsin to develop plans to reducecoal-fired generation plants in violation of the emissionsClean Air Act. The Environmental Protection Agency is seeking penalties and the installation of nitrogen oxides from sources withinadditional pollution-control equipment at these plants.
As a continuation of this initiative, the state by late 2003.
On a preliminary basis,Environmental Protection Agency requested, on December 14, 2000, that Wisconsin Public Service provide information related to projects potential capital
costsundertaken at its Pulliam and Weston plants. This information was submitted on January 6, 2001. Wisconsin Power and Light Company, the operator of between $62.5 million and $112.0 million to complyunits co-owned with possible
future regulations. The annual operating and maintenance expense associated
with these possible future regulations are projected to range from
$2.0 million to $6.0 million. The costs depend on the state-specific
compliance method to be adopted in the future and the effectiveness of the
various technologies available for nitrogen oxide emission control. Under
Wisconsin Public Service's current practice, the capital costs (as reflected
in depreciation expenses and return on capital allowed) and the annual
operating costs are anticipated to be recovered through future customer rates.
On December 24, 1998, Wisconsin Public Service, joined other parties in a
petition challengingalso submitted information related to projects undertaken at the Environmental Protection Agency's regulations that
require Wisconsin to prepareColumbia and submit a nitrogen oxide implementation plan.
On January 22, 1999, the State of Wisconsin intervened in the litigation and
challenged the geographic scope of the rule and the required timing for
implementation of nitrogen oxide controls within the state. The court heard
arguments on November 9, 1999. No decision has yet been rendered.Edgewater plants.
The Sunbury plant, acquired by WPS Power Development in November 1999, currently purchases emission allowances to comply with air regulations. Additional technology may be required by 2003 in order to comply with nitrogen oxide standards. Expenditures for this technology could be significant.
KEWAUNEE NUCLEAR POWER PLANT
Kewaunee Nuclear Power Plant
On September 29, 1998, Wisconsin Public Service and Madison Gas and Electric Company entered into an agreement pursuant to which Wisconsin Public Service will acquire Madison Gas and Electric's 17.8% share of the Kewaunee plant. This agreement, the closing of which is contingent upon regulatoryNuclear Regulatory Commission approval and steam generator replacement scheduled for the fall of 2001, will result in Wisconsin Public Service's ownership interest in the Kewaunee plant increasing to 59.0%59%.
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On January 1, 2001, Wisconsin Public Service's administrative employees at the Kewaunee plant transferred to Nuclear Management Company, LLC. As a result of these employees leaving the Wisconsin Public Service benefit plans, a curtailment loss of $8.7 million was experienced. The majority of the curtailment loss was deferred as a regulatory asset. A settlement gain is anticipated in 2001 as withdrawals are made. The majority of the settlement gain will be recorded as a regulatory liability.
Wisconsin Public Service anticipates a significant increase in Kewaunee operating costs in 2001 due to expenditures related to Nuclear Regulatory Commission compliance requirements and is seeking regulatory approval to defer all incremental costs for recovery in the next rate proceeding.
IMPACT OF INFLATION - WPSR
Our financial statements are prepared in accordance with accounting principles generally accepted accounting principlesin the United States and report operating results in terms of historic cost. The statements provide a reasonable, objective, and quantifiable statement of financial results; but they do not evaluate the impact of inflation. Under rate treatment prescribed by utility regulatory commissions, Wisconsin Public Service's and Upper Peninsula Power's projected operating costs are recoverable in revenues. Because rate forecasting assumes inflation, most of the inflationary effects on normal operating costs are recoverable in rates. However, in these forecasts, Wisconsin Public Service and Upper Peninsula Power are only allowed to recover the historic cost of plant via depreciation.
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RESULTS OF OPERATIONS - WISCONSIN PUBLIC SERVICE CORPORATION
Wisconsin Public Service Corporation is a regulated electric and gas utility. Electric operations accounted for approximately 73%69% of 19992000 revenues, while gas operations contributed 27%31% to 2000 revenues.
2000 Compared with 1999 revenues.
1999 COMPARED WITH 1998
WISCONSIN PUBLIC SERVICE CORPORATION OVERVIEW
Revenues at
Overview
Wisconsin Public Service were $719.4Service's 2000 and 1999 results of operations are shown in the following chart:
Wisconsin Public Service's Results (Millions) | 2000 | 1999 | Change |
Operating revenues | $840.5 | $719.4 | 17% |
Net income | 70.4 | 67.1 | 5% |
Net income from electric utility operations was $58.2 million in 19992000 compared with $652.5 million in 1998, an increase of 10.3%. Earnings were
$67.1 million in 1999 and $54.1 million in 1998, an increase of 24.0%.1999. Net income from gas utility operations was $11.6 million in 2000 and $11.2 million in 1999. The primary reasonsreason for the higher earnings at Wisconsin Public Service were
increased sales coupled with the implementation of newutility net income was a Wisconsin retail electric rate increase and increased gas rates.
ELECTRIC UTILITY OPERATIONSsales volumes as the result of winter weather that was 8% colder in 2000 than in 1999.
Electric Utility Operations
Wisconsin Public Service's electric marginsutility margin increased $22.8$27.4 million, or 6.8%.8%, primarily due to a 4.6% Wisconsin retail electric rate increase which became effective on January 1, 2000. This rate increase was primarily intended to recover additional fuel and purchased power costs for the year. The 2000 electric rate increase also took into account the expected gain on the sale of utility assets which is discussed under "Other Electric and Gas Utility Expenses/Income."
Electric Utility Results (Thousands) | 2000 | 1999 | 1998 |
Revenues | $575,951 | $527,922 | $487,340 |
Fuel and purchased power | 191,148 | 170,560 | 152,783 |
Margin | $384,803 | $357,362 | $334,557 |
Sales in kilowatt-hours | 12,406,917 | 11,920,148 | 11,600,164 |
Electric utility revenues increased $48.0 million, or 9%, due to increaseda 4% increase in overall sales volume coupled with the January 15, 1999 implementation of new Wisconsin retail electric rates. A
6.3% increaserate increase. Sales volumes increased in electric ratesspite of summer weather that was authorized by the Public Service
Commission of Wisconsin.
==========================================================================31% cooler in 2000 than in 1999.
Fuel expense increased $15.4 million, or 14%, due to increased production at Wisconsin Public Service's Electric Utility Results (Thousands)
- --------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------
Revenues $ 527,922 $ 487,340 $ 479,388
Fuelfossil-fueled and purchased power 170,560 152,783 153,414
- --------------------------------------------------------------------------
Margin $ 357,362 $ 334,557 $ 325,974
==========================================================================
Sales in kilowatt-hours 11,920,148 11,600,164 11,259,327
==========================================================================
Wisconsin Public Service's electric utility revenuescombustion turbine generation plants. In addition, the average cost of generation at the combustion turbine plants increased $40.6 million, or 8.3%, primarily due to90% largely as a result of a higher unit cost of natural gas. Generation costs at the electric rate increase. Also
contributing to higher electric revenues was a 2.8% increase in overall
kilowatt-hour sales. Included in 1998 electric revenues, but not in 1999
electric revenues, are surcharge revenues of $3.8 million related to the
recovery of the deferred costs for the 1997 Kewaunee Nuclear Power Plant steam
generator repairs.decreased 14% in 2000 due to its scheduled outage for refueling and maintenance in the second quarter of 2000. A similar outage did not occur in 1999. The Kewaunee plant was off-line beginning April 22, 2000 and returned to power on June 2, 2000. During the scheduled outage, nuclear generation was replaced with additional fossil fuel and combustion turbine generation and additional purchased power. Wisconsin Public Service is the operator and 41.2% owner of the Kewaunee plant. Electric production fuel expense increased $2.7 million, or 2.5%,
primarily as a result of increased generation requirements at Wisconsin Public
Service's combustion turbine and nuclear generating plants in 1999. Partially
offsetting this factor was a decrease in production at Wisconsin Public
Service's coal-fired generation plants as a result of both scheduled and
unscheduled maintenance activities.
Purchased power expense increased $15.1decreased $5.2 million, or 35.5%, primarilyhowever, largely due to additional purchase requirements ata 5% decrease in the cost per kilowatt-hour of power purchases made by Wisconsin Public Service in 2000 compared with 1999.
Purchase requirements increased 20.1% due to the lack of production at
Wisconsin Public Service's coal-fired generation plants during the time they
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were off-line for maintenance in 1999. In addition, the cost of purchases was
12.8% higher in 1999 than in 1998.
The Public Service Commission of Wisconsin allows Wisconsin Public Service to adjust prospectively the amount billed to Wisconsin retail customers for fuel and purchased power if costs fall outside a specified range. Wisconsin Public Service is required to file an application to adjust rates either higher or lower when costs are plus or minus 2.0%2% from forecasted costs on an annualized basis. Annual 2000 fuel costs at December 31, 2000 were within this 2% window and, accordingly, no adjustment was initiated.
Gas Utility Operations
Wisconsin Public Service's gas utility margin increased $5.4 million, or 7%, in 2000. This increase was primarily due to an increase in therm sales.
Gas Utility Results (Thousands) | 2000 | 1999 | 1998 |
Revenues | $264,519 | $191,521 | $165,111 |
Purchase costs | 185,143 | 117,582 | 104,608 |
Margin | $ 79,376 | $ 73,939 | $ 60,503 |
Sales in therms | 701,094 | 662,615 | 608,029 |
Winter weather was a factor for gas operations in 2000. Weather was 8% colder in 2000 than in 1999; however, weather was 2% warmer than normal in 2000. Gas revenues increased $73.0 million, or 38%, as the result of a 43% increase in the average unit cost of natural gas coupled with a 6% increase in overall therm sales.
Gas purchase costs increased $67.6 million, or 57%. This increase resulted from a higher average unit cost of natural gas and higher gas volumes purchased of 10%. The higher unit cost of natural gas is reflected in both revenues and gas purchases, thus having little impact on margin.
Under current regulatory practice, the Public Service Commission of Wisconsin and the Michigan Public Service Commission allow Wisconsin Public Service to pass changes in the cost of gas on to customers through a purchased gas adjustment clause.
Other Electric and Gas Utility Expenses/Income
Utility operation and maintenance expenses increased $20.6 million. Electric utility operation and maintenance expenses increased $16.6 million primarily due to costs associated with the scheduled outage and other maintenance activities at the Kewaunee plant.
Higher earnings of $6.2 million on the Kewaunee plant's nuclear decommissioning fund resulted in increased other income in 2000. Due to regulatory practices, this higher income was offset by increased depreciation and decommissioning expense. Other income also included a gain of $3.8 million on the sale of a combustion turbine which Wisconsin Public Service constructed for another Wisconsin utility. The Public Service Commission of Wisconsin considered this gain in the Wisconsin retail electric rate adjustment which was effective January 1, 2000.
1999 Compared with 1998
Overview
Wisconsin Public Service's 1999 and 1998 results of operations are shown in the following chart:
Wisconsin Public Service's Results (Millions) | 1999 | 1998 | Change |
Operating revenues | $719.4 | $652.5 | 10% |
Net income | 67.1 | 54.1 | 24% |
Net income from electric utility operations was $54.1 million in 1999 and $47.0 million in 1998. Net income from gas utility operations was $11.2 million in 1999 and $5.9 million in 1998. The primary reasons for higher utility net income were increased sales volumes coupled with the implementation of new Wisconsin retail electric and gas rates.
Electric Utility Operations
The electric utility margin increased $22.8 million in 1999 due to increased sales volumes coupled with the January 15, 1999 implementation of new Wisconsin retail electric rates. The Public Service Commission of Wisconsin authorized a 6.3% increase in electric rates.
Electric utility revenues increased $40.6 million primarily due to the electric rate increase. A 3% increase in overall kilowatt-hour sales also contributed to higher electric revenues. Included in 1998 electric revenues, but not in 1999 electric revenues, were surcharge revenues of $3.8 million related to the recovery of the deferred costs for the Kewaunee plant's 1997 steam generator repairs.
Fuel expense increased $2.7 million as a result of increased generation requirements at the combustion turbine and nuclear generation plants in 1999. Partially offsetting this factor was a decrease in production at the coal-fired generation plants as a result of both scheduled and unscheduled maintenance activities.
Purchased power requirements increased $15.1 million primarily due to additional purchase requirements. Purchase requirements increased 20% due to the lack of production at its coal-fired generation plants during the time they were off-line for maintenance in 1999. In addition, the cost of purchases was 13% higher in 1999 than in 1998.
Annual 1999 fuel costs at December 31, 1999 were within this 2.0%the 2% fuel window and, accordingly, no adjustment will be made.
GAS UTILITY OPERATIONSwas made to electric rates for 1999 fuel costs.
Gas Utility Operations
The gas utility margin at Wisconsin Public Service increased $13.4 million or 22.2%, in 1999. This increase was primarily due to the implementation of a Public Service Commission of Wisconsin rate order which authorized a 5.1% increase in Wisconsin retail gas rates and to an increase in therm sales.
==========================================================================
Wisconsin Public Service's
Gas Utility Results (Thousands)
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1999 1998 1997
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Revenues $191,521 $165,111 $211,090
Purchase costs 117,582 104,608 147,493
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Margin $ 73,939 $ 60,503 $ 63,597
==========================================================================
Sales in therms 662,615 608,092 662,008
==========================================================================
Wisconsin Public Service's gas operating revenues increased $26.4 million, or 16.0%.million. This increase was due to the implementation of new Wisconsin retail gas rates and a 9.0%9% increase in overall therm sales as a result of colder weather in 1999. Although the winter weather was 11.4%11% colder in 1999 than in 1998, it was still 8.3%8% warmer than normal.
Note that 1998 gas
Gas utility revenues in 1998 were reduced by $7.5 million for refunds from ANR Pipeline Company which were passed on to Wisconsin Public Service's customers. Gas purchase costs in 1998 were likewise reduced as this $7.5 million refund was credited to gas expense.
Wisconsin Public Service's gas
Gas purchase costs increased $13.0 million
or 12.4%. This increase was due to increased sales and to a higher unit cost of natural gas. Under current regulatory practice, the Public Service Commission of
Wisconsin
Other Electric and the Michigan Public Service Commission allow Wisconsin Public
Service to pass changes in the cost of gas on to customers through a purchased
gas adjustment clause.
OTHER UTILITY EXPENSES/INCOME
OtherGas Utility Expenses/Income
Utility operating expenses at Wisconsin Public Service increased $12.6 million or 9.1%, primarily due to higher customer service expenses of $5.1 million related to conservation expenditures, and higher pension costs of $3.4 million due to a change in the assumptions used to calculate this expense. Also contributing to increased operating expenses were higher medical -73-
Maintenance expense at Wisconsin Public Service increased $7.2 million
or 14.6%, primarily due to additional costs of $8.0 million at itsthe coal-fired generation plants and $1.6 million at itsthe other power generation plants for both scheduled and unscheduled maintenance activities. Offsetting these costs was a decrease in maintenance expense of $8.5 million at the Kewaunee plant. A scheduled refueling outage at the Kewaunee plant in 1998 caused 1998 nuclear maintenance expenses to be higher. In addition, $3.8 million in deferred costs for the 1997 Kewaunee plant's 1997 steam generator repairs waswere recognized in 1998. Maintenance of overhead distribution lines increased $4.7 million in 1999 due to additional tree trimming, line clearance, and storm damage repairs.
Overview of Other Nonutility Operations
A one-time dividend of $0.5 million was received by Wisconsin Public
Service in 1999. This dividend was1999 related to a land sale from an investment. PRICE RISK MANAGEMENT ACTIVITIES AT WISCONSIN PUBLIC SERVICE
Wisconsin Public Service engages in minimal price risk management
activities because much of the utility price risk exposure is recoverable
through customer rates.
1998 COMPARED WITH 1997
WISCONSIN PUBLIC SERVICE OVERVIEW
Revenues at Wisconsin Public Service Corporation were $652.5 million in
1998 compared with $690.5 million in 1997,This dividend represented a decrease of 5.5%. Earnings were
$54.1 million in 1998 and $61.1 million in 1997, a decrease of 12.2%. The
primary reasonsone cent per share increase to earnings for the decrease in earnings at Wisconsin Public Service were
the impact of unusually warm winter weather, increased maintenance expenses, a
decrease in other income, an increase in other operating expenses, and a
decrease in the gas margin. Partially offsetting these factors were an
increase in the electric utility margin and a decrease in interest expense.
ELECTRIC UTILITY OPERATIONS
Wisconsin Public Service's electric utility margin increased
$8.6 million, or 2.6%, primarily due to increased kilowatt-hour sales of 3.0%
as a result of warmer summer weather in 1998. Partially offsetting the
increase in electric margins in 1998 was the impact of a Public Service
Commission of Wisconsin 8.1% retail electric rate decrease which was effective
for the entire year in 1998 but was only effective in 1997 for the period
after February 21, 1997.
Electric utility revenues increased $8.0 million, or 1.7%, largely due
to increased revenues of $4.8 million from Wisconsin Public Service's
wholesale customers and $1.5 million from its commercial and industrial
customers as a result of the warmer summer weather. Also included in 1998
electric revenues were surcharge revenues of $3.8 million related to the
recovery of deferred costs for the 1997 Kewaunee plant steam generator
repairs. Partially offsetting these factors were the electric rate reduction
and a $1.0 million refund of Wisconsin Public Service's transmission revenues
as the result of a 1998 Federal Energy Regulatory Commission settlement
related to open access transmission tariff rates.
Electric production fuel expense increased $2.9 million, or 2.7%,
primarily as a result of increased generation expense. The Kewaunee plant was
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out of service for the first six months of 1997 as the result of an extended
outage to repair steam generators, thus, in comparison, the higher generation
expense in 1998.
Purchased power expense decreased $3.5 million, or 7.7%, primarily due
to decreased purchase requirements in the first half of 1998. Purchase
requirements in the first half of 1997 were higher due to lack of production
at the Kewaunee plant in the first and second quarters of 1997 as a result of
an extended outage. The Kewaunee plant was also off-line in 1998 for a six-
week scheduled refueling outage. Also contributing to lower purchased power
expense was a $1.2 million credit to purchased power expense in the fourth
quarter of 1998 related to the settlement of litigation involving a contract
with a power supplier.
GAS UTILITY OPERATIONS
Wisconsin Public Service's gas utility margin decreased $3.1 million, or
4.9%, in 1998. This decrease was primarily due to winter weather that was
19.4% warmer in 1998 than in 1997.
Wisconsin Public Service's gas operating revenues decreased
$46.0 million, or 21.8%. This decrease was due to unusually mild winter
weather in 1998 resulting in lower gas therm sales for 1998 of 8.1%.
Note that 1998 gas utility revenues were reduced by $7.5 million for
refunds from ANR Pipeline Company which were passed on to Wisconsin Public
Service's customers. Gas purchase costs in 1998 were likewise reduced as this
$7.5 million refund was credited to gas expense.
Wisconsin Public Service's gas purchase costs decreased $42.9 million,
or 29.1%. This decrease was due to reduced customer demand as a result of the
mild weather during 1998.
OTHER UTILITY EXPENSES/INCOME
Other operating expenses at Wisconsin Public Service increased
$4.1 million, or 3.1%, primarily due to higher benefit costs in 1998.
Maintenance expense at Wisconsin Public Service increased $7.8 million,
or 18.6%, primarily as a result of increased expenses at the Kewaunee plant
during the second and fourth quarters of 1998. This increase was partly due
to the recognition of the deferred expenses for the 1997 Kewaunee plant's
steam generator repairs. The Public Service Commission of Wisconsin approved
deferral of the repairs in 1997, the cost of which had been collected in the
second quarter of 1998 through a $3.8 million electric revenue surcharge. In
addition, maintenance expense at the Kewaunee plant increased in the fourth
quarter of 1998 due to a scheduled refueling outage.
Depreciation and decommissioning expenses increased $2.4 million, or
3.1%, due to an increased plant base and to the accelerated recovery of
investment in the Kewaunee plant and accelerated funding of the Kewaunee
plant's decommissioning costs. Accelerated recovery of investment and funding
began on February 21, 1997 and, therefore, was effective for all of 1998 but
only a portion of 1997.
Wisconsin Public Service recognized a one-time gain of $4.8 million
on the sale of nonutility property in 1997.
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PRICE RISK MANAGEMENT ACTIVITIES AT WISCONSIN PUBLIC SERVICE
Wisconsin Public Service engages in minimal price risk management
activities because much of the utility price risk exposure is recoverable
through customer rates.
1999.
BALANCE SHEET - WISCONSIN PUBLIC SERVICE
2000 Compared With 1999 COMPARED WITH 1998
Nuclear decommissioning trusts
Net utility plant increased $26.6$45.9 million due to continued
funding and favorable investment returns. Construction in progress increased
$31.8 million largely as a result of construction expenditures related to the
Kewaunee plant's steam generator replacement project and the combustion
turbine project at West Marinette which Wisconsin Public Service is building
for Madison Gas and Electric Company. Investments and other assets decreased
$25.5 million primarily as the result of transferring nonutility assetsgeneral business growth, implementation of the automated meter reading system, and additional funding and favorable returns in the nuclear decommissioning trusts. Customer and other receivables increased $21.1 million as the result of additional sales volumes. The higher unit cost of natural gas experienced, especially in December of 2000, also contributed to WPS Resources.the increased receivables balance. Likewise, accrued utility revenues increased $20.7 million and accounts payable increased $44.1 million largely due to the additional sales volumes and the higher unit cost of natural gas. Commercial paper increased $15.0$20.0 million duelargely to increased operational
cash needs at Wisconsin Public Service.
finance capital needs.
FINANCIAL CONDITION - WISCONSIN PUBLIC SERVICE
INVESTMENTS AND FINANCING
Nonutility assets of $11.9 million were transferred from
Wisconsin Public Service to WPS Resources in 1999.
Investments and Financing
Special common stock dividends of $25.0$50.0 million were paid by Wisconsin Public Service to WPS Resources in 1999.2000. Equity infusions of $60.0$75.0 million were made by WPS Resources to Wisconsin Public Service in 1999. These2000. The special dividends and equity infusions allowed Wisconsin Public Service's average equity capitalization and its capitalization ratio for ratemaking to remain near its target levellevels as established by the Public Service Commission of Wisconsin in its most recent1999 rate order.
Cash requirements exceeded internally generated funds by $44.6 million in 2000. Short-term borrowings through commercial paper increased $20.0 million in addition to the net equity infusions. Pretax interest coverage was 4.714.40 times for the 12 months ended December 31, 1999.2000. See the following table below for Wisconsin Public Service's credit ratings.
========================================================================
Credit Ratings Standard & Poor's Moody's
- ------------------------------------------------------------------------
Credit Ratings | Standard & Poor's | Moody's |
Wisconsin Public Service Corporation | ||
Bonds | AA+ | Aa1 |
Preferred stock | AA | aa2 |
Commercial paper | A1+ | P1 |
We normally use internally-generated funds and short-term borrowing to satisfy most of our capital requirements. We may periodically issue additional long-term debt to reduce short-term debt and to maintain desired capitalization ratios. Equity infusions will be made as necessary to maintain the equity capitalization ratio as allowed by the Public Service Commission of Wisconsin in its recent rate proceeding.
The specific forms of financing, amounts, and timing will depend on the availability of projects, market conditions, and other factors. However, up to $150.0 million of fading lien bonds may be issued in 2001.
Wisconsin Public Service Corporation
Bonds AA+ Aa1
Preferred stock AA aa2
Commercial paper A1+ P1
========================================================================
Seemakes large investments in capital assets. Construction expenditures are expected to be approximately $486.0 million in the aggregate for the 2001 through 2003 period. This includes expenditures for the replacement of the Kewaunee plant's steam generators. In addition, other capital requirements for the three-year period include contributions of approximately $7.8 million to the Kewaunee plant's decommissioning trust fund.
Regulatory
On December 21, 2000, Wisconsin Public Service received an order from the Public Service Commission of Wisconsin authorizing a 5.4% increase in retail electric rates and a 1.5% increase in retail gas rates for 2001. A 12.1% return on equity was approved. The new rates were implemented on January 1, 2001. The Public Service Commission of Wisconsin did not approve a 2002 rate reopener but acknowledged that pursuant to statutes, Wisconsin Public Service may request a reopener at any time.
Merger with Wisconsin Fuel and Light Company
On July 13, 2000, WPS Resources signed a merger agreement with Wisconsin Fuel and Light Company. Under the agreement, Wisconsin Fuel and Light shareholders will receive 1.73 shares of WPS Resources' management discussioncommon stock for additional information
regardingeach share of Wisconsin Fuel and Light's common stock. The exchange ratio will be adjusted if, at the time of closing the transaction, the market price of WPS Resources' common stock exceeds $33.96 per share or is less than $27.79 per share. The market price is defined as the average of the closing price of WPS Resources' common stock during the ten trading days ending three days immediately preceding the effective date of the merger. The merger remains subject to (i) approval by the Public Service Commission of Wisconsin; (ii) receipt of an opinion of counsel that the exchange of stock qualifies as a tax-free transaction; and (iii) the satisfaction of various other conditions.
A majority of the outstanding preferred shareholders of Wisconsin Public Service's financial conditionService approved the merger, allowing Wisconsin Fuel and trends.
Light to merge into Wisconsin Public Service. A majority of the Wisconsin Fuel and Light shareholders approved the merger in November of 2000. The merger will be accounted for under the purchase method of accounting and is expected to be completed in April of 2001.
ITEM 7A. QUALITATIVE AND QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative
Market Risks
WPS Resources has potential market risk exposure related to interest rate risk, equity return and Qualitative Disclosures About Marketprincipal preservation risk, and commodity price risk. There currently is no material exposure due to foreign currency risk. Our exposure to interest rate risk relates primarily to ongoing short-term financing and a long-term debt financing at WPS Power Development. Exposure to equity return and principal preservation risk results from various debt and equity security investments in our employee benefit and nuclear decommissioning trust funds. Exposure to commodity price risk exists with respect to the price of coal, uranium, electricity, natural gas, and fuel oil. WPS Resources has risk management policies in place to monitor and assist in controlling these market risks and uses derivative instruments to manage some of these exposures.
Interest Rate Risk
WPS Resources generally issues commercial paper, subject to varying interest rates, for short-term borrowing. The fluctuation of interest rates will have an impact on interest expense related to this short-term borrowing. We manage interest rate exposure by continually monitoring the effects of market changes on interest rates. The amount of commercial paper outstanding was $119.6 million and $79.9 million at December 31, 2000 and December 31 1999, respectively. A change in interest rates of 100 basis points would have affected annual interest expense on this commercial paper by approximately $1.2 million in 2000 and $0.8 million in 1999. Wisconsin Public Service also has outstanding a $10 million master note that is subject to a variable interest rate adjusted daily. WPS Resources is not exposed to changes in interest rates on most of its long-term debt until such debt matures and may be refinanced at the then applicable rates.
