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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------- ---------------
Commission 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
920-433-1466
1-3016 WISCONSIN PUBLIC SERVICE CORPORATION 39-0715160
(A Wisconsin Corporation)
700 North Adams Street
P. O. Box 19001
Green Bay, WI 54307-9001
920-433-1466
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 and Chicago Stock
Exchange
Rights to purchase New York Stock Exchange
Common Stock pursuant and Chicago Stock
to Rights Agreement Exchange
dated December 12, 1996
PAGE
Securities registered pursuant to Section 12(g) of the Act:
- -----------------------------------------------------------
WISCONSIN PUBLIC SERVICE CORPORATION
Preferred Stock, Cumulative, $100 par value
5.00% Series 5.08% Series
5.04% Series 6.76% Series
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
$781,131,945 as of March 4, 1998
WISCONSIN PUBLIC SERVICE CORPORATION
None
Number of shares outstanding of each class of common stock, as of December 31,
- ------------------------------------------------------------------------------
1997
- ----
WPS RESOURCES CORPORATION Common Stock, $1 par value,
23,896,962 shares
WISCONSIN PUBLIC SERVICE CORPORATION Common Stock, $4 par value,
23,896,962 shares
DOCUMENTS INCORPORATED BY REFERENCE
(1) Definitive proxy statement for the WPS Resources Corporation Annual
Meeting of Shareholders on May 7, 1998 is incorporated into Parts I and
III.
PAGE
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, 1997
TABLE OF CONTENTS
DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .v
PART I
1. BUSINESS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
A. GENERAL
WPS Resources Corporation . . . . . . . . . . . . . . . . . . .1
Wisconsin Public Service Corporation. . . . . . . . . . . . . .1
Regulatory Oversight. . . . . . . . . . . . . . . . . . . . . .2
Year 2000 Compliance. . . . . . . . . . . . . . . . . . . . . .2
Forward-Looking Statements. . . . . . . . . . . . . . . . . . .2
B. ELECTRIC MATTERS
Electric Operations . . . . . . . . . . . . . . . . . . . . . .3
Generating Capacity . . . . . . . . . . . . . . . . . . . . . .3
Kewaunee Nuclear Power Plant. . . . . . . . . . . . . . . . . .4
Fuel Supply . . . . . . . . . . . . . . . . . . . . . . . . . .6
Electric Generation Mix. . . . . . . . . . . . . . . . . . .6
Fuel Costs . . . . . . . . . . . . . . . . . . . . . . . . .6
Coal . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
Nuclear. . . . . . . . . . . . . . . . . . . . . . . . . . .6
Regulatory Matters in the Wisconsin Jurisdiction. . . . . . . .7
Industry Restructuring . . . . . . . . . . . . . . . . . . .7
Independent System Operator. . . . . . . . . . . . . . . . .8
Merger Activity. . . . . . . . . . . . . . . . . . . . . . .9
Electric Supply Issues . . . . . . . . . . . . . . . . . . .9
Customer Rate Matters. . . . . . . . . . . . . . . . . . . 10
Regulatory Matters in the Michigan Jurisdiction . . . . . . . 10
Industry Restructuring . . . . . . . . . . . . . . . . . . 10
Customer Rate Matters. . . . . . . . . . . . . . . . . . . 11
Regulatory Matters in the FERC Jurisdiction . . . . . . . . . 11
Customer Rate Matters. . . . . . . . . . . . . . . . . . . 11
Open Access Transmission Tariff. . . . . . . . . . . . . . 11
Marketer Status. . . . . . . . . . . . . . . . . . . . . . 11
Wholesale Status . . . . . . . . . . . . . . . . . . . . . 11
Regulatory Compliance. . . . . . . . . . . . . . . . . . . 12
Hydroelectric Licenses . . . . . . . . . . . . . . . . . . 12
Other Matters . . . . . . . . . . . . . . . . . . . . . . . . 12
Research and Development . . . . . . . . . . . . . . . . . 12
Customer Segmentation. . . . . . . . . . . . . . . . . . . 12
Electric Financial Summary. . . . . . . . . . . . . . . . . . 13
Electric Operating Statistics . . . . . . . . . . . . . . . . 14
WPS Resources Corporation. . . . . . . . . . . . . . . . . 14
Wisconsin Public Service Corporation . . . . . . . . . . . 15
i
C. GAS MATTERS
Wisconsin Public Service Corporation's Gas Market . . . . . . 16
Gas Supply. . . . . . . . . . . . . . . . . . . . . . . . . . 16
General. . . . . . . . . . . . . . . . . . . . . . . . . . 16
Pipeline Capacity and Storage. . . . . . . . . . . . . . . 17
Gas Supply Contracts . . . . . . . . . . . . . . . . . . . 18
New Pipeline Supply Source . . . . . . . . . . . . . . . . 18
Federal Regulatory Activities . . . . . . . . . . . . . . . . 19
Dakota . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Viking Costs on ANR Pipeline . . . . . . . . . . . . . . . 19
ANR Rate Case Settlement . . . . . . . . . . . . . . . . . 19
Wisconsin Regulatory Activities . . . . . . . . . . . . . . . 20
General. . . . . . . . . . . . . . . . . . . . . . . . . . 20
Gas Cost Recovery Mechanism. . . . . . . . . . . . . . . . 20
Gas Distribution Restructuring . . . . . . . . . . . . . . 20
Customer Rate Matters. . . . . . . . . . . . . . . . . . . 21
Michigan Regulatory Activities. . . . . . . . . . . . . . . . 21
Gas Cost Recovery. . . . . . . . . . . . . . . . . . . . . 21
Gas Distribution Restructuring . . . . . . . . . . . . . . 21
Customer Rate Matters. . . . . . . . . . . . . . . . . . . 21
Gas Financial Summary . . . . . . . . . . . . . . . . . . . . 22
Gas Operating Statistics. . . . . . . . . . . . . . . . . . . 23
WPS Resources Corporation. . . . . . . . . . . . . . . . . 23
Wisconsin Public Service Corporation . . . . . . . . . . . 24
D. NONREGULATED BUSINESS ACTIVITIES
General . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
WPS Energy Services, Inc. . . . . . . . . . . . . . . . . . . 25
WPS Power Development, Inc. . . . . . . . . . . . . . . . . . 25
Earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . 26
E. ENVIRONMENTAL MATTERS
General . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Air Quality . . . . . . . . . . . . . . . . . . . . . . . . . 26
Water Quality . . . . . . . . . . . . . . . . . . . . . . . . 27
Gas Plant Cleanup . . . . . . . . . . . . . . . . . . . . . . 27
F. CAPITAL REQUIREMENTS . . . . . . . . . . . . . . . . . . . . . . 28
G. EMPLOYEES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
2. PROPERTIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
A. UTILITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
B. NONREGULATED . . . . . . . . . . . . . . . . . . . . . . . . . . 31
3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . 31
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . . 31
4A. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. . . . . . . . . 32
A. EXECUTIVE OFFICERS OF WPS RESOURCES CORPORATION. . . . . . . . . 32
B. EXECUTIVE OFFICERS OF WISCONSIN PUBLIC SERVICE CORPORATION . . . 33
ii
PART II
5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . 34
WPS Resources Corporation Common Stock Two-Year Comparison . . . 34
Dividend Restrictions. . . . . . . . . . . . . . . . . . . . . . 34
Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . 34
6. SELECTED FINANCIAL DATA
WPS RESOURCES CORPORATION
COMPARATIVE FINANCIAL STATEMENTS AND
FINANCIAL STATISTICS (1993 TO 1997)
A. CONSOLIDATED STATEMENTS OF INCOME. . . . . . . . . . . . . . . . 35
B. CONSOLIDATED BALANCE SHEETS. . . . . . . . . . . . . . . . . . . 36
C. FINANCIAL STATISTICS . . . . . . . . . . . . . . . . . . . . . . 37
WISCONSIN PUBLIC SERVICE CORPORATION
COMPARATIVE FINANCIAL DATA AND FINANCIAL
STATISTICS (1993 TO 1997)
D. SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . . . . . . 38
E. FINANCIAL STATISTICS . . . . . . . . . . . . . . . . . . . . . . 39
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION FOR WPS RESOURCES CORPORATION AND
WISCONSIN PUBLIC SERVICE CORPORATION. . . . . . . . . . . . . . . . 40
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WPS RESOURCES CORPORATION
A. CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS. . . . . 52
B. CONSOLIDATED BALANCE SHEETS. . . . . . . . . . . . . . . . . . . 53
C. CONSOLIDATED STATEMENTS OF CAPITALIZATION. . . . . . . . . . . . 55
D. CONSOLIDATED STATEMENTS OF CASH FLOWS. . . . . . . . . . . . . . 56
E. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . 57
F. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS . . . . . . . . . . . . 76
WISCONSIN PUBLIC SERVICE CORPORATION
G. CONSOLIDATED STATEMENTS OF INCOME. . . . . . . . . . . . . . . . 77
H. CONSOLIDATED BALANCE SHEETS. . . . . . . . . . . . . . . . . . . 78
I. CONSOLIDATED STATEMENTS OF CAPITALIZATION. . . . . . . . . . . . 80
J. CONSOLIDATED STATEMENTS OF CASH FLOWS. . . . . . . . . . . . . . 81
K. CONSOLIDATED STATEMENTS OF RETAINED EARNINGS . . . . . . . . . . 82
L. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . 83
M. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS . . . . . . . . . . . . 84
9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . 85
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. . . . . . . . . 85
11. EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . . . . . . . . . 85
iii
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. . . 85
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. . . . . . . . . . . 85
PART IV
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . . . . 86
DESCRIPTION OF DOCUMENTS. . . . . . . . . . . . . . . . . . . . . . 88
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
SCHEDULE III - CONDENSED PARENT COMPANY FINANCIAL STATEMENTS
WPS RESOURCES CORPORATION (PARENT COMPANY ONLY)
A. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS . . . . . . . . . . . . 95
B. STATEMENTS OF INCOME AND RETAINED EARNINGS . . . . . . . . . . . 96
C. BALANCE SHEETS . . . . . . . . . . . . . . . . . . . . . . . . . 97
D. STATEMENTS OF CASH FLOWS . . . . . . . . . . . . . . . . . . . . 98
E. NOTES TO PARENT COMPANY FINANCIAL STATEMENTS . . . . . . . . . . 99
EXHIBITS
10F-1 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
Wisconsin Public Service Corporation. . . . . . . . . . . .100
10G-1 WPS Resources Corporation Amended and Restated
Deferred Compensation Plan Effective January 1,
1998
WPS Resources Corporation . . . . . . . . . . . . . . . . .213
10G-3 WPS Resources Corporation Short-Term Variable
Pay Plan Effective January 1, 1998
WPS Resources Corporation . . . . . . . . . . . . . . . . .240
11 Statement Regarding Computation of Per Share
Earnings
WPS Resources Corporation . . . . . . . . . . . . . . . . .248
21 Subsidiaries of the Registrant . . . . . . . . . . . . . . . . .249
23 Consent of Independent Public Accountants. . . . . . . . . . . .250
24 Powers of Attorney . . . . . . . . . . . . . . . . . . . . . . .251
27 Financial Data Schedule
WPS Resources Corporation . . . . . . . . . . . . . . . . .259
Wisconsin Public Service Corporation. . . . . . . . . . . .260
iv
DEFINITIONS
The following abbreviations and acronyms are used in the text of this
Form 10-K:
Act . . . . . . . . . . . Federal Clean Air Act Amendments of 1990
AFUDC . . . . . . . . . . Allowance for funds used during construction
ANR . . . . . . . . . . . ANR Pipeline Company
APBO. . . . . . . . . . . Accrued postretirement benefit obligation
Btu . . . . . . . . . . . British thermal unit
Columbia *. . . . . . . . The Columbia Energy Center
CWIP. . . . . . . . . . . Construction work in progress
Dakota *. . . . . . . . . Dakota Gasification Plant
De Pere . . . . . . . . . De Pere Energy Center
DNR . . . . . . . . . . . Wisconsin Department of Natural Resources
DOE . . . . . . . . . . . United States Department of Energy
DSM . . . . . . . . . . . Demand-side management of energy use
Dth . . . . . . . . . . . Dekatherm
Edgewater * . . . . . . . The Edgewater Unit 4 power plant
EPA . . . . . . . . . . . United States Environmental Protection Agency
ESOP. . . . . . . . . . . Employee Stock Ownership Plan and Trust of
Wisconsin Public Service Corporation
ESI . . . . . . . . . . . WPS Energy Services, Inc., a nonregulated
subsidiary of WPS Resources Corporation
FASB. . . . . . . . . . . Financial Accounting Standards Board
FERC. . . . . . . . . . . Federal Energy Regulatory Commission
Great Lakes . . . . . . . Great Lakes Transmission Company
GSR . . . . . . . . . . . Gas supply realignment
Interface . . . . . . . . Constrained Minnesota to Eastern Wisconsin
transmission interface
ISO . . . . . . . . . . . Independent system operator
Kewaunee. . . . . . . . . Kewaunee Nuclear Power Plant
v
kVa . . . . . . . . . . . Kilovolt-ampere
kw. . . . . . . . . . . . Kilowatts
kWh . . . . . . . . . . . Kilowatt-hour
MG&E. . . . . . . . . . . Madison Gas and Electric Company
MPSC. . . . . . . . . . . Michigan Public Service Commission
NRC . . . . . . . . . . . Nuclear Regulatory Commission
Order . . . . . . . . . . Order No. 636 issued by the Federal Energy
Regulatory Commission in April 1992
PD. . . . . . . . . . . . Pricing differential
PDI . . . . . . . . . . . WPS Power Development, Inc., a nonregulated
subsidiary of WPS Resources Corporation
PGAC. . . . . . . . . . . Purchased gas adjustment clause
Polsky. . . . . . . . . . Polsky Energy Corporation
PBR . . . . . . . . . . . Performance based rates
PSCW. . . . . . . . . . . Public Service Commission of Wisconsin
Pulliam * . . . . . . . . The Pulliam generating facility
River Power . . . . . . . Wisconsin River Power Company
SEC . . . . . . . . . . . Securities and Exchange Commission
SFAS. . . . . . . . . . . Statement of Financial Accounting Standards
Sheboygan II. . . . . . . Property adjacent to the Sheboygan River
previously used by Wisconsin Public Service
Corporation for the gasification of coal
Stoneman. . . . . . . . . Stoneman Power Plant, a merchant steam plant
Superfund * . . . . . . . Comprehensive Environmental Response,
Compensation, and Liability Act
TransCanada . . . . . . . TransCanada Pipelines
Union . . . . . . . . . . Local 310 of the International Union of
Operating Engineers which represents certain
Wisconsin Public Service Corporation employees
UPEN. . . . . . . . . . . Upper Peninsula Energy Corporation
UPPCO . . . . . . . . . . Upper Peninsula Power Company
Viking. . . . . . . . . . Viking Gas Transmission Company
vi
WDG . . . . . . . . . . . Wisconsin Distributors Group
WEPCO . . . . . . . . . . Wisconsin Electric Power Company
Weston *. . . . . . . . . The Weston generating facility
WP&L. . . . . . . . . . . Wisconsin Power and Light Company
WPPI. . . . . . . . . . . Wisconsin Public Power, Inc.
WPSC. . . . . . . . . . . Wisconsin Public Service Corporation, a
regulated electric and gas utility and the
principal subsidiary of WPS Resources
Corporation
WPSR. . . . . . . . . . . WPS Resources Corporation, a holding company
- -----
* Indicates items not defined elsewhere in this report.
vii
PART I
ITEM 1. BUSINESS
A. GENERAL
WPS RESOURCES CORPORATION
WPS Resources Corporation ("WPSR"), a Wisconsin Corporation, was
incorporated on December 3, 1993 and operates as a holding company with both
regulated (utility) and nonregulated business units. WPSR's principal
wholly-owned subsidiaries, each of which is a Wisconsin corporation, are:
Wisconsin Public Service Corporation ("WPSC"), a regulated electric and gas
utility; and WPS Energy Services, Inc. ("ESI") and WPS Power Development, Inc.
("PDI"), both nonregulated subsidiaries. WPSC, ESI, and PDI represent
approximately 79%, 21%, and .2% of WPSR's consolidated revenues for 1997 and
95%, 4%, and 1% of WPSR's consolidated assets at December 31, 1997,
respectively. All of WPSR's net income for 1997 was derived from WPSC.
On July 10, 1997, WPSR announced an agreement to merge with Upper
Peninsula Energy Corporation ("UPEN"). The S-4 Registration Statement of WPSR
was declared effective by the Securities and Exchange Commission ("SEC") on
December 5, 1997. The shareholders of UPEN approved the merger on January 29,
1998. The merger is subject to (1) approval by the Federal Energy Regulatory
Commission ("FERC"); (2) approval by the SEC under the Public Utility Holding
Company Act of 1935; (3) the expiration or termination of the waiting period
applicable to the merger under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976; (4) receipt by the parties of an opinion of counsel that the
exchange of stock qualifies as a tax-free transaction; (5) receipt by the
parties of appropriate assurances that the transaction will be accounted for
as a pooling of interests; and (6) the satisfaction of various other
conditions. The merger is expected to be completed in the second half of
1998. UPEN will merge with and into WPSR, and Upper Peninsula Power Company
("UPPCO"), UPEN's utility subsidiary, will become a wholly-owned subsidiary of
WPSR. Each of the 2,950,001 outstanding shares of UPEN common stock (no par
value) will be converted into 0.90 shares of WPSR common stock ($1.00 par
value), subject to adjustment for fractional shares, as provided in the merger
agreement.
On a stand-alone basis, WPSR incurred a net loss in 1997 of $1.0 million,
compared with net income of $0.8 million in 1996. The 1997 WPSR stand-alone
loss was attributable primarily to costs related to the proposed merger with
UPEN.
WISCONSIN PUBLIC SERVICE CORPORATION
At December 31, 1997, WPSC served 374,516 electric retail customers and
218,299 gas retail customers in an 11,000 square mile service territory in
northeastern and central Wisconsin and an adjacent part of Upper Michigan.
Additionally, WPSC provides wholesale (full or partial requirements) electric
service, either directly or indirectly, to 12 municipal utilities, 3 Rural
Electrification Administration financed electric cooperatives, and a privately
held utility. Operating revenues in the year 1997 were derived 97% from
Wisconsin customers and 3% from Michigan customers. Of total revenues in
1997, 69% were from electric operations and 31% were from gas operations. Of
-1-
total electric revenues, 90% were from retail sales and 10% were from
wholesale sales.
WPSC's retail service areas are principally protected by indeterminate
permits secured by statute in Wisconsin and through franchises granted by
municipalities in Michigan.
REGULATORY OVERSIGHT
WPSR is exempt from registration under the Public Utility Holding
Company Act of 1935, as amended, but is subject to the various requirements
and prohibitions of the Wisconsin Public Utility Holding Company Act.
Utility rates, service, and securities issues of WPSC are subject to
regulation by the Public Service Commission of Wisconsin ("PSCW") and the
Michigan Public Service Commission ("MPSC"); and WPSC is subject to regulation
of its wholesale electric rates, hydroelectric projects, and certain other
matters by the FERC. WPSC is also subject to limited regulation by local
authorities. WPSC follows Statement of Financial Accounting Standards No. 71,
"Accounting for the Effects of Certain Types of Regulation," and its financial
statements reflect the effects of the different ratemaking principles of
various jurisdictions. These include the PSCW, 90% of revenues, the MPSC,
3% of revenues, and the FERC, 7% of revenues. The operation of the Kewaunee
Nuclear Power Plant ("Kewaunee") is subject to the jurisdiction of the Nuclear
Regulatory Commission ("NRC").
YEAR 2000 COMPLIANCE
WPSR has completed an initial assessment of the impact of year 2000
compliance on its computer systems. WPSR worked with a consultant beginning
in 1996 to analyze the year 2000 problem. Plans have been established to
analyze all in-house and third party software products and applications. A
preliminary plan indicates that all major in-house developed systems are
expected to be in compliance by the end of 1998. The plan is intended to
enable all systems to be in compliance by the year 2000. The most recent
estimated future internal labor and third party cost of year 2000 compliance
is approximately $13.4 million.
FORWARDING-LOOKING STATEMENTS
This report includes forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. Although WPSR
believes that its expectations are based on reasonable assumptions, no
assurance can be given that actual results may not differ materially from
those in the forward-looking statements included in this report for reasons
that include: the speed and degree to which competition enters the electric
and natural gas industries; state and federal legislative and regulatory
initiatives that increase competition, affect cost and investment recovery,
and have an impact on rate structures; the economic climate and industrial,
commercial, and residential growth in areas served by WPSC and ESI; the
weather and other natural phenomena; the timing and extent of changes in
commodity prices and interest rates; conditions in the capital markets; and
growth in opportunities for ESI and PDI.
A forward-looking statement speaks only as of the date on which such
statement is made, and WPSR does not undertake to update any forward-looking
-2-
statement to reflect events or circumstances after the date on which such
statement is made or to reflect the occurrence of unanticipated events. New
factors emerge from time to time, and it is not possible for WPSR to predict
all such factors, nor can it assess the impact of each such factor or the
extent to which any factor, or combination of factors, may cause results to
differ materially from those contained in any forward-looking statement.
B. ELECTRIC MATTERS
ELECTRIC OPERATIONS
The largest communities served at retail with electricity are the cities
of Green Bay, Oshkosh, Wausau, and Stevens Point.
GENERATING CAPACITY
Coordinated planning for generation and transmission is a function of
the Wisconsin Upper Michigan Systems of which WPSC is a member. Other members
include Madison Gas and Electric Company ("MG&E"), UPPCO, Wisconsin Electric
Power Company ("WEPCO"), Wisconsin Power and Light Company ("WP&L"), and
Wisconsin Public Power, Inc. ("WPPI"). Existing and planned interconnections
with other neighboring utilities provide a further means of sharing reserve
capacities and interchanging energy.
WPSC experienced a 1997 net firm load peak of 1,607,000 kilowatts
("kw") on July 17. Considering a firm purchase of 234,000 kw and a total
generating capability of 1,831,300 kw, the system reserve margin was 30.1%.
In addition, 13,300 kw of firm opportunity sales were served during the peak
hour. WPSC's future generating reserves, adjusted for firm purchases, firm
sales, and planned capacity additions, are estimated to be above the planning
criteria of a 18% minimum reserve in 1998 and 1999. See Part I, Item 2,
PROPERTIES, at page 30 for information concerning generating facilities.
During 1997, the PSCW authorized Polsky Energy Corporation ("Polsky"),
an independent power producer, to build the De Pere Energy Center ("De Pere"),
a 179-megawatt combustion turbine generating facility that is scheduled to be
operational in 1999. De Pere will be converted to a 232-megawatt combined
cycle operation on or after the fifth year of operation, per the requirements
of the contract. A combined-cycle unit is a type of combustion turbine in
which the hot exhaust gases pass through a heat recovery steam generator to
produce steam that drives a steam turbine generator which produces
approximately one-third of the power generated. WPSC has a 25-year contract
to purchase capacity and energy from De Pere. WPSC will furnish the natural
gas fuel for the facility and is working closely with Polsky to ensure that
there are adequate transmission lines serving De Pere.
WPSC owns 33.1% of the outstanding capital stock of Wisconsin River
Power Company ("River Power"). The business of River Power consists of the
ownership and operation of two dams and related hydroelectric plants on the
Wisconsin River having an aggregate installed capacity of approximately
38.7 megawatts. The output of the hydroelectric plants is sold, at the sites
of the plants, to the three joint owners (Consolidated Water Power Company of
Wisconsin Rapids, Wisconsin; Wisconsin Power and Light Company of Madison,
Wisconsin; and WPSC of Green Bay, Wisconsin) substantially in proportion to
their stock ownership interests.
-3-
KEWAUNEE NUCLEAR POWER PLANT
The Kewaunee Nuclear Power Plant ("Kewaunee"), a 562-megawatt
pressurized water reactor plant, is operated by WPSC and is jointly owned by
WPSC (41.2%), WP&L (41.0%), and MG&E (17.8%). The Kewaunee operating license
expires in 2013.
Kewaunee returned to service on June 12, 1997 after having been out of
service since September 21, 1996 for refueling, routine maintenance, and
repair of the two steam generators. The original Kewaunee steam generator
tubes are susceptible to corrosion and cracking. Tubes are repaired by
inserting sleeves (tubes within tubes) in the original steam generator tubes.
The most recent repair was undertaken when previously repaired tubes failed.
The repair consisted of removing old sleeves and inserting new slightly longer
sleeves which cover the areas of concern in the original steam generator
tubes. The new sleeves will be inspected during the next refueling and
maintenance outage which is scheduled for the fall of 1998. Kewaunee is
operating at 97% of rated capacity because certain steam generator tubes have
been removed from service rather than repaired.
Kewaunee operated for 238 consecutive days before being removed from
service on February 6, 1998 for repair of a reactor coolant pump seal. The
plant was returned to service on February 13, 1998.
Additional replacement power costs due to the extended Kewaunee outage
were recovered by a $2.0 million per month customer surcharge during the
period February 21, 1997 through July 1, 1997. Kewaunee steam generator
repair costs have been deferred as authorized by the PSCW. The WPSC portion
of these costs is approximately $3.6 million. The owners have requested the
PSCW to approve recovery of these costs through a customer surcharge which
for WPSC would be effective for April and May of 1998.