Sunbury Generation, LLC, a nonregulated subsidiary of WPS Resources, had an outstanding balance of approximately $79.1 million on a variable rate nonrecourse loan at December 31, 2000. Sunbury Generation utilized interest rate swaps to fix the interest rate for 50% of the loan beginning in May of 2000 and continuing through March of 2018. In January of 2001, Sunbury Generation used an interest rate swap to fix the interest rate for the remaining 50% of the loan beginning April 1, 2001. A change in interest rates of 100 basis points would have affected annual interest expense in 2000 on the loan by approximately $0.4 million. WPS Resources currently does not employ any other interest rate swaps.
Mid-American Power, LLC, a nonregulated subsidiary of WPS Resources, currently has an outstanding balance of approximately $11 million on a variable rate loan. The interest rate is adjusted quarterly. A change in interest rates of 100 basis points would have affected annual interest expense on the loan by approximately $0.1 million.
Equity Return and Principal Preservation Risk
WPS Resources currently funds its liabilities related to employee benefits and nuclear decommissioning through various trust funds. These funds are reportedmanaged by various investment managers and hold investments in debt and equity securities. Changes in the market value of these investments can have an impact on the future expenses related to these liabilities. The pension liability is adequately funded and under "Pricenormal market conditions future required contributions to the plan are unlikely. Changes in the market value of investments related to other employee benefits or nuclear decommissioning could impact future contributions. WPS Resources monitors the trust fund portfolios by benchmarking the performance of the investments against certain security indices. All decommissioning costs and most of the employee benefit costs relate to WPS Resources' regulated utilities. The majority of these costs are reflected in customers' rates, mitigating any equity return and principal preservation risk on these exposures.
Commodity Price Risk
Exposure to commodity price risk exists with respect to the price of coal, uranium, electricity, natural gas, and fuel oil. WPS Resources and its affiliates employ established policies and procedures to reduce the market risk associated with changing commodity prices, including utilizing various types of commodity and financial instruments. Management Activities (WPSactively monitors commodity price risk exposure across all of its subsidiaries. WPS Resources engages in minimal price risk management activities at its regulated utility operations because much of this risk exposure is recoverable through customer rates.
WPS Energy Services)"Services uses derivative financial and commodity instruments to reduce market risk associated with the changing prices of natural gas and electricity sold at firm prices to customers. WPS Energy Services also uses derivatives to manage market risk associated with anticipated energy purchases, as partwell as trading activities. Derivatives may include, but are not limited to, futures and forward contracts, basis swap agreements, and call and put options. For purposes of Item 7, Management's Discussionrisk management disclosure, all of WPS Energy Services' activities including all of its energy commodity purchase and Analysissale contracts and its gas in storage inventory are classified as trading.
WPS Power Development uses derivative commodity instruments in connection with the sale of Financial Conditionits generated power. For purposes of risk management disclosure, all of WPS Power Development's activities are classified as non-trading.
Value-at-Risk
To measure commodity price risk exposure, WPS Resources performs a value-at-risk (VaR) analysis on third party exposures.
VaR is used to describe a probabilistic approach to managing the exposure to market risk. The VaR amount represents the potential change in fair value that could occur from adverse changes in market factors within a given confidence level if an instrument or portfolio is held for a specified time period. VaR models are relatively sophisticated. However, the quantitative risk information is limited by the parameters established in creating the model. The instruments being utilized may have features that may trigger a potential loss in excess of the calculated amount if the changes in the underlying commodity price exceed the confidence level of the model used. VaR is not necessarily indicative of actual results which may occur.
At WPS Resources, VaR is estimated using a delta-normal approximation based on a one-day holding period and Resultsa 95% confidence level. The delta-normal approximation is based on the assumption that changes in the value of Operations, on pages 54the portfolio over short time periods, such as one day, are normally distributed. It does not take into account higher order risk exposures, so it may not provide a good approximation of the risk in a portfolio with substantial option positions. We utilized a delta-normal approximation because our portfolio has limited exposure to optionality. In 2000, we switched from a tabular presentation of quantitative risk disclosure to a VaR presentation, because we believe VaR is a more effective risk monitoring tool.
Our VaR amount for trading activities was calculated to be $0.4 million at December 31, 2000 compared to $0.3 million at December 31, 1999. Our VaR amount for non-trading activities was calculated to be $4.4 million and $1.2 million at December 31, 2000 and December 31, 1999, respectively. However, a significant portion of the VaR amount related to non-trading activities is mitigated by WPS Power Development's generating capabilities, which are excluded from the VaR calculation.
For the year ended December 31, 2000, the average, high, and low VaR amounts for trading activities were $0.3 million, $0.4 million, and $0.2 million, respectively. The average, high, and low VaR amounts over the same reporting period for non-trading activities were $2.2 million, $4.4 million, and $1.1 million, respectively. The average, high, and low amounts were computed using the VaR amounts at the beginning of the reporting period and the four quarter-end amounts.
Foreign Currency Exchange Rate Risk
We are exposed to foreign currency risk primarily through 57.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | |||
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WPS RESOURCES CORPORATION |
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A. CONSOLIDATED STATEMENTS OF INCOME, COMPREHENSIVE INCOME, AND RETAINED EARNINGS | |||
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Year Ended December 31 (Thousands, except share amounts) | 2000 | 1999 | 1998 |
Operating revenues | |||
Electric utility | $ 623,786 | $ 582,471 | $ 543,260 |
Gas utility | 264,519 | 191,521 | 165,111 |
Nonregulated gas | 913,816 | 286,495 | 329,413 |
Nonregulated electric and other | 149,453 | 38,053 | 25,952 |
Total operating revenues | 1,951,574 | 1,098,540 | 1,063,736 |
Operating expenses | |||
Utility electric production fuels | 129,507 | 113,780 | 110,809 |
Utility purchased power | 69,473 | 73,619 | 56,447 |
Utility gas purchased for resale | 180,308 | 118,889 | 105,908 |
Nonregulated gas cost of sales | 907,360 | 280,577 | 324,287 |
Nonregulated electric and other cost of sales | 106,954 | 20,874 | 22,376 |
Other operating expenses | 238,470 | 194,938 | 172,876 |
Maintenance | 73,031 | 60,564 | 52,813 |
Depreciation and decommissioning | 99,842 | 83,744 | 86,274 |
Taxes other than income | 33,799 | 31,818 | 31,902 |
Total operating expenses | 1,838,744 | 978,803 | 963,692 |
Operating income | 112,830 | 119,737 | 100,044 |
Other income | |||
Allowance for equity funds used during construction | 1,712 | 716 | 173 |
Other, net | 15,848 | 8,233 | 2,505 |
Total other income | 17,560 | 8,949 | 2,678 |
Income before interest expense | 130,390 | 128,686 | 102,722 |
Interest on long-term debt | 41,677 | 27,162 | 23,987 |
Other interest | 11,855 | 8,507 | 4,827 |
Allowance for borrowed funds used during construction | (2,752) | (2,901) | (177) |
Total interest expense | 50,780 | 32,768 | 28,637 |
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Distributions - preferred securities of subsidiary trust | 3,501 | 3,501 | 1,488 |
Income before income taxes | 76,109 | 92,417 | 72,597 |
Income taxes | 6,005 | 29,741 | 23,445 |
Minority interest | - | - | (611) |
Preferred stock dividends of subsidiaries | 3,111 | 3,111 | 3,132 |
Net income | 66,993 | 59,565 | 46,631 |
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Other comprehensive income | - | - | - |
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Comprehensive income | 66,993 | 59,565 | 46,631 |
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Retained earnings at beginning of year | 341,701 | 335,154 | 339,508 |
Cash dividends on common stock | (53,938) | (53,018) | (50,985) |
Retained earnings at end of year | $ 354,756 | $ 341,701 | $ 335,154 |
Average shares of common stock | 26,463 | 26,644 | 26,511 |
Basic and diluted earnings per average share of common stock | $2.53 | $2.24 | $1.76 |
Dividend per share of common stock | 2.04 | 2.00 | 1.96 |
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The accompanying notes are an integral part of these statements. | |||
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | ||
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WPS RESOURCES CORPORATION |
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B. CONSOLIDATED BALANCE SHEETS | ||
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Assets | ||
At December 31 (Thousands) | 2000 | 1999 |
Utility plant | ||
Electric | $1,893,358 | $1,797,832 |
Gas | 302,942 | 285,048 |
Property under capital lease | 74,130 | 74,130 |
Total | 2,270,430 | 2,157,010 |
Less - Accumulated depreciation and decommissioning | 1,365,367 | 1,293,354 |
Net | 905,063 | 863,656 |
Nuclear decommissioning trusts | 207,224 | 198,052 |
Construction in progress | 69,997 | 74,187 |
Nuclear fuel, less accumulated amortization | 16,040 | 15,007 |
Net utility plant | 1,198,324 | 1,150,902 |
Current assets | ||
Cash and equivalents | 12,789 | 10,547 |
Customer and other receivables, net of reserves of $4,205 | ||
at December 31, 2000 and $2,676 at December 31, 1999 | 317,808 | 132,355 |
Accrued utility revenues | 60,149 | 38,533 |
Fossil fuel, at average cost | 18,122 | 24,657 |
Gas in storage | 65,975 | 29,344 |
Materials and supplies, at average cost | 31,373 | 28,618 |
Assets from risk management activities | 642,481 | - |
Prepayments and other | 52,474 | 28,871 |
Total current assets | 1,201,171 | 292,925 |
Regulatory assets | 74,579 | 70,490 |
Nonutility and nonregulated plant, net of accumulated |
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depreciation of $13,341 at December 31, 2000 |
| |
and $8,189 at December 31, 1999 | 152,474 | 129,352 |
Pension assets | 62,992 | 65,622 |
Investments and other assets | 126,602 | 107,257 |
Total | $2,816,142 | $1,816,548 |
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | ||
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WPS RESOURCES CORPORATION | ||
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B. CONSOLIDATED BALANCE SHEETS (CONTINUED) | ||
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Capitalization and Liabilities | ||
At December 31 (Thousands) | 2000 | 1999 |
Capitalization | ||
Common stock equity | $ 542,777 | $ 536,300 |
Preferred stock of subsidiary with no mandatory redemption | 51,168 | 51,193 |
Company-obligated mandatorily redeemable trust preferred |
| |
securities of subsidiary trust holding solely WPS Resources |
| |
7.00% subordinated debentures | 50,000 | 50,000 |
Long-term capital lease obligation | 72,955 | 73,585 |
Long-term debt | 587,017 | 510,917 |
Total capitalization | 1,303,917 | 1,221,995 |
Current liabilities | ||
Current portion of long-term debt and capital lease obligation | 8,311 | 1,362 |
Notes payable | 10,000 | 10,403 |
Commercial paper | 119,557 | 79,855 |
Accounts payable | 334,311 | 103,437 |
Accrued taxes | 11,217 | 9,844 |
Accrued interest | 9,882 | 7,561 |
Liabilities from risk management activities | 659,468 | - |
Other | 29,866 | 21,099 |
Total current liabilities | 1,182,612 | 233,561 |
Long-term liabilities and deferred credits | ||
Accumulated deferred income taxes | 100,463 | 111,092 |
Accumulated deferred investment tax credits | 23,963 | 25,748 |
Regulatory liabilities | 50,641 | 64,148 |
Environmental remediation liabilities | 38,867 | 40,557 |
Postretirement liabilities | 47,267 | 49,643 |
Other long-term liabilities | 68,412 | 69,804 |
Total long-term liabilities and deferred credits | 329,613 | 360,992 |
|
|
|
Commitments and contingencies (See Note 13) | - | - |
Total | $2,816,142 | $1,816,548 |
|
|
|
The accompanying notes are an integral part of these statements. | ||
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
|
|
|
|
|
WPS RESOURCES CORPORATION |
|
|
|
|
|
C. CONSOLIDATED STATEMENTS OF CAPITALIZATION | ||
At December 31 (Thousands, except share amounts) | 2000 | 1999 |
Common stock equity | ||
Common stock, $1 par value, 100,000,000 shares authorized; | ||
26,851,034 shares outstanding at December 31, 2000 and | ||
26,851,045 shares outstanding at December 31, 1999 | $ 26,851 | $ 26,851 |
Premium on capital stock | 172,451 | 172,108 |
Retained earnings | 354,756 | 341,701 |
Treasury stock, 336,385 shares at average |
|
|
cost of $24.23 at December 31, 2000 | (8,149) | - |
Shares in deferred compensation trust; 105,179 shares at an average |
| |
cost of $29.78 per share at December 31, 2000 and 71,097 shares |
| |
at an average cost of $30.04 per share at December 31, 1999 | (3,132) | (2,136) |
Employee Stock Ownership Plan loan guarantees | - | (2,224) |
Total common stock equity | 542,777 | 536,300 |
Preferred stock - Wisconsin Public Service Corporation | ||
Cumulative, $100 par value, 1,000,000 shares authorized; | ||
with no mandatory redemption | ||
Shares Outstanding | ||
Series 2000 1999 |
|
|
5.00% 131,720 131,950 | 13,172 | 13,195 |
5.04% 29,980 29,980 | 2,998 | 2,998 |
5.08% 49,980 50,000 | 4,998 | 5,000 |
6.76% 150,000 150,000 | 15,000 | 15,000 |
6.88% 150,000 150,000 | 15,000 | 15,000 |
Total preferred stock of subsidiary with no mandatory redemption | 51,168 | 51,193 |
Company-obligated mandatorily redeemable trust | ||
preferred securities of subsidiary trust | ||
holding solely WPS Resources 7.00% subordinated debentures | 50,000 | 50,000 |
Capital lease obligation - Wisconsin Public Service Corporation | 73,585 | 74,004 |
Less current portion | (630) | (419) |
Long-term capital lease obligation | 72,955 | 73,585 |
Long-term debt | ||
First mortgage bonds - Wisconsin Public Service Corporation | ||
Series Year Due | ||
7.30% 2002 | 50,000 | 50,000 |
6.80% 2003 | 50,000 | 50,000 |
6-1/8% 2005 | 9,075 | 9,075 |
6.90% 2013 | 22,000 | 22,000 |
8.80% 2021 | 53,100 | 53,100 |
7-1/8% 2023 | 50,000 | 50,000 |
6.08% 2028 | 50,000 | 50,000 |
First mortgage bonds - Upper Peninsula Power Company | ||
Series Year Due | ||
7.94% 2003 | 15,000 | 15,000 |
10.0% 2008 | 3,000 | 4,800 |
9.32% 2021 | 18,000 | 18,000 |
Unsecured senior notes - WPS Resources Corporation | ||
| Series Year Due | ||
7.00% 2009 | 150,000 | 150,000 |
Employee Stock Ownership Plan loan guarantees | - | 2,224 |
Term loans - nonrecourse, secured by nonregulated assets | 102,742 | 24,000 |
Notes payable to bank, secured by nonregulated plant | 19,342 | 11,136 |
Senior secured note | 3,542 | 3,722 |
Other long-term debt | 119 | 142 |
Total | 595,920 | 513,199 |
Unamortized discount and premium on bonds and debt securities, net | (1,222) | (1,339) |
Total long-term debt | 594,698 | 511,860 |
Less current portion | (7,681) | (943) |
Net long-term debt | 587,017 | 510,917 |
Total capitalization | $1,303,917 | $1,221,995 |
The accompanying notes are an integral part of these statements. | ||
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | |||
|
|
| |
WPS RESOURCES CORPORATION |
|
| |
|
|
| |
D. CONSOLIDATED STATEMENTS OF CASH FLOWS | |||
Year Ended December 31 (Thousands) | 2000 | 1999 | 1998 |
Cash flows from operating activities | |||
Net income | $ 66,993 | $ 59,565 | $ 46,631 |
Adjustments to reconcile net income to net cash from | |||
operating activities | |||
Depreciation and decommissioning | 99,842 | 83,744 | 86,274 |
Gain on nuclear decommissioning trust | (10,771) | (3,941) | (3,258) |
Amortization of nuclear fuel and other | 19,746 | 14,949 | 16,257 |
Deferred income taxes | (15,030) | (12,624) | (11,940) |
Investment tax credit restored | (1,785) | (1,402) | (2,311) |
Allowance for equity funds used during construction | (1,712) | (716) | (173) |
Gain on sale of property | (3,750) | - | - |
Pension income | 2,630 | (5,604) | (9,669) |
Postretirement funding | (2,602) | 5,402 | 4,491 |
Unrealized gains and losses on nonregulated energy contracts | 16,988 | 7,586 | (6,380) |
Other, net | 5,903 | 17,908 | 3,469 |
|
|
|
|
Changes in | |||
Customer and other receivables | (185,515) | (15,149) | (21,106) |
Accrued utility revenues | (21,616) | (4,358) | (3,425) |
Fossil fuel inventory | 6,535 | (11,505) | (2,530) |
Gas in storage | (36,631) | (8,549) | 1,285 |
Miscellaneous assets | (39,044) | (16,713) | (2,367) |
Accounts payable | 230,874 | (12,053) | 25,743 |
Accrued taxes | 8,363 | 7,006 | (7,276) |
Miscellaneous current and accrued liabilities | 1,373 | 11,312 | (4,004) |
Net cash from operating activities | 140,791 | 114,858 | 109,711 |
Cash flows from (used for) investing activities | |||
Construction of utility plant and nuclear fuel expenditures | (159,475) | (140,697) | (94,734) |
Construction of nonregulated plant | (8,481) | - | - |
Purchase of other property and equipment | (31,128) | (132,486) | (16,075) |
Decommissioning funding | (8,831) | (9,180) | (17,239) |
Proceeds from sale of property | 31,337 | - | - |
Other | (15,569) | 12,840 | 4,046 |
Net cash used for investing activities | (192,147) | (269,523) | (124,002) |
Cash flows from (used for) financing activities | |||
Issuance of notes payable | - | 34,350 | 196,353 |
Redemption of notes payable | - | (36,650) | (203,150) |
Issuance of other long-term debt | 87,351 | 174,433 | 50,233 |
Redemption of other long-term debt | (10,330) | (1,484) | (53,660) |
Issuance of mandatorily redeemable trust preferred securities | - | - | 50,000 |
Issuance of commercial paper | 1,044,401 | 1,661,095 | 2,157,808 |
Redemption of commercial paper | (1,004,699) | (1,628,830) | (2,130,924) |
Cash dividends on common stock | (53,938) | (53,018) | (50,985) |
Issuance of common stock | - | 8,970 | - |
Purchase of treasury and deferred compensation shares | (10,505) | (631) | (554) |
Other | 1,318 | (157) | (2,191) |
Net cash from financing activities | 53,598 | 158,078 | 12,930 |
Net increase (decrease) in cash and equivalents | 2,242 | 3,413 | (1,361) |
Cash and equivalents at beginning of year | 10,547 | 7,134 | 8,495 |
Cash and equivalents at end of year | $ 12,789 | $ 10,547 | $ 7,134 |
Cash paid during year for | |||
Interest, less amount capitalized | $49,498 | $34,106 | $26,879 |
Income taxes | 25,468 | 35,285 | 44,553 |
Preferred stock dividends of subsidiary | 3,111 | 3,111 | 3,132 |
|
|
|
|
Supplemental schedule of noncash investing and financing activities for 1999 only (thousands): | |||
1. A capital lease obligation of $74,130 was incurred when Wisconsin Public Service | |||
entered into a long-term lease agreement for utility plant assets. |
| ||
2. Net cash surrender value of a key executive life insurance policy of $11,787 | |||
was transferred from Wisconsin Public Service to WPS Resources. | |||
3. Nonutility assets of $121 were transferred from Wisconsin Public Service to WPS Resources. | |||
The accompanying notes are an integral part of these statements. | |||
| |||
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WPS RESOURCES CORPORATION
A. CONSOLIDATED STATEMENTS OF INCOME,
COMPREHENSIVE INCOME, AND RETAINED EARNINGS
E. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) NATURE OF OPERATIONS--WPSNature of Operations--WPS Resources Corporation is a holding company. Approximately 71% of our 1999 revenues, 83% of our assets, and
substantially all of our 1999 net income was derived from our utility
subsidiaries. Our primary wholly-owned subsidiary, Wisconsin Public Service Corporation, is an electric and gas utility. Wisconsin Public Service supplies and distributes electric power and natural gas in its franchised service territory in northeastern Wisconsin and an adjacent portion of the Upper Peninsula of Michigan. Our other wholly-owned utility subsidiary, Upper Peninsula Power Company, is an electric utility. Upper Peninsula Power supplies and distributes electric energy in the Upper Peninsula of Michigan. Another wholly-owned subsidiary, WPS Resources Capital Corporation, is a holding company for our nonregulated businesses;businesses, WPS Energy Services, Inc.,
which and WPS Power Development, Inc. WPS Energy Services is a diversified energy supply and services company andcompany. WPS Power Development Inc., which develops, owns and operates, through its own subsidiaries, electric generation projects and provides service to the
electric power generation industry. Our other nonregulated subsidiaries
include Upper Peninsula Building Development Company, Penvest, Inc., and
subsidiaries of Wisconsin Public Service and WPS Power Development.projects.
The term "utility" refers to the regulated activities of Wisconsin Public Service and Upper Peninsula Power, while the term "nonutility" refers to the activities of Wisconsin Public Service and Upper Peninsula Power which are not regulated. The term "nonregulated" refers to activities other than those of Wisconsin Public Service and Upper Peninsula Power.
(b) USE OF ESTIMATES--WeUse of Estimates--We prepare our financial statements in conformity with accounting principles generally accepted accounting principles.in the United States. We make estimates and assumptions that affect reported amounts. These estimates and assumptions include assets, liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results couldmay differ from those estimates.
(c) ACQUISITIONS AND NONREGULATED INVESTMENTS--In 1999,Accounting for Price Risk Management--Effective January 1, 2001, WPS Power
Development purchased the Sunbury plant, a 472-megawatt nameplate capacity
coal and oil-fired generation facility in Pennsylvania from
PP&L Resources Inc., and 92 megawatts of hydro, steam, and diesel generation
facilities in Maine and New Brunswick, Canada from Maine Public Service
Company. In addition, WPS Power Development indirectly owns a two-thirds
interest in a merchant generating plant in Cassville, Wisconsin, the Stoneman
Power Plant, and owns a two-thirds interest in a coal pelletization plant
currently located in Alabama.
The emission allowances acquired in the Sunbury plant acquisition have
been assigned a value which is being amortized over the respective lives of
the allowances.
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At WPS Energy Services, the price paid in excess of fair value for
identifiable assets acquired in 1995 and 1999 are being amortized over
five-year periods.
(d) CONSOLIDATION--We consolidate all majority-owned subsidiaries.
All significant intercompany transactions and accounts have been eliminated.
(e) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES--In June 1998,adopted the Financial Accounting Standards Board issuedBoard's Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities.Activities," This statement(Statement No. 133) as amended by Statements of Financial Accounting Standards Nos. 137 and 138. Statement No. 133 normalizes accounting and financial reporting standards for forward contracts, futures, options, and other derivative instruments, and related hedging activities. Statement No. 133 requires, in part, that we report all derivatives to be measured at fair
value and recognizedderivative instruments on the balance sheet as either assets or liabilities in the statementat their fair value. The treatment of financial position. The accounting forsubsequent changes in the fair value of a
derivative depends upon the use of the derivative and its resulting
designation. Unless specificare recorded currently in earnings unless certain hedge accounting criteria are met changes inor if the derivative's fair value must be recognized currently in earnings.
In June 1999,derivatives are subject to the Financial Accounting Standards Board issuedprovisions of Statement of Financial Accounting Standards No. 137. This new statement delays71, "Accounting for the effective dateEffects of Certain Types of Regulation" (Statement 71).
Although all of WPS Resources' subsidiaries adopted Statement No. 133, to fiscal periods beginning after June 15,
2000. We will be adopting Statement No. 133 on January 1, 2001.
We have certain fixed price contracts for future purchases of
commodities in our utility business that may be considered derivatives under
Statement No. 133. We believe these contracts would qualify as hedges under
current interpretations. Based on the limited number of contracts as of
December 31, 1999, we do not expect the amount of derivative assets and
liabilities that would be recognized on our balance sheet to be significant.
We are currently reviewing the impact of implementing Statement No. 133
at our nonregulated subsidiaries. At this time, we do not know the effect
that Statement No. 133 will have on our financial statements. We expect that
substantially all of the derivatives usedinstruments utilized by WPS Energy Services to hedge
price risk associatedin connection with firm commitments and inventory will qualify for
hedge accounting. Statement No. 133, in part, allows special hedge accounting
for fair value and cash flow hedges. Statement No. 133 provides that the gain
or loss on a derivative instrument designated and qualifying as a fair value
hedging instrument as well as the offsetting gain or loss on the hedged item
attributable to the hedged risk be recognized currently in earnings in the
same accounting period. Statement No. 133 provides that the effective portion
of the gain or loss on a derivative designated and qualifying as a cash flow
hedging instrument be reported as a component of other comprehensive income.
The effective portion of the gain or loss will be reclassified into earnings
in the period or periods during which the hedged forecasted transaction
affects earnings. The ineffective portion of the gain or loss on the
derivative instrument, if any, must be recognized currently in earnings.
Prior to the adoption of these new accounting requirements in January of
2001, we will continue to account for price risk management activities under
existingare accounted for using the mark-to-market method of accounting standards. Under these standards, we have not experienced
significant price risk activities at our utility operations because muchas prescribed by the Emerging Issues Task Force Issue 98-10, "Accounting for Contracts Involved in Energy Trading and Risk Management Activities." In the first quarter of the utility price risk exposure is recoverable through customer rates.2000, WPS Energy Services experiences price risk underclassified all of its unaffiliated energy contracts and gas in storage as trading operations. Under the existingmark-to-market method of accounting, pronouncements. WPS Energy Services recordsthe unrealized gains or losses on derivatives
related to firm commitments as adjustments to the cost of sales or to revenues
when the related transactions affect earnings. Gains and losses on derivatives associated with forecasted transactionsthese contracts are recorded whenas Price Risk Management Assets and Liabilities on the forecastedbalance sheet. Changes in the market value of these assets and liabilities and gas in storage are recorded in operations on the income statement and result primarily from changes in the valuation of the portfolio of contracts, newly originated transactions, affect earnings.and the timing of settlement relative to the receipt of cash for certain contracts. The market prices used to value these transactions reflect management's best estimate considering various factors including exchange and over-the-counter market closing quotations, time value, and volatility factors underlying the commitments. Contracts entered into with other subsidiaries at WPS Power Development experiences
electric power price risk, but doesResources and the related hedged commitments are not use derivativesclassified as trading contracts and continue to manage risk.
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(f) PROPERTY ADDITIONS, MAINTENANCE, AND RETIREMENTS OF UTILITY
PLANT--Utilitybe accounted for at cost.
(d) Income Taxes--We account for income taxes using the liability method as prescribed by Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Under the liability method, deferred income tax liabilities are established for all temporary differences in the book and tax basis of assets and liabilities based upon enacted tax laws and rates applicable to the periods in which the taxes become payable.
(e)Property, Plant, and Equipment--Utility plant is stated at the original cost of construction which includes an allowance for funds used during construction. The cost of renewals and betterments of units of property (as distinguished from minor items of property) is capitalized as an addition to the utility plant accounts. Except for land, no gain or loss is recognized in connection with ordinary retirements of utility property units. The utility charges the cost of units of property retired, sold, or otherwise disposed of, plus removal, less salvage, are
charged to the accumulated provision for depreciation. Maintenance, repair, replacement, and renewal costs associated with items not qualifying as units of property are generally charged topart of operating expense.