On March 15, 1996, WPSC filed an application with the PSCW for
permission to replace the Kewaunee steam generators. Public hearings were
held in January of 1998. A decision is expected in March of 1998. The total
cost of replacing the two steam generators would be approximately
$89.0 million. WPSC's share would be $36.7 million in year of occurrence
dollars. Because of work already completed, the elapsed time from placing a
firm order for steam generators to receiving delivery has been shortened to
approximately 22 months.
The owners of Kewaunee have differing views on the desirability of
proceeding with the steam generator replacement project. Although the new
resleeving repair technology may allow the plant to remain in service for an
extended period of time, WPSC favors replacement at the earliest possible date
because of reliability and cost concerns related to steam generator repairs.
To date, the other two owners have been unwilling to support replacement of
the steam generators. If the steam generator replacement project receives
PSCW approval, the issues related to the continued operation and future
ownership would still need to be resolved before steam generator replacement
could proceed.
The NRC's Systematic Assessment of Licensee Performance for Kewaunee for
the period February 19, 1995 through February 15, 1997 was received in 1997.
The report evaluated Kewaunee's performance in four categories: operations,
maintenance, engineering, and plant support. Maintenance was ranked
-4-
"superior," and the other areas were rated as "good." The NRC stated that
Kewaunee's overall performance was generally characterized by effective
management involvement and interdepartmental communication, and a clear
emphasis on quality by the staff. Areas for improvement that were identified
were: timely evaluation of errors of personnel, adequacy of procedures and
equipment for monitoring equipment performance, and the timely resolution of
plant identified deficiencies.
On July 14, 1997, the NRC assessed a $50,000 penalty against Kewaunee.
The penalty was the result of a NRC inspection in January of 1997 where the
NRC questioned the procedures and equipment used to conduct routine
operational tests on several pumps. In response, the procedures were updated
to improve the test methods, and more sensitive equipment was obtained. All
safety-related pumps in the plant were then retested and found to be operating
within standards.
The federal government has the responsibility to dispose of or
permanently store spent nuclear fuel. Spent nuclear fuel is currently being
stored at Kewaunee. With minor plant modifications, Kewaunee should have
sufficient fuel storage capacity until the end of its licensed life in 2013.
Legislation is being considered on the federal level to provide for the
establishment of an interim storage facility as early as 2002. Permanent
storage pursuant to the Nuclear Waste Policy Act of 1982 is discussed at
page 7.
The Midwest Compact Commission, on June 26, 1997, halted development in
Ohio of a six-state, regional disposal facility for low-level radioactive
waste. The Commission cited dwindling regional waste volumes, continued
access to existing disposal facilities, and potentially high development costs
as the primary reasons for the decision. A site at Barnwell, South Carolina,
continues to be available for the storage of low-level radioactive waste from
Kewaunee. In addition, because of technological advances, waste compaction,
and the reduction of waste generated, Kewaunee has on-site low-level
radioactive waste storage capacity sufficient to store low-level waste
expected to be generated over a 10-year period.
The PSCW has directed the owners of Kewaunee to develop depreciation and
decommissioning cost levels based on full recovery by the end of 2002 versus
recovery by license expiration in 2013. This was prompted by the uncertainty
regarding the expected useful life of the plant without steam generator
replacement. At December 31, 1997, the net carrying amount of WPSC's
investment in Kewaunee was approximately $43.0 million. The current cost of
WPSC's share of the estimated costs to decommission Kewaunee, assuming early
retirement ($182.2 million), exceeds the trust assets at December 31, 1997
($134.1 million) by $48.1 million. WPSC's customers in the Wisconsin
jurisdiction are responsible for approximately 89% of WPSC's share of Kewaunee
costs.
As a result of accelerating the recovery of WPSC's share of Kewaunee
related costs, depreciation expense and decommissioning funding have increased
approximately $3.3 million (from $4.7 million in 1996 to $8.0 million in 1997)
and $8.3 million (from $9.0 million in 1996 to $17.3 million in 1997),
respectively, on an annualized basis. During 1997, $7.5 million of
depreciation expense related to unrecovered plant investment was recognized
compared to $4.7 million which was recognized in 1996. During 1997, the
decommissioning funding level was $16.1 million compared to $9.0 million in
-5-
1996. Customer rates, which became effective in the Wisconsin jurisdiction on
February 21, 1997, are designed to recover the accelerated Kewaunee
depreciation and decommissioning costs.
Additional discussion of Kewaunee matters is included in MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION at
pages 46 and 48, and NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Notes 1(h),
1(j), 1(k), and 9 at pages 59, 60, 60, and 71, respectively.
FUEL SUPPLY
ELECTRIC GENERATION MIX
WPSC's electric generation mix in 1997 compared with 1996 was: steam
plants (coal), 68.9%, up from 67.9%; steam plant (nuclear), 8.2% down from
11.2%; hydro, 3.0% down from 3.1%; combined natural gas and fuel oil, 1.3% up
from .6%; and purchased power, 18.6% up from 17.3%. Purchased power
represents short-term energy purchases.
FUEL COSTS
Fuel costs in 1997 compared with 1996, expressed in dollars per million
British thermal unit ("Btu"), were: nuclear, $.43, down from $.47; coal,
$1.09, down from $1.14; natural gas, $2.96, up from $2.84; and No. 2 fuel oil,
$4.27, down from $4.36.
COAL
WPSC's primary fuel source is coal. In 1997, 99% of this coal came from
Powder River Basin mines located in Wyoming and Montana. This coal is very
low in sulfur and meets the standards of the 1990 Clean Air Act for the year
2000 and beyond. Further, this coal is the least cost coal for WPSC from any
of the subbituminous coal producing regions in the United States.
The majority of coal for WPSC's wholly-owned plants and the
jointly-owned Edgewater and Columbia plants is purchased under relatively
short-term contracts of up to three years duration. WPSC has one long-term
contract which covers approximately 16% of total requirements and has
take-or-pay obligations totaling $198.4 million from 1998 through 2016. Coal
transportation for these plants is purchased under contracts of up to five
years duration. Over 90% of the coal transported to these plants is moved
under competitive transportation market conditions which are expected to
continue to yield competitive fuel costs for WPSC for the long term.
NUCLEAR
WPSC purchases uranium concentrates, conversion services, enrichment
services, and fabrication services for nuclear fuel assemblies at Kewaunee.
New fuel assemblies replace used assemblies that are removed from the reactor
every 18 months and placed in storage at the plant site pending removal by the
United States Department of Energy ("DOE").
Uranium concentrates, conversion services, and enrichment services are
purchased at spot market prices, through a bid process, or using existing
contracts.
-6-
A uranium inventory policy requires that sufficient inventory exist for
up to two reactor reloads of fuel. As of December 31, 1997, 960,000 pounds of
yellowcake or its equivalent are held in inventory for Kewaunee.
Two contracts are in place to provide conversion services for Kewaunee
nuclear fuel for reloads in 1998 and 2000.
A contract with Cogema, Inc. provides a fixed quantity of enrichment
services through the year 2001. Additional enrichment services will be
acquired under a contract with the United States Enrichment Corporation which
is in effect for the life of Kewaunee or by purchases on the spot market.
A contract with Siemens Power Corporation provides fuel fabrication
services through March 15, 2001, for Kewaunee. This contract contains force
majeure and termination provisions.
If, for any reason, Kewaunee were forced to suspend operations
permanently, fuel-related obligations are as follows: (1) there are no
financial penalties associated with the present uranium supply, conversion
service, and enrichment agreements, and (2) the fuel fabrication contract
contains force majeure and termination for convenience provisions. As of the
end of 1997, the maximum exposure would not be expected to exceed $550,000.
Uranium inventories could be sold on the spot market.
The Nuclear Waste Policy Act of 1982 requires that the DOE accept,
transport, and dispose of spent nuclear fuel beginning no later than
January 31, 1998. The DOE has announced that it will delay the acceptance of
spent nuclear fuel beyond 1998. The nuclear utilities have been supported by
a decision of the United States Court of Appeals for the District of Columbia
Circuit in their claim that they may pursue the remedies provided in the DOE
standard contract in the event the DOE does not perform its duty to dispose of
spent nuclear fuel by the January 31, 1998 deadline.
The Energy Policy Act of 1992 requires that the federal government and
nuclear utilities fund the decontamination and decommissioning of the
government's three gaseous diffusion plants in the United States. WPSC is
required to pay approximately $600,000 per year (adjusted for inflation)
through the year 2007. WPSC, as well as other nuclear utilities, has filed
suit in the United States Court of Federal Claims disputing the
decontamination and decommissioning assessment. The suit has been stayed
pending the outcome of the Yankee Atomic Electric Company appeal. Yankee
Atomic Electric Company has received an adverse decision in the United States
Court of Appeals for the Federal Circuit and has filed a petition for
certiorari with the United States Supreme Court.
REGULATORY MATTERS IN THE WISCONSIN JURISDICTION
INDUSTRY RESTRUCTURING
In late 1995, the PSCW outlined a plan for restructuring the electric
industry in Wisconsin. The plan included a 32-step, 5-year process which
could conclude with retail competition by the year 2001. Progress on the plan
has been slow. During 1997, the PSCW chairperson developed a replacement
7-step plan for restructuring which is essentially a regrouping of the
original 32 steps with new priorities. To date, the revised plan has not been
adopted as the official PSCW restructuring plan. Restructuring and retail
-7-
competition, although still under consideration, have been replaced as a
priority by electric reliability issues. As a result of the electric
reliability problems during the summer of 1997 (see Electric Supply Issues, at
page 9), the PSCW announced that its first priority is to develop the utility
infrastructure necessary to assure reliable electric service and to remove the
barriers to competition at the wholesale level.
WPSC currently applies accounting standards that recognize the economic
effects of rate regulations and record regulatory assets and liabilities
related to its generation, transmission, and distribution operations. If rate
recovery of generation-related costs becomes unlikely or uncertain, whether
due to competition or regulatory action, these accounting standards may no
longer apply to WPSC's generation operations. This change could result in
either full recovery of generation-related regulatory assets (net of related
regulatory liabilities) and costs or an impairment charge, depending on
whether regulators adopt a transition mechanism for the recovery of all or a
portion of these net regulatory assets and costs. WPSC believes that the
magnitude of any possible impairment charge is lower than the stranded cost
exposure of many other companies in this industry. Based on a current
evaluation of the various factors and conditions that are expected to impact
future cost recovery, management believes that its regulatory assets,
including those related to generation, are probable of future recovery.
Management expects that increased competition in a deregulated
environment will put pressure on operating margins at WPSC. Management also
believes that no significant changes to depreciable lives of WPSC's capital
assets would be necessary in a competitive environment. However, at this
time, management cannot predict the ultimate results of deregulation.
During 1997, in an effort to mitigate the effects of market power, the
PSCW issued an order that prohibited ownership by electric utility affiliates
of merchant electric generating plants. A merchant electric generating plant
is defined as a plant not owned by or under long-term contract with a public
utility. Later, the PSCW decided that it did not have statutory authority to
order a flat prohibition of utility affiliate ownership of merchant plants and
would consider such ownership on a case-by-case basis. The major utilities in
Wisconsin, including WPSC, have made legislative proposals, as part of
reliability and restructuring efforts, advocating deregulation of merchant
plants. PDI has an ownership interest in a merchant generating facility as
discussed on page 25.
In late 1997, the PSCW initiated a docket on essential services and
customer protections the purpose of which is to create a utility customer
safety net for a restructured electric and gas industry.
INDEPENDENT SYSTEM OPERATOR
A major feature of a restructured electric industry is establishment of
independent system operators ("ISOs"). An ISO 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 ISO would monitor the generation,
transmission, and distribution systems, direct the operations of transmission
facilities, administer open access transmission tariffs, and direct generation
redispatch.
-8-
WPSC has been working with a number of groups that are attempting to
form ISOs. The PSCW and the MPSC are considering the formation of statewide
ISOs. The Mid American Power Pool, one of ten National Electric Reliability
Council regions, is developing an ISO that would include utilities in portions
of Illinois, Minnesota, North Dakota, South Dakota, and Wisconsin.
Additionally, a group of 26 utilities in 10 Midwestern states is attempting to
form what is known as the Midwest ISO.
MERGER ACTIVITY
Industry restructuring has been accompanied by merger activity in the
region which could impact the competitive environment. The merger of WPSR and
UPEN, as previously described, is presently awaiting regulatory approval. The
proposed merger between Wisconsin Energy Corporation and Northern States Power
Company was terminated in May 1997 due to merger conditions imposed by the
FERC that were unacceptable to the applicants. The Interstate Energy
Corporation merger between WPL Holdings, Inc., IES Industries, Inc., and
Interstate Power Company has received FERC and state approvals. At
December 31, 1997, approval was pending from the Securities and Exchange
Commission. In May 1997, Wisconsin Energy Corporation announced the proposed
acquisition of ESELCO, Inc., the parent company of the Edison Sault Electric
Company. Regulatory approvals are pending.