Nonutility property and nonregulated property follow a similar policy
except that interest is capitalized during construction and gains and losses
are recognized in connection with retirements.
We capitalize software in accordance with the American Institute of
Certified Public Accountant's Statement of Position 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use."expenses.
We capitalize certain costs related to software developed or obtained for internal use and amortize those costs to operating expense over the estimated useful life of the related software.
(g) ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION--Approximately
Nonutility property interest capitalization takes place during construction and gain and loss recognition occurs in connection with retirements. Nonregulated property, plant, and equipment are capitalized at original cost. Significant additions or improvements that extend asset lives are capitalized, while repairs and maintenance are charged to expense as incurred.
(f) Allowance for Funds Used During Construction--Approximately 50% of Wisconsin Public Service's retail jurisdictional construction work in progress expenditures are subject to allowance for funds used during construction. WisconsinThe Public Service uses a factor based on its overall costCommission of capital.
Certain major new generating facilities earn anWisconsin is allowing accrual of allowance for funds used during construction based on total construction work in progress expenditures.
This includes100% of the combustion turbine being constructed at West Marinette for
Madison Gas and Electric.Kewaunee plant's steam generator replacement project. For 1999,2000, Wisconsin Public Service's retail rate allowance for funds used during construction retail rate was approximately 10.6%. A
separately negotiated rate, however, is being used for the combustion turbine
being constructed for Madison Gas and Electric.Historically, Upper Peninsula Power's construction work in progress expenditures arehave not been subject to retail jurisdictional allowance for funds used during construction due to their small dollar amounts. We expect larger projects to occur in the future that will be subject to retail jurisdictional allowance for funds used during construction.
Allowance
Wholesale jurisdictional electric allowance for funds used during construction is recorded on Wisconsin Public Service's and Upper Peninsula Power's wholesale
jurisdictional electric construction work in progress at debt and equity percentages specified in the Federal Energy Regulatory Commission's Uniform System of Accounts. For 1999,2000, the allowance for funds used during construction wholesale rate was approximately 6.7%7.4% for Wisconsin Public Service and 5.3%8.9% for Upper Peninsula Power.
(h) LEASES--Wisconsin
(g) Leases--Wisconsin Public Service accounts for the agreement to purchase power from the De Pere Energy Center, LLC (an affiliate of SkyGen LLC)
as a capital lease according to Statement of Financial Accounting Standards
No. 13, "Accounting For Leases."lease. On June 14, 1999, Wisconsin Public Service recorded a leased asset and a lease obligation equal to the present value of the minimum lease payments. The leased asset is depreciated over 25 years, the life of the contract.
(i) DEPRECIATION--Straight-line
(h) Depreciation--We record straight-line depreciation expense is recorded over the estimated useful life of utility property and includesinclude amounts for estimated removal and salvage. Depreciation rates for Wisconsin Public Service were approved by the Public Service Commission of Wisconsin effective January 1, 1999. Wisconsin Public Service also uses the rates established by the
Public Service Commission of Wisconsin to depreciate its property in the
Upper Peninsula of Michigan. Depreciation of the Kewaunee Nuclear Power Plant
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is covered in a separate order from the Public Service Commission of Wisconsin
as explained below.
Depreciation rates for Upper Peninsula Power were approved by the Michigan Public Service Commission on January 1, 1994 and remain in effect through 2001. A new depreciation study will be filed with the Michigan Public Service Commission in early 2001, with new rates2001. A final rate order is expected to
become effective January 1, 2002.
Depreciation expense also includes accruals for nuclear decommissioning.
These accruals are not included in the annual composite rates shown below. An
explanation of this item is included in Note 1(l).
============================================================
WPS Resources 1999 1998 1997
------------------------------------------------------------
Annual composite
depreciation rates
Electric 3.56% 3.57% 3.55%
Gas 3.23% 3.26% 3.26%
============================================================
Wisconsin Public Service
------------------------------------------------------------
Annual composite
depreciation rates
Electric 3.46% 3.55% 3.52%
Gas 3.23% 3.26% 3.26%
============================================================
Property recently acquired from Maine Public Service and PP&L Resources
is depreciated using various lives. Depreciable lives are as long as 40 years
on the Maine and Canada property and as long as 30 years on the Sunbury
property. Property at the Stoneman plant is also depreciated using various
lives. Some of the lives are as long as 40 years. Other nonutility and
nonregulated property is depreciated using straight-line depreciation. Asset
lives range from five to ten years.2001.
Depreciation for the Kewaunee plant is being accrued based on a 1997 Public Service Commission of Wisconsin order. The order allows for full cost recovery by the end of 2002. The Public Service Commission of Wisconsin's
depreciationWisconsin rate order that became effective for 1999 alsoon January 1, 2001 includes a change in the methodology for the Kewaunee plant after the steam generators have been replaced. Under this order, existing net plant at January 1, 2001 will be recovered using a straight-line remaining life method, with full recovery to be realized by the end of April 2010. The replacement is estimated for completion in the fallcost of 2001. At that time,
the unrecovered basis of the Kewaunee plant, including the new steam generators, estimated to be in service by November 2001, will be recovered over an 8.5-year remaining life8-1/2 year period using the sum-of-the-years depreciation method.
(j) IMPAIRMENT--Statementsum-of-years-digits method of Financial Accounting Standards No. 121,
"Accountingdepreciation.
Depreciation expense also includes accruals for nuclear decommissioning. These accruals are not included in the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of," requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever circumstances indicate that
the carrying amount of an asset may not be recoverable. Impairment losses
resulting from applicationannual composite rates shown below. An explanation of this statement are reporteditem is included in income inNote 1(j).
Annual Utility Composite | 2000 | 1999 | 1998 |
Electric | 3.52% | 3.46% | 3.52% |
Gas | 3.26% | 3.23% | 3.26% |
Other nonutility property is depreciated using straight-line depreciation. Asset lives range from 3 to 20 years.
Our nonregulated subsidiaries compute depreciation using the periodstraight-line method over the recognition criteria are first applied and met. This statement
does not have a material impact on the current carrying amount of our assets.
(k) NUCLEAR FUEL--Thefollowing estimated useful lives:
Structures 15 to 40 years Equipment 5 to 35 years Vehicles 5 years Leasehold improvements Life of the lease
(i) Nuclear Fuel--The quantity of heat produced for the generation of electric energy by the Kewaunee plant is the basis for the amortization of the costs of nuclear fuel to electric production fuel expense. Costs amortized to
electric fuel expense assume no salvage values for uranium and plutonium.
-85-
Included in the costs wasincluding an amount for ultimate disposal. TheseRecovery of these costs are
recoveredoccurs currently from customers in rates. The ultimate storage of fuel is handled by the United States Department of Energy pursuant to a contract. The
contract was required by the Nuclear Waste Act of 1982. The Department of Energy receives quarterly payments for the storage of fuel based on generation. Spent nuclear fuel storage space is provided at the Kewaunee plant on an interim basis. The expensesExpenses associated with thisinterim spent fuel storage at the Kewaunee plant are recognized as current operating costs. With minor plant modifications planned for 2001, the Kewaunee plant should have sufficient fuel storage capacity until the end of its useful life in 2013. At December 31, 1999,2000, the accumulated provision for nuclear fuel totaled $162.7$167.7 million compared with $156.6$162.7 million at December 31, 1998.
(l) NUCLEAR DECOMMISSIONING--Nuclear1999.
(j) Nuclear Decommissioning--Our share of nuclear decommissioning costs to date havehas been accrued over the estimated service life of the Kewaunee plant, recovered currently from customers in rates, and deposited in external trusts. Such costs totaled $8.9 million in 2000, $9.2 million in 1999, and $17.2 million in 1998, and
$16.1 million in 1997.1998. The decrease in 1999 was the result of the
Public Service Commission of Wisconsin's approval of a change in
Wisconsin Public Service's decommissioning1998-2000 funding levels in a rate order
issued on January 14, 1999. The revised funding level continues to useused a recovery period ending in 2002 as described in Note 1(i).1(h), Depreciation. Beginning in 2001, the Public Service Commission of Wisconsin has authorized use of a funding period ending in 2010. As a result of this extension, the contributions for 2001 will be $2.6 million.
Based on the standard cost escalation assumptions required by a July 1994 Public Service Commission of Wisconsin order, the undiscounted amount of Wisconsin Public Service's share of decommissioning costs forecasted to be expended between the years 2013 and 2043 is $675.2 million under the revised funding plan which became effective in 1999. In developing the funding plan, a long-term after-tax earnings rate of approximately 5.3% was assumed.
Wisconsin Public Service's share of the Kewaunee plant decommissioning based on a 41.2% ownership interest is estimated to be $200.7$211.4 million in current dollars based on a site-specific study. The study, which was performed in 1998, uses immediate dismantlement as the method of decommissioning and assumes shutdown in 2013. As of December 31, 1999,2000, the market value of the external nuclear decommissioning trusts totaled $198.1$207.2 million. Based on that study, Wisconsin Public
Service's contributions for 2000 under the 1999 Public Service Commission of
Wisconsin rate order will be $8.3 million.
Depreciation expense includes future decommissioning costs collected in customer rates and an offsetting charge for earnings from external trusts. As of December 31, 1999,2000, the accumulated provision for depreciation and decommissioning included accumulated provisions for decommissioning totaling $198.1$207.2 million. Realized trust earnings totaled $10.8 million in 2000, $4.6 million in 1999, and $3.3 million in 1998, and $3.7 million in 1997. Unrealized trust earnings
totaled $16.2 million in 1999, $16.8 million in 1998, and $13.8 million in
1997.1998. Unrealized gains, net of tax, in external trusts are reflected as an increase to the decommissioning reserve, since decommissioning expense will be recognized as the gains are realized, in accordance with regulatory requirements.
Investments in the nuclear decommissioning trusts are recorded at market value. Investments at December 31, 19992000, consisted of 61.0%51.4% equity securities and 39.0% corporate and municipal debt48.6% fixed income securities. The investments classified as utility plant are presented net of related income tax effects on unrealized gains and represent the amount of assets available to accomplish decommissioning. The nonqualified trust investments designated to pay income taxes when unrealized gains become realized are classified as other assets. An offsetting regulatory liability reflects the expected reduction in future rates as unrealized gains in the nonqualified trust are realized. Information -86-
=========================================================================
Unrealized
1999 (Thousands) Market Cost Gain (Loss)
- -------------------------------------------------------------------------
Security Type
Debt $ 77,156 $ 78,394 $(1,238)
Equity 120,896 62,861 58,035
- -------------------------------------------------------------------------
Balance at December 31 $198,052 $141,255 $56,797
=========================================================================
=========================================================================
Unrealized
1998 (Thousands) Market Cost Gain (Loss)
- -------------------------------------------------------------------------
Security Type
Debt $ 71,771 $ 69,911 $ 1,860
Equity 99,680 58,231 41,449
- -------------------------------------------------------------------------
Balance at December 31 $171,451 $128,142 $43,309
=========================================================================
(m) CASH AND EQUIVALENTS--We
2000 Security Type (Thousands) | Market | Cost | Unrealized Gain (Loss) |
Fixed income | $100,702 | $ 98,898 | $ 1,804 |
Equity | 106,522 | 61,959 | 44,563 |
Balance at December 31 | $207,224 | $160,857 | $46,367 |
1999 Security Type (Thousands) | Market | Cost | Unrealized Gain (Loss) |
Fixed income | $ 77,156 | $ 78,394 | $(1,238) |
Equity | 120,896 | 62,861 | 58,035 |
Balance at December 31 | $198,052 | $141,255 | $56,797 |
(k) Cash and Equivalents--We consider short-term investments with an original maturity of three months or less to be cash equivalents.
(n) REVENUE AND CUSTOMER RECEIVABLES--We
(l) Revenue and Customer Receivables--We accrue revenues related toestimated amounts for electric and gas service. These accruals include estimated amounts for service rendered but not billed. Approximately 12%8.8% of our total revenue is from companies in the paper products industry.
Automatic
Wisconsin Public Service and Upper Peninsula Power use automatic fuel adjustment clauses are used for the Federal Energy Regulatory Commission wholesale-electric and the Michigan Public Service Commission retail-electric portions of Wisconsin Public Service's and Upper Peninsula
Power's businesses.the business.
The Wisconsin retail-electric portion of Wisconsin Public Service's business uses a "cost variance range" approach. This range isapproach, based on a specific estimated fuel cost for the forecast year. If Wisconsin Public Service's actual fuel costs fall outside this range, a hearing can be held resulting in an adjustment to future rates.
The Public Service Commission of Wisconsin has approved a modified one-for-one gas cost recovery plan for Wisconsin Public Service. Utilities
were given the choice between continuing under a modified one-for-one gas cost
recovery plan or switching to an incentive gas cost recovery mechanism. Implementation of the modified one-for-one gas cost recovery plan began in January 1999. This plan allows Wisconsin Public Service to pass changes in the cost of gas purchased from its suppliers on to system gas customers, subject to regulatory review.
Billings to Upper Peninsula Power's customers under the Michigan Public Service Commission's jurisdiction include base rate charges and a power supply cost recovery factor. Approximately 44% of Upper Peninsula Power's operating
expenses are power supply costs. Upper Peninsula Power receives Michigan Public Service Commission approval each year to recover projected power supply costs by establishment of power supply cost recovery factors. -87-
TheseAnnually the Michigan Public Service Commission reconciles these factors are subject to annual reconciliation to actual costs and permitpermits 100% recovery of allowed power supply costs. AnyUpper Peninsula Power defers any over or under recovery is
deferred on Upper Peninsula Power'sthe balance sheet. AdditionalThe deferrals are relieved with additional billings or refunds are made to relieve these deferrals.refunds.
Wisconsin Public Service and Upper Peninsula Power are required to provide service and grant credit to customers within their service territories. The two companies continually review their customers' credit-worthiness and obtain deposits or refund deposits accordingly. Wisconsin Public Service is precluded from discontinuing service to residential customers during certain periods of the year. Wisconsin Public
Service
At WPS Power Development, electric power revenues related to fixed-price contracts are recognized at the lower of amounts billable under the contract or an amount equal to volume of the capacity made available or the energy delivered during the period multiplied by the estimated average revenue per kilowatt-hour per the term of the contract.
Under floating-price contracts, electric power revenues are recognized when capacity is provided or energy is delivered.
WPS Energy Services accrues revenues in the month that energy is delivered and/or services are rendered.
(m) Gas in Storage--Average cost is used to value gas in storage used for non-trading activities. Gas in storage used for trading activities is recorded at fair market value. Approximately 67% of the total gas in storage at December 31, 2000 was recorded at fair market value. In 1999, none of the gas in storage was recorded at fair market value.
(n) Regulatory Assets and Upper Peninsula Power continually review their customers'
credit-worthiness and obtain deposits or refund deposits accordingly.
(o) REGULATORY ASSETS AND LIABILITIES--WisconsinLiabilities--Wisconsin Public Service and Upper Peninsula Power are subject to the provisions of Statement of Financial
Accounting Standards No. 71, "Accounting for the Effects of Certain Types of
Regulation."71. Regulatory assets represent probable future revenue associated with certain incurred costs. Revenue will be recovered from customers through the ratemaking process. Regulatory liabilities represent amounts that are refundable in future customer rates. The following regulatory assets and
liabilities were reflected in our Consolidated Balance Sheets as of
December 31:
======================================================================
WPS Resources (Thousands) 1999 1998
- ----------------------------------------------------------------------
Regulatory assets
Demand-side management expenditures $23,862 $23,860
Environmental remediation costs
(net of insurance recoveries) 30,942 30,285
Funding for enrichment facilities 4,579 5,056
Other 11,107 10,840
- ----------------------------------------------------------------------
Total $70,490 $70,041
======================================================================
Regulatory liabilities
Income tax related items $29,080 $29,617
Unrealized gain on decommissioning trust 19,129 16,397
Kewaunee deferred revenue 2,819 4,009
De Pere Energy Center deferred revenue 3,263 -
Deferred gain on emission allowance sales 3,705 3,304
Interest from tax refunds 3,730 -
Other 2,422 (2,853)
- ----------------------------------------------------------------------
Total $64,148 $50,474
======================================================================
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======================================================================
Wisconsin Public Service (Thousands) 1999 1998
- ----------------------------------------------------------------------
Regulatory assets
Demand-side management expenditures $23,862 $23,860
Environmental remediation costs
(net of insurance recoveries) 29,017 29,021
Funding for enrichment facilities 4,579 5,056
Other 10,711 10,398
- ----------------------------------------------------------------------
Total $68,169 $68,335
======================================================================
Regulatory liabilities
Income tax related items $21,660 $22,734
Unrealized gain on decommissioning trust 19,129 16,397
Kewaunee deferred revenue 2,819 4,009
De Pere Energy Center deferred revenue 3,263 -
Deferred gain on emission allowance sales 3,705 3,304
Interest from tax refunds 3,730 -
Other 2,422 (2,853)
- ----------------------------------------------------------------------
Total $56,728 $43,591
======================================================================
As of December 31, 1999, most of Wisconsin Public Service's regulatory
assets are being recovered through rates charged to customers over periods
ranging from one to ten years. Recovery periods for Upper Peninsula Power's
regulatory assets are up to 35 years. Carrying costs for all of
Wisconsin Public Service's regulatory assets are being recovered except for
those associated with environmental costs. No carrying costs are being
recovered for Upper Peninsula Power's regulatory assets in 1999. Starting in
2000, Upper Peninsula Power is permitted to recover carrying costs on
environmental regulatory assets. Based on prior and current rate treatment
for such costs, we believe it is probable that Wisconsin Public Service and
Upper Peninsula Power will continue to recover from customers the regulatory
assets described above.
See Notes 11 and 12 for specific information on pension and income tax
related regulatory liabilities. See Note 13 for information on environmental
remediation deferred costs.
(p) INVESTMENTS AND OTHER ASSETS--Investments include Wisconsin Public
Service's ownership interests in Wisconsin River Power Company and Wisconsin
Valley Improvement Company. Income related to these investments is included
in other income and deductions using the equity method of accounting. Other
assets include operating deposits for jointly-owned plants, the cash surrender
value of life insurance policies, the long-term portion of energy conservation
loans to customers, and the decommissioning trust investments designated for
payment of income taxes.
(q) STOCK OPTIONS--Beginning in 1999, we issued
(o) Stock Options--We issue options under our stock option plans. Weplans and account for these plansthem using the intrinsic value based method described in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."Employees" (Opinion 25). The intrinsic value based method only records compensation expense for the excess of the quoted market price of the stock at the measurement date over the amount an employee must pay to acquire the stock. See Note 8
(p) Investments and Other Assets--WPS Resources follows cost, equity, and consolidation methods of accounting for its investments. Unless circumstances are present that lead to a different conclusion, the following criteria are used to determine which method of accounting is applied. The cost method of accounting is used for investments where WPS Resources owns less than 20% of the voting stock of the company, unless other evidence indicates we have significant influence over the operating and financial policies of the investee. If more information onthan 20% of the voting stock is owned, we use the equity method of accounting. This decision is made presuming we have significant influence. When we own 50% or more of the voting stock, the subsidiary is consolidated into our stock option plans.
(r) RECLASSIFICATIONS--Certainfinancial statements, unless our control is temporary. All significant intercompany transactions and accounts are eliminated. If a minority owner's equity is reduced to zero, it is our policy to record 100% of the subsidiary's losses until the minority owner makes capital contributions or commitments to fund its share of the operating costs.
(q) Reclassifications--We reclassified certain prior year financial statement amounts have been reclassified to conform to current year presentation.
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(s) RETIREMENT OF DEBT--Historically,
(r) Retirement of Debt--Amortization of gains or losses resulting from the settlement of long-term utility debt obligations have been deferred and
amortized concurrentoccurred concurrently with rate recovery as required by regulators.
NOTE 2--JOINTLY-OWNED UTILITY FACILITIES
Information regarding Wisconsin Public Service's share of major jointly-owned electric-generating facilities in service at December 31, 19992000 is set forth below:
(Thousands, except for percentages) | West | Columbia | Edgewater | Kewaunee Nuclear |
Ownership | 68.0% | 31.8% | 31.8% | 41.2% |
Plant capacity (Megawatts) | 77.0 | 322.6 | 105.8 | 205.2 |
Utility plant in service | $17,497 | $118,663 | $22,695 | $135,861 |
Accumulated depreciation | $ 5,169 | $ 73,141 | $14,697 | $115,131 |
In-service date | 1993 | 1975 and 1978 | 1969 | 1974 |
Wisconsin Public Service's share of direct expenses for these plants is included in the corresponding operating expenses in the consolidated statements of income. Wisconsin Public Service has supplied its own financing for all jointly-owned projects.
We have an agreement with Madison Gas and Electric Company, which is
contingent upon steam generator replacement, that Wisconsin Public Service
will acquire Madison Gas and Electric's 17.8% share
Our ownership of the Kewaunee plant.
This will increase Wisconsin Public Service's ownership in the Kewaunee plant to 59.0%.could change based on commitments we have made. See Note 13 for additional information regarding the Kewaunee
plant.
information.
NOTE 3--CAPITAL LEASE
In June 1999, Phase I of a 25-year power purchase contract became
effective with the De Pere Energy Center, LLC.LLC became effective. We have accounted for the contract as a capital lease. In Phase I, an initial asset and corresponding obligation were recorded at $74.1 million. The asset and obligation represent the present value of minimum lease payments. Excluded from the payments are executory costs such as insurance, maintenance, and taxes. When the contract expires in 2024, Wisconsin Public Service may renew the contract for two additional five-year periods with proper notice. TheWe are amortizing the leased asset is being
amortized on a straight-line basis over the original 25-year term of the contract. The following is a schedule of future minimum lease payments, excluding executory costs, under the De Pere Energy Center LLC capital lease:
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=============================================================
Year ending December 31 (Thousands)
-------------------------------------------------------------
2000 $ 4,869
2001 5,048
2002 5,234
2003 5,426
2004 5,625
Later years 108,380
-------------------------------------------------------------
Net minimum lease payments 134,582
Less: Amount representing interest (60,578)
-------------------------------------------------------------
Present value of net minimum lease payments $ 74,004
=============================================================
Year ending December 31 (Thousands) | |
2001 | $ 5,048 |
2002 | 5,234 |
2003 | 5,426 |
2004 | 5,625 |
2005 | 5,831 |
Later years | 102,550 |
Net minimum lease payments | 129,714 |
Less: Amount representing interest | (56,129) |
Present value of net minimum lease payments | $ 73,585 |
NOTE 4--SHORT-TERM DEBT AND LINES OF CREDIT
To provide short-term borrowing flexibility and security for commercial paper outstanding, WPS Resources and its subsidiaries maintain bank lines of credit. These lines of credit require a fee.
The information in the table below relates to short-term debt and lines of credit for the years indicated:
(Thousands, except for percentages) | 2000 | 1999 | 1998 |
As of end of year | |||
Commercial paper outstanding | $119,557 | $ 79,855 | $ 47,590 |
Average discount rate on outstanding commercial paper | 6.63% | 6.55% | 4.84% |
Short-term notes payable outstanding | $ 10,000 | $ 10,403 | $ 12,703 |
Average interest rate on short-term notes payable | 6.73% | 8.10% | 5.88% |
Available (unused) lines of credit | $132,000 | $127,000 | $ 62,102 |
For the year | |||
Maximum amount of short-term debt | $139,548 | $218,545 | $102,033 |
Average amount of short-term debt | $ 65,558 | $ 68,620 | $ 50,939 |
Average interest rate on short-term debt | 6.39% | 5.34% | 5.93% |
NOTE 5--LONG-TERM DEBT
In November 1999, we issued $150.0 million of 7.00% unsecured senior
notes due in 2009.
At Wisconsin Public Service and Upper Peninsula Power,our utility subsidiaries, plant assets secure first mortgage bonds. In December 1998, Wisconsin Public Service issued $50.0 million of 6.08% senior notes due in 2028 secured by a pledge of first mortgage bonds. The 1998 notes become unsecured if Wisconsin Public Service retires all of its outstanding first mortgage bonds.
WPS Resources isand Wisconsin Public Service are not required to make sinking fund payments on our
outstanding debt. Wisconsin Public Service also has no sinking fund payment
requirements. Upper Peninsula Power, however, is required to make bond sinking fund payments for its outstanding first mortgage bonds.
PDI
A schedule of all debt payments, including bond maturities and excluding capital lease payments, for WPS Resources is as follows:
Year ending December 31 (Thousands) | |
2001 | $ 7,681 |
2002 | 55,834 |
2003 | 82,118 |
2004 | 15,104 |
2005 | 16,403 |
Future years | 418,780 |
Total payments | $595,920 |
WPS New England Generation, Inc. and PDIWPS Canada Generation, Inc., subsidiaries of WPS Power Development, make semiannual installment payments on a $24.0 million nonrecourse term loan obtained in 1999 for financing the purchase of Maine Public Service's
generating assets. A schedulegeneration assets in Maine. The assets purchased secure the loan.
In April 2000, Sunbury Generation, LLC, an indirect subsidiary of all debtWPS Power Development, obtained $83.7 million of nonrecourse financing that is secured by the Sunbury generation plant. Quarterly payments including bond maturities
is as follows:
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==================================================
Year ending December 31 (Thousands)
--------------------------------------------------
2000 $ 14,538
2001 1,695
2002 52,863
2003 68,134
2004 3,406
Future years 372,563
--------------------------------------------------
Total payments $513,199
==================================================will be made in relation to this financing.
As of December 31, 1999, $8.0 million has been drawn against2000, WPS Power Development'sDevelopment drew $11.0 million against its revolving credit note of $11.5$12.5 million, which is secured by the assets of the Stoneman plant. An additional $3.3 million, which is to be
borrowed in the year 2000, has been committed against this note. The note, which is guaranteed by WPS Resources, is due in 2000 or when the plant is
converted to a gas-fired combined cycle facility.
2003.
NOTE 6--COMPANY-OBLIGATED MANDATORILY REDEEMABLE TRUST PREFERRED SECURITIES
OF SUBSIDIARY TRUST
On July 30, 1998, WPSR Capital Trust I, a Delaware business trust, issued $50.0 million of trust preferred securities to the public. The Trust is a Delaware business trust. WPS Resources owns all of the outstanding trust common securities of the Trust, and the only asset of the Trust is $51.5 million of subordinated debentures that we issued. The debentures are due on June 30, 2038 and bear interest at 7.0%7% per year. The terms and interest payments on the debentures correspond to the terms and distributions on the trust preferred securities. We have consolidated the preferred securities of the Trust into our financial statements. We reflect the interest payments on the debentures as "Distributions - preferred securities of subsidiary trust." These payments are tax deductible by WPS Resources.