ELECTRIC SUPPLY ISSUES
The summer of 1997 provided a serious challenge to the reliability of
the electric system in the region. Over 5,000 megawatts of generating
capacity were unavailable for most of the summer as various utility companies
experienced forced outages for a variety of reasons.
Kewaunee was returned to service after a longer than normal outage
before the greatest demands were placed on the WPSC electric system. WPSC's
Pulliam Unit 3, a 26.7-megawatt facility, was refurbished and returned to
service. WPSC's system operated at nearly full capacity during the warmest
portions of the summer months. WPSC's interruptible customers experienced
only limited interruptions as a result of WPSC being required to provide power
to other utilities in Wisconsin who were experiencing more severe energy
supply problems. See page 3 for a discussion of new generating capacity.
After the summer's reliability concerns, Governor Thompson requested
reports from the PSCW, electric utilities, and industrial customers assessing
the electric capacity problems experienced in eastern Wisconsin during this
past spring and summer. The reports provided analyses and recommendations on
how to assure the future reliability of the electrical supply and made
recommendations on how to improve the effectiveness of the state's utility
regulatory process. WPSC participated in the development of the utility
report.
WPSC is working closely with Governor Thompson, the PSCW, legislators,
and industry participants to ensure that Wisconsin has an adequate supply of
reliable power, an enhanced transmission system, and appropriate regulatory
changes.
-9-
CUSTOMER RATE MATTERS
In the Wisconsin jurisdiction, of the major investor-owned utilities,
WPSC is the low cost electric provider (based on the Edison Electric Institute
Summer 1997 Typical Bill Rate Report) with rates being 91% of the state
average for residential rates, 86% for commercial rates, and 88% for large
industrial rates. WPSC also has some of the lowest gas rates in Wisconsin
with rates being 95% of the state average for residential rates and 94% for
commercial rates.
Customer rates are based on forecasted expenses and capital costs. On
February 20, 1997, the PSCW authorized a $35.5 million, or 8.1%, decrease in
retail electric rates. These rates are effective through 1998.
WPSR's return on common equity was 11.3% and 10.2% for 1997 and 1996,
respectively. WPSR's return on common equity is determined in large part by
the return authorized for WPSC by the PSCW. The authorized return was 11.8%
and 11.5% for 1997 and 1996, respectively, before giving consideration to
earnings on deferred investment tax credits. The authorized return for 1998
remains at 11.8%.
The PSCW approved an electric surcharge to allow WPSC to recover costs
of acquiring replacement power during the extended outage at Kewaunee. The
surcharge, which amounted to approximately $2.0 million per month
(approximately $.23 per kilowatt-hour) was in place for the period
February 21, 1997 through July 1, 1997.
The PSCW authorized deferral of Kewaunee steam generator repair costs
which totaled $10.4 million, with WPSC's share being $3.6 million. The owners
have requested the PSCW to approve recovery of these costs through a customer
surcharge which would be effective for April and May of 1998.
WPSR anticipates filing on April 1, 1998 an application with the PSCW
for increased electric rates to be effective for the years 1999 and 2000.
REGULATORY MATTERS IN THE MICHIGAN JURISDICTION
INDUSTRY RESTRUCTURING
On June 5, 1997, the MPSC ordered utilities under its jurisdiction to
file electric open access plans and related tariffs. This action followed two
years of public hearings and a lack of consensus among the stakeholders. The
MPSC order called for generation open access in increments of 2.5% of retail
load each year starting in 1997 and ending in 2001. Generation open access is
the ability of customers to purchase electric generation from any supplier and
to use existing transmission and distribution lines to transport the energy to
the purchaser's facilities at the same price that the local supplier would
charge itself for such transportation services. There would be full
generation open access for retail load in 2002.
WPSC submitted a plan which provides retail open access starting in 2000
when the MPSC order requires open access for 10% of retail load. The WPSC
plan then continues on the MPSC schedule including full open access in 2002.
There is uncertainty whether the MPSC has authority to order open
access. In early 1998, the Michigan Circuit Court issued a decision holding
-10-
that the MPSC does not have the authority to order retail access, at least on
a pilot basis. It is expected that this court decision will be appealed. In
the meantime, the largest Michigan utilities are preparing for the start of
open access in 1998, and Michigan's small utilities are working with the MPSC
staff to determine when and how they should proceed toward open access.
CUSTOMER RATE MATTERS
WPSC is the lowest cost provider of electric service in Michigan for all
customer classes. WPSC's electric rates are 72% of the Michigan residential
customer average rate and 75% of the large industrial average rate.
Other than power supply cost recovery, WPSC has not had an electric rate
increase in Michigan since 1987.
REGULATORY MATTERS IN THE FERC JURISDICTION
CUSTOMER RATE MATTERS
WPSC has not had a FERC wholesale rate case since 1987.
OPEN ACCESS TRANSMISSION TARIFF
WPSC has reached agreement with a group of Wisconsin municipal
intervenors, the FERC staff, and two administrative law judges regarding the
proposed open access transmission tariff rates and conditions and WPSC's
request for market-based rates. FERC approval is expected early in 1998. The
settlement rate will be in effect for two years.
MARKETER STATUS
ESI has received FERC power "marketer" status. WPSC, ESI, and PDI have
also been authorized to sell electric energy and capacity at market rates.
WHOLESALE STATUS
In recent years, WPSC has experienced increased competition and reduced
margins in the wholesale power market. Transmission availability, pricing and
policy, the availability of reliable and economically priced energy and
capacity in the region, changing market participants (both suppliers and
consumers), the development and increasing use of risk management tools, and
regulatory and legislative developments at both the state and federal levels
are forces that will continue to influence the wholesale electric market.
WPSC aggressively and competitively procures, packages, markets, and
sells electric energy, capacity, ancillary services, and other associated
energy-related products and services to primarily municipal electric utilities
and electric distribution cooperatives. The objectives are to retain existing
wholesale customer load, obtain new customers, maintain margins, and optimize
the use of WPSC's generating assets. WPSC currently provides 12 wholesale
electric customers with approximately 300 megawatts of firm and various levels
of interruptible service. Wholesale sales represented 16% of WPSC's electric
sales volume in 1997 compared to 17% in 1996.
Effective in October 1997, WPPI discontinued purchasing power under a
full-requirements supply contract. WPPI had been purchasing 66 megawatts of
-11-
electricity from WPSC for resale to municipal utilities. WPSC has been
successful in partially offsetting the loss of this load by securing new
customers and by other sales to WPPI.
During 1996, WPSC entered into agreements with UPPCO covering the
handling of after-hours calls, system operating services, and a multi-year
power supply agreement beginning in 1998. Subsequently, as described at
page 1 of this report, WPSR and UPEN, the parent of UPPCO, announced an
agreement to merge.
REGULATORY COMPLIANCE
WPPI requested transmission service across the WPSC portion of the
constrained Minnesota to eastern Wisconsin interface ("Interface") to serve
five of WPPI's municipal customers (Sturgeon Bay, Algoma, Eagle River,
New Holstein, and Washington Island) located in the WPSC service territory.
The Interface is owned by WEPCO, (52%), WP&L (28%), and WPSC (20%). WPPI has
a 1993 contract with WP&L that provides transmission service for these loads
through the WP&L portion of the Interface.
WPSC filed a complaint with the FERC contending that WPPI and WP&L were
conspiring to use the WPSC portion of the interface capacity for a service
that should use the WP&L portion of the Interface. WPPI responded with a FERC
complaint against both WPSC and WP&L indicating that neither has provided the
necessary transmission services across the constrained Interface. WPSC and
WP&L both maintain that they have previous claims to the interface capacity
consistent with the FERC first-come-first-served transmission scheduling
process.
HYDROELECTRIC LICENSES
New licenses were received in 1997 from the FERC for WPSC's
Caldron Falls, High Falls, Johnson Falls, Sandstone Rapids, Potato Rapids,
Peshtigo, and Grand Rapids hydroelectric projects. These licenses represent
29.7 megawatts of hydroelectric generating capacity.
OTHER MATTERS
RESEARCH AND DEVELOPMENT
Electric research and development expenditures totaled $1.3 million for
1997, $1.9 million for 1996, and $2.6 million for 1995. These expenditures
were made for WPSC sponsored projects and were primarily charged to electric
operations.
CUSTOMER SEGMENTATION
Although 13% of electric revenues come from sales to 26 paper mills,
resulting in a relatively high and favorable load factor, 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 WPSC under the current
regulatory environment.
-12-
ELECTRIC FINANCIAL SUMMARY
The following table sets forth the revenues, operating income, and
identifiable assets attributable to electric utility operations:
WISCONSIN PUBLIC SERVICE CORPORATION
==============================================================================
(Thousands) Year Ended December 31
- ------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------
Electric Operating Revenues $479,388 $490,506 $489,000
Operating Income, Including Allowance
For Funds Used During Construction $ 92,998 $101,425 $ 97,928
Identifiable Assets $906,198 $905,325 $906,029
==============================================================================
See Note 12 in Notes to Consolidated Financial Statements.
-13-
ELECTRIC OPERATING STATISTICS
WPS Resources Corporation
=====================================================================================================================
1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
Operating revenues (Thousands)
Residential and farm $163,766 $169,587 $168,391 $163,381
Small commercial and industrial 138,949 144,055 140,280 137,323
Large commercial and industrial 120,312 118,997 117,978 118,121
Resale and other 62,734 58,648 62,351 61,991
- ---------------------------------------------------------------------------------------------------------------------
Total $485,761 $491,287 $489,000 $480,816
=====================================================================================================================
Kilowatt-hour sales (Thousands)
Residential and farm 2,565,432 2,570,397 2,548,373 2,406,479
Small commercial and industrial 2,876,832 2,761,278 2,672,359 2,555,488
Large commercial and industrial 3,943,275 3,744,153 3,644,764 3,468,390
Resale and other 2,126,805 1,970,083 2,112,635 2,121,660
- ---------------------------------------------------------------------------------------------------------------------
Total 11,512,344 11,045,911 10,978,131 10,552,017
=====================================================================================================================
-14-
ELECTRIC OPERATING STATISTICS
Wisconsin Public Service Corporation
================================================================================================================================
1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------------
Operating revenues (Thousands)
Residential and farm $163,766 $169,587 $168,391 $163,381 $165,568
Small commercial and industrial 138,949 144,055 140,280 137,323 140,678
Large commercial and industrial 120,312 118,997 117,978 118,121 123,920
Resale and other 56,361 57,867 62,351 61,991 63,090
- --------------------------------------------------------------------------------------------------------------------------------
Total $479,388 $490,506 $489,000 $480,816 $493,256
================================================================================================================================
Kilowatt-hour sales (Thousands)
Residential and farm 2,565,432 2,570,397 2,548,373 2,406,479 2,349,307
Small commercial and industrial 2,876,832 2,761,278 2,672,359 2,555,488 2,444,548
Large commercial and industrial 3,943,275 3,744,153 3,644,764 3,468,390 3,296,254
Resale and other 1,873,788 1,936,014 2,112,635 2,121,660 2,060,804
- --------------------------------------------------------------------------------------------------------------------------------
Total 11,259,327 11,011,842 10,978,131 10,552,017 10,150,913
================================================================================================================================
Customers served (End of period)
Residential and farm 334,134 328,522 322,550 316,442 310,336
Small commercial and industrial 39,400 38,376 37,455 36,491 35,683
Large commercial and industrial 197 168 170 164 137
Resale and other 836 826 802 796 794
- --------------------------------------------------------------------------------------------------------------------------------
Total 374,567 367,892 360,977 353,893 346,950
================================================================================================================================
Annual average use (Kilowatt-hours)
Residential and farm 7,751 7,905 7,982 7,688 7,649
Small commercial and industrial 74,082 72,995 72,326 70,931 69,532
Large commercial and industrial 21,606,984 22,115,491 21,824,937 22,091,659 24,416,697
================================================================================================================================
Average kilowatt-hour price (Cents)
Residential and farm 6.38 6.60 6.61 6.79 7.05
Small commercial and industrial 4.83 5.22 5.25 5.37 5.75
Large commercial and industrial 3.05 3.18 3.24 3.41 3.76
================================================================================================================================
Production capacity (Summer - kilowatts)
Steam 1,326,000 1,325,400 1,325,400 1,318,300 1,315,300
Nuclear 212,200 213,800 216,700 215,100 215,100
Hydraulic 53,000 53,100 52,900 53,400 53,100
Combustion turbine 205,930 208,600 207,480 201,200 177,200
Other 7,800 4,200 4,240 4,240 4,240
Purchased capacity 14,750 27,250 26,400 26,400 27,700
- --------------------------------------------------------------------------------------------------------------------------------
Total system capacity 1,819,680 1,832,350 1,833,120 1,818,640 1,792,640
================================================================================================================================
Generation and purchases
(Thousands of kilowatt-hours)
Steam 8,213,518 7,956,378 7,428,612 7,047,511 7,004,634
Nuclear 973,485 1,305,751 1,564,268 1,631,003 1,572,696
Hydraulic 351,034 359,750 306,101 292,617 346,386
Purchases and other 2,327,334 2,050,762 2,310,399 2,243,021 1,849,047
- --------------------------------------------------------------------------------------------------------------------------------
Total 11,865,371 11,672,641 11,609,380 11,214,152 10,772,763
================================================================================================================================
Steam fuel costs
(Cents per million Btu)
Fossil 110.124 115.132 118.365 132.360 139.038
Nuclear 43.174 46.674 49.539 49.168 44.888
Total 103.093 105.439 106.320 116.782 121.949
- --------------------------------------------------------------------------------------------------------------------------------
System peak - firm (kilowatts) 1,607,000 1,591,000 1,670,000 1,543,000 1,569,000
================================================================================================================================
Annual load factor 79.42% 77.56% 73.32% 76.96% 73.29%
================================================================================================================================
-15-
C. GAS MATTERS
WPSC'S GAS MARKET
As of December 31, 1997, WPSC provided natural gas distribution service
to 213,195 customers in 210 cities, villages, and towns in northeastern and
central Wisconsin, and 5,104 customers in and around the city of Menominee,
Michigan, for a total of 218,299 gas distribution customers. This represents
an increase of 6,205 customers, or 2.9%, compared to December 31, 1996. The
principal cities served by WPSC include Green Bay, Oshkosh, Sheboygan,
Two Rivers, Marinette, Stevens Point, and Rhinelander all in Wisconsin, and
the city of Menominee in Michigan.