We may defer interest payments on the debentures for up to 20 consecutive quarters. This would causerequire the deferral of distributions on the trust preferred securities as well. If we would defer interest payments, interest and distributions would continue to accrue. We would also accrue compounding interest on the deferred amounts. We may redeem all or part of the debentures after July 30, 2003. This would require the Trust to redeem an equal amount of trust securities at face value plus any accrued interest and unpaid distributions. We entered into a limited guarantee of payment of distributions, redemption payments, and liquidation payments with respect to the trust preferred securities. This guarantee, together with our obligations under the debentures, and under other related documents, provides a full and unconditional guarantee by us of amounts due on the outstanding trust preferred securities.
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NOTE 7--COMMON EQUITY
Effective December 1999,
During 2000, we commenced purchasingpurchased common stock on the open market to meet annual requirements of the Stock Investment Plan. From
January 1999 through November 1999, we issued new stock to satisfy shareholder
and employee purchase requirements under our Stock Investment Plan. We also purchasepurchased stock on the open market in connection with our stock-based employee benefit plans. Effective January 2001, we began issuing new stock for our Stock Investment Plan and for some of our stock-based employee benefit plans.
In December 1996, we adopted a Shareholder Rights Plan. The plan is designed to enhance the ability of the Board of Directors to protect shareholders and the company if efforts are made to gain control of our company in a manner that is not in our best interests or the best interests of our shareholders. The plan gives our existing shareholders, under certain circumstances, the right to purchase stock at a discounted price. The rights expire on December 11, 2006.
At December 31, 1999,2000, we had $335.4$347.6 million of retained earnings available for dividends. Wisconsin Public Service
Earnings per share is restrictedcomputed by a
Public Service Commission of Wisconsin order to paying normal common stock
dividends of no more than 109.0% ofdividing net income available for the previous year's common stock dividend
without the Public Service Commission of Wisconsin's approval. Special
dividends may be declared in order to maintain utility common equity levels
consistent with those allowedperiod by the regulators. Wisconsin law prohibits
Wisconsin Public Service from making loans to or guaranteeing obligationsweighted average number of WPS Resources or our other subsidiaries.
Upper Peninsula Power's indentures relating to first mortgage bonds
contain certain limitations on the payment of cash dividends on common stock.
Under the most restrictive of these provisions, approximately $6.4 million of
consolidated retained earnings were available at December 31, 1999, for the
paymentshares of common stock cash dividendsoutstanding during the period. Diluted earnings per share is computed by Upper Peninsula Power.
During 1999, we made equity infusions of $60.0 million to
Wisconsin Public Service. Wisconsin Public Service paid special common
dividends of $25.0 million to WPS Resources in 1999. The equity infusions and
special dividends allowed Wisconsin Public Service's average equity
capitalization ratiodividing net income available for ratemaking to remain at about its target level of
54.0% as establishedthe period by the Public Service Commissionweighted average number of Wisconsin in its most
recent rate order.
shares of common stock outstanding during the period adjusted for the exercise and/or conversion of all potentially dilutive securities. Such dilutive items include in-the-money stock options and deferred compensation plan shares. The calculation of diluted earnings per share for the years shown excludes deferred compensation plan shares that had an anti-dilutive effect. The following table reconciles the computation of basic and diluted earnings per share:
Reconciliation of Earnings Per Share | |||
2000 | 1999 | 1998 | |
Net income | $66,993 | $59,565 | $46,631 |
Basic weighted average shares | 26,463 | 26,644 | 26,511 |
Incremental issuable shares | 11 | - | 10 |
Diluted weighted average shares | 26,474 | 26,644 | 26,521 |
Basic earnings per share | $2.53 | $2.24 | $1.76 |
Diluted earnings per share | $2.53 | $2.24 | $1.76 |
NOTE 8--STOCK OPTION PLANS
In 1999, shareholders approved the WPS Resources Corporation 1999 Stock Option Plan for certain management personnel. In December 1999, the Board of Directors approved the WPS Resources Corporation 1999 Non-Employee Directors Stock Option Plan. Accounting Principles Board Opinion No. 25 "Accounting for
Stock Issued to Employees," and related interpretations are used to account for these plans. Accordingly, no compensation costs have been recognized for these plans in 2000 or 1999. Had compensation cost been determined consistent with Financial Accounting Standards Board Statement of Financial Accounting Standards No. 123 "Accounting for Stock Based Compensation," net income and earnings per share would have been reduced to the pro forma amounts indicated below:
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====================================================================
(Thousands) 1999 1998 1997
- --------------------------------------------------------------------
Net income
As reported $59,565 $46,631 $55,809
Pro forma 59,450 46,631 55,809
Basic and diluted earnings per share
As reported $2.24 $1.76 $2.10
Pro forma 2.23 1.76 2.10
====================================================================
(Thousands, except per share amounts) 2000 1999 1998 Net income As reported $66,993 $59,565 $46,631 Pro forma 66,830 56,450 46,631 Basic earnings per share As reported $2.53 $2.24 $1.76 Pro forma 2.53 2.23 1.76 Diluted earnings per share As reported $2.53 $2.24 $1.76 Pro forma 2.52 2.23 1.76
Under the provisions of ourthe WPS Resources Corporation 1999 Stock Option Plan (Employee Plan), the number of options cannot be
granted for more than an aggregate of 1,500,000 sharesmay not exceed 1.5 million and no single employee can be granted options for more than 400,0000.4 million shares during any five-year period. TheOptions are granted by the Compensation and Nominating Committee of the Board of Directors and may grant optionsbe granted at any time. No options may be granted after February 10, 2004, under this plan. All options have a ten-year life. The exercise price of each option is equal to the fair market value of the stock on the date the option was granted. Options were granted on May 6, 1999, have anMarch 13, 2000, and December 14, 2000 having exercise priceprices of $29.875.$29.875, $23.1875, and $34.75, respectively. One-fourth of the options granted May 6, 1999will become vested and exercisable each year following the year of grant on February 11 of eachthe anniversary date of the first four
years beginning February 11, 2000.grant.
Under the provisions of ourthe WPS Resources Corporation 1999 Non-Employee Directors Stock Option Plan (Director Plan), the aggregate number of shares for which options may be granted under the plan cannotmay not exceed 100,000. Options are granted at the discretion of the
Compensation Committee of the Board of Directors. No options may be granted under this plan after December 31, 2008. All options have a ten-year life, but may not be exercised until one year after the date of grant. Options granted under this plan are immediately vested. The exercise price of each option is equal to the fair market value of the stock on the date the option
wasoptions were granted. Options were granted on December 9, 1999 and February 10, 2000, with an exercise priceprices of $25.4375.$25.4375 and $25.6875, respectively.
The number of shares subject to each option plan and each outstanding option, and option exercise prices are subject to adjustment in the event of any stock split, stock dividend, or other transaction affecting our outstanding common stock.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model assuming:
=======================================================================
WPS Resources WPS Resources 1999
1999 Non-Employee Directors
Stock Option Plan Stock Option Plan
- -----------------------------------------------------------------------
Annual dividend yield 6.63% 7.94%
Expected volatility 14.00% 14.90%
Risk-free interest rate 5.52% 6.14%
Expected life (in years) 10 10
=======================================================================
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The
WPS Resources | WPS Resources 2000 | |
Annual dividend yield | ||
May 6, 1999 | 6.63% | |
December 31, 1999 | 7.94% | |
March 13, 2000 | 8.71% | |
December 14, 2000 | 5.93% | |
Expected volatility | ||
May 6, 1999 | 14.00% | |
December 31, 1999 | 14.90% | |
March 13, 2000 | 15.50% | |
December 14, 2000 | 20.40% | |
Risk-free interest rate | ||
May 6, 1999 | 5.52% | |
December 31, 1999 | 6.14% | |
March 13, 2000 | 6.36% | |
December 14, 2000 | 5.23% | |
Expected life (in years) | 10 | 10 |
A summary of the status of the stock option plans as of December 31, 2000 is presented below:
Options |
| Weighted-Average Exercise Price |
Options outstanding at beginning of year | ||
Employee plan | 478,000 | $29.8750 |
Director plan | 21,000 | 25.4375 |
Granted | ||
Employee plan | 244,416 | 32.9997 |
Director plan | 3,000 | 25.6875 |
Exercised | - | - |
Forfeited | - | - |
Outstanding at end of year | ||
Employee plan | 722,416 | 30.9322 |
Director plan | 24,000 | 25.4688 |
Options exercisable at year-end | ||
Employee plan | 119,500 | 29.8750 |
Director plan | 21,000 | 25.4375 |
Weighted-average fair value of options granted during the year | ||
Employee plan |
| |
A summary of the status of the stock option plans as of December 31, 1999 is presented below:
==========================================================================
Weighted-Average
Options Shares Exercise Price
- --------------------------------------------------------------------------
Outstanding
Options |
| Weighted-Average Exercise Price |
Options outstanding at beginning of year | - | $ - |
Granted | ||
Employee plan | 478,000 | 29.8750 |
Director plan | 21,000 | 25.4375 |
Exercised | - | - |
Forfeited | - | - |
Outstanding at end of year | ||
Employee plan | 478,000 | 29.8750 |
Director plan | 21,000 | 25.4375 |
Options exercisable at year-end | - | - |
Weighted-average fair value of options granted during the year | ||
Employee plan |
| |
The 722,416 options outstanding for the Employee Plan have exercise prices between $23.1875 and $34.7500 and are summarized below:
Options Outstanding | |||
Exercise | Options outstanding at December 31, 2000 | Weighted average exercise price | Weighted average remaining contractual life (in years) |
$23.1875 | 37,000 | $23.1875 | 9 |
29.8750 | 478,000 | 29.8750 | 9 |
34.7500 | 207,416 | 34.7500 | 10 |
The 119,500 stock options exercisable under the Employee Plan all have an exercise price of $29.8750 and a remaining life of 9 years.
The Director Plan has 24,000 options outstanding at beginningyear-end. All options have an exercise price of year - -
Granted
Employee plan 478,000 $29.8750
Director planapproximately $25.50 with a remaining contractual life of approximately 9 years. A total of 21,000 $25.4375
Exercised - -
Forfeited - -
Outstanding at end of year
Employee plan 478,000 $29.8750
Director plan 21,000 $25.4375
Optionsthese options are exercisable at year-end, - -
- --------------------------------------------------------------------------
Weighted-average fair valuewith an exercise price of options granted during the year
Employee plan $2.04
Directors plan $1.38
==========================================================================
$25.4375 and a remaining contractual life of 9 years.
NOTE 9--FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate such value:
Cash, Short-Term Investments, Energy Conservation Loans, Notes Payable, and Outstanding Commercial Paper: The carrying amount approximates fair value due to the short maturity of those investments and obligations.
Nuclear Decommissioning Trusts: The value of Wisconsin Public Service's nuclear decommissioning trust investments is recorded at market value.value, net of taxes payable on unrealized gains and losses.
Long-Term Debt, Preferred Stock, and Employee Stock Ownership Plan Loan Guarantees: The fair value of Wisconsin Public Service's long-term debt, preferred stock, and Employee Stock Ownership Plan loan guarantees isare estimated based on the quoted market price for the same or similar issues or on the current rates offered to Wisconsin Public ServiceWPS Resources for debt of the same remaining maturity.
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The estimated fair values of our financial instruments as of December 31 were:
(Thousands) | 2000 | 1999 | ||
Carrying Amount | Fair Value | Carrying Amount | Fair Value | |
Cash and cash equivalents | $ 2,789 | $ 12,789 | $ 10,547 | $ 10,547 |
Energy conservation loans | 3,509 | 3,509 | 5,198 | 5,198 |
Nuclear decommissioning trusts - utility plant | 207,224 | 207,224 | 198,052 | 198,052 |
Nuclear decommissioning trusts - other assets | 18,338 | 18,338 | 19,129 | 19,129 |
Notes payable | 10,000 | 10,000 | 10,403 | 10,403 |
Commercial paper | 119,557 | 119,557 | 79,855 | 79,855 |
Employee Stock Ownership Plan loan guarantees | - | - | 2,224 | 2,249 |
Trust preferred securities | 50,000 | 49,000 | 50,000 | 40,260 |
Long-term debt | 595,920 | 601,912 | 513,199 | 497,369 |
Preferred stock | 51,168 | 41,902 | 51,193 | 47,881 |
Electric and gas commodity instruments | 16,987 | 16,987 | (692) | 1,265 |
NOTE 10--PRICE RISK MANAGEMENT ACTIVITIES
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." Statement of Financial Accounting Standards No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities" amended this statement in June 15, 2000. WPS Resources adopted the statements as of January 1, 2001. Statement No. 133 requires that every derivative instrument be recorded on the balance sheet as either an asset or liability measured at its fair value and that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met.
WPS Resources has concluded that at its utility subsidiaries and WPS Power Development the majority of its contracts for the purchase, sale, and storage of natural gas, electricity, coal, and nuclear fuel do not meet the definition of a derivative. Therefore, the majority of such contracts at January 1, 2001 are not subject to the accounting requirements of the new statement. Wisconsin Public Service has entered into a limited number of commodity contracts to service its customers that meet the definition of a derivative under Statement No. 133. Most of these contracts are gas purchase agreements with minimal fixed commodity price components. Management believes any gains or losses resulting from the eventual settlement of the gas purchase agreements will be collected from or refunded to customers under our utilities' tariffs with the Public Service Commission of Wisconsin and Michigan Public Service Commission. The derivative amounts to be recorded as a result of these contracts will be offset with a corresponding regulatory asset and liability pursuant to Statement No. 71. A limited number of other financial derivative instruments are used to mitigate commodity price risk related to fuel oil held in inventory. WPS Resources has designated these instruments as fair value hedges of the inventory. Future changes in the fair market values of these derivatives will be recorded directly in earnings with offsetting changes in the value of the inventory also recorded directly in earnings. As of January 1, 2001, we have recorded a derivative asset and a regulatory liability of approximately $17 million related to our utility subsidiaries. The cumulative effect on income was not significant.
WPS Energy Services uses derivative financial and commodity instruments to reduce market risk associated with changing prices of natural gas and electricity sold at firm prices to customers. WPS Energy Services also utilizes derivatives to manage market risk associated with anticipated energy purchases as well as trading activities. Derivatives may include futures and forward contracts, price swap agreements, and call and put options. Gains and losses on derivatives are recognized immediatelyAs a result of changes in earnings
when it is no longer probablestrategic focus that the related forecasted transaction will
occur. Each accounting period,resulted in a shift in customer mix, WPS Energy Services records gains or lossesin applying Emerging Issues Task Force Issue 98-10, "Accounting for Contracts Involved in Energy Trading and Risk Management Activities" (Issue 98-10) concluded in the first quarter of 2000 that all of its activities should be classified as trading activities. Issue 98-10 requires energy trading contracts to be recorded at fair value on the balance sheet, with changes in marketfair value of trading derivativesincluded in other income.earnings. Because WPS Energy Services recorded netmarks to market its energy trading gainscontracts in accordance with Issue 98-10 and does not anticipate designating any derivative contracts as hedges for accounting purposes, the adoption of $0.1 million in 1999 and net trading
losses of $6.1 million in 1998.
At December 31, 1999,Statement No. 133 is not expected to have a material impact at WPS Energy Services had outstanding 11.4 million
notional dekatherms of natural gas under futures and option agreements and
5.9 million notional dekatherms of natural gas under basis swap agreements in
order to manage market risk. These financial instruments expire at various
times through October 2001. WPS Energy Services has gas sales commitments
through October 2000 with a range of sale prices from $2.06 to $3.09 per
dekatherm and a range of associated gas purchase costs of $2.05 to $3.00 per
dekatherm.
At December 31, 1999, the fair value of trading instruments included
assets of $7.5 million and liabilities of $6.8 million. Virtually all trading
activities in 1999 and 1998 involved natural gas derivatives, except for a
small amount of electric trading transactions. At December 31, 1999,
WPS Energy Services had outstanding 1.4 million notional dekatherms of natural
gas under futures and option agreements and 1.7 million notional dekatherms of
natural gas under basis swap agreements for trading purposes.
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NOTE 11--EMPLOYEE BENEFIT PLANS
WPS Resources and our subsidiaries havehas non-contributory retirement plans covering substantially all employees under which the company may make annual contributions
may be made to an irrevocable trusttrust. We established the plans to provide retired employees, with a monthly payment ifwho meet conditions relating to age and length of service, have been met. The plans are administered and maintained bywith a monthly payment. Wisconsin Public Service.Service administers and maintains the plans. These plans are fully funded and no contributions were made to them in 2000, 1999, 1998, or 1997.1998.
WPS Resources and our subsidiaries also currently offeroffers medical, dental, and life insurance benefits to employees retirees, and their dependents. The
expensesWe expense these items for active employees are expensed as incurred. We fund these
benefits for retirees through irrevocable trusts as allowed for income tax purposes. The
funded amounts at Wisconsin Public Service and Upper Peninsula Power our
utility subsidiaries, have been expensed and recovered through customer rates.
Funded amounts associated with WPS Resources and all otherrates the net periodic benefit cost. Our nonregulated subsidiaries have been expensed but are not recovered through customer rates.funded amounts. Our non-administrative plan is a collectively bargained plan and, therefore, is tax exempt. The investments in the trust covering administrative employees are subject to federal unrelated business income taxes at a 39.6% tax rate.
All pension costs and postretirement plan costs are accounted for under StatementStatements of Financial Accounting Standards Nos. 87 and 106.106, "Employers' Accounting for Pensions" and "Employers' Accounting for Postretirement Benefits Other Than Pensions," respectively. The standards require the company to accrue the cost of these benefits to be accrued as expense over the period in which the employee renders service. The transition obligation for current and future retirees is recognized over 20 years beginning in 1993.
The following tables provide a reconciliation of the changes in the plan's benefit obligations and fair value of assets over the three one-year periods ending December 31, 2000, 1999, 1998, and 1997,1998, and a statement of the funded status as of December 31 offor each year:
(Thousands) | 2000 | 1999 | 1998 |
Reconciliation of benefit obligation - pension | |||
Obligation at January 1 | $396,651 | $399,364 | $350,669 |
Service cost | 10,216 | 10,904 | 9,014 |
Interest cost | 31,492 | 27,524 | 25,264 |
Plan amendments | 56,552 | 3,956 | 5,762 |
Actuarial (gain) loss | 2,224 | (31,515) | 26,085 |
Acquisitions | - | 4,863 | - |
Benefit payments | (19,429) | (18,445) | (17,430) |
Curtailments | 7,182 | - | - |
Obligation at December 31 | $484,888 | $396,651 | $399,364 |
Reconciliation of fair value of plan assets - pension | |||
Fair value of plan assets at January 1 | $654,251 | $610,483 | $537,756 |
Actual return on plan assets | 41,243 | 57,984 | 89,618 |
Employer contributions | - | - | 539 |
Acquisitions | - | 4,229 | - |
Benefit payments | (19,429) | (18,445) | (17,430) |
Fair value of plan assets at December 31 | $676,065 | $654,251 | $610,483 |
Funded status at December 31 | $191,177 | $257,599 | $211,119 |
Unrecognized transition (asset) obligation | (6,097) | (9,890) | (13,467) |
Unrecognized prior-service cost | 64,377 | 21,242 | 19,336 |
Unrecognized (gain) loss | (186,465) | (204,057) | (156,972) |
Net prepaid benefit cost | $ 62,992 | $ 64,894 | $ 60,016 |
(Thousands) | 2000 | 1999 | 1998 |
Reconciliation of benefit obligation - other | |||
Obligation at January 1 | $135,211 | $138,815 | $127,705 |
Service cost | 2,757 | 4,632 | 3,874 |
Interest cost | 7,769 | 9,410 | 9,126 |
Plan amendments | (16,755) | - | - |
Actuarial (gain) loss | (19,026) | (13,835) | 2,599 |
Acquisitions adjustments | (1,323) | 2,174 | - |
Benefit payments | (6,033) | (5,985) | (4,489) |
Obligation at December 31 | $102,600 | $135,211 | $138,815 |
Reconciliation of fair value of plan assets - other | |||
Fair value of plan assets at January 1 | $149,742 | $139,841 | $121,930 |
Actual return on plan assets | 7,872 | 15,226 | 21,161 |
Employer contributions | 715 | 660 | 1,239 |
Benefit payments | (6,033) | (5,985) | (4,489) |
Fair value of plan assets at December 31 | $152,296 | $149,742 | $139,841 |
Funded status at December 31 | $ 49,696 | $ 14,530 | $ 1,026 |
Unrecognized transition (asset) obligation | 15,724 | 36,605 | 39,434 |
Unrecognized prior-service cost | (14,107) | 3,935 | 4,259 |
Unrecognized (gain) loss | (96,906) | (104,989) | (87,011) |
Net accrued benefit liability | $(45,593) | $(49,919) | $(42,292) |
We reduced the net amounts recognized for 1997 and 1998 pension benefits have been
reducedto account for an additional unrecognized regulatory liability related to pension costs. The entire regulatory liability was recognized by year-end 1998.
The following table provides the amounts recognized in the statement of
financial position as of December 31 of each year:
The following table provides the components of net periodic benefit cost for the plans for fiscal years 2000, 1999, 1998, and 1997:
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=============================================================================================
(Thousands) 1999 1998 1997
- ---------------------------------------------------------------------------------------------
Net periodic benefit cost - pension
- ---------------------------------------------------------------------------------------------
Service cost $ 10,904 $ 9,014 $ 7,019
Interest cost 27,524 25,264 22,919
Expected return on plan assets (42,414) (38,282) (33,883)
Amortization of transition (asset) obligation (3,576) (3,576) (3,576)
Amortization of prior-service cost 2,050 1,950 921
Amortization of net (gain) loss - (507) (781)
- ---------------------------------------------------------------------------------------------
Net periodic benefit cost $ (5,512) $ (6,137) $ (7,381)
Curtailment (gain) loss - - 1,088
- ---------------------------------------------------------------------------------------------
Net periodic benefit cost after curtailments $ (5,512) $ (6,137) $ (6,293)
=============================================================================================
Net periodic benefit cost - other
- ---------------------------------------------------------------------------------------------
Service cost $ 4,632 $ 3,874 $ 3,500
Interest cost 9,410 9,126 9,496
Expected return on plan assets (8,302) (7,356) (6,378)
Amortization of transition (asset) obligation 2,828 2,852 3,010
Amortization of prior-service cost 324 324 324
Amortization of net (gain) loss (2,780) (2,692) (2,196)
- ---------------------------------------------------------------------------------------------
Net periodic benefit cost $ 6,112 $ 6,128 $ 7,756
Curtailment (gain) loss - - 356
- ---------------------------------------------------------------------------------------------
Net periodic benefit cost after curtailments $ 6,112 $ 6,128 $ 8,112
=============================================================================================
Under1998:
(Thousands) | 2000 | 1999 | 1998 |
Net periodic benefit cost - pension | |||
Service cost | $ 10,216 | $ 10,904 | $ 9,014 |
Interest cost | 31,492 | 27,524 | 25,264 |
Expected return on plan assets | (46,331) | (42,414) | (38,282) |
Amortization of transition asset | (3,576) | (3,576) | (3,576) |
Amortization of prior-service cost | 4,661 | 2,050 | 1,950 |
Amortization of net loss | (2,688) | - | (507) |
Net periodic benefit cost | $(6,226) | $(5,512) | $(6,137) |
Curtailment loss | 8,756 | - | - |
Regulatory asset offset | (8,121) | - | - |
Net periodic benefit cost after curtailments | $(5,591) | $(5,512) | $(6,137) |
Net periodic benefit cost - other | |||
Service cost | $ 2,757 | $ 4,632 | $ 3,874 |
Interest cost | 7,769 | 9,410 | 9,126 |
Expected return on plan assets | (9,289) | (8,302) | (7,356) |
Amortization of transition obligation | 1,804 | 2,828 | 2,852 |
Amortization of prior-service cost | (700) | 324 | 324 |
Amortization of net gain | (4,646) | (2,780) | (2,692) |
Net periodic benefit cost | $(2,305) | $ 6,112 | $ 6,128 |
During 2000, WPS Resources made substantial changes to the administrative employees' portion of the pension and postretirement benefit plans. Effective January 1, 2001, the administrative employees' pension plan was changed to a contractpension equity plan with Wisconsin Electric Powera lump sum distribution option for all future retirees. Additionally, all future administrative retirees will no longer be given subsidized postretirement medical and dental coverage. Due to employees who waited until 2001 to retire to take advantage of the new plan benefits and various reorganizations including the formation of Nuclear Management Company, Upper Peninsula
Power had operated Wisconsin Electric Power's Presque Isle Power Planta significant number of employees are leaving our pension plan in Michigan since 1988. That contract terminated on December 31, 1997,early 2001. This requires curtailment accounting for the year 2000 under Statement of Financial Accounting Standards No. 88, "Employers' Accounting for Settlements and all
employees atCurtailments of Defined Benefit Pension Plans and for Termination Benefits." Most of the plant became employees of Wisconsin Electric Power. In 1997,
Upper Peninsula Power recognized a $1.1 million pension2000 curtailment loss andwas deferred as a $0.4 million other benefit plan curtailment loss from the termination of the
Presque Isle Power Plant operating agreement.regulatory asset.
The assumptions used in measuring WPS Resources' benefit obligation are shown in the following table:
2000 | 1999 | 1998 | |
Weighted average assumptions as of December 31 - pension | |||
Discount rate | 7.50% | 7.50% | 6.75% |
Expected return on plan assets | 8.75% | 8.75% | 8.75% |
Rate of compensation increase | 5.50% | 5.50% | 5.50% |
Weighted average assumptions as of December 31 - other | |||
Discount rate | 7.50% | 7.50% | 6.75% |
Expected return on plan assets | 8.75% | 8.75% | 8.75% |
For 2000, we assumed health care cost trend rates for 1999 are 8.0% for medical
and 7.5% for dental, bothof 7%, decreasing to 5.0%5% by the year 2006. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A 1.0%1% change in assumed health care cost trend rates would have the following effects:
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======================================================================
1.0% 1.0%
(Thousands) Increase Decrease
- ----------------------------------------------------------------------
Effect on total of service and interest
cost components of net periodic
postretirement health care benefit cost $ 2,721 $ (2,127)
Effect on the health care component
of the accumulated postretirement
benefit obligation $22,339 $(17,804)
======================================================================
(Thousands) | 1% Increase | 1% Decrease |
Effect on total of service and interest cost | $ 1,348 | $ (1,243) |
Effect on the health care component of the | $14,364 | $(11,682) |
Wisconsin Public Service has a leveragedan Employee Stock Ownership Plan and Trust that held 1,912,0021,868,859 shares of WPS Resources common stock (market value of approximately $48.0$68.8 million) at December 31, 1999. At that date, the2000. The Employee Stock Ownership Plan also had a loan guaranteed by Wisconsin Public Service and secured by common stock. Principalstock which was paid off in June of 2000. The company had been paying principal and interest on the loan are
to be paid using contributions from Wisconsin Public Service and dividends on our common stock held by the Employee Stock Ownership Plan. Shares in theThe Employee Stock Ownership Plan are allocated shares to participants as the loan iswas repaid. Tax benefits from dividends paid to the Employee Stock Ownership Plan are recognized as a reduction in Wisconsin Public Service's cost of providing service to customers. The Public Service Commission of Wisconsin has allowed Wisconsin Public Service to include in cost of service an additional employer contribution to the plan. The net effect of the tax benefits and of the employer contribution is an approximately equal sharing of the tax benefits of the program between customers and employees.
NOTE 12--INCOME TAXES
We account for income
WPS Resources is refunding to customers taxes using the liability method as prescribed by
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." Under the liability method, deferred income tax liabilities are
established for all temporary differences in the book and tax basis of assets
and liabilities based upon enacted tax laws and rates applicable to the
periods in which the taxes become payable. Taxes provided in prior years at rates greater than current rates are being refunded to customers prospectively as the temporary differences reverse. The net regulatory liability for these refunds totaled $21.7$25.2 million as of December 31, 1999.
As2000 and $29.1 million as of December 31, 1999, respectively.
We recognized a deferred tax asset of approximately $11.0 million for tax credits that will be carried forward to reduce the regular tax liability in future years. In addition, as of December 31, 2000 and 1998,1999, we had the following significant temporary differences that created deferred tax assets and liabilities:
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=========================================================================
(Thousands) 1999 1998
- -------------------------------------------------------------------------
Deferred tax assets
Plant related $ 72,077 $ 76,400
Customer advances 11,512 10,599
Capital losses/state net operating losses 3,368 3,652
Environmental cleanup 3,835 3,992
Employee benefits 32,486 28,021
Other 5,186 4,302
- -------------------------------------------------------------------------
Total $128,464 $126,966
=========================================================================
Deferred tax liabilities
Plant related $201,826 $210,418
Demand-side management expenditures 7,043 9,421
Employee benefits 26,442 24,009
Other 4,190 5,760
- -------------------------------------------------------------------------
Total $239,501 $249,608
=========================================================================
Net deferred tax liabilities $111,037 $122,642
=========================================================================
Previously
(Thousands) | 2000 | 1999 |
Deferred tax assets | ||
Plant related | $ 72,088 | $ 72,077 |
Customer advances | 12,423 | 11,512 |
Capital losses/state net operating losses | 6,520 | 3,368 |
Deferred tax credit carry forward | 11,016 | - |
Environmental cleanup | 3,337 | 3,835 |
Employee benefits | 35,007 | 32,486 |
Other | 1,677 | 5,131 |
Total | $142,068 | $128,409 |
Deferred tax liabilities | ||
Plant related | $200,251 | $201,826 |
Demand-side management expenditures | 4,688 | 7,043 |
Employee benefits | 31,288 | 26,442 |
Other | 6,304 | 4,190 |
Total | $242,531 | $239,501 |
Net deferred tax liabilities | $100,463 | $111,092 |
We are amortizing previously deferred investment tax credits are being amortized as a reduction in income tax expense over the life of the related utility plant. The components of incomeIncome tax expense are set forthdecreased in 2000 primarily due to increased utilization of federal tax credits. Income tax expense is comprised of the table below:
=================================================================================================
(Thousands,
except for percentages) 1999 1998 1997
- -------------------------------------------------------------------------------------------------
Rate Amount Rate Amount Rate Amount
- -------------------------------------------------------------------------------------------------
Statutory federal income tax 35.0% $32,346 35.0% $25,623 35.0% $31,525
State income taxes, net 5.0 4,611 5.9 4,344 5.4 4,862
Investment tax credit restored (1.9) (1,789) (2.6) (1,924) (2.2) (1,949)
Rate difference on reversal
of income tax temporary
differences (1.6) (1,461) (2.4) (1,761) (2.1) (1,888)
Dividends paid to
Employee Stock Ownership Plan (1.5) (1,349) (1.9) (1,414) (1.5) (1,381)
Section 29 and 45 credits (1.6) (1,520) (1.0) (751) (0.2) (220)
Other differences, net (1.2) (1,097) (1.0) (672) 0.2 157
- -------------------------------------------------------------------------------------------------
Effective income tax 32.2% $29,741 32.0% $23,445 34.6% $31,106
=================================================================================================
Current provision
Federal $33,788 $29,492 $31,444
State 9,436 7,779 7,527
- -------------------------------------------------------------------------------------------------
Total current provision 43,224 37,271 38,971
Deferred (benefit) provision (11,694) (11,902) (5,916)
Investment tax credit
restored, net (1,789) (1,924) (1,949)
- -------------------------------------------------------------------------------------------------
Total income tax expense $29,741 $23,445 $31,106
=================================================================================================
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(Thousands, except for percentages) | 2000 | 1999 | 1998 | |||
Rate | Amount | Rate | Amount | Rate | Amount | |
Statutory federal income tax | 35.0% | $26,637 | 35.0% | $32,346 | 35.0% | $25,623 |
State income taxes, net | 5.5 | 4,162 | 5.0 | 4,611 | 5.9 | 4,344 |
Investment tax credit restored | (2.3) | (1,785) | (1.9) | (1,789) | (2.6) | (1,924) |
| Rate difference on reversal of income tax temporary differences | (2.1) | (1,584) |
|
|
|
|
Dividends paid to | (0.9) | (648) |
|
|
|
|
Federal tax credits | (24.1) | (18,324) | (1.6) | (1,520) | (1.0) | (751) |
Other differences, net | (3.2) | (2,453) | (1.2) | (1,097) | (1.4) | (972) |
Effective income tax | 7.9% | $ 6,005 | 32.2% | $29,741 | 32.0% | $23,445 |
Current provision | ||||||
Federal | $ 5,938 | $33,788 | $29,492 | |||
State | 8,569 | 9,436 | 7,779 | |||
Total current provision | 14,507 | 43,224 | 37,271 | |||
Deferred benefit | (6,717) | (11,694) | (11,902) | |||
Investment tax credit restored, net | (1,785) | (1,789) | (1,924) | |||
Total income tax expense | $ 6,005 | $29,741 | $23,445 | |||
NOTE 13--COMMITMENTS AND CONTINGENCIES
COAL CONTRACTS
Coal Contracts
To ensure a reliable, low-cost supply of coal, Wisconsin Public Service entered into a long-term contract that has take-or-pay obligations totaling $94.2$89.2 million from 20002001 through 2016. The obligations are subject to force majeure provisions which provide Wisconsin Public Service other options if the specified coal does not meet emission limits whichthat may be mandated in future legislation. We believe that any amounts paid under the take-or-pay obligations described above would be considered costs of service subject to recovery in customer rates.
PURCHASED POWER
Purchased Power
Wisconsin Public Service has several take-or-pay contracts for either capacity or energy related to purchased power. These contracts total $68.0$87.2 million through April 2003. We expect to recover these costs in future customer rates.
LONG-TERM POWER SUPPLY
Long-Term Power Supply
In November 1995, Wisconsin Public Service signed a 25-year agreement to purchase power from De Pere Energy Center, LLC, (an affiliate of SkyGen Energy
LLC), an independent power producer, that built a cogeneration facility and is selling electrical power to Wisconsin Public Service. Phase I of the project went into operation in June of 1999 and is accounted for as a capital lease. The amount recorded as a part of utility plant was $74.1 million. This amount
will be depreciated over 25 years, the term of the contract. Phase II is currently projected to be operational within five years of the start of Phase I. IfWhen Phase II becomes operational, Wisconsin Public Service will record an additional utility plant asset of approximately $80.0 million will be recorded.
GAS COSTSmillion. See Note 3, Capital Lease, for more detail.
Natural Gas Costs
Wisconsin Public Service has natural gas supply and transportation contracts that require total estimated demand payments of $125.1$72.9 million through October 2008.
In April 1992, the Federal Energy Regulatory Commission issued
Order No. 636 which required natural gas interstate pipelines to restructure
their sales and transportation services. As a result,2010.
Wisconsin Public Service was obligated to pay for a portionwill acquire the natural gas supply and transportation contracts from Wisconsin Fuel and Light Company when the acquisition of ANR Pipeline Company's
transition costs through various Federal Energy Regulatory Commission approved
surcharges. Though there may be additional transition costs, which could be
significant, the amountWisconsin Fuel and timing of these costs are unknown at this time.Light is completed. We expect the acquisition to recover these costsbe completed in future customer rates since theApril of 2001. Because Wisconsin Public Service Commissionand Wisconsin Fuel and Light hold similar natural gas supply and transportation contracts, the acquisition of the Wisconsin Fuel and the MichiganLight contracts is expected to have no significant impact on Wisconsin Public Service
Commission have allowed such recovery to date.
NUCLEAR LIABILITYService's cost of natural gas.
Nuclear Liability
The Price Anderson Act ensures that funds will be available to pay for public liability claims arising out of a nuclear incident. This Act may require Wisconsin Public Service may be required to pay up to a maximum of $36.3 million per incident. The payments will not exceed $4.1 million per incident in a given calendar year. These amounts represent Wisconsin Public Service's 41.2% ownership in the Kewaunee plant.
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NUCLEAR PLANT OPERATION
After Wisconsin Public Service acquires Madison Gas and Electric's share of the Kewaunee plant, our ownership will be 59%; and thus our liabilities will increase accordingly. The maximum liability per incident will be $52.0 million with payments not to exceed $5.9 million per incident in a given calendar year.
Nuclear Plant Operation
On September 29, 1998, Wisconsin Public Service and Madison Gas and Electric entered into an agreement pursuant to which Wisconsin Public Service will acquire, at Madison Gas and Electric's book value on the date of acquisition, Madison Gas and Electric's 17.8% share of the Kewaunee plant including Madison Gas and Electric's decommissioning trust assets andheld in their qualified trust fund. Wisconsin Public Service will also assume Madison Gas and Electric's share of the decommissioning obligation.obligation to the extent such obligation may exceed the funds available within Madison Gas and Electric's nonqualified trust fund at the time of decommissioning. This agreement, the closing of which isremains contingent upon regulatoryNuclear Regulatory Commission approval and steam generator replacement scheduled for the fall of 2001, will result in Wisconsin Public Service's ownership interest in the Kewaunee plant increasing to 59.0%59%.
The net book value of Wisconsin Public Service's share of the Kewaunee plant at December 31, 19992000 is $28.2$52.5 million. In addition, the current cost of Wisconsin Public Service's share of the estimated costs to decommission the Kewaunee plant, assuming early retirement, exceeds the trust assets at December 31, 19992000 by $2.6$4.2 million. On January 3, 1997, the Public Service Commission of Wisconsin accepted Wisconsin Public Service's recommendation to accelerate recovery of the Wisconsin retail portion of both the current undepreciated plant balance and the unfunded decommissioning costs over a six-year period, 1997 through 2002. TheThis method of recovery ended on December 31, 2000, as a result of a recent Public Service Commission of Wisconsin depreciation rate order in Docket 6690-UR-112 authorizing new rates for 19992001. This rate order includes a change in methodology for recovery of the Kewaunee plant investment. Under the new rates, the investment after new
steam generators have been installed, estimated to be the fall of 2001. At
that time, the unrecovered basis of the Kewaunee plant, includingin the new steam generators will be recovered overusing the sum-of-the-years-digits depreciation method with an 8.5 year remaining life usingafter installation. The unrecovered plant investment at the sum-of-the-years depreciation method.
CLEAN AIR REGULATIONS
Wisconsin Public Service is in compliance with both the Phase I and
Phase II sulfur dioxide and nitrogen oxide emission limits established by the
Federal Clean Air Act Amendmentsend of 1990. We believe that all costs incurred
for additional compliance2000 will be recoverable in future customer rates.
Wisconsin Public Service is evaluating the installation ofrecovered over a baghouse at
its Weston Unit 3 plant. Currently, an electrostatic precipitator is used as
a pollution control device, but it is in need of replacement due to
degradation. A baghouse is an alternative pollution control device to an
electrostatic precipitator. Ifperiod ending 8.5 years after the installation of the baghouse proceeds, it
is estimated that it will cost $25.7 million.
In late Septembersteam generators using a straight-line remaining life depreciation methodology. Also under the 2001 rate order, the funding period for decommissioning was extended to the end of 1998, the United States Environmental Protection
Agency required certain states, including Wisconsin, to develop plans to
reduce the emission of nitrogen oxides from sources within the state by May of
2003. Compliance is required during the ozone season of May through
September. On a preliminary basis, 2010.
Transmission Assets
During 2000,Wisconsin Public Service projects
potential capital costs of between $62.5 million and $112.0 millioncommitted to comply
with possible future regulations. The annual operating and maintenance
expense associated with these possible future regulations are projectedtransfer all its transmission assets to range from $2.0 million to $6.0 million. The costs dependAmerican Transmission Company LLC. This transfer occurred on January 1, 2001 at the state-specific compliance method to be adopted in the future and the
effectivenessnet book value of the various technologies available for nitrogen oxide
emission control. Underassets. WPS Investments, LLC, a wholly-owned subsidiary of Wisconsin Public Service's current practice,Service, will hold the capital costs (as reflectedresulting investment in depreciation expenses)American Transmission Company and use the annual operating
costs are anticipatedequity method of accounting.
Clean Air Regulations
Early compliance with the federal Clean Air Act has generated surplus sulfur dioxide allowances. We will consider the sale of any allowances available in excess of our own needs. The Wisconsin Commission has ordered that profits from the sale of allowances be passed on to be recovered through future customer rates.customers.
On December 24, 1998, Wisconsin Public Service joined other parties in a petition challenging the Environmental Protection Agency's regulations that requirerequired Wisconsin to prepare and submit a nitrogen oxide implementation plan.
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courtUnited States Court of Appeals for the District of Columbia heard arguments on November 9, 1999. No decisionOn March 3, 2000, the Court held that the Environmental Protection Agency's nitrogen oxide state implementation plan was not appropriately issued to the State of Wisconsin and vacated the rule for the State of Wisconsin.
However, under another part of the Clean Air Act, the State of Wisconsin developed a nitrogen oxide reduction plan for Wisconsin's ozone non-attainment area in southern Wisconsin. The nitrogen oxide reductions begin in 2003 and are gradually increased through 2007. This plan affects Edgewater Unit 4. A compliance plan for this unit was started in 2000 and may include a combination of combustion optimization and emission trading at a cost of about $5 million. The state rule also seeks voluntary reductions from utility units outside the ozone non-attainment area, which may lead to additional expenditures for nitrogen oxide reductions at other units. Wisconsin Public Service is participating in voluntary efforts to reduce nitrogen oxide levels at the Columbia Energy Center. Wisconsin Public Service owns 31.8% of Columbia. The Public Service Commission of Wisconsin has yetapproved recovery of the costs associated with nitrogen oxide compliance.
Recent air quality modeling by the Wisconsin Department of Natural Resources revealed that Weston Units 1 and 2 contribute to a modeled deviation from the sulfur dioxide ambient air quality standard. Wisconsin Public Service and the Wisconsin Department of Natural Resources developed a plan to eliminate the model deviation by extending the existing stacks at Weston Units 1 and 2 by 55 feet and limiting the sulfur content of the fuel to 1.2 lb/mm Btu. The cost of the stack extension is about $0.86 million. The current and projected fuel meets the sulfur content limit. The Environmental Protection Agency is reviewing this plan.
On November 3, 1999, the Environmental Protection Agency announced that it was pursuing an enforcement initiative against seven utilities, or their subsidiaries, located in the Midwest and the South as well as the Tennessee Valley Authority. The enforcement initiative alleges that the utilities may have undertaken projects at certain coal-fired generation plants in violation of the Clean Air Act. The Environmental Protection Agency is seeking penalties and the installation of additional pollution control equipment.
As a continuation of this initiative, the Environmental Protection Agency requested on December 14, 2000 that Wisconsin Public Service Corporation provide information pursuant to Section 114 of the Clean Air Act relating to projects undertaken at the Pulliam and Weston plants. The information was submitted on January 16, 2001. Wisconsin Power and Light Company, the operator of units jointly-owned with Wisconsin Public Service, also submitted information related to projects undertaken at the Columbia and Edgewater plants.
The Wisconsin Department of Natural Resources has initiated a rulemaking effort aimed at the control of mercury emissions. Coal burning power plants are likely to be the target of this regulatory effort. A draft of the rule has not been rendered.released, and as such, the effect on Wisconsin Public Service is unknown. However, if restrictive limits are adopted, the costs could be significant.
WPS Power Development acquired 30 years of emission allowances as a result of the acquisition of Sunbury Generation, LLC in November 1999. The purchase of WPS Westwood Generation, LLC in September 2000 also resulted in acquiring 30 years of emission allowances. A consistent valuation across vintage years is being utilized to allocate the cost of these allowances. The cost assigned to these allowances is being charged to expense as the allowances are used. The Sunbury plant acquired by WPS Power Development in November 1999,
currentlyalso purchases incremental emission allowances on the open market to comply with air regulations. Additional technology may be required by 2003 in order to comply with nitrogen oxide standards. Expenditures for this technology could be significant.
MANUFACTURED GAS PLANT REMEDIATION
Manufactured Gas Plant Remediation
Wisconsin Public Service continues to investigate the environmental cleanup of eight manufactured gas plant sites. The cleanup of Wisconsin Public Service's Stevens Point manufactured gas plant site is complete with monitoring of the site continuing. Costs of this cleanup were within the range expected for this site. FutureCleanup began at both of the Sheboygan sites in November 2000 and is expected to be completed by June 2001. To-date costs are at expected levels. Wisconsin Public Service estimates future undiscounted investigation and cleanup costs for the remaining seven sites are estimated in the range of
$34.3to be $35.7 million to $41.0$42.2 million. These estimates may be adjusted in the future contingent upon remedialremediation technology, regulatory requirements, and experience
gained through cleanup activities.
An initialthe assessment of natural resources damages.
Wisconsin Public Service currently has a $37.4 million liability recorded for cleanup of $41.7 million was established with an offsetting regulatory asset (deferred charge). Of this amount,
approximately $3.1 million has been spentWe expect to date. Wisconsin Public Service
believes it will recover cleanup costs net of insurance recoveries in current and future customer rates. Carrying costs associated with the cleanup expenditures will not be recoverable. Wisconsin Public Service has received $12.6 million in insurance recoveries which arethat we recorded as a reduction into the regulatory asset.
FUTURE UTILITY EXPENDITURES
Future Utility Expenditures
We estimate utility plant construction expenditures at Wisconsin Public Service for 20002001 to be approximately $144.6$179.7 million and construction expenditures at Upper Peninsula Power for 20002001 to be approximately $8.4$28.7 million. Demand-side management expenditures at Wisconsin Public Service are estimatedestimates demand-side management expenditures to be $21.5$19.9 million in 2000. Of this amount, $17.7 million will
be recovered in rates in 2000 with the remainder expected to be recovered in
future rates.2001. In addition, recovery of previously deferred demand-side management expenditures of $17.8$11.9 million are being recovered from customers will occur through 2002.
NOTE 14--REGULATORY14--ACQUISITIONS AND OTHER INVESTMENTS
On December 31, 2000, Wisconsin Public Service increased its ownership in Wisconsin River Power Company to two-thirds by purchasing an additional one-third interest from Consolidated Water Power Company. The purchase price was at net book value of Wisconsin River Power at August 31, 2000. In addition, one-third of the net proceeds from the sale of Wisconsin River Power's real estate and wood products over a 12-year period will be payable to Consolidated Water Power. In 2001, Wisconsin Power and Light has the option to purchase one-half of our newly purchased one-third share of Wisconsin River Power. Exercise of this option would result in Wisconsin Public Service and Wisconsin Power and Light each owning one-half of Wisconsin River Power, but Wisconsin Public Service would remain the operator of the facility.
Along with Wisconsin Public Service, we entered into a merger agreement with Wisconsin Fuel and Light on July 13, 2000. Under the agreement, Wisconsin Fuel and Light shareholders will receive 1.73 shares of WPS Resources' common stock for each share of Wisconsin Fuel and Light's common stock. The exchange ratio will be adjusted if, at the time of closing the transaction, the market price of WPS Resources' common stock exceeds $33.96 per share or is less than $27.79 per share. The market price is defined as the average of the closing price of WPS Resources' common stock during the ten trading days ending three days immediately preceding the effective date of the merger.
A majority of the outstanding preferred shareholders of Wisconsin Public Service approved the merger, allowing Wisconsin Fuel and Light to merge into Wisconsin Public Service. In November 2000, a majority of the outstanding common shareholders of Wisconsin Fuel and Light approved the plan of merger. We will account for the merger using the purchase method of accounting, and we expect to complete it in April of 2001.
WPS Power Development reached an agreement with Sierra Pacific Power Company in October 2000 to purchase their 545-megawatt Tracy/Pinon Power Station. The facility consists of natural gas and oil-fired generation units and a coal gasification project that had been co-funded by the United States Department of Energy. Regulatory approval is still needed to complete the purchase. The purchase price of $249.8 million is subject to taxes and other adjustments at closing. We expect to close the purchase in 2001 and to finance a portion of the purchase with nonrecourse debt. Included with the purchase is a temporary purchase power agreement to sell the power generated by Tracy/Pinon to Sierra Pacific.
Also in 2000, WPS Power Development's subsidiary, Sunbury Holdings, LLC, purchased CinCap VI, LLC from Cinergy Capital and Trading, Inc. CinCap VI owns the 30-megawatt Westwood generation facility located in Pennsylvania. As of January 1, 2001, CinCap VI changed its name to WPS Westwood Generation, LLC.
At WPS Energy Services, the price paid in excess of fair value for the purchase of retail gas contracts acquired in 1999 is being amortized over a five-year period.
NOTE 15--INVESTMENTS AND OTHER ASSETS
The table below details items included in investments and other assets at December 31, 2000.
WPS Resources' Investments and Other Assets (Thousands) | 2000 | 1999 |
Emissions allowances | $ 42,363 | $ 38,791 |
Investments in other companies | 19,294 | 12,420 |
Nuclear decommissioning trusts | 18,338 | 19,129 |
Key executive life insurance | 14,996 | 11,787 |
Unamortized debt expense | 4,081 | 5,156 |
Edgewater and Columbia deposits | 3,190 | 3,144 |
Notes receivable from unaffiliated companies | 6,869 | 6,973 |
Deferred financing costs | 3,712 | - |
Other | * 13,759 | * 9,857 |
Total | $126,602 | $107,257 |
* Contains items that are less than 5% of the total investments and other assets.
Emission allowances are related to WPS Power Development's ownership of the Westwood and Sunbury generation facilities. The emission allowances extend 29 years into the future and are expensed as used by each facility.
NOTE 16--REGULATORY ENVIRONMENT
Wisconsin Public Service received a rate order in the Wisconsin jurisdiction oneffective January 15, 1999.1, 2001. The impact is an estimated $26.9$27.2 million increase in electric revenues and an estimated $10.3$4.3 million increase in gas revenues on an annual basis. The new rates are effective for 19992001 and 2000.2002. The Public Service Commission of Wisconsin authorized a 12.1% return on Wisconsin Public Service's equity for 19992001 and 2000.2002. A 2002 rate reopener was not approved by the Public Service Commission of Wisconsin, but the Commission did acknowledge that pursuant to statutes Wisconsin Public Service receivedmay request a newreopener at any time.
On October 13, 2000, Upper Peninsula Power filed a $5.7 million rate increase with the Michigan Public Service Commission. A final rate order is expected in 2001.
Note 17--REGULATORY ASSETS AND LIABILITIES
The following regulatory assets and liabilities were reflected in our consolidated balance sheets as of December 31:
WPS Resources Regulatory Assets/Liabilities (Thousands) | 2000 | 1999 |
Regulatory assets | ||
Demand-side management expenditures | $20,734 | $23,862 |
Environmental remediation costs | 30,503 | 30,942 |
Funding for enrichment facilities | 4,122 | 4,579 |
Pension curtailment loss | 8,121 | - |
Other | 11,099 | 11,107 |
Total | $74,579 | $70,490 |
Regulatory liabilities | ||
Income tax related items | $25,171 | $29,080 |
Unrealized gain on decommissioning trust | 18,338 | 19,129 |
Kewaunee deferred revenue | - | 2,819 |
De Pere Energy Center deferred revenue | - | 3,263 |
Deferred gain on emission allowance sales | 2,921 | 3,705 |
Interest from tax refunds | 3,811 | 3,730 |
Other | 400 | 2,422 |
Total | $50,641 | $64,148 |
Our utility subsidiaries are recovering their regulatory assets and returning their regulatory liabilities through rates charged to customers based on specific ratemaking decisions or precedent for each item. Except for amounts expended for environmental costs, Wisconsin Public Service is recovering carrying costs for all regulatory assets. Upper Peninsula Power may recover carrying costs on environmental regulatory assets. Based on prior and current rate treatment for such costs, we believe it is probable that Wisconsin Public Service and Upper Peninsula Power will continue to recover from customers the Wisconsin
retail jurisdiction effectiveregulatory assets described above.
See Notes 11 and 12 for specific information on January 1, 2000 because of a rate reopener
filed in July 1999. The impact is an estimated $21.1 million increase in
electric revenuespension and income tax related regulatory liabilities. See Note 13 for the year 2000. The reopener addressed a limited number
of issues for which information was not available when the original order for
1999 and 2000 was authorized. There were no changes to the 2000 gas revenues
or return on equity which remains at 12.1% for 2000.
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NOTE 15--SEGMENTS18--SEGMENTS OF BUSINESS
Effective December 31, 1998, we adopted Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information." Our
We manage our reportable segments are managed separately due to their different operating and regulatory environments. Our principal business segments are the regulated electric utility operations of Wisconsin Public Service and Upper Peninsula Power and the regulated gas utility operations of Wisconsin Public Service. Our other reportable segments include WPS Energy Services and WPS Power Development. WPS Energy Services is a diversified energy supply and services company, and WPS Power Development is an electric generation asset development company. Nonutility operations and subsidiaries of WPS Resources not already mentioned are included in the Other column. The tables below and on the following
page present information for the respective years pertaining to our operations segmented by lines of business. We restated 1998 and 1997 for comparative
purposes due to changes in our reportable segments. The changes include
adding a utility subtotal column and separating WPS Power Development from
Other due to its increase in significance.
Segments of Business (Thousands) | ||||||||
Regulated Utilities | Nonutility and Nonregulated | |||||||
| Electric | Gas | Total | WPS Energy | WPS Power |
| Reconciling | WPS Resources Consolidated |
Income Statement | ||||||||
Operating | $ 642,705 | $264,519 | $ 907,224 | $955,622 | $128,135 | $ 9,841 | $(49,248) | $1,951,574 |
Depreciation and | 82,439 | 8,894 | 91,333 | 1,384 | 6,687 | 438 | - | 99,842 |
Other income | 18,154 | 56 | 18,210 | 872 | 1,039 | 1,042 | (3,603) | 17,560 |
Interest expense | 27,258 | 4,813 | 32,071 | 416 | 10,879 | 20,676 | (9,761) | 54,281 |
Income taxes | 33,597 | 7,615 | 41,212 | 922 | (29,252) | (6,877) | - | 6,005 |
Net income (loss) | 60,653 | 11,577 | 72,230 | 1,734 | 931 | (7,902) | - | 66,993 |
Balance Sheet | ||||||||
Total assets | 1,239,003 | 305,491 | 1,544,494 | 924,922 | 233,086 | 178,062 | (64,422) | 2,816,142 |
Cash expenditures | 137,947 | 21,528 | 159,475 | 295 | 39,018 | 296 | - | 199,084 |
* Includes only utility operations. Nonutility operations are included in the Other column.