WPSC's gas distribution business has a significant seasonal component
and is impacted by varying weather conditions from year-to-year.
Approximately 68% of WPSC's gas sales and 60% of WPSC's total gas system
throughput (i.e., total gas delivered by WPSC--includes gas sales and gas
delivered for transportation customers) occur during the 5 winter months of
November through March. 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. WPSC
offers interruptible gas sales and gas transportation service for these
customers to enable them to reduce their energy costs and use natural gas
instead of other fuels. Transportation customers total 224. These customers
purchase their gas from other suppliers and contract with WPSC to transport
the gas from ANR Pipeline Company ("ANR") to the customer's facilities.
Another 133 customers still purchase their gas from WPSC but have elected to
do so on an interruptible basis. Additional customers are switching from firm
system supply to either interruptible system supply or transportation service
each year as the economics and service options become attractive for them.
WPSC's gas operations also provide gas to WPSC's electric operations for
power generation in combustion turbine peaking generators and for start-up,
flame stabilization, and peaking use at WPSC's Weston and Pulliam coal-fired
steam plants. Gas sales for power generation use are provided on an
interruptible basis, with the power plants maintaining alternate fuel
capability.
Total gas deliveries by WPSC in 1997, including customer-owned gas
transported by WPSC, were 67,289,030 Dth, a 0.4% decrease over 1996. A
dekatherm ("Dth") is equivalent to 10 therms or 1 million Btu of energy. Gas
transported for end-user transport customers included in the above total was
28,077,338 Dth in 1997, or approximately 42% of WPSC's total deliveries.
WPSC's peak day gas throughput in 1997 occurred on January 16 with
422,859 Dth total gas throughput at an average Green Bay temperature of minus
7.7 degrees Fahrenheit. This compares with WPSC's record gas system
throughput of 432,928 Dth set on February 2, 1996 at an average Green Bay
temperature of minus 23.8 degrees Fahrenheit.
GAS SUPPLY
GENERAL
Since the implementation of FERC Order 636 in November 1993, WPSC has
had full responsibility for the design, acquisition, and operation of gas
-16-
supplies and the pipeline transportation and storage services required to meet
the varying daily, seasonal, and annual load requirements of its customers.
WPSC operates a portfolio of gas supply contracts and pipeline transportation
and storage services designed to meet reliably WPSC's varying load pattern at
the lowest reasonable cost.
WPSC is presently served by a single interstate pipeline, ANR Pipeline
Company. Because ANR's pipeline system in Wisconsin has reached its maximum
capacity, and because lower prices are generally available in other areas
where there is competition for pipeline services, WPSC is investigating
potential suppliers of pipeline services in addition to those offered by ANR.
Prominent among possible alternatives is the Viking Voyageur project proposed
by TransCanada Pipelines, Northern States Power Company, and NICOR. WPSC, as
part of the Wisconsin Capacity Coalition (a group of Wisconsin gas utilities
consisting of MG&E, Wisconsin Gas Company, Wisconsin Fuel and Light Company,
Northern States Power Company-Wisconsin, and WPSC who are working together to
encourage development of alternate pipeline capacity to serve Wisconsin), is
presently evaluating construction of lateral lines to interconnect WPSC's
distribution system with Viking Voyageur and thereby provide access to WPSC's
markets. Other pipeline service alternatives are also being evaluated.
PIPELINE CAPACITY AND STORAGE
ANR's system serving WPSC accesses three major gas producing areas of
North America: (1) the Gulf of Mexico, (2) the mid-continent areas of
Oklahoma, Texas, and Kansas, and (3) the Province of Alberta in western
Canada. WPSC holds firm long-term transportation capacity on ANR in roughly
equal proportions from each of these three supply areas. The term of these
long-line ANR firm transportation contracts from the Gulf Coast and
mid-continent areas extend through October 2003. The term of the ANR contract
for 83% of the supplies from Canada extends through October 1998. WPSC
intends to renew this ANR contract for supply from Canada in 1998 for another
five-year term through October 2003 at a reduced capacity to coincide with the
expiration of an upstream transportation contract with Viking Gas
Transmission. The remaining 17% of the Canadian contracts extend through
October 2003.
Because of the substantial daily and seasonal swings in gas usage in
WPSC's service territory, WPSC 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 WPSC the ability to manage significant changes in
daily gas demand, storage also provides WPSC 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 63% of WPSC's supply on winter peak days,
approximately 32% of WPSC's winter sales volumes, and approximately 22% of
WPSC's total annual sales volumes. WPSC's total firm storage capacity with
ANR is 11.3 million Dth.
WPSC also contracts for high deliverability storage in the Gulf Coast
and mid-continent production areas during the winter from third-party
-17-
suppliers. This storage capacity provides a back-up supply of gas into WPSC's
long-line transportation contracts when other supplies cannot be delivered due
to production supply losses caused by extremely cold weather in the production
areas.
As of December 31, 1997, WPSC's total firm winter long-line
transportation capacity from ANR was 128,952 Dth per day, and firm capacity
from ANR storage was 223,120 Dth per day, for a total winter peak day capacity
of 352,072 Dth per day. WPSC's forecasted peak day firm load requirement for
the 1997-1998 winter is 337,453 Dth per day, providing WPSC a 14,619 Dth per
day or 4.3% reserve margin of capacity for load growth and unforeseen needs.
On November 1, 1998, WPSC's total firm winter long-line transportation
capacity from ANR will be 121,254 Dth per day, and firm capacity from ANR
storage will be 223,120 Dth per day, for a total winter peak day capacity of
344,374 Dth per day. WPSC's forecasted peak day firm load requirement for the
1998-1999 winter is 323,885 Dth per day, providing WPSC a 20,489 Dth per day
or 6.3% reserve margin of capacity for load growth and unforeseen needs.
WPSC also holds firm transportation capacity with Viking Gas
Transmission Company, ("Viking") to deliver gas on a firm basis from Viking's
interconnection with TransCanada Pipelines ("TransCanada") at Emerson,
Manitoba, Canada to the interconnection with ANR at Marshfield, Wisconsin.
The Canadian suppliers, from whom WPSC purchases gas, hold firm capacity on
TransCanada and NOVA from Emerson back into the production areas in Alberta,
Canada.
GAS SUPPLY CONTRACTS
WPSC contracts for firm term supplies with approximately 12 to 16
suppliers each year for gas produced in each of the three production areas.
WPSC initially designed its supply portfolio with terms ranging from one to
ten years so that only a portion of WPSC's supply contracts expired in any
given year. With the current uncertainty surrounding the future of WPSC's gas
merchant function, however, as long-term contracts expire, WPSC has been
replacing them with contracts of a one-year term or less. This will minimize
potential stranded gas supply contract costs if retail gas deregulation should
proceed quickly in Wisconsin. WPSC's supply portfolio as of December 31, 1997
contained contracts with remaining terms ranging from two months to six years.
An exception to this short-term supply contracting practice will occur
if the proposed Viking Voyageur gas pipeline project is constructed. In which
case, WPSC plans to enter into five-year gas supply contracts with suppliers
to help support construction of the pipeline. Viking Voyageur supply
contracts will be assignable to third parties should WPSC's merchant function
be substantially reduced during the term of the supply agreements.
Additional supplies are purchased on the monthly spot market as required
to supplement supplies from long-term firm contracts. WPSC has been an active
spot market purchaser since 1985 and has contracts in place with a number of
suppliers of spot market gas.
NEW PIPELINE SUPPLY SOURCE
WPSC is planning a joint project with Wisconsin Electric Power Company-
Gas Operations to construct a new eight-inch pipeline from an interconnection
-18-
with Great Lakes Gas Transmission Company ("Great Lakes") in the Upper
Peninsula of Michigan near Watersmeet into northern Wisconsin. WPSC plans to
build additional pipeline facilities to connect the new pipeline to WPSC's
existing northern area distribution system to reinforce pressures and increase
system reliability. WPSC plans to modify and extend the term of portions of
its existing pipeline capacity and storage contracts with ANR and add a new
transportation service on Great Lakes to deliver up to 7,000 Dth per day into
the new pipeline system during the winter. The new pipeline project is
expected to be in service by November 1998.
FEDERAL REGULATORY ACTIVITIES
WPSC's involvement in federal regulatory activities has been through the
Wisconsin Distributor Group ("WDG") which is made up of several Wisconsin gas
utilities. Over the past several years, the WDG has participated in numerous
dockets filed by ANR at the FERC.
Successes in three key issues this year are summarized below.
DAKOTA
In December 1996, ANR's Dakota Gasification Plant settlement was
approved by FERC. The settlement results in cost savings for WPSC's customers
compared to the original gas purchase contracts ANR had with Dakota, and
brings to an end the extensive litigation that surrounded this issue. As part
of the settlement, in July 1997, WPSC received a refund of previously paid
above-market Dakota costs in the amount of $1,912,225 which WPSC refunded to
customers in September 1997.
VIKING COSTS ON ANR PIPELINE
The WDG was also successful in obtaining refunds of overcollections by
ANR for Viking-related expenses. In July 1997, WPSC received a refund of
$890,325 which was refunded to its customers in September.
ANR RATE CASE SETTLEMENT
After nearly three years of effort, a settlement was achieved in the
rate case ANR filed on November 1, 1993 and put into effect on May 1, 1994.
The settlement will result in refunds to WPSC of $6.8 million, an annual
reduction in WPSC's rates paid to ANR of approximately $7.5 million, or 19%, a
moratorium period against rate increases, and an opportunity for additional
cost reduction through contract portfolio reshaping. The new, lower rates
went into effect November 1, 1997, subject to future FERC approval. On
February 13, 1998, FERC issued an order approving ANR's settlement agreement
as filed. ANR now has until March 15, 1998 to notify the FERC if any party
objects to any conditions imposed by the FERC in its order. Since the FERC
approved ANR's settlement without modification, WPSC expects ANR will notify
the FERC that no party objects, and the settlement will become effective by
April 15, 1998.
-19-
WISCONSIN REGULATORY ACTIVITIES
GENERAL
The PSCW is considering gas restructuring issues including unbundling of
rates, pricing of contracted services in potential utility bypass situations
(i.e., situations in which a major industrial gas customer may construct a
pipeline connecting them directly to an interstate pipeline, thus avoiding
purchasing any delivery service from the local gas utility), and the
separation of gas utilities from their unregulated gas marketing affiliates.
GAS COST RECOVERY MECHANISM
Historically, Wisconsin gas utilities, including WPSC, have recovered
their costs for gas supply and pipeline services on a one-for-one basis
through a mechanism called the Purchased Gas Adjustment Clause. The PSCW
conducted an investigation in Docket 05-GI-106 to determine whether alternate
gas cost recovery mechanisms may be more appropriate in the evolving gas
market. In particular, Performance Based Rates ("PBR") were evaluated as
alternatives to the traditional one-for-one recovery mechanism. Under PBRs,
gas utilities are given an incentive to reduce gas costs by being allowed to
keep a portion of any cost savings they are able to obtain relative to a gas
cost target value.
In November 1996, the PSCW issued an order which gave gas utilities a
choice between continuing under a modified one-for-one gas cost recovery
mechanism, or switching to a PBR mechanism. WPSC elected to continue under a
modified one-for-one mechanism, as WPSC believes it provides the greatest
value to customers through regulatory oversight and the return to customers of
all savings achieved. Development of WPSC's modified one-for-one mechanism is
in process, with implementation expected in November 1998.