Segments of Business (Thousands) | ||||||||
Regulated Utilities | Nonutility and Nonregulated Operations | |||||||
| Electric | Gas | Total | WPS Energy | WPS Power |
| Reconciling | WPS Resources Consolidated |
Income Statement | ||||||||
Operating | $ 590,359 | $191,521 | $ 781,880 | $292,212 | $ 35,400 | $ 5,718 | $ (16,670) | $1,098,540 |
Depreciation and | 70,898 | 8,216 | 79,114 | 1,058 | 3,282 | 290 | - | 83,744 |
Other income | 7,232 | 78 | 7,310 | (221) | (253) | 5,716 | (3,603) | 8,949 |
Interest expense | 23,965 | 4,534 | 28,499 | 336 | 4,629 | 11,308 | (8,503) | 36,269 |
Income taxes | 32,040 | 7,405 | 39,445 | (2,579) | (4,683) | (2,442) | - | 29,741 |
Net income (loss) | 56,083 | 11,246 | 67,329 | (3,488) | (3,799) | (477) | - | 59,565 |
Balance Sheet | ||||||||
Total assets | 1,247,859 | 267,356 | 1,515,215 | 64,846 | 190,247 | 184,349 | (138,109) | 1,816,548 |
Cash expenditures | 120,929 | 19,768 | 140,697 | 70 | 132,137 | 279 | - | 273,183 |
* Includes only utility operations. Nonutility operations are included in the Other column.
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============================================================================================
Segments of Business (Thousands) Regulated Utilities
- --------------------------------------------------------------------------------------------
Electric Gas Total
1997 Utility* Utility* Utility*
- --------------------------------------------------------------------------------------------
Income Statement
Operating revenues $ 539,590 $211,090 $ 750,680
Depreciation and decommissioning 74,016 7,349 81,365
Other income (expense) 7,395 (701) 6,694
Interest expense 25,266 4,841 30,107
Income taxes 29,461 4,211 33,672
Net income (loss) 53,294 7,878 61,172
Balance Sheet
Total assets 1,089,875 246,842 1,336,717
Cash expenditures for
long-lived assets 48,846 14,227 63,073
============================================================================================
Nonutility and
Nonregulated Operations
- --------------------------------------------------------------------------------------------
WPS Energy WPS Power
Services Development Other
- --------------------------------------------------------------------------------------------
Income Statement
Operating revenues $189,404 $ 2,623 $ 2,803
Depreciation and decommissioning 1,048 671 357
Other income (expense) (1,158) (20) 6,422
Interest expense 905 1,153 1,112
Income taxes (3,315) (1,114) 1,863
Net income (loss) (4,949) (1,944) 1,530
Balance Sheet
Total assets 44,779 18,133 57,703
Cash expenditures for
long-lived assets 78 1,223 1,941
============================================================================================
Reconciling WPS Resources
Eliminations Consolidated
- --------------------------------------------------------------------------------------------
Income Statement
Operating revenues $ (9,673) $ 935,837
Depreciation and decommissioning - 83,441
Other income (expense) 168 12,106
Interest expense (2,261) 31,016
Income taxes - 31,106
Net income (loss) - 55,809
Balance Sheet
Total assets (21,528) 1,435,804
Cash expenditures for
long-lived assets - 66,315
============================================================================================
*Includes
Segments of Business (Thousands) | ||||||||
Regulated Utilities | Nonutility and Nonregulated Operations | |||||||
| Electric | Gas | Total | WPS Energy | WPS Power |
| Reconciling | WPS Resources Consolidated |
Income Statement | ||||||||
Operating | $ 550,004 | $165,111 | $ 715,115 | $351,258 | $ 5,919 | $ 3,587 | $(12,143) | $1,063,736 |
Depreciation and | 75,974 | 7,751 | 83,725 | 1,148 | 1,205 | 196 | - | 86,274 |
Other income | 5,461 | 114 | 5,575 | (5,765) | 110 | 4,681 | (1,923) | 2,678 |
Interest expense | 22,820 | 4,323 | 27,143 | 592 | 1,320 | 5,082 | (4,012) | 30,125 |
Income taxes | 27,534 | 4,429 | 31,963 | (4,783) | (2,516) | (1,219) | - | 23,445 |
Net income (loss) | 50,488 | 5,912 | 56,400 | (6,869) | (2,432) | (468) | - | 46,631 |
Balance Sheet | ||||||||
Total assets | 1,117,438 | 246,365 | 1,363,803 | 71,839 | 32,894 | 90,729 | (48,878) | 1,510,387 |
Cash expenditures | 75,589 | 19,145 | 94,734 | 291 | 15,029 | 755 | - | 110,809 |
* Includes only utility operations. Nonutility operations are included in the Other column.
NOTE 16--QUARTERLY19--QUARTERLY FINANCIAL INFORMATION (Unaudited)
(Thousands, except for share amounts) | Three Months Ended | ||||
2000 | |||||
March | June | September | December | Total | |
Operating revenues | $398,849 | $374,673 | $458,639 | $719,413 | $1,951,574 |
Net income | $ 29,232 | $ 11,355 | $ 12,867 | $ 13,539 | $ 66,993 |
Average number of shares of common stock | 26,634 | 26,398 | 26,407 | 26,413 | 26,463 |
Basic and diluted earnings per share | $1.10 | $0.43 | $0.49 | $0.51 | $2.53 |
1999 | |||||
March | June | September | December | Total | |
Operating revenues | $329,834 | $221,552 | $251,005 | $296,149 | $1,098,540 |
Net income | $ 22,752 | $ 10,041 | $ 13,819 | $ 12,953 | $ 59,565 |
Average number of shares of common stock | 26,520 | 26,601 | 26,682 | 26,768 | 26,644 |
Basic and diluted earnings per share | $0.86 | $0.38 | $0.52 | $0.48 | $2.24 |
Because of various factors, which affect the utility business, the quarterly results of operations are not necessarily comparable.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WPS RESOURCES CORPORATION
F. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of WPS Resources Corporation:
We have audited the accompanying consolidated balance sheets and consolidated statements of capitalization of WPS Resources Corporation (a Wisconsin corporation) and subsidiaries as of December 31, 19992000 and 1998,1999, and the related consolidated statements of income, comprehensive income, and retained earnings and cash flows for each of the three years in the period ended December 31, 1999.2000. 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 auditing standards generally accepted auditing
standards.in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of WPS Resources Corporation and subsidiaries as of December 31, 19992000 and 1998,1999, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999,2000, in conformity with accounting principles generally accepted accounting principles.
/s/in the United States.
/s/ Arthur Andersen LLP
ARTHUR ANDERSENArthur Andersen LLP
Milwaukee, Wisconsin
January 27, 2000
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
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WISCONSIN PUBLIC SERVICE CORPORATION |
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G. CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME | ||||||
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Year Ended December 31 (Thousands) | 2000 | 1999 | 1998 | |||
Operating revenues |
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| |||
Electric | $575,951 | $527,922 | $487,340 | |||
Gas | 264,519 | 191,521 | 165,111 | |||
Total operating revenues | 840,470 | 719,443 | 652,451 | |||
Operating expenses | ||||||
Electric production fuels | 128,538 | 113,170 | 110,443 | |||
Purchased power | 62,610 | 57,390 | 42,340 | |||
Gas purchased for resale | 185,143 | 117,582 | 104,608 | |||
Other operating expenses | 160,698 | 150,822 | 138,232 | |||
Maintenance | 67,354 | 56,650 | 49,425 | |||
Depreciation and decommissioning | 85,288 | 73,163 | 78,206 | |||
Federal income taxes | 31,447 | 30,154 | 23,642 | |||
Investment tax credit restored | (1,605) | (1,608) | (1,742) | |||
State income taxes | 8,758 | 8,752 | 7,291 | |||
Gross receipts tax and other | 28,083 | 26,414 | 26,403 | |||
Total operating expense | 756,314 | 632,489 | 578,848 | |||
Operating income | 84,156 | 86,954 | 73,603 | |||
Other income and (deductions) | ||||||
Allowance for equity funds used during construction | 1,712 | 719 | 173 | |||
Other, net | 17,970 | 7,888 | 6,765 | |||
Income taxes | (1,452) | (805) | (331) | |||
Total other income | 18,230 | 7,802 | 6,607 | |||
Income before interest expense | 102,386 | 94,756 | 80,210 | |||
Interest expense | ||||||
Interest on long-term debt | 21,833 | 21,855 | 20,400 | |||
Other interest | 9,824 | 5,560 | 2,801 | |||
Allowance for borrowed funds used during construction | (2,752) | (2,874) | (177) | |||
Total interest expense | 28,905 | 24,541 | 23,024 | |||
Net income | 73,481 | 70,215 | 57,186 | |||
Preferred stock dividend requirements | 3,111 | 3,111 | 3,111 | |||
Earnings on common stock | 70,370 | 67,104 | 54,075 | |||
Other comprehensive income | - | - | - | |||
Comprehensive income | $ 70,370 | $ 67,104 | $54,075 | |||
The accompanying WPS Resources Corporation and Wisconsin Public Service Corporation notes | ||||||
are an integral part of these statements. |
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | ||
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WISCONSIN PUBLIC SERVICE CORPORATION |
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H. CONSOLIDATED BALANCE SHEETS | ||
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Assets | ||
At December 31 (Thousands) | 2000 | 1999 |
Utility plant | ||
Electric | $1,698,843 | $1,611,543 |
Gas | 302,942 | 285,048 |
Property under capital lease | 74,130 | 74,130 |
Total | 2,075,915 | 1,970,721 |
Less - Accumulated depreciation and decommissioning | 1,268,949 | 1,202,725 |
Total | 806,966 | 767,996 |
Nuclear decommissioning trusts | 207,224 | 198,052 |
Construction in progress | 64,593 | 67,831 |
Nuclear fuel, less accumulated amortization | 16,040 | 15,007 |
Net utility plant | 1,094,823 | 1,048,886 |
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Current assets | ||
Cash and equivalents | 4,375 | 3,428 |
Customer and other receivables, net of reserves of $3,367 |
| |
at December 31, 2000 and $2,455 at December 31, 1999 | 92,058 | 70,940 |
Accrued utility revenues | 56,826 | 36,132 |
Fossil fuel, at average cost | 11,223 | 15,134 |
Gas in storage, at average cost | 21,682 | 18,776 |
Materials and supplies, at average cost | 22,241 | 21,302 |
Prepayments and other | 23,020 | 20,734 |
Total current assets | 231,425 | 186,446 |
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Regulatory assets | 72,367 | 68,169 |
Nonutility plant, net of accumulated depreciation of $174 |
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at December 31, 2000 and $138 at December 31, 1999 | 1,168 | 1,294 |
Pension assets | 62,992 | 65,622 |
Investments and other assets | 40,471 | 39,468 |
Total | $1,503,246 | $1,409,885 |
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | ||
WISCONSIN PUBLIC SERVICE CORPORATION | ||
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H. CONSOLIDATED BALANCE SHEETS (CONTINUED) | ||
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Capitalization and Liabilities | ||
At December 31 (Thousands) | 2000 | 1999 |
Capitalization | ||
Common stock equity | $ 567,757 | $ 525,128 |
Preferred stock with no mandatory redemption | 51,188 | 51,193 |
Capital lease obligation | 72,955 | 73,585 |
Long-term debt to parent | 13,476 | 13,780 |
Long-term debt | 283,594 | 285,783 |
Total capitalization | 988,970 | 949,469 |
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Current liabilities | ||
Current portion of capital lease obligation | 630 | 419 |
Note payable | 10,000 | 10,000 |
Commercial paper | 60,000 | 40,000 |
Accounts payable | 96,728 | 52,654 |
Accrued interest and taxes | 12,389 | 12,819 |
Other | 14,776 | 13,118 |
Total current liabilities | 194,523 | 129,010 |
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Long-term liabilities and deferred credits | ||
Accumulated deferred income taxes | 109,024 | 107,516 |
Accumulated deferred investment tax credits | 21,946 | 23,551 |
Regulatory liabilities | 42,729 | 56,728 |
Environmental remediation liability | 37,367 | 38,632 |
Postretirement liabilities | 47,267 | 49,643 |
Other long-term liabilities | 61,420 | 55,336 |
Total long-term liabilities and deferred credits | 319,753 | 331,406 |
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Commitments and contingencies (See Note 13) |
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Total | $1,503,246 | $1,409,885 |
The accompanying WPS Resources Corporation and Wisconsin Public Service Corporation | ||
notes are an integral part of these statements. |
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | ||||
WISCONSIN PUBLIC SERVICE CORPORATION | ||||
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I. CONSOLIDATED STATEMENTS OF CAPITALIZATION | ||||
At December 31 (Thousands, except share amounts) | 2000 | 1999 | ||
Common stock equity | ||||
Common stock | $ 95,588 | $ 95,588 | ||
Premium on capital stock | 242,877 | 167,842 | ||
Retained earnings | 229,292 | 263,922 | ||
Employee Stock Ownership Plan loan guarantees | - | (2,224) | ||
Total common stock equity | 567,757 | 525,128 | ||
Preferred stock | ||||
Cumulative, $100 par value, 1,000,000 shares authorized | ||||
with no mandatory redemption - | ||||
Shares Outstanding | ||||
Series 2000 1999 |
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5.00% 131,920 131,950 | 13,192 | 13,195 | ||
5.04% 29,980 29,980 | 2,998 | 2,998 | ||
5.08% 49,980 50,000 | 4,998 | 5,000 | ||
6.76% 150,000 150,000 | 15,000 | 15,000 | ||
6.88% 150,000 150,000 | 15,000 | 15,000 | ||
Total preferred stock | 51,188 | 51,193 | ||
Capital lease obligation | 73,585 | 74,004 | ||
Less current portion | (630) | (419) | ||
Net capital lease obligation | 72,955 | 73,585 | ||
Long-term debt to parent |
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Series Year Due | ||||
8.76% 2015 |
| 5,567 |
| 5,693 |
7.35% 2016 |
| 7,909 |
| 8,087 |
Total long-term debt to parent | 13,476 | 13,780 | ||
|
|
| ||
Long-term debt | ||||
First mortgage bonds | ||||
| Series Year Due | ||||
7.30% 2002 | 50,000 | 50,000 | ||
6.80% 2003 | 50,000 | 50,000 | ||
6-1/8% 2005 | 9,075 | 9,075 | ||
6.90% 2013 | 22,000 | 22,000 | ||
8.80% 2021 | 53,100 | 53,100 | ||
7-1/8% 2023 | 50,000 | 50,000 | ||
6.08% 2028 | 50,000 | 50,000 | ||
Total | 284,175 | 284,175 | ||
Unamortized discount and premium on bonds, net | (700) | (758) | ||
Total first mortgage bonds | 283,475 | 283,417 | ||
Employee Stock Ownership Plan loan guarantees | - | 2,224 | ||
Other long-term debt | 119 | 142 | ||
Total long-term debt | 283,594 | 285,783 | ||
Total capitalization | $988,970 | $949,469 | ||
The accompanying WPS Resources Corporation and Wisconsin Public Service Corporation notes | ||||
are an integral part of these statements. | ||||
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | |||
WISCONSIN PUBLIC SERVICE CORPORATION | |||
J. CONSOLIDATED STATEMENTS OF CASH FLOWS | |||
Year Ended December 31 (Thousands) | 2000 | 1999 | 1998 |
Cash flows from operating activities: | |||
Net income | $ 3,481 | $ 70,215 | $ 57,186 |
Adjustments to reconcile net income to net cash from | |||
operating activities - | |||
Depreciation and decommissioning | 85,288 | 73,163 | 78,206 |
Gain on nuclear decommissioning trust | (10,771) | (3,941) | (3,258) |
Amortization of nuclear fuel and other | 14,712 | 14,160 | 15,634 |
Deferred income taxes | (2,893) | (12,034) | (12,421) |
Investment tax credit restored | (1,605) | (1,221) | (2,129) |
Allowance for equity funds used during construction | (1,712) | (719) | (173) |
Gain on sale of property | (3,750) | - | - |
Pension income | 2,630 | (5,604) | (9,669) |
Postretirement funding | (2,602) | 5,402 | 9,743 |
Other, net | 3,705 | 14,066 | 2,488 |
Changes in - | |||
Customer and other receivables | (21,118) | (7,747) | (7,300) |
Accrued utility revenues | (20,694) | (5,255) | (127) |
Fossil fuel inventory | 3,911 | (2,701) | (2,469) |
Gas in storage | (2,906) | (3,921) | 2,339 |
Miscellaneous assets | (16,020) | (9,350) | 281 |
Accounts payable | 44,074 | (8,026) | 14,227 |
Miscellaneous current and accrued liabilities | 699 | 6,048 | (5,019) |
Accrued taxes | (430) | 10,229 | (7,666) |
Gas refunds | - | - | 684 |
Net cash from operating activities | 143,999 | 132,764 | 130,557 |
Cash flows from (used for) investing activities: | |||
Construction of utility plant and nuclear fuel expenditures | (150,541) | (133,809) | (89,544) |
Decommissioning funding | (8,831) | (9,180) | (17,239) |
Purchase of other property and equipment | (50) | (243) | (270) |
Proceeds from sale of property | 31,339 | ||
Other | (1,434) | 16,282 | 4,565 |
Net cash used for investing activities | (129,517) | (126,950) | (102,488) |
Cash flows from (used for) financing activities: | |||
Redemption of long-term debt | - | - | (53,659) |
Proceeds from issuance of long-term debt | - | - | 50,000 |
Proceeds from issuance of commercial paper | 656,000 | 403,000 | 290,521 |
Redemptions of commercial paper | (636,000) | (388,000) | (281,021) |
Equity infusion from parent | 75,000 | 60,000 | 34,000 |
Preferred stock dividends | (3,111) | (3,111) | (3,111) |
Dividends to parent | (105,000) | (76,000) | (66,838) |
Other | (424) | (157) | - |
Net cash used for financing activities | (13,535) | (4,268) | (30,108) |
Net increase (decrease) in cash and equivalents | 947 | 1,546 | (2,039) |
Cash and equivalents at beginning of year | 3,428 | 1,882 | 3,921 |
Cash and equivalents at end of year | $ 4,375 | $ 3,428 | $ 1,882 |
Cash paid during year for: | |||
Interest, less amount capitalized | $24,421 | $22,941 | $20,905 |
Income taxes | $45,157 | $44,416 | $48,781 |
Supplemental schedule of noncash investing and financing activities for 1999 only (thousands): | |||
1. A capital lease obligation of $74,130 was incurred when Wisconsin Public Service | |||
entered into a long-term lease agreement for utility plant assets. | |||
2. Net cash surrender value of a key executive life insurance policy of $11,787 | |||
was transferred from Wisconsin Public Service to WPS Resources. | |||
3. Nonutility assets of $121 were transferred from Wisconsin Public Service to WPS Resources | |||
The accompanying WPS Resources Corporation and Wisconsin Public Service Corporation notes | |||
are an integral part of these statements. | |||
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | |||
WISCONSIN PUBLIC SERVICE CORPORATION | |||
| |||
K. CONSOLIDATED STATEMENTS OF RETAINED EARNINGS | |||
| |||
|
|
|
|
| |||
Year Ended December 31 (Thousands) | 2000 | 1999 | 1998 |
Balance at beginning of year | $263,922 | $284,726 | $297,489 |
Add - Net income | 73,481 | 70,215 | 57,186 |
337,403 | 354,941 | 354,675 | |
Deduct - | |||
Cash dividends declared on preferred stock | |||
5.00% Series ($5.00 per share) | 660 | 660 | 660 |
5.04% Series ($5.04 per share) | 151 | 151 | 151 |
5.08% Series ($5.08 per share) | 254 | 254 | 254 |
6.76% Series ($6.76 per share) | 1,014 | 1,014 | 1,014 |
6.88% Series ($6.88 per share) | 1,032 | 1,032 | 1,032 |
Dividend to parent | 105,000 | 87,908 | 66,838 |
108,111 | 91,019 | 69,949 | |
Balance at end of year | $229,292 | $263,922 | $284,726 |
|
|
|
|
The accompanying WPS Resources Corporation and Wisconsin Public Service Corporation | |||
notes are an integral part of these statements. |
| ||
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WISCONSIN PUBLIC SERVICE CORPORATION
G.
L. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
The accompanyingfollowing are supplemental notes to the WPS Resources Corporation financial statements and should be read in conjunction with WPS Resources consolidated financial statements and the related notes.
NOTE 1--SHORT-TERM DEBT AND LINES OF CREDIT
To provide short-term borrowing flexibility and security for commercial paper outstanding, Wisconsin Public Service maintains bank lines of credit. These lines of credit require a fee.
The information in the table below relates to short-term debt and lines of credit for the years indicated:
(Thousands, except for percentages) | 2000 | 1999 | 1998 |
As of end of year | |||
Commercial paper outstanding | $60,000 | $40,000 | $25,000 |
Average discount rate on outstanding commercial paper | 6.62% | 6.50% | 5.10% |
Short-term notes payable outstanding | $10,000 | $10,000 | $10,000 |
Average interest rate on short-term notes payable | 6.73% | 6.43% | 5.58% |
Available (unused) lines of credit | $65,000 | $30,000 | $ 5,000 |
For the year | |||
Maximum amount of short-term debt | $73,000 | $54,000 | $49,000 |
Average amount of short-term debt | $44,809 | $29,049 | $20,099 |
Average interest rate on short-term debt | 6.51% | 5.27% | 5.50% |
NOTE 2--LONG-TERM DEBT
At Wisconsin Public Service, utility plant assets secure first mortgage bonds. In December 1998, Wisconsin Public Service issued $50.0 million of 6.08% senior notes due in 2028 secured by a pledge of first mortgage bonds. The 1998 notes become unsecured if Wisconsin Public Service retires all of its outstanding first mortgage bonds.
Wisconsin Public Service has no sinking fund payment requirements on its outstanding debt. A schedule of all debt payments including bond maturities is as follows:
Year ending December 31 (Thousands) | |
2001 | $ - |
2002 | 50,023 |
2003 | 50,023 |
2004 | 23 |
2005 | 9,098 |
Future years | 175,127 |
Total payments | $284,294 |
NOTE 3--COMMON EQUITY
Wisconsin Public Service is restricted by a Public Service Commission of Wisconsin order to paying normal common stock dividends of no more than 109% of the previous year's common stock dividend without the Public Service Commission of Wisconsin's approval. The company may declare special dividends in order to maintain utility common equity levels consistent with those allowed by the regulators. Wisconsin law prohibits Wisconsin Public Service from making loans to or guaranteeing obligations of WPS Resources or its other subsidiaries.
During 2000, Wisconsin Public Service received equity infusions of $75 million from WPS Resources. Wisconsin Public Service paid special common dividends of $50 million to WPS Resources in 2000. The equity infusions and special dividends allowed Wisconsin Public Service's average equity capitalization ratio for ratemaking to remain near target levels as established by the Public Service Commission of Wisconsin in its most recent rate order.
NOTE 4--FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate such value:
Cash, Short-Term Investments, Energy Conservation Loans, Notes Payable, and Outstanding Commercial Paper: The carrying amount approximates fair value due to the short maturity of those investments and obligations.
Nuclear Decommissioning Trusts: The value of nuclear decommissioning trust investments is recorded at market value.
Long-Term Debt, Preferred Stock, and Employee Stock Ownership Plan Loan Guarantees: The fair value of long-term debt, preferred stock, and Employee Stock Ownership Plan loan guarantees is estimated based on the quoted market price for the same or similar issues or on the current rates offered to Wisconsin Public Service for debt of the same remaining maturity.
The estimated fair values of Wisconsin Public Service's financial instruments as of December 31 were:
(Thousands) | 2000 | 1999 | ||
Carrying Amount | Fair | Carrying Amount | Fair | |
Cash and cash equivalents | $ 4,375 | $ 4,375 | $ 3,428 | $ 3,428 |
Energy conservation loans | 3,509 | 3,509 | 5,198 | 5,198 |
Nuclear decommissioning trusts - utility plant | 207,224 | 207,224 | 198,052 | 198,052 |
Nuclear decommissioning trusts - other assets | 18,338 | 18,338 | 19,129 | 19,129 |
Notes payable | 10,000 | 10,000 | 10,000 | 10,000 |
Commercial paper | 60,000 | 60,000 | 40,000 | 40,000 |
Employee Stock Ownership Plan loan guarantees | - | - | 2,224 | 2,249 |
Long-term debt | 284,294 | 286,892 | 284,175 | 272,961 |
Preferred stock | 51,188 | 41,915 | 51,193 | 47,881 |
NOTE 5--INCOME TAXES
Wisconsin Public Service is refunding taxes provided in prior years at rates greater than current rates to customers prospectively as the temporary differences reverse. The regulatory liability for these refunds totaled $17.3 million as of December 31, 2000 and $29.1 million as of December 31, 1999.
As of December 31, 2000 and 1999, Wisconsin Public Service had the following significant temporary differences that created deferred tax assets and liabilities:
(Thousands) | 2000 | 1999 |
Deferred tax assets | ||
Plant related | $ 67,244 | $ 68,848 |
Customer advances | 11,304 | 10,592 |
Capital losses/state net operating losses | - | - |
Environmental cleanup | 3,337 | 3,835 |
Employee benefits | 30,984 | 30,500 |
Other | 1,877 | 2,602 |
Total | $114,746 | $116,377 |
Deferred tax liabilities | ||
Plant related | $183,419 | $188,796 |
Demand-side management expenditures | 4,688 | 7,043 |
Employee benefits | 31,288 | 26,442 |
Other | 4,375 | 1,612 |
Total | $223,770 | $223,893 |
Net deferred tax liabilities | $109,024 | $107,516 |
Wisconsin Public Service is amortizing previously deferred investment tax credits as a reduction in income tax expense over the life of the related utility plant. Income tax expense is comprised of the following components:
(Thousands, except for percentages) | 2000 | 1999 | 1998 | |||
Rate | Amount | Rate | Amount | Rate | Amount | |
Statutory federal income tax | 35.0% | $39,700 | 35.0% | $37,870 | 35.0% | $30,301 |
State income taxes, net | 5.5 | 6,282 | 5.3 | 5,770 | 5.8 | 5,009 |
Investment tax credit restored | (1.4) | (1,605) | (1.5) | (1,608) | (2.0) | (1,742) |
Rate difference on reversal of income tax temporary differences | (1.3) | (1,503) |
|
|
|
|
Dividends paid to | (0.6) | (648) |
|
|
|
|
Federal tax credits | (0.3) | (295) | (0.1) | (147) | - | - |
Other differences, net | (1.6) | (1,879) | (0.6) | (596) | (1.1) | (871) |
Effective income tax | 35.3% | $40,052 | 35.2% | $38,103 | 34.1% | $29,522 |
Current provision | ||||||
Federal | $35,998 | $41,915 | $34,564 | |||
State | 8,552 | 9,430 | 7,777 | |||
Total current provision | 44,550 | 51,345 | 42,341 | |||
Deferred benefit | (2,893) | (11,634) | (11,077) | |||
Investment tax credit restored, net | (1,605) | (1,608) | (1,742) | |||
Total income tax expense | $40,052 | $38,103 | $29,522 | |||
NOTE 6--REGULATORY ASSETS AND LIABILITIES
The following regulatory assets and liabilities were reflected in Wisconsin Public Service's consolidated balance sheets as of December 31:
(Thousands) |
2000
1999
Regulatory assets
Demand-side management expenditures
$20,734
$23,862
Environmental remediation costs
(net of insurance recoveries)
29,003
29,017
Funding for enrichment facilities
4,122
4,579
Pension curtailment loss
8,121
-
Other
10,387
10,711
Total
$72,367
$68,169
Regulatory liabilities
Income tax related items
$17,259
$21,660
Unrealized gain on decommissioning trust
18,338
19,129
Kewaunee deferred revenue
-
2,819
De Pere Energy Center deferred revenue
-
3,263
Deferred gain on emission allowance sales
2,921
3,705
Interest from tax refunds
3,811
3,730
Other
400
2,422
Total
$42,729
$56,728
NOTE 7--SEGMENTS OF BUSINESS
Wisconsin Public Service manages its reportable segments separately due to their different operating and regulatory environments. Its principal business segments are an
integral partthe regulated electric utility operations and the regulated gas utility operations. The tables below present information for the respective years pertaining to the operations of these statements.