GAS DISTRIBUTION RESTRUCTURING
The PSCW has an ongoing investigation into gas industry restructuring in
Docket 05-GI-108. Although the gas utility distribution function is expected
to continue as a regulated monopoly, sales of the natural gas commodity and
associated services, which were formerly also utility monopoly functions, are
expected to become increasingly open for competition among unregulated
third-party suppliers. WPSC's position is that utilities should be allowed to
continue to offer a regulated gas supply merchant function if they so choose,
thereby providing customers with a regulated supply choice.
Phase I of this docket addressed issues of unbundling rates, pricing of
contracted service in potential utility bypass situations, and the separation
of gas utilities from their unregulated gas marketing affiliates. Phase II
established standards of conduct regarding how gas utilities can interact with
their marketing affiliates. Phase III explored the issue of how to determine
when a competitive market exists for various segments of customers, so the
utility could then be taken out of serving that market.
Because of the complexity of the many issues involved, industry work
groups were formed to study particular issues and bring recommendations back
to the PSCW. The six work groups are studying pipeline capacity, market-based
pricing for interruptible customers, end-user price reporting, marketer
certification, changes needed in the form of legislation or administrative
-20-
rules, and social issues and essential services. Although most of this work
has not yet started, completion of these work groups' assignments is projected
for November 1999.
CUSTOMER RATE MATTERS
Customer rates are based on forecasted expenses and capital costs. On
February 20, 1997, the PSCW authorized a $5.7 million, or 2.7%, increase in
WPSC's retail natural gas rates. The rates are effective through 1998.
WPSC anticipates filing on April 1, 1998 an application with the PSCW
for increased gas rates to be effective for the years 1999 and 2000.
MICHIGAN REGULATORY ACTIVITIES
GAS COST RECOVERY
In June 1997, WPSC filed with the MPSC the annual reconciliation of gas
costs and gas revenues for the period April 1, 1996 through March 31, 1997.
WPSC's gas cost recovery clause in Michigan allows WPSC to recover all
prudently incurred gas costs on a one-for-one basis. The MPSC staff contested
the prudency of certain summer-only gas sales WPSC made to a single
large-volume customer and recommended that WPSC not be allowed to recover
approximately $245,088 of gas costs associated with these sales. In January
1998, an administrative law judge issued a Proposal For Decision and
recommended that the MPSC issue an order allowing WPSC to recover the entire
amount in contention. A final order in this case is expected in March 1998.
GAS DISTRIBUTION RESTRUCTURING
The MPSC is also investigating the deregulation of retail gas markets
and expansion of gas transportation service in Michigan in Case No. U-11017.
The MPSC decided it would be appropriate to conduct a series of pilot projects
to test the development of competitive retail gas markets in Michigan.
Michigan's four largest gas utilities were approached by the MPSC regarding
development and implementation of pilot programs.
Because of the small size and limited number of customers in WPSC's
Michigan service territory and the service territories of two other utility
companies, the MPSC did not conduct pilot transportation programs for these
three utilities.
CUSTOMER RATE MATTERS
WPSC has not had a natural gas rate case in Michigan since 1986.
-21-
GAS FINANCIAL SUMMARY
The following table sets forth the amounts of revenues, operating
income, and identifiable assets attributable to gas utility operations:
WISCONSIN PUBLIC SERVICE CORPORATION
==============================================================================
(Thousands) Year Ended December 31
- ------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------
Gas Operating Revenues $211,090 $211,357 $174,693
Operating Income, Including Allowance
For Funds Used During Construction $ 18,584 $ 10,191 $ 12,116
Identifiable Assets $235,490 $255,200 $232,983
==============================================================================
See Note 12 in Notes to Consolidated Financial Statements.
-22-
GAS OPERATING STATISTICS
WPS Resources Corporation
=====================================================================================================================
1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
Operating revenues (Thousands)
Residential $122,782 $122,224 $109,998 $104,020
Small commercial and industrial 23,790 22,392 19,933 18,586
Large commercial and industrial 53,517 55,211 47,627 45,115
Other 190,310 164,673 52,367 25,258
- ---------------------------------------------------------------------------------------------------------------------
Total $390,399 $364,500 $229,925 $192,979
=====================================================================================================================
Therms delivered (Thousands)
Residential 202,558 216,963 202,152 187,355
Small commercial and industrial 43,056 46,614 42,600 38,568
Large commercial and industrial 127,132 142,033 129,494 115,939
Other 595,154 527,069 294,372 56,961
- ---------------------------------------------------------------------------------------------------------------------
Total therm sales 967,900 932,679 668,618 398,823
Transportation 268,114 251,279 241,531 234,149
- ---------------------------------------------------------------------------------------------------------------------
Total 1,236,014 1,183,958 910,149 632,972
=====================================================================================================================
-23-
GAS OPERATING STATISTICS
Wisconsin Public Service Corporation
========================================================================================================================
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
Operating revenues (Thousands)
Residential $122,782 $122,224 $109,998 $104,020 $110,541
Small commercial and industrial 23,790 22,392 19,933 18,586 20,254
Large commercial and industrial 53,517 55,211 47,627 45,115 47,091
Other 11,001 11,530 (2,865) 14,337 9,490
- ------------------------------------------------------------------------------------------------------------------------
Total $211,090 $211,357 $174,693 $182,058 $187,376
========================================================================================================================
Therms delivered (Thousands)
Residential 202,558 216,963 202,152 187,355 192,053
Small commercial and industrial 43,056 46,614 42,600 38,568 41,385
Large commercial and industrial 127,132 142,033 129,494 115,939 108,068
Other 21,148 9,709 15,415 9,810 6,337
- ------------------------------------------------------------------------------------------------------------------------
Total therm sales 393,894 415,319 389,661 351,672 347,843
Transportation 268,114 251,279 241,531 234,149 220,672
- ------------------------------------------------------------------------------------------------------------------------
Total 662,008 666,598 631,192 585,821 568,515
========================================================================================================================
Customers served (End of period)
Residential 198,524 192,947 186,267 178,992 172,902
Small commercial and industrial 16,770 16,133 15,905 14,689 14,571
Large commercial and industrial 2,780 2,846 2,432 2,867 2,508
Other 1 1 1 1 1
Transportation customers 224 167 121 117 127
- ------------------------------------------------------------------------------------------------------------------------
Total 218,299 212,094 204,726 196,666 190,109
========================================================================================================================
Average annual use (Therms)
Residential 1,037.3 1,146.6 1,112.3 1,068.8 1,128.4
Small commercial and industrial 2,619.4 2,937.2 2,770.8 2,673.9 2,888.8
Large commercial and industrial 32,423.5 37,163.7 39,707.6 34,651.2 41,354.4
========================================================================================================================
Average therm price (Cents)
Residential 60.62 56.33 54.41 55.52 57.56
Small commercial and industrial 55.25 48.04 46.79 48.19 48.94
Large commercial and industrial 45.92 42.84 40.63 41.84 44.97
========================================================================================================================
-24-
D. NONREGULATED BUSINESS ACTIVITIES
GENERAL
At the end of 1997, WPSR had two principal nonregulated subsidiaries:
WPS Energy Services, Inc. ("ESI") and WPS Power Development, Inc. ("PDI").
These subsidiaries were formed in 1994 and 1995, respectively, for the purpose
of positioning WPSR strategically for participation in the evolving
nonregulated energy marketplace.
WPS ENERGY SERVICES, INC.
ESI is a diversified energy company. ESI targets retail energy sales
and related services in Midwestern and Eastern states with an emphasis on
serving commercial, industrial, and wholesale customers. Principal operations
are located in Illinois, Michigan, Ohio, and Wisconsin. ESI also is
participating in retail pilot projects in each of these states. Wholesale
energy sales and related services are provided nationwide.
ESI provides electric, natural gas, and alternate fuel products; risk
management consulting services; real-time energy management services; and
project management. ESI also provides energy utilization consulting which
identifies opportunities for improving purchasing practices, equipment, and
systems necessary for the efficient use of energy.
The gas markets in which ESI participates are characterized by strong
competition, narrow margins, and volatile commodity and transportation prices.
ESI uses various financial instruments to minimize the risks present in the
natural gas marketplace (see Note 1(e), Price Risk Management Activities on
page 57 of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS).
Revenues were predominantly from the sale of natural gas. Revenues from
the sale of natural gas were $179.3 million in 1997 compared to $153.1 million
in 1996. Sales totaled 574.0 million therms in 1997 compared to 517.4 million
therms in 1996. Electric sales are not significant because electric retail
access has been slow to develop in ESI's target market areas. ESI continues
to pursue the electric wholsesale market, but to a lesser extent than in the
past.
WPS POWER DEVELOPMENT, INC.
PDI develops and owns electric generation projects and provides services
to the electric power generation industry nationwide. PDI's services include
acquisition and investment analysis, project development, engineering and
management services, and operations and maintenance services. PDI's areas of
expertise include cogeneration, distributed generation, generation from
renewables, generation plant repowering projects, and conversion of paper mill
sludge to lightweight aggregate.
PDI owns a two-thirds interest in the Stoneman Power Plant ("Stoneman"),
a 53-megawatt merchant steam plant located in Cassville, Wisconsin. The
redevelopment of Stoneman as a 300-megawatt to 500-megawatt gas-fired combined
cycle facility is planned for the 1999 to 2000 time period. PDI also owns
landfill gas generating facilities.
-25-
EARNINGS
Both ESI and PDI incurred losses for 1997 and 1996. The loss incurred
at ESI in 1997 was $4.9 million, compared with a loss of $6.3 million in 1996,
a decrease of 22.2%. The loss incurred by PDI in 1997 was $1.9 million,
compared with $4.0 million in 1996, a decrease of 52.5%. Operating losses at
the nonregulated subsidiaries were anticipated by management as the companies
develop infrastructure and finance additional working capital needed to
support growth.
See MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION at page 42 for additional information regarding
nonregulated operations.
E. ENVIRONMENTAL MATTERS
GENERAL
WPSC is subject to regulation with regard to the impact of its
operations on air and water quality and solid waste disposal, and may be
subject to regulation with regard to other environmental considerations by
various federal, state, and local authorities. The application of federal and
state restrictions to protect the environment involves or may involve review,
certification, or issuance of permits by various federal and state
authorities, including the United States Environmental Protection Agency
("EPA") and the Wisconsin Department of Natural Resources ("DNR"). Such
restrictions (particularly in regard to emissions into the air and water, and
solid waste disposal) may limit, prevent, or substantially increase the cost
of the operation of WPSC's generating facilities and may require substantial
investments in new equipment at existing installations. Such restrictions may
also require substantial additional investments for any new projects and may
delay or prevent authorization and completion of the projects. WPSC cannot
forecast effects of such regulation upon its generating, transmission, and
other facilities, or its operations, but believes that it is presently meeting
existing requirements.
AIR QUALITY
WPSC's generating plants are in compliance with all current sulfur
dioxide, nitrogen oxide, and particulate emission standards.
The Federal Clean Air Act Amendments of 1990 ("Act") required reductions
in sulfur dioxide in 1995 (Phase I) to meet limitations based on an emission
rate of 2.5 pounds per Btu multiplied by a historical generation baseline for
Pulliam Unit 8 and Edgewater Unit 4 generating units. The Act requires
further reductions beginning in the year 2000 (Phase II). 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 generating units. WPSC's
generating facilities met the year 2000 standard in 1995. WPSC achieved
compliance with Wisconsin and federal sulfur dioxide emission limitations by
switching to low sulfur coal.
Because of the emission allowance system included in the Act, operations
during Phase I are expected to produce surplus allowances which will be
available to aid in compliance with the requirements of Phase II. To the
-26-
extent WPSC determines that it will have allowances available beyond its own
requirements in both Phase I and Phase II, it will consider the sale of the
excess allowances. The PSCW has ordered that profits from the sale of
allowances be used to benefit utility customers.
The Act also requires the installation of low nitrogen oxide burners on
several units. Low nitrogen oxide burners were installed at Pulliam Unit 8
early in 1994. Phase I of the Act allows units smaller than 100 megawatts,
such as Pulliam Unit 7, to be designated Phase I units, 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 emissions from
Pulliam Units 7 and 8 and Weston Unit 3 are averaged with Weston Units 1
and 2. This averaging plan generates additional emission allowances in
Phase I and locks in Phase I nitrogen oxide limits for these units. This
should reduce Phase II compliance costs.
Expenditures of $1.0 million to $2.0 million for Phase II of the Acid
Rain Program are projected through 1999 to assure nitrogen oxide emission
compliance at the Pulliam and Weston plants. The EPA recently proposed
additional nitrogen oxide emission reductions from facilities in 22 eastern
states, including those in Wisconsin. The reduction in nitrogen oxide
emissions that WPSC will need to achieve has yet to be determined. However,
it is likely that the reduction will be significant and beyond that required
by the existing rules. The proposed rules will probably take effect in 2002
to 2004 and result in significant emission control costs.