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Segments of Business (Thousands) | |||||
Regulated Utilities | |||||
| Electric | Gas | Total | Other* | Wisconsin Public Service Consolidated |
Income Statement | |||||
Operating revenues | $ 575,951 | $264,519 | $ 840,470 | $ - | $ 840,470 |
Depreciation and decommissioning | 76,394 | 8,894 | 85,288 | - | 85,288 |
Other income | 18,119 | 56 | 18,175 | 1,507 | 19,682 |
Interest expense | 22,907 | 4,813 | 27,720 | 1,185 | 28,905 |
Income taxes | 32,712 | 7,615 | 40,327 | (275) | 40,052 |
Net income | 58,196 | 11,577 | 69,773 | 597 | 70,370 |
Balance Sheet | |||||
Total assets | 1,112,418 | 305,491 | 1,417,909 | 85,337 | 1,503,246 |
Cash expenditures for long-lived | 129,011 | 21,528 | 150,539 | 52 | 150,591 |
* Nonutility operations are included in the Other column.
Segments of Business (Thousands) | |||||
Regulated Utilities | |||||
| Electric | Gas | Total | Other* | Wisconsin Public Service Consolidated |
Income Statement | |||||
Operating revenues | $ 527,922 | $191,521 | $ 719,443 | $ - | $ 719,443 |
Depreciation and decommissioning | 64,947 | 8,216 | 73,163 | - | 73,163 |
Other income | 6,530 | 78 | 6,608 | 1,999 | 8,607 |
Interest expense | 19,726 | 4,534 | 24,260 | 281 | 24,541 |
Income taxes | 30,719 | 7,405 | 38,124 | (21) | 38,103 |
Net income | 54,117 | 11,246 | 65,363 | 1,741 | 67,104 |
Balance Sheet | |||||
Total assets | 1,122,703 | 267,356 | 1,390,059 | 19,826 | 1,409,885 |
Cash expenditures for long-lived | 114,041 | 19,768 | 133,809 | 252 | 134,061 |
* Nonutility operations are included in the Other column.
Segments of Business (Thousands) | |||||
Regulated Utilities | |||||
| Electric | Gas | Total | Other* | Wisconsin Public Service Consolidated |
Income Statement | |||||
Operating revenues | $487,340 | $165,111 | $ 652,451 | $ - | $ 652,451 |
Depreciation and decommissioning | 70,455 | 7,751 | 78,206 | - | 78,206 |
Other income | 5,783 | 114 | 5,897 | 1,041 | 6,938 |
Interest expense | 18,441 | 4,323 | 22,764 | 260 | 23,024 |
Income taxes | 25,502 | 4,429 | 29,931 | (409) | 29,522 |
Net income | 46,973 | 5,912 | 52,885 | 1,190 | 54,075 |
Balance Sheet | |||||
Total assets | 990,260 | 245,628 | 1,235,888 | 31,694 | 1,267,582 |
Cash expenditures for long-lived | 70,399 | 19,145 | 89,544 | 270 | 89,814 |
* Nonutility operations are included in the Other column.
NOTE 8--QUARTERLY FINANCIAL INFORMATION (Unaudited)
(Thousands) | Three Months Ended | ||||
2000 | |||||
March | June | September | December | Total | |
Operating revenues | $217,107 | $183,092 | $190,046 | $250,225 | $840,470 |
Earnings on common stock | $ 27,285 | $ 11,661 | $ 15,778 | $ 15,646 | $ 70,370 |
1999 | |||||
March | June | September | December | Total | |
Operating revenues | $195,836 | $159,196 | $179,875 | $184,536 | $719,443 |
Earnings on common stock | $ 23,377 | $ 10,645 | $ 15,818 | $ 17,264 | $ 67,104 |
Because of various factors, which affect the utility business, the quarterly results of operations are not necessarily comparable.
NOTE 9--RELATED PARTY TRANSACTIONS
Wisconsin Public Service enters into transactions with Upper Peninsula Power and WPS Energy Services, which are both wholly-owned subsidiaries of WPS Resources. During 2000, Wisconsin Public Service recorded revenue of $20.6 million from electric sales to Upper Peninsula Power and $0.9 million from gas sales to WPS Energy Services. In addition, Wisconsin Public Service purchased $5.7 million of gas from WPS Energy Services. During 1999, we recorded revenue of $8.3 million from electric sales to Upper Peninsula Power and $2.8 million from gas sales to WPS Energy Services. Wisconsin Public Service also purchased $1.5 million of gas from WPS Energy Services. For 1998, we recorded revenue of $6.4 million from electric sales to Upper Peninsula Power and $1.8 million from gas sales to WPS Energy Services. Wisconsin Public Service also purchased $0.6 million of gas from WPS Energy Services.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WISCONSIN PUBLIC SERVICE CORPORATION
H. CONSOLIDATED BALANCE SHEETS
M. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Wisconsin Public Service Corporation:
We have audited the accompanying consolidated balance sheets and consolidated statements of capitalization of Wisconsin Public Service Corporation (a Wisconsin corporation) and subsidiarysubsidiaries as of December 31, 19992000 and 1998,1999, and the related consolidated statements of income, comprehensive income, and retained earnings and cash flows for each of the three years in the period ended December 31, 1999.2000. 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 auditing standards generally accepted auditing
standards.in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Wisconsin Public Service Corporation and subsidiarysubsidiaries as of December 31, 19992000 and 1998,1999, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999,2000, in conformity with accounting principles generally accepted accounting principles.
/s/in the United States.
/s/ Arthur Andersen LLP
ARTHUR ANDERSENArthur Andersen LLP
Milwaukee, Wisconsin
January 27, 2000
-116-
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the directors of WPS Resources and those Class CA directors seeking re-election can be found on pages 3 through 4 ofin our March 20, 200019, 2001 Proxy Statement. Such information is incorporated by reference as if fully set forth herein.
Information regarding our executive officers, which is not included in our Proxy Statement, can be found on pages 37 through 40 ofin this document.
ITEM 11. EXECUTIVE COMPENSATION
Information required under Item 11 regarding compensation paid by WPS Resources to its Chief Executive Officer and its other executive officers can be found in our March 20, 200019, 2001 Proxy Statement, which information is incorporated by reference as if fully set forth herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning principal securities holders and the security holdings of our management can be found on pages 7 through 8 ofin our March 20,
200019, 2001 Proxy Statement, which is incorporated by reference as if fully set forth herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There have been no transactions since the beginning of fiscal year 1999,2000, or any currently proposed transactions, or series of similar transactions, to which WPS Resources or any of its subsidiaries was or is to be party to in which the amount exceeds $60,000 and in which any director, executive officer, any nominee for election as a director, any security holder owning of record or beneficially more than 5% of the Common Stock of WPS Resources, or any member of the immediate family of any of the foregoing persons had or will have a direct material interest.
-117-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
(1) Consolidated Financial Statements included in Part II at
Item 8 above:
Description Pages in 10-K
----------- -------------
WPS RESOURCES CORPORATION
Consolidated Statements of Income,
Comprehensive Income, and
Retained Earnings for the three years
ended December 31, 1999, 1998, and 1997 77
Consolidated Balance Sheets as of
December 31, 1999 and 1998 78
Consolidated Statements of Capitalization
as of December 31, 1999 and 1998 80
Consolidated Statements of Cash Flows for
the three years ended December 31, 1999, 1998,
and 1997 81
Notes to Consolidated Financial Statements 82
Report of Independent Public Accountants 108
Wisconsin Public Service Corporation
Consolidated Statements of Income and
Comprehensive Income for the three years
ended December 31, 1999, 1998, and 1997 109
Consolidated Balance Sheets as of
December 31, 1999 and 1998 110
Consolidated Statements of Capitalization
as of December 31, 1999 and 1998 112
Consolidated Statements of Cash Flows for
the three years ended December 31, 1999, 1998,
and 1997 113
Consolidated Statements of Retained Earnings 114
Notes to Consolidated Financial Statements 115
Report of Independent Public Accountants 116
-118-
(2) Financial statement schedules.
The following financial statement schedules are included in
Part IV of this report. Schedules not included herein have
been omitted because they are not applicable or the required
information is shown in the financial statements or notes
thereto.
Description Pages in 10-K
----------- -------------
Schedule I - Condensed Parent
Company Only Financial Statements
A. Report of Independent Public
Accountants 128
B. Statements of Income and Retained
Earnings 129
C. Balance Sheets 130
D. Statements of Cash Flows 131
E. Notes to Parent Company Financial
Statements 132
(3) Listing of all exhibits, including those incorporated by
reference.
-119-
Exhibit
Number Description of Documents
- ------- ------------------------
2* Asset Purchase Agreement Among Maine Public Service Company, Main
and New Brunswick Electrical Power Company, Limited and WPS Power
Development, Inc. dated as of July 7, 1998. (Incorporated by
reference to Exhibit 2 to Form 10-K for the year ended
December 31, 1998.)
2A* Asset Purchase Agreement By and Among PP&L, Inc., PP&L Resources,
Inc., Lady Jane Collieries, Inc. and Sunbury Holdings, LLC, dated
as of May 1, 1999.
3A-1 Restated Articles of Incorporation of WPS Resources Corporation.
(Incorporated by reference to Appendix B to Amendment No. 1 to the
Company's Registration Statement on Form S-4, filed February 28,
1994 [Reg. No. 33-52199]).
3A-2 Articles of Incorporation of Wisconsin Public Service Corporation
as effective May 26, 1972 and amended through May 31, 1988
(Incorporated by reference to Exhibit 3A to Form 10-K for the year
ended December 31, 1991); Articles of Amendment to Articles of
Incorporation dated June 9, 1993 (Incorporated by reference to
Exhibit 3 to Form 8-K filed June 10, 1993).
3B-1 By-Laws of WPS Resources Corporation as in effect February 10,
2000.
3B-2 By-Laws of Wisconsin Public Service Corporation as in effect
February 10, 2000.
4A Copy of Rights Agreement, dated December 12, 1996 between
WPS Resources Corporation and Firstar Trust Company (Incorporated
by reference to Exhibit 4.1 to Form 8-A filed December 13, 1996
[File No.1-11337]).
- --------------
* Schedules and exhibits to this document are not being filed herewith.
The registrant agrees to furnish supplementally a copy of any such schedule or
exhibit to the Securities and Exchange Commission upon request.
-120-
Exhibit
Number Description of Documents
- ------- ------------------------
4B Copy of First Mortgage and Deed of Trust, dated as of January 1,
1941 from Wisconsin Public Service Corporation to First Wisconsin
Trust Company, Trustee (Incorporated by reference to Exhibit 7.01
- File No. 2-7229); Supplemental Indenture, dated as of
November 1, 1947 (Incorporated by reference to Exhibit 7.02
- File No. 2-7602); Supplemental Indenture, dated as of
November 1, 1950 (Incorporated by reference to Exhibit 4.04
- File No. 2-10174); Supplemental Indenture, dated as of May 1,
1953 (Incorporated by reference to Exhibit 4.03 - File No.
2-10716); Supplemental Indenture, dated as of October 1, 1954
(Incorporated by reference to Exhibit 4.03 - File No. 2-13572);
Supplemental Indenture, dated as of December 1, 1957 (Incorporated
by reference to Exhibit 4.03 - File No. 2-14527); Supplemental
Indenture, dated as of October 1, 1963 (Incorporated by reference
to Exhibit 2.02B - File No. 2-65710); Supplemental Indenture,
dated as of June 1, 1964 (Incorporated by reference to Exhibit
2.02B - File No. 2-65710); Supplemental Indenture, dated as of
November 1, 1967 (Incorporated by reference to Exhibit 2.02B -
File No. 2-65710); Supplemental Indenture, dated as of April 1,
1969 (Incorporated by reference to Exhibit 2.02B - File No.
2-65710); Fifteenth Supplemental Indenture, dated as of May 1,
1971 (Incorporated by reference to Exhibit 2.02B - File
No. 2-65710); Sixteenth Supplemental Indenture, dated as of
August 1, 1973 (Incorporated by reference to Exhibit 2.02B - File
No. 2-65710); Seventeenth Supplemental Indenture, dated as of
September 1, 1973 (Incorporated by reference to Exhibit 2.02B -
File No. 2-65710); Eighteenth Supplemental Indenture, dated as of
October 1, 1975 (Incorporated by reference to Exhibit 2.02B - File
No. 2-65710); Nineteenth Supplemental Indenture, dated as of
February 1, 1977 (Incorporated by reference to Exhibit 2.02B -
File No. 2-65710); Twentieth Supplemental Indenture, dated as of
July 15, 1980 (Incorporated by reference to Exhibit 4B to Form
10-K for the year ended December 31, 1980); Twenty-First
Supplemental Indenture, dated as of December 1, 1980 (Incorporated
by reference to Exhibit 4B to Form 10-K for the year ended
December 31, 1980); Twenty-Second Supplemental Indenture dated as
of April 1, 1981 (Incorporated by reference to Exhibit 4B to Form
10-K for the year ended December 31, 1981); Twenty-Third
Supplemental Indenture, dated as of February 1, 1984 (Incorporated
by reference to Exhibit 4B to Form 10-K for the year ended
December 31, 1983); Twenty-Fourth Supplemental Indenture, dated as
of March 15, 1984 (Incorporated by reference to Exhibit 1 to Form
10-Q for the quarter ended June 30, 1984); Twenty-Fifth
Supplemental Indenture, dated as of October 1, 1985 (Incorporated
by reference to Exhibit 1 to Form 10-Q for the quarter ended
September 30, 1985); Twenty-Sixth Supplemental Indenture, dated as
of December 1, 1987 (Incorporated by reference to Exhibit 4A-1 to
Form 10-K for the year ended December 31, 1987); Twenty-Seventh
Supplemental Indenture, dated as of September 1, 1991
(Incorporated by reference to Exhibit 4 to Form 8-K filed
September 18, 1991); Twenty-Eighth Supplemental Indenture, dated
as of July 1, 1992 (Incorporated by reference to Exhibit 4B - File
No. 33-51428); Twenty-Ninth Supplemental Indenture, dated as of
-121-
Exhibit
Number Description of Documents
- ------- ------------------------
October 1, 1992 (Incorporated by reference to Exhibit 4 to Form
8-K filed October 22, 1992); Thirtieth Supplemental Indenture,
dated as of February 1, 1993 (Incorporated by reference to Exhibit
4 to Form 8-K filed January 27, 1993); Thirty-First Supplemental
Indenture, dated as of July 1, 1993 (Incorporated by reference to
Exhibit 4 to Form 8-K filed July 7, 1993); Thirty-Second
Supplemental Indenture, dated as of November 1, 1993 (Incorporated
by reference to Exhibit 4 to Form 10-Q for the quarter ended
September 30, 1993); Thirty-Third Supplemental Indenture, dated as
of December 1, 1998 (Incorporated by reference to Exhibit 4D to
Form 8-K filed December 18, 1998). All references to periodic
reports are to those of Wisconsin Public Service Corporation (File
No. 1-3016).
4C Amended and Restated Declaration of Trust of WPS Resources Capital
Trust I dated as of July 30, 1998 among WPS Resources Corporation
as sponsor, State Street Bank and Trust Company as Administrative
Trustee, First Union Trust Company, National Association, as
Delaware Trustee, and Daniel P. Bittner and Ralph G. Baeten, as
Administrative Trustees (Incorporated by reference to Exhibit 4.1
to Form 8-K filed August 6, 1998) (File No. 1-11337).
4D Indenture dated as of July 30, 1998, between WPS Resources
Corporation and State Street Bank and Trust Company, as trustee
(Incorporated by reference to Exhibit 4.2 to Form 8-K filed
August 6, 1998); First Supplemental Indenture dated as of July 30,
1998, between WPS Resources Corporation and State Street Bank and
Trust Company, as trustee (Incorporated by reference to
Exhibit 4.3 to Form 8-K filed August 6, 1998). References to
periodic reports are to those of WPS Resources Corporation. (File
No. 1-11337).
4E Trust Preferred Securities Guarantee Agreement dated as of
July 30, 1998, between WPS Resources Corporation and State Street
Bank and Trust Company, guarantee trustee (Incorporated by
reference to Exhibit 4.4 to Form 8-K filed August 6, 1998) (File
No. 1-11337).
4F Indenture, dated as of December 1, 1998, between Wisconsin Public
Service Corporation and Firstar Bank Milwaukee, N.A., National
Association (Incorporated by reference to Exhibit 4A to Form 8-K
filed December 18, 1998); First Supplemental Indenture, dated as
of December 1, 1998 between Wisconsin Public Service Corporation
and Firstar Bank Milwaukee, N.A., National Association
(Incorporated by reference to Exhibit 4C to Form 8-K filed
December 18, 1998). References to periodic reports are to those
of Wisconsin Public Service Corporation. (File No. 1-03016).
4G First Supplemental Indenture, dated as of November 1, 1999 between
WPS Resources Corporation and Firstar Bank, National Association
and Form of 7.00% Note Due November 1, 2009. (Incorporated by
reference to Exhibit 4A of Form 8-K filed November 12, 1999. [File
No. 1-11337]
-122-
Exhibit
Number Description of Documents
- ------- ------------------------
4H Term Loan Agreement, dated as of November 5, 1999 among PDI New
England, Inc., PDI Canada, Inc., and Bayerische Landesbank
Girozentrale.
10A Copy of Joint Power Supply Agreement among Wisconsin Public
Service Corporation, Wisconsin Power and Light Company, and
Madison Gas and Electric Company, dated February 2, 1967
(Incorporated by reference to Exhibit 4.09 in File No. 2-27308).
10B Copy of Joint Power Supply Agreement (Exclusive of Exhibits) among
Wisconsin Public Service Corporation, Wisconsin Power and Light
Company, and Madison Gas and Electric Company dated July 26, 1973
(Incorporated by reference to Exhibit 5.04A in File No. 2-48781).
10C Settlement and Ownership Transfer Agreement dated September 29,
1998 between Wisconsin Public Service Corporation and Madison Gas
and Electric Company (Incorporated by reference to Exhibit 99-2 to
Form 8-K/A filed March 2, 1999) (File No. 1-03016).
10D-1 Copy of Basic Generating Agreement, Unit 4, Edgewater Generating
Station, dated June 5, 1967, between Wisconsin Power and Light
Company and Wisconsin Public Service Corporation (Incorporated by
reference to Exhibit 4.10 in File No. 2-27308).
10D-2 Copy of Agreement for Construction and Operation of Edgewater 5
Generating Unit, dated February 24, 1983, between Wisconsin Power
and Light Company, Wisconsin Electric Power Company, and Wisconsin
Public Service Corporation (Incorporated by reference to
Exhibit 10C-1 to Form 10-K of Wisconsin Public Service Corporation
for the year ended December 31, 1983 [File No. 1-3016]).
10D-3 Amendment No. 1 to Agreement for Construction and Operation of
Edgewater 5 Generating Unit, dated December 1, 1988 (Incorporated
by reference to Exhibit 10C-2 to Form 10-K of Wisconsin Public
Service Corporation for the year ended December 31, 1988 [File
No. 1-3016]).
10E Copy of revised Agreement for Construction and Operation of
Columbia Generating Plant among Wisconsin Public Service
Corporation, Wisconsin Power and Light Company, and Madison Gas
and Electric Company, dated July 26, 1973 (Incorporated by
reference to Exhibit 5.07 in File No. 2-48781).
10F Copy of Guaranty and Agreements and Note Agreements for Wisconsin
Public Service Corporation Employee Stock Ownership Plan and Trust
(ESOP) dated November 1, 1990 (Incorporated by reference to
Exhibits 10.1 and 10.2 to Form 8-K of Wisconsin Public Service
Corporation filed November 2, 1990 [File No. 1-3016]).
10G-1 Copy of Power Purchase Agreement Between De Pere Energy LLC and
Wisconsin Public Service Corporation dated November 8, 1995 and
amended by a Letter Agreement dated February 18, 1997.
(Incorporated by reference to Exhibit 10F-1 to the Form 10-K for
the year ended December 31, 1997 [File No. 1-3016]).
-123-
Exhibit
Number Description of Documents
- ------- ------------------------
10H-1 Copy of amended and restated WPS Resources Corporation Deferred
Compensation Plan for executives and non-employee directors,
effective March 1, 1999.
10H-2 Copy of Form of Executive Employment and Severance Agreement
entered into between WPS Resources Corporation and each of the
following: Ralph G. Baeten, Daniel P. Bittner, Diane L. Ford,
Richard E. James, Thomas P. Meinz, Phillip M. Mikulsky,
Wayne J. Peterson, Patrick D. Schrickel, Charles A. Schrock,
Clark R. Steinhardt, Bernard J. Treml, and Larry L. Weyers
(Incorporated by reference to Exhibit 10.6 to Form 10-Q for the
quarter ended June 30, 1997, filed July 25, 1997 [File
No. 1-11337]).
10H-3 Copy of WPS Resources Corporation Short-Term Variable Pay Plan
effective January 1, 1998. (Incorporated by reference to
Exhibit 10G-3 in the Form 10-K for the year ended December 31,
1997 [File No. 1-11337]).
10H-4 Copy of WPS Resources 1999 Stock Option Plan effective May 6, 1999
(Incorporated by reference to Exhibit 10-2 in the Form 10-Q for
the quarter ended June 30, 1999, filed August 11, 1999. [File No.
[1-11337])
10H-5 WPS Resources Corporation 1999 Non-Employee Directors Stock Option
Plan (Incorporated by reference to Exhibit 4.2 in Form S-8
December 21, 1999. [File No. 333-93193])
99A Settlement and Ownership Transfer Agreement dated September 29,
1998 between Wisconsin Public Service Corporation and Madison Gas
& Electric Company. (Incorporated by reference to Exhibit 99-2 of
Form 8-K/A filed March 1, 1999.)
-124-
LISTING OF EXHIBITS ATTACHED
Exhibit
Number Description of Document Pages in 10-K
- ------- ----------------------- -------------
2A* Asset Purchase Agreement By and Among PP&L,
Inc., PP&L Resources, Inc., Lady Jane Collieries,
Inc. and Sunbury Holdings, LLC, dated as of
May 1, 1999. E-1
3B-1 By-Laws of WPS Resources Corporation as in
effect February 10, 2000. E-76
3B-2 By-Laws of Wisconsin Public Service Corporation
as in effect February 10, 2000. E-116
4H Term Loan Agreement, dated as of November 5, 1999
among PDI New England, Inc., PDI Canada, Inc.,
and Bayerische Landesbank Girozentrale. E-155
10H-1 WPS Resources Corporation Amended and Restated
Deferred Compensation Plan Effective March 1,
1999 E-211
21 Subsidiaries of the Registrant E-240
23 Consent of Independent Public Accountants E-241
24 Powers of Attorney E-242
27 Financial Data Schedule
WPS Resources Corporation E-251
Wisconsin Public Service Corporation E-252
- --------------
* Schedules and exhibits to this document are not being filed herewith.
The registrant agrees to furnish supplementally a copy of any such schedule or
exhibit to the Securities and Exchange Commission upon request.
-125-
(b) Reports on Form 8-K
A Current Report on Form 8-K dated May 24, 1999 was filed by
WPS Resources Corporation on June 1, 1999. The report included
under Item 5 the announcement of that WPS Power Development
reached agreement with PP&L Resources, Inc. to purchase the
389megawatt Sunbury Station, two oil fired combustion turbines,
coal inventory and the Lady Jane Coal Transshipment Facility.
The Form 8-K also reported on the establishment of a $150 million
medium term note program by WPS Resources Capital Corporation.
A Current Report on Form 8-K dated November 9, 1999 was filed by
WPS Resources Corporation on November 11, 1999. The report
included under Item 5 the announcement that WPS Resources entered
into an underwriting agreement in connection with the offering of
$150 million aggregate principal amount of 7.00% Senior Notes Due
November 1, 2009.
A Current Report on Form 8-K was dated and filed December 14, 1999
by WPS Resources. The report included under Item 5 the
announcement that WPS Resources would discontinue issuing common
stock under its Stock Investment Plan and would begin purchasing
common stock on the open market to meet the Plan's annual
requirements.