Air toxic provisions in the Act will not be applied until the EPA
determines if those standards need to be applied to utilities.
WATER QUALITY
WPSC is subject to regulation by the EPA and the DNR with respect to
thermal and other discharges into Lake Michigan and other waters of Wisconsin
from WPSC's power plants. Wastewater discharge permits with a term of five
years were reissued by the DNR to WPSC for Kewaunee in 1995 and the Pulliam
and Weston power plants in 1996. No new permit conditions or associated
material costs were imposed compared to permits issued during earlier
renewals. Revisions to state water quality rules as a result of the
Great Lakes Initiative should not result in any significant changes when
wastewater permits are reissued in 2000 for Kewaunee and in 2001 for the
Pulliam and Weston plants.
GAS PLANT CLEANUP
WPSC is investigating the cleanup of eight manufactured gas plant sites
which it previously operated in Green Bay, Two Rivers, Oshkosh, Marinette,
Sheboygan (two sites), Stevens Point, and Menominee (Michigan). In general,
WPSC is proceeding with these projects as the designated responsible party for
cleanup, although for two sites, Sheboygan II and Oshkosh, formal agreements
have been executed with the DNR covering the investigation and restoration
activities. The agreement for Sheboygan II allows WPSC to work with Wisconsin
on restoration. The site is not associated with the larger Sheboygan River
and Harbor Superfund site. The agreement for Oshkosh was entered into in
order to resolve a unilateral administrative order that was issued by the DNR.
-27-
Total costs of cleanup for all eight sites, as estimated by an
environmental consultant, should be in the range of $34.1 million to
$41.1 million. The estimates assume removal of significantly contaminated
soil and groundwater treatment/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.
Expenditures for the gas plant sites are estimated to be made over the
next 32 years. WPSC has recorded on its books a liability with an offsetting
deferred charge (i.e., a regulatory asset) in the amount of $41.7 million.
Insurance recoveries and collections in rates have reduced the regulatory
asset to $29.2 million at December 31, 1997. Expenditures have reduced the
liability to $40.2 million at December 31, 1997. Based on discussions with
regulators and a Wisconsin rate order, management believes that these costs,
but not the carrying costs associated with the deferred charges, will be
recoverable in future customer rates. In a rate order that became effective
in February 1997, the PSCW authorized current annualized recovery for gas site
cleanup of $225,000 for each of the years 1997 and 1998.
Work at the Stevens Point site is expected to commence in 1998. As
remedial feasibility studies and initial remedial activities are completed,
remediation cost estimates may be adjusted and these adjustments could be
significant. Other factors that can affect these estimates are changes in
remedial technology and regulatory requirements.
The cost estimates presented above do not take into consideration any
recovery from insurance carriers or other third parties which WPSC has
obtained or is pursuing. Insurance recoveries are deferred as a reduction to
the regulatory asset; therefore, neither adjustments to the estimated
liability nor insurance recoveries have an immediate impact on net income. To
date, WPSC has received insurance settlements of approximately $12.6 million.
F. CAPITAL REQUIREMENTS
WPSR's utility subsidiary, WPSC, makes large investments in capital
assets. Construction expenditures for WPSC are expected to continue in the
$75.0 million to $90.0 million range annually during the 1998 through 2000
period. This does not include any expenditures for the replacement of
Kewaunee steam generators. Steam generator replacement, WPSC's share of which
would be approximately $36.7 million in year of occurrence dollars, is
contingent upon receipt of approval from the PSCW to proceed with replacement
and agreement among the owners on a replacement plan. Potential expenditures
for gas pipeline laterals which would connect WPSC's distribution system with
the proposed Viking Voyageur pipeline from Canada are also not included.
In addition, other capital requirements for WPSC during the three-year
period include Kewaunee decommissioning trust fund contributions of
approximately $30.0 million and replacement financing for maturing
first-mortgage bonds of $50.0 million.
See note 9 of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Future Utility
Expenditures, at page 72 for additional information regarding forecasted
construction expenditures for WPSC.
-28-
WPSR expects that internally-generated funds and short-term borrowing
will satisfy most of its capital requirements. WPSR may periodically issue
additional long-term debt and common stock to reduce short-term debt and to
maintain desired capitalization ratios. The specific forms of financing,
amounts, and timing will depend on the availability of projects, market
conditions, and other factors. However, at this time, it is anticipated that
trust originated preferred stock could be issued on behalf of WPSR in 1998.
WPSR may also expand its leveraged employee stock ownership plan during the
three-year period.
Investment expenditures for nonregulated projects are uncertain since
there are no material firm commitments at this time. Debt financing for most
nonregulated projects is expected to be on a nonrecourse basis.
G. EMPLOYEES
At December 31, 1997, WPSR, including its subsidiaries, employed
2,486 persons. Of this number, 2,399 employees were employed by WPSC.
Of the employees of WPSC, 1,888 were considered electric utility
employees and 511 were considered gas utility employees. Approximately
1,200 WPSC employees are represented by Local 310 of the International Union
of Operating Engineers ("Union"). The Union has been operating without a
contract since October 29, 1997. Unresolved issues remain and contract
negotiations continue. There has never been a strike against WPSC by its
employees.
-29-
ITEM 2. PROPERTIES
A. UTILITY
The following table includes information about electric generation
facilities of WPSC (including those jointly-owned):
Rated
Capacity (a)
Type Name Location Fuel (Kilowatts)
- ------------- ---------------- ------------- ----------- -------------
Steam Pulliam Green Bay, WI Coal 400,900 (b)
Weston Wausau, WI Coal or Gas 480,100 (c)
Kewaunee Kewaunee, WI Nuclear 210,500 (d)
Columbia -
Units No. 1 & 2 Portage, WI Coal 325,100 (d)
Edgewater
Unit No. 4 Sheboygan Coal 106,200 (d)
---------
Total Steam 1,522,800
Hydro Various 68,400 (e)
(15 Plants)
Combustion Various Gas or Oil 269,410 (f)
Turbine (7 Plants)
& Diesel ---------
Total System 1,860,610
=========
(a) Based on winter-rated capacity.
(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. Kewaunee is operated by
WPSC. WP&L is operator of the Columbia and Edgewater units.
The capacity indicated is WPSC's portion of total plant
capacity based on percent of ownership.
(e) Includes 12,900 kw purchased from Wisconsin River Power Company.
(f) WPSC and the Marshfield Electric and Water Department jointly
own 115,600 kilowatts of combustion turbine peaking capacity
which WPSC operates. The capacity indicated is WPSC's
portion of total plant capacity based on percent of
ownership.
WPSC owns 55 transmission substations with a transformer capacity of
5,616,110 kilovolt-ampere ("kVa"), 110 distribution substations with a
transformer capacity of 2,881,270 kVa, 1,549 miles of electric transmission
lines, and 19,358 miles of electric distribution lines.
-30-
Gas properties include approximately 4,623 miles of main, 68 gate and
city regulator stations, and 201,566 services. All gas facilities are located
in Wisconsin except for distribution facilities in and near the city of
Menominee, Michigan.
Substantially all of WPSC's utility plant is subject to a first mortgage
lien.
B. NONREGULATED
The following table includes information about jointly-owned electric
generation facilities of PDI:
Rated
Capacity
Type Name Location Fuel (Kilowatts)
- ----- -------------- ------------ ---- -----------
Steam Stoneman Cassville, WI Coal 53,000 (a)
(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.
ITEM 3. LEGAL PROCEEDINGS
See Part I, Item 1E, ENVIRONMENTAL MATTERS, at page 26, for a
description of various proceedings relating to environmental matters.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year.
-31-
ITEM 4A. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information about outside directors is omitted for the reason that such
information will be included in a proxy statement for the Annual Meeting of
Shareholders of WPSR which is scheduled to be held on May 7, 1998.
A. EXECUTIVE OFFICERS OF WPS RESOURCES CORPORATION ("WPSR")
Current Position and Business Effective
Name and Age Experience During Past Five Years Date
- ----------------------------- ------------------------------------------- ---------
Larry L. Weyers 52 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 53 Executive Vice President 12-29-96
Vice President 12-09-93
Phillip M. Mikulsky 49 Senior Vice President-Development 02-12-98
Vice President-Development 09-01-95
Manager-System Operations 10-01-91 *
Director-System Operations 09-28-91 *
Daniel P. Bittner 54 Vice President and Chief Financial Officer 05-01-97
Vice President 12-29-96
Richard E. James 44 Vice President-Corporate Planning 12-29-96
Vice President-Corporate Planning 08-01-95 *
Assistant Vice President-Corporate Planning 05-09-94 *
Assistant Vice President-Rates and Economic
Evaluation 03-01-92 *
Thomas P. Meinz 51 Vice President-Public Affairs 02-12-98
Bernard J. Treml 48 Vice President-Human Resources 02-12-98
Glen R. Schwalbach 52 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 *
Francis J. Kicsar 58 Secretary 01-01-96
Ralph G. Baeten 54 Treasurer 12-09-93
Diane L. Ford 44 Controller and Chief Accounting Officer 05-01-97
Controller 12-15-93
George R. Wiesner 40 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 ("WPSC")
for Richard E. James, Phillip M. Mikulsky, Glen R. Schwalbach, and
George R. Wiesner. The other listed officers of WPSR are also officers
of WPSC and their experience with WPSC is indicated below.
All of the above named executive officers have been employed by WPSR or WPSC
for at least five years.
-32-
B. EXECUTIVE OFFICERS OF WISCONSIN PUBLIC SERVICE CORPORATION ("WPSC")
Current Position and Business Effective
Name and Age Experience During Past Five Years Date
- ----------------------------- ------------------------------------------- ---------
Larry L. Weyers 52 Chairman and Chief Executive Officer 02-12-98
President and Chief Executive Officer 05-04-97
President and Chief Operating Officer 01-01-96
Senior Vice President-Power Supply and
Engineering 08-01-95
Vice President-Power Supply and Engineering 05-09-94
Vice President-Energy Supply 01-01-92
Patrick D. Schrickel 53 President and Chief Operating Officer 02-12-98
Executive Vice President 12-29-96
Senior Vice President-Finance and Corporate
Services 05-09-94
Senior Vice President-Operations 06-01-89
Daniel P. Bittner 54 Senior Vice President-Finance and Corporate
Services 12-29-96
Senior Vice President-Customer Service 05-09-94
Senior Vice President-Finance 03-01-92
Vice President-Treasurer 02-01-89
Clark R. Steinhardt 56 Senior Vice President-Nuclear Power 06-01-91
Ralph G. Baeten 54 Vice President-Treasurer 08-01-95
Treasurer 03-01-92
Insurance and Benefits Director 05-01-87
Thomas P. Meinz 51 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
Manager-System Planning and Licensing 03-01-91
Bernard J. Treml 48 Vice President-Human Resources 05-09-94
Assistant Vice President-Human Resources 07-01-93
Manager-Human Resources 08-01-92
Manager-Marketing Programs and Services 08-01-91
Wayne J. Peterson 39 Vice President-Distribution and Customer
Service 02-12-98
Assistant Vice President-Customer Service 02-23-97
Manager-System Operations 10-01-95
Site Leader 10-01-94
Electric Superintendent 04-01-92
Director-Distribution Services 01-02-92
David W. Schonke 64 Assistant Vice President-Electric
Distribution Engineering 06-01-86
Francis J. Kicsar 58 Secretary 01-01-96
Assistant Secretary 03-01-92
Director-Corporate Tax 10-01-76
Diane L. Ford 44 Controller 03-01-92
Administrator-Corporate Accounting 05-01-87
NOTE: All ages for the officers of WPSR and WPSC are as of December 31,
1997. None of the executives listed above for WPSR or for WPSC 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 shall have been duly elected and
qualified, or until his or her death, resignation, disqualification,
or removal.
-33-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
WPS RESOURCES CORPORATION COMMON STOCK TWO-YEAR COMPARISON
Dividends
Share Data Per Share Price Range
- ---------- --------- ---------------------
High Low
------- -------
1997
1st Quarter $ .475 28-3/4 26-1/8
2nd Quarter .475 27-7/8 23-3/8
3rd Quarter .485 29-1/4 26-3/4
4th Quarter .485 34-1/4 28-1/16
-----
Total $1.92
1996
1st Quarter $ .465 34-3/8 31-7/8
2nd Quarter .465 33-1/2 30-1/8
3rd Quarter .475 32-1/8 30-3/8
4th Quarter .475 30-5/8 28-1/4
-----
Total $1.88
DIVIDEND RESTRICTIONS
WPSC, WPSR's principal subsidiary, is restricted by a PSCW order to
paying normal common stock dividends of no more than 109% of the previous
year's common stock dividend without prior notice to the PSCW. Also,
Wisconsin law prohibits WPSC from making loans to WPSR and its nonregulated
subsidiaries and from guaranteeing their obligations.