-126-
(a) | Documents filed as part of this report: | ||
(1) | Consolidated Financial Statements included in Part II at Item 8 above: | ||
Description | Pages in 10-K | ||
WPS Resources Corporation | |||
Consolidated Statements of Income, Comprehensive Income, and Retained Earnings for the three years ended December 31, 2000, 1999, and 1998 | 67 | ||
Consolidated Balance Sheets as of December 31, 2000 and 1999 | 68 | ||
Consolidated Statements of Capitalization as of December 31, 2000 and 1999 | 70 | ||
Consolidated Statements of Cash Flows for the three years ended December 31, 2000, 1999, and 1998 | 71 | ||
Notes to Consolidated Financial Statements | 72 | ||
Report of Independent Public Accountants | 98 | ||
Wisconsin Public Service Corporation | |||
Consolidated Statements of Income and Comprehensive Income for the three years ended December 31, 2000, 1999, and 1998 | 99 | ||
Consolidated Balance Sheets as of December 31, 2000 and 1999 | 100 | ||
Consolidated Statements of Capitalization as of December 31, 2000 and 1999 | 102 | ||
Consolidated Statements of Cash Flows for the three years ended December 31, 2000, 1999, and 1998 | 103 | ||
Consolidated Statements of Retained Earnings for the three years ended December 31, 2000, 1999, and 1998 | 104 | ||
Notes to Consolidated Financial Statements | 105 | ||
Report of Independent Public Accountants | 111 | ||
(2) | Financial statement schedules. | ||
Description | Pages in 10-K | ||
Schedule I - Condensed Parent Company Only Financial Statements | |||
A. | Report of Independent Public Accountants | 123 | |
B. | Statements of Income and Retained Earnings | 124 | |
C. | Balance Sheets | 125 | |
D. | Statements of Cash Flows | 126 | |
E. | Notes to Parent Company Financial Statements | 127 | |
(3) | Listing of all exhibits, including those incorporated by reference. | ||
Exhibit | Description of Documents |
2* | Asset Purchase Agreement Among Maine Public Service Company, Maine and New Brunswick Electrical Power Company, Limited and WPS Power Development, Inc. dated as of July 7, 1998. (Incorporated by reference to Exhibit 2 to Form 10-K for the year ended December 31, 1998.) |
2A-1* | Asset Purchase Agreement By and Among PPL, Inc., PP&L Resources, Inc., Lady Jane Collieries, Inc. and Sunbury Holdings, LLC, dated as of May 1, 1999. (Incorporated by reference to Exhibit 2A to Form 10-K for the year ended December 31, 1999.) |
2A-2* | Asset Sale Agreement Between Sierra Pacific Power Company and WPS Northern Nevada, LLC for the Tracy/Pinon Asset Bundle, dated as of October 25, 2000. |
2A-3* | Asset Contribution Agreement between American Transmission Company LLC and Wisconsin Electric Power Company, Wisconsin Power and Light Company, Wisconsin Public Service Corp, Madison Gas & Electric Co., Edison Sault Electric Company, South Beloit Water, Gas and Electric Company, dated as of December 15, 2000. |
2A-4* | Operating Agreement of American Transmission Company LLC dated as of January 1, 2001. |
3A-1 | Restated Articles of Incorporation of WPS Resources Corporation. (Incorporated by reference to Appendix B to Amendment No. 1 to the Company's Registration Statement on Form S-4, filed February 28, 1994 [Reg. No. 33-52199]). |
3A-2 | Articles of Incorporation of Wisconsin Public Service Corporation as effective May 26, 1972 and amended through May 31, 1988 (Incorporated by reference to Exhibit 3A to Form 10-K for the year ended December 31, 1991); Articles of Amendment to Articles of Incorporation dated June 9, 1993 (Incorporated by reference to Exhibit 3 to Form 8-K filed June 10, 1993). |
3B-1 | By-Laws of WPS Resources Corporation as in effect February 8, 2001. |
3B-2 | By-Laws of Wisconsin Public Service Corporation as in effect February 8, 2001. |
4A | Copy of Rights Agreement, dated December 12, 1996 between WPS Resources Corporation and Firstar Trust Company (Incorporated by reference to Exhibit 4.1 to Form 8-A filed December 13, 1996 [File No.1-11337]). |
4B | Copy of First Mortgage and Deed of Trust, dated as of January 1, |
4C | Amended and Restated Declaration of Trust of WPS Resources Capital Trust I dated as of July 30, 1998 among WPS Resources Corporation as sponsor, State Street Bank and Trust Company as Administrative Trustee, First Union Trust Company, National Association, as Delaware Trustee, and Daniel P. Bittner and Ralph G. Baeten, as Administrative Trustees (Incorporated by reference to Exhibit 4.1 to Form 8-K filed August 6, 1998) (File No. 1-11337). |
4D | Indenture dated as of July 30, 1998, between WPS Resources Corporation and State Street Bank and Trust Company, as trustee (Incorporated by reference to Exhibit 4.2 to Form 8-K filed August 6, 1998); First Supplemental Indenture dated as of July 30, 1998, between WPS Resources Corporation and State Street Bank and Trust Company, as trustee (Incorporated by reference to Exhibit 4.3 to Form 8-K filed August 6, 1998). References to periodic reports are to those of WPS Resources Corporation. (File No. 1-11337). |
4E | Trust Preferred Securities Guarantee Agreement dated as of July 30, 1998, between WPS Resources Corporation and State Street Bank and Trust Company, guarantee trustee (Incorporated by reference to Exhibit 4.4 to Form 8-K filed August 6, 1998) (File No. 1-11337). |
4F | Indenture, dated as of December 1, 1998, between Wisconsin Public Service Corporation and Firstar Bank Milwaukee, N.A., National Association (Incorporated by reference to Exhibit 4A to Form 8-K filed December 18, 1998); First Supplemental Indenture, dated as of December 1, 1998 between Wisconsin Public Service Corporation and Firstar Bank Milwaukee, N.A., National Association (Incorporated by reference to Exhibit 4C to Form 8-K filed December 18, 1998). References to periodic reports are to those of Wisconsin Public Service Corporation. (File No. 1-03016). |
4G | First Supplemental Indenture, dated as of November 1, 1999 between WPS Resources Corporation and Firstar Bank, National Association and Form of 7.00% Note Due November 1, 2009. (Incorporated by reference to Exhibit 4A of Form 8-K filed November 12, 1999. (File No. 1-11337) |
10A | Copy of Joint Power Supply Agreement among Wisconsin Public Service Corporation, Wisconsin Power and Light Company, and Madison Gas and Electric Company, dated February 2, 1967 (Incorporated by reference to Exhibit 4.09 in File No. 2-27308). |
10B | Copy of Joint Power Supply Agreement (Exclusive of Exhibits) among Wisconsin Public Service Corporation, Wisconsin Power and Light Company, and Madison Gas and Electric Company dated July 26, 1973 (Incorporated by reference to Exhibit 5.04A in File No. 2-48781). |
10C | Settlement and Ownership Transfer Agreement dated September 29, 1998 between Wisconsin Public Service Corporation and Madison Gas and Electric Company (Incorporated by reference to Exhibit 99-2 to Form 8-K/A filed March 2, 1999) (File No. 1-03016). |
10D-1 | Copy of Basic Generating Agreement, Unit 4, Edgewater Generating Station, dated June 5, 1967, between Wisconsin Power and Light Company and Wisconsin Public Service Corporation (Incorporated by reference to Exhibit 4.10 in File No. 2-27308). |
10D-2 | Copy of Agreement for Construction and Operation of Edgewater 5 Generating Unit, dated February 24, 1983, between Wisconsin Power and Light Company, Wisconsin Electric Power Company, and Wisconsin Public Service Corporation (Incorporated by reference to Exhibit 10C-1 to Form 10-K of Wisconsin Public Service Corporation for the year ended December 31, 1983 [File No. 1-3016]). |
10D-3 | Amendment No. 1 to Agreement for Construction and Operation of Edgewater 5 Generating Unit, dated December 1, 1988 (Incorporated by reference to Exhibit 10C-2 to Form 10-K of Wisconsin Public Service Corporation for the year ended December 31, 1988 [File No. 1-3016]). |
10E | Copy of revised Agreement for Construction and Operation of Columbia Generating Plant among Wisconsin Public Service Corporation, Wisconsin Power and Light Company, and Madison Gas and Electric Company, dated July 26, 1973 (Incorporated by reference to Exhibit 5.07 in File No. 2-48781). |
10G-1 | Copy of Power Purchase Agreement Between De Pere Energy LLC and Wisconsin Public Service Corporation dated November 8, 1995 and amended by a Letter Agreement dated February 18, 1997. (Incorporated by reference to Exhibit 10F-1 to the Form 10-K for the year ended December 31, 1997 [File No. 1-3016]). |
10H-1 | Copy of Amendment to Key Executive Employment and Severance Agreement entered into between WPS Resources Corporation and each of the following: Daniel P. Bittner, Phillip M. Mikulsky, Patrick D. Schrickel, and Larry L. Weyers. |
10H-2 | Copy of Amendment to Key Executive Employment and Severance Agreement entered into between WPS Resources Corporation and each of the following: Ralph G. Baeten, Diane L. Ford, Richard E. James, Thomas P. Meinz, Wayne J. Peterson, Charles A. Schrock, and Bernard J. Treml. |
10H-3 | WPS Resources Corporation Deferred Compensation Plan to be effective January 1, 2001. |
10H-4 | WPS Resources Corporation 2001 Omnibus Incentive Compensation Plan to be effective January 1, 2001. |
10H-5 | WPS Resources Corporation Non-Employee Director Deferred Compensation and Deferred Stock Unit Plan to be effective January 1, 2001. |
10H-6 | WPS Resources Corporation Short-Term Variable Pay Plan effective January 1, 1999. |
10H-7 | Copy of WPS Resources 1999 Stock Option Plan effective May 6, 1999 (Incorporated by reference to Exhibit 10-2 in the Form 10-Q for the quarter ended June 30, 1999, filed August 11, 1999. [File No. |
10H-8 | WPS Resources Corporation 1999 Non-Employee Directors Stock Option Plan (Incorporated by reference to Exhibit 4.2 in Form S-8 December 21, 1999. [File No. 333-93193]) |
10H-9 | Copy of the amended and restated WPS Resources Corporation Deferred Compensation Plan for executives and non-employee directors, effective March 1,1999. (Incorporated by reference to Exhibit 10H-1 to Form 10-K for the year ended December 31, 1999) |
10I-1 | Equity Contribution Agreement Between WPS Resources Corporation and WPS Northern Nevada, LLC, dated October 25, 2000 |
10I-2 | Guaranty Agreement Between WPS Resources Corporation and WPS Northern Nevada, LLC, dated October 25, 2000 |
10I-3* | Transitional Power Purchase Agreement By and Between Sierra Pacific Power Company and WPS Northern Nevada, LLC, dated October 25, 2000 |
10J-1 | Term Loan Agreement, dated as of November 5, 1999 among PDI New England, Inc., PDI Canada, Inc., and Bayerische Landesbank Girozentrale. (Incorporated by reference to Exhibit 4H to Form 10-K for the year ended December 31, 1999.) |
10J-2* | Credit Agreement dated as of April 14, 2000 among Sunbury Generation, LLC, as Borrower, Bayerische Landesbank Girozentrale, Cayman Islands Branch, as WC Lender, the Term Lenders Party Hereto From Time to Time and Bayerische Landesbank Girozentrale, New York Branch, as Administrative Agent. |
12 | WPS Resources Corporation Ratio of Earnings to Fixed Charges and Ratio of Earnings to Fixed Charges and Preferred Dividends |
21 | Subsidiaries of the Registrant |
23 | Consent of Independent Public Accountants |
24 | Powers of Attorney |
LISTING OF EXHIBITS ATTACHED | |||
Exhibit Number | Description of Document | ||
2A-2* | Asset Sale Agreement Between Sierra Pacific Power Company and WPS Northern Nevada, LLC for the Tracy/Pinon Asset Bundle, dated as of October 25, 2000. | ||
2A-3* | Asset Contribution Agreement between American Transmission Company LLC and Wisconsin Electric Power Company, Wisconsin Power and Light Company, Wisconsin Public Service Corp, Madison Gas & Electric Co., Edison Sault Electric Company, South Beloit Water, Gas and Electric Company, dated as of December 15, 2000. | ||
2A-4* | Operating Agreement of American Transmission Company LLC dated as of January 1, 2001. | ||
3B-1 | By-Laws of WPS Resources Corporation as in effect February 8, 2001. | ||
3B-2 | By-Laws of Wisconsin Public Service Corporation as in effect February 8, 2001. | ||
10H-1 | Copy of Amendment to Key Executive Employment and Severance Agreement entered into between WPS Resources Corporation and each of the following: Daniel P. Bittner, Phillip M. Mikulsky, Patrick D. Schrickel, and Larry L. Weyers. | ||
10H-2 | Copy of Amendment to Key Executive Employment and Severance Agreement entered into between WPS Resources Corporation and each of the following: Ralph G. Baeten, Diane L. Ford, Richard E. James, Thomas P. Meinz, Wayne J. Peterson, Charles A. Schrock, and Bernard J. Treml. | ||
10H-3 | WPS Resources Corporation Deferred Compensation Plan to be effective January 1, 2001. | ||
10H-4 | WPS Resources Corporation 2001 Omnibus Incentive Compensation Plan to be effective January 1, 2001. | ||
10H-5 | WPS Resources Corporation Non-Employee Director Deferred Compensation and Deferred Stock Unit Plan to be effective January 1, 2001. | ||
10H-6 | WPS Resources Corporation Short-Term Variable Pay Plan effective January 1, 1999. | ||
10I-1 | Equity Contribution Agreement Between WPS Resources Corporation and WPS Northern Nevada, LLC, dated October 25, 2000 | ||
10I-2 | Guaranty Agreement Between WPS Resources Corporation and WPS Northern Nevada, LLC, dated October 25, 2000 | ||
10I-3* | Transitional Power Purchase Agreement By and Between Sierra Pacific Power Company and WPS Northern Nevada, LLC, dated October 25, 2000 | ||
10J-2* | Credit Agreement dated as of April 14, 2000 among Sunbury Generation, LLC, as Borrower, Bayerische Landesbank Girozentrale, Cayman Islands Branch, as WC Lender, the Term Lenders Party Hereto From Time to Time and Bayerische Landesbank Girozentrale, New York Branch, as Administrative Agent. | ||
12 | WPS Resources Corporation Ratio of Earnings to Fixed Charges and Ratio of Earnings to Fixed Charges and Preferred Dividends | ||
21 | Subsidiaries of the Registrant | ||
23 | Consent of Independent Public Accountants | ||
24 | Powers of Attorney | ||
* | Schedules and exhibits to this document are not being filed herewith. The registrant agrees to furnish supplementally a copy of any such schedule or exhibit to the Securities and Exchange Commission upon request. | ||
(b) | Reports on Form 8-K | ||
On March 8, 2000 a Form 8-K was filed by WPS Resources Corporation. The Form reported under Item 5 WPS Resources' plans to purchase shares of common stock in the open market to fund the stock-based employee benefit plans and the Stock Investment Plan. | |||
On May 30, 2000 a Form 8-K was filed by WPS Resources Corporation. The Form reported under Item 5 that WPS Resources Corporation and Wisconsin Fuel and Light Company agreed to merge Wisconsin Fuel and Light Company into a wholly-owned subsidiary of WPS Resources Corporation. | |||
On August 31, 2000 a Form 8-K was filed by WPS Resources Corporation. The Form reported under Item 5 that WPS Power Development, Inc. completed the purchase of CinCap VI, LLC. | |||
On October 27, 2000 a Form 8-K was filed by WPS Resources Corporation. The Form reported under Item 5 that WPS Power Development, Inc. reached an agreement to purchase the Tracy Power Station from Sierra Pacific Resources. | |||
On November 7, 2000 a Form 8-K was filed by Wisconsin Public Service Corporation. The Form reported under Item 5 that Wisconsin Public Service Corporation adjourned its Special Meeting of Preferred Shareholders. | |||
On November 29, 2000 a Form 8-K was filed by WPS Resources Corporation. The Form reported under Item 5 that WPS Resources Corporation revised its earnings projection for the calendar year 2000. | |||
On January 1, 2001 a Form 8-K was filed by Wisconsin Public Service Corporation. The Form reported under Item 5 that Public Service Commission of Wisconsin approved new electric and natural gas rates, effective on January 1, 2001, for Wisconsin Public Service Corporation. | |||
On January 1, 2001 a Form 8-K was filed by WPS Resources Corporation and Wisconsin Public Service Corporation. The Form reported under Item 5 that Wisconsin Public Service Corporation completed the transfer of the ownership and operation of certain of its transmission facilities to American Transmission Company, LLC pursuant to regulatory approvals. WPS Resource Corporation also reported, effective January 22, 2001, it will be issuing new shares of WPS Resources Corporation common stock to meet the annual requirements of its Stock Investment Plan. | |||
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
WPS RESOURCES CORPORATION
and
WISCONSIN PUBLIC SERVICE CORPORATION
(Registrants)
/S/ L. L. Weyers
-------------------------------------------------------------------
L. L. Weyers L. L. Weyers
Chairman, President, and Chairman and
Chief Executive Officer Chief Executive Officer
WPS Resources Corporation
/s/ L. L. Weyers | |
L. L. Weyers | L. L. Weyers |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title
Signature | Title | Date |
A. Dean Arganbright | Director | February 27, 2001 |
Michael S. Ariens | Director | |
Richard A. Bemis | Director | |
Robert C. Gallagher | Director | |
Kathryn M. Hasselblad-Pascale | Director | /s/ L. L. Weyers |
James L. Kemerling | Director | L. L. Weyers |
John C. Meng | Director | Attorney-in Fact |
/s/ L. L. Weyers | Principal Executive Officer and Director | |
L. L. Weyers | ||
/s/ D. P. Bittner | Principal Financial Officer | |
D. P. Bittner | ||
/s/ D. L. Ford | Principal Accounting Officer | |
D. L. Ford |
SCHEDULE I - -------------------------------------------------------------------------
A. Dean Arganbright Director March 16, 2000
Michael S. Ariens Director
Richard A. Bemis Director
Clarence R. Fisher Director
Robert C. Gallagher Director /S/ L. L. Weyers
Kathryn M. Hasselblad-Pascale Director -----------------
James L. Kemerling Director L. L. Weyers
John C. Meng Director Attorney-in-Fact
/S/ L. L. Weyers Principal Executive March 16, 2000
- ----------------------- Officer and Director
L. L. Weyers
/S/ D. P. Bittner Principal Financial March 16, 2000
- ----------------------- Officer
D. P. Bittner
/S/ D. L. Ford Principal Accounting March 16, 2000
- ----------------------- Officer
D. L. Ford
-127-
SCHEDULE I - CONDENSED
PARENT COMPANY FINANCIAL STATEMENTS
WPS RESOURCES CORPORATION (PARENT COMPANY ONLY)
A. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON SCHEDULE I - CONDENSED PARENT COMPANY
ONLY FINANCIAL STATEMENTS
To the Board of Directors of WPS Resources Corporation:
We have audited in accordance with auditing standards generally accepted auditing standards,in the United States, the consolidated financial statements of WPS Resources Corporation included in this Form 10-K, and have issued our report thereon dated January 27, 2000.25, 2001. Our audit was made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. Supplemental Schedule I is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not a part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in ourthe audit of the basic consolidated 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 financial statements taken as a whole.
/s/
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin
January 27, 2000
-128-
SCHEDULE I - CONDENSED |
| ||
PARENT COMPANY FINANCIAL STATEMENTS |
| ||
WPS RESOURCES CORPORATION (PARENT COMPANY ONLY) |
| ||
| |||
B. STATEMENTS OF INCOME AND RETAINED EARNINGS | |||
|
| ||
| |||
Year Ended December 31 (Thousands) | 2000 | 1999 | 1998 |
|
|
|
|
Income | |||
Dividends from subsidiaries in excess of equity earnings | ($33,522) | ($30,128) | ($26,752) |
Dividends from subsidiaries | 109,340 | 91,883 | 75,370 |
Income from subsidiaries | 75,818 | 61,755 | 48,618 |
Investment income and other | 8,711 | 5,144 | 4,516 |
|
|
|
|
Total income | 84,529 | 66,899 | 53,134 |
Operating expenses | 8,759 | 2,642 | 4,557 |
Income before interest expense and income taxes | 75,770 | 64,257 | 48,577 |
Interest expense | 15,553 | 7,066 | 2,914 |
Income before income taxes | 60,217 | 57,191 | 45,663 |
Income taxes | (6,776) | (2,374) | (968) |
Net Income | 66,993 | 59,565 | 46,631 |
Retained earnings, beginning of year | 341,701 | 335,154 | 339,508 |
Common stock dividend | (53,938) | (53,018) | (50,985) |
|
|
|
|
Retained earnings, end of year | $354,756 | $341,701 | $335,154 |
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SCHEDULE I - CONDENSED |
| |
PARENT COMPANY FINANCIAL STATEMENTS |
| |
WPS RESOURCES CORPORATION (PARENT COMPANY ONLY) |
| |
| ||
C. BALANCE SHEETS | ||
|
| |
| ||
At December 31 (Thousands) | 2000 | 1999 |
Assets |
|
|
Current assets |
|
|
Cash and equivalents | $ 3,010 | $ - |
Accounts receivable - affiliates | 2,170 | 1,165 |
Other receivables | 1,960 | 987 |
Notes receivable - affiliates (See Note 1) | 34,312 | 125,190 |
Total current assets | 41,452 | 127,342 |
|
|
|
Long-term notes receivable - affiliates (See Note 2) | 20,976 | 8,811 |
|
| |
Investments in subsidiaries, at equity |
|
|
Wisconsin Public Service Corporation | 567,757 | 525,128 |
WPS Resources Capital Corporation | 108,583 | 59,093 |
Upper Peninsula Power Company | 40,581 | 38,924 |
Other | 5,144 | 6,207 |
Total investments in subsidiaries, at equity | 722,065 | 629,352 |
|
| |
Net equipment | 822 | 860 |
Other investments | 21,644 | 18,617 |
Deferred income taxes | 1,930 | 543 |
|
|
|
Total assets | $808,889 | $785,525 |
|
| |
|
| |
Liabilities and Capitalization |
|
|
Current liabilities |
|
|
Commercial paper | $ 59,557 | $ 39,855 |
Accounts payable - affiliates | 654 | 549 |
Accounts payable | 817 | 5,045 |
Dividends payable | 1,143 | 861 |
Other | 2,963 | 1,996 |
Total current liabilities | 65,134 | 48,306 |
|
| |
Capitalization |
|
|
Common stock, $1 par value, 100,000,000 shares |
|
|
authorized; 26,851,034 shares outstanding at |
|
|
December 31, 2000 and 26,851,045 shares |
|
|
outstanding at December 31, 1999 | 26,851 | 26,851 |
Premium on capital stock | 172,451 | 172,108 |
Retained earnings | 354,756 | 341,701 |
Employee Stock Ownership Plan loan guarantees | - | (2,224) |
Treasury shares | (8,149) | - |
Shares in deferred compensation trust | (3,132) | (2,136) |
Total common stock equity | 542,777 | 536,300 |
Unsecured senior note, net of unamortized discount (See Note 3) | 149,478 | 149,419 |
Advances from affiliates | 51,500 | 51,500 |
Total capitalization | 743,755 | 737,219 |
|
|
|
Total liabilities and capitalization | $808,889 | $785,525 |
SCHEDULE I - CONDENSED |
| ||
PARENT COMPANY FINANCIAL STATEMENTS |
| ||
WPS RESOURCES CORPORATION (PARENT COMPANY ONLY) |
| ||
| |||
D. STATEMENTS OF CASH FLOWS | |||
| |||
| |||
Year Ended December 31 (Thousands) | 2000 | 1999 | 1998 |
|
|
|
|
Operating |
|
|
|
Net income | $ 66,993 | $ 59,565 | $ 46,631 |
|
|
|
|
Add dividends from subsidiaries in excess of equity earnings | 33,522 | 18,211 | 26,752 |
Deferred income taxes | (1,387) | (374) | (124) |
Other - net | 3,441 | 7 | (17) |
|
|
|
|
Changes in other items |
|
|
|
Receivables | (1,873) | 572 | (1,542) |
Accounts payable | (4,228) | 3,447 | (4,855) |
Other | (501) | 1,922 | 295 |
Net cash - operating | 95,967 | 83,350 | 67,140 |
|
|
| |
Investing |
|
|
|
Notes receivable - affiliates | 78,713 | (93,372) | (20,181) |
Capital contributions - affiliates | (124,008) | (108,554) | (62,340) |
Investments - other | (4,663) | (1,941) | (1,968) |
Net cash - investing | (49,958) | (203,867) | (84,489) |
|
|
| |
Financing |
|
|
|
Proceeds from short-term debt | - | 34,250 | 196,050 |
Payments on short-term debt | - | (36,650) | (193,650) |
Proceeds from commercial paper | 388,401 | 1,258,095 | 1,867,287 |
Payments on commercial paper | (368,699) | (1,240,830) | (1,849,903) |
Proceeds from intercompany debt | - | - | 50,000 |
Proceeds from long-term debt | - | 149,412 | - |
Purchase of deferred compensation stock | (10,505) | (631) | (554) |
Proceeds from issuance of common stock | - | 8,970 | - |
Common stock dividends | (53,938) | (53,018) | (50,985) |
Financing - other | 1,742 | - | - |
Net cash - financing | (42,999) | 119,598 | 18,245 |
|
|
| |
Net change in cash | 3,010 | (919) | 896 |
Cash, beginning of period | - | 919 | 23 |
Cash, end of period | $ 3,010 | $ 0 | $ 919 |
|
|
| |
Supplemental disclosure of significant noncash transactions: | |||
WPS Resources received noncash dividends of $11,917 |
| ||
from its subsidiaries in the form of investments and |
| ||
real property. |
|
| |
SCHEDULE I - CONDENSED
PARENT COMPANY FINANCIAL STATEMENTS
WPS RESOURCES CORPORATION (PARENT COMPANY ONLY)
B. STATEMENTS OF INCOME AND RETAINED EARNINGS
E. NOTES TO PARENT COMPANY FINANCIAL STATEMENTS
The following are supplemental notes to the WPS Resources Corporation (parent company only) financial statements and should be read in conjunction with our consolidated financial statements and the related notes.
SUPPLEMENTAL NOTES
Note 1 WPS Resources has short-term notes receivable from WPS Energy
Services of $4.9 million, from WPS Power Development of
$103.0 million and from Upper Peninsula Power of $3.0 million.
Notes receivable bear interest rates that approximate current
market rates.
Note 2 WPS Resources has long-term notes receivable from Wisconsin Public
Service of $5.7 million and $8.1 million bearing interest at 8.76%
and 7.35%. Monthly payments are $51,670 and $63,896 through
January 2015 and May 2016. We have $1.3 million of long-term
notes receivable from WPS Energy Services bearing interest at
7-7/8%. Quarterly payments are $69,076 through October 2005. We
also have a $7.5 million note receivable from Upper Peninsula
Power bearing interest at 8.5% through January 2001.
Note 3 WPS Resources has long-term unsecured notes payable of
$150.0 million with an unamortized discount of $0.6 million. The
notes bear interest at 7% through November 2009. Interest is paid
semiannually.
Note 4 WPS Resources has guaranteed certain long term debt and other
obligations of our consolidated subsidiaries primarily for
customer and supplier performance arising in the ordinary course
of business.
-132-
SUPPLEMENTAL NOTES | |
Note 1 | WPS Resources has short-term notes receivable in 2000 and 1999, respectively from WPS Energy Services of $9.0 million and $4.9 million, from WPS Power Development of $19.3 million and $103.0 million, and from Upper Peninsula Power of $6.0 million and $3.0 million. Notes receivable bear interest rates that approximate current market rates. |
Note 2 | WPS Resources has long-term notes receivable from Wisconsin Public Service of $5.6 million and $7.9 million in 2000 and $5.7 million and $8.1 million in 1999, bearing interest rates at 8.76% and 7.35%. Monthly payments are $51,670 and $63,896 through January 2015 and May 2016. We also have a $7.5 million note receivable from Upper Peninsula Power in both years bearing an interest rate at 8.5% through January 2002. |
Note 3 | WPS Resources has long-term unsecured notes payable of $150.0 million in both years with an unamortized discount of $0.5 million and $0.6 million in 2000 and 1999, respectively. The note bears an interest rate at 7% through October 2009. Interest is paid semiannually. |
Note 4 | WPS Resources has guaranteed certain long-term debt and other obligations of our subsidiaries arising in the ordinary course of business. |