On January 15, 1997, a special common stock dividend of $10.0 million
was declared by WPSC to be paid to WPSR. The special dividend allowed WPSC's
average equity capitalization ratio to remain at approximately 54%, the level
approved by the PSCW for ratemaking. The dividend was paid in January 1997.
COMMON STOCK
Listed on the New York and Chicago Stock Exchanges
Ticker Symbol: WPS
Transfer Agent and Registrar: Firstar Trust Company
P. O. Box 2077
Milwaukee, Wisconsin 53201
As of December 31, 1997, there were 23,704 common stock shareholders of
record.
-34-
ITEM 6. SELECTED FINANCIAL DATA
WPS RESOURCES CORPORATION
COMPARATIVE FINANCIAL STATEMENTS AND
FINANCIAL STATISTICS (1993 TO 1997)*
A. CONSOLIDATED STATEMENTS OF INCOME
========================================================================================================================
Consolidated Statements of Income
========================================================================================================================
Year Ended December 31
(Thousands, except share amounts) 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
Operating revenues
Electric utility $479,388 $490,506 $489,000 $480,816 $493,256
Gas utility 211,090 211,357 174,693 182,058 187,376
Nonregulated energy and other 187,862 156,391 56,155 10,921 -
- ------------------------------------------------------------------------------------------------------------------------
Total operating revenues 878,340 858,254 719,848 673,795 680,632
========================================================================================================================
Operating expenses
Electric production fuels 107,538 105,418 104,858 111,011 114,051
Purchased power 45,876 37,737 39,593 38,631 30,703
Gas purchased for resale 147,755 149,388 116,253 126,351 133,347
Nonregulated energy cost of sales 182,863 155,133 53,983 10,663 -
Other operating expenses 148,569 168,905 154,445 148,917 148,270
Maintenance 41,661 48,806 50,761 49,983 51,597
Depreciation and decommissioning 77,541 65,178 65,627 56,365 60,609
Taxes other than income 26,448 26,868 25,921 26,063 25,204
- ------------------------------------------------------------------------------------------------------------------------
Total operating expenses 778,251 757,433 611,441 567,984 563,781
========================================================================================================================
Operating income 100,089 100,821 108,407 105,811 116,851
- ------------------------------------------------------------------------------------------------------------------------
Other income
Allowance for equity funds
used during construction 129 139 170 108 287
Other, net 11,511 (1,084) 6,080 4,473 3,356
- ------------------------------------------------------------------------------------------------------------------------
Total other income 11,640 (945) 6,250 4,581 3,643
========================================================================================================================
Income before interest expense 111,729 99,876 114,657 110,392 120,494
- ------------------------------------------------------------------------------------------------------------------------
Interest on long-term debt 22,331 21,532 22,859 23,407 24,393
Other interest 4,172 3,596 2,604 1,796 1,562
Allowance for borrowed funds
used during construction (100) (128) (68) (139) (200)
- ------------------------------------------------------------------------------------------------------------------------
Total interest expense 26,403 25,000 25,395 25,064 25,755
========================================================================================================================
Income before income taxes 85,326 74,876 89,262 85,328 94,739
Income taxes 29,270 24,358 30,808 29,526 32,539
Minority interest (797) (348) - - -
Preferred stock dividends of
subsidiary 3,111 3,111 3,111 3,111 3,311
- ------------------------------------------------------------------------------------------------------------------------
Net income $ 53,742 $ 47,755 $ 55,343 $ 52,691 $ 58,889
========================================================================================================================
Shares of common stock
Outstanding at December 31 23,897 23,897 23,897 23,897 23,897
Average 23,873 23,891 23,897 23,897 23,888
Basic and diluted earnings per
average share of common stock $2.25 $2.00 $2.32 $2.21 $2.47
Dividend per share of common stock 1.92 1.88 1.84 1.80 1.76
========================================================================================================================
* WPS Resources Corporation became a holding company in 1994. The data in the 1993 column is that of Wisconsin Public
Service Corporation.
-35-
PAGE
ITEM 6. SELECTED FINANCIAL DATA
WPS RESOURCES CORPORATION
COMPARATIVE FINANCIAL STATEMENTS AND
FINANCIAL STATISTICS (1993 TO 1997)*
B. CONSOLIDATED BALANCE SHEETS
========================================================================================================================
Consolidated Balance Sheets
At December 31 (Thousands) 1997 1996 1995 1994 1993
========================================================================================================================
Assets
- ------------------------------------------------------------------------------------------------------------------------
Utility plant
Electric $1,513,310 $1,483,829 $1,449,201 $1,423,316 $1,386,007
Gas 252,029 241,367 228,734 203,384 184,234
- ------------------------------------------------------------------------------------------------------------------------
Total 1,765,339 1,725,196 1,677,935 1,626,700 1,570,241
Less - Accumulated depreciation
and decommissioning 1,032,149 952,296 905,427 846,505 801,056
- ------------------------------------------------------------------------------------------------------------------------
Total 733,190 772,900 772,508 780,195 769,185
Nuclear decommissioning trusts 134,108 100,570 82,109 64,147 56,699
Nuclear fuel, net 19,062 19,381 14,275 19,417 17,981
- ------------------------------------------------------------------------------------------------------------------------
Net utility plant 886,360 892,851 868,892 863,759 843,865
========================================================================================================================
Current assets 196,591 219,144 186,085 170,015 180,140
Net nonutility and nonregulated plant 19,194 19,738 3,307 2,218 2,121
Regulatory and other assets 197,457 199,132 208,459 181,283 172,715
- ------------------------------------------------------------------------------------------------------------------------
Total assets $1,299,602 $1,330,865 $1,266,743 $1,217,275 $1,198,841
========================================================================================================================
========================================================================================================================
Capitalization and Liabilities
========================================================================================================================
Capitalization
Common stock equity $ 477,823 $ 467,524 $ 463,441 $ 446,540 $ 433,724
Preferred stock of subsidiary
with no mandatory redemption 51,200 51,200 51,200 51,200 51,200
Long-term debt of subsidiary 304,008 305,788 306,590 309,945 314,225
- ------------------------------------------------------------------------------------------------------------------------
Total capitalization 833,031 824,512 821,231 807,685 799,149
========================================================================================================================
Liabilities
Short-term borrowings 30,706 57,950 26,500 22,500 21,000
Deferred income taxes 125,804 130,208 135,958 126,639 138,952
Other liabilities and credits 310,061 318,195 283,054 260,451 239,740
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities 466,571 506,353 445,512 409,590 399,692
========================================================================================================================
Total capitalization and liabilities $1,299,602 $1,330,865 $1,266,743 $1,217,275 $1,198,841
========================================================================================================================
* WPS Resources Corporation became a holding company in 1994. The data in the 1993 column is that of Wisconsin Public
Service Corporation.
-36-
ITEM 6. SELECTED FINANCIAL DATA
WPS RESOURCES CORPORATION
COMPARATIVE FINANCIAL STATEMENTS AND
FINANCIAL STATISTICS (1993 TO 1997)*
C. FINANCIAL STATISTICS
================================================================================================================
Year Ended December 31 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------
Stock price $33-13/16 $28-1/2 $34 $26-3/4 $33-5/8
Book value per share $20.00 $19.56 $19.39 $18.69 $18.18
Return on average equity 11.3% 10.2% 12.2% 12.0% 13.9%
Number of common stock shareholders 23,704 23,998 24,341 25,395 25,240
Number of employees 2,486 2,606 2,547 2,578 2,603
================================================================================================================
* WPS Resources Corporation became a holding company in 1994. The data in the 1993 column is that of
Wisconsin Public Service Corporation.
-37-
PAGE
ITEM 6. SELECTED FINANCIAL DATA
WISCONSIN PUBLIC SERVICE CORPORATION
COMPARATIVE FINANCIAL DATA AND
FINANCIAL STATISTICS (1993 TO 1997)
D. SELECTED FINANCIAL DATA
========================================================================================================
(Millions) 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------
Operating Revenues $ 690.5 $ 701.9 $ 663.7 $ 662.8 $ 680.6
Net Income 64.7 60.4 59.2 55.8 62.2
Total Assets (At December 31) 1,234.0 1,258.9 1,233.4 1,205.2 1,198.8
Long-Term Debt, Net (At December 31) 307.6 310.8 312.7 316.1 314.2
========================================================================================================
-38-
PAGE
ITEM 6. SELECTED FINANCIAL DATA
WISCONSIN PUBLIC SERVICE CORPORATION
COMPARATIVE FINANCIAL STATEMENTS AND
FINANCIAL STATISTICS (1993 TO 1997)
E. FINANCIAL STATISTICS
===================================================================================================================
Year Ended December 31 (Millions) 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
Coverage
Times interest earned before income taxes 4.48 4.36 4.00 4.19 4.49
Times interest earned after income taxes 3.30 3.21 3.03 3.09 3.29
Times interest and preferred dividends
earned after income taxes 2.97 2.88 2.70 2.77 2.93
===================================================================================================================
Capitalization ratios
Common equity including ESOP 56.0 55.3 55.0 53.9 54.3
Preferred stock 6.3 6.3 6.3 6.4 6.4
Long-term debt 37.7 38.4 38.7 39.7 39.3
===================================================================================================================
Percent long-term debt to net utility plant 34.7 34.8 36.0 36.6 37.2
===================================================================================================================
Average rate
Bonds 7.0 7.0 7.1 7.1 7.1
Preferred stock 6.1 6.1 6.1 6.1 6.1
===================================================================================================================
Number of preferred stock shareholders 2,734 2,965 3,165 3,372 3,577
===================================================================================================================
Weather information
Cooling degree days 255 352 808 519 432
Cooling degree days as a percent of normal 53.3% 73.6% 170.1% 107.0% 86.2%
Heating degree days 8,099 8,566 7,813 7,578 7,916
Heating degree days as a percent of normal 101.6% 107.5% 98.0% 95.5% 100.2%
===================================================================================================================
-39-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION OF
WPS RESOURCES CORPORATION AND
WISCONSIN PUBLIC SERVICE CORPORATION
RESULTS OF OPERATIONS
WPS Resources Corporation ("WPSR") is a holding company. Approximately
79% and 95% of WPSR's 1997 revenues and assets, respectively, and all of its
net income are derived from Wisconsin Public Service Corporation ("WPSC"), an
electric and gas utility. WPSR's wholly-owned subsidiaries include WPSC, WPS
Energy Services, Inc. ("ESI"), and WPS Power Development, Inc. ("PDI").
1997 COMPARED WITH 1996
WPS RESOURCES CORPORATION OVERVIEW
Revenues at WPSR increased from $858.3 million in 1996 to $878.3 million
in 1997, or 2.3%. Net income increased 12.3% from $47.8 million in 1996 to
$53.7 million in 1997. Basic and diluted earnings per share increased 12.5%,
from $2.00 in 1996 to $2.25 in 1997. The primary reasons for the increase in
earnings at WPSR were decreased operating and maintenance expenses, increased
other income, an increased nonregulated energy margin, and an increased gas
utility margin. Partially offsetting these increases in earnings were a
decrease in the electric utility margin, an increase in depreciation
and decommissioning expense, and an increase in income tax expense.
Earnings on common stock of WPSC were $61.6 million in 1997 and
$57.3 million in 1996. Nonregulated losses were $7.9 million in 1997 and
$9.5 million in 1996.
WISCONSIN PUBLIC SERVICE CORPORATION OVERVIEW
Revenues at WPSC were $690.5 million in 1997 compared with
$701.9 million in 1996, a decrease of 1.6%. Earnings on common stock
increased 7.5%, from $57.3 million in 1996 to $61.6 million in 1997. The
primary reasons for the increase in earnings at WPSC were a decrease in
operating and maintenance expenses, an increase in other income, and an
increase in the gas utility margin. Offsetting these increases in earnings
were a decrease in the electric utility margin, an increase in depreciation
and decommissioning expense, and an increase in income tax expense.
ELECTRIC UTILITY OPERATIONS
Electric margins decreased $21.4 million (see table below), or 6.2%, due
to implementation of a Public Service Commission of Wisconsin ("PSCW") rate
order which authorized a $35.5 million, or 8.1%, electric revenue reduction.
A second factor contributing to decreased margins was increased replacement
power costs as a result of an extended outage at the Kewaunee Nuclear Power
Plant ("Kewaunee"). WPSC is the operator and 41.2% owner of Kewaunee. A
surcharge authorized by the PSCW partially offset increases in replacement
power costs in the latter part of the first quarter and in the second
quarter of 1997.
-40-
=================================================================
ELECTRIC MARGINS ($000) 1997 1996 1995
-----------------------------------------------------------------
Revenues $479,388 $490,506 $489,000
Fuel and purchased power 153,414 143,155 144,451
-----------------------------------------------------------------
Margins $325,974 $347,351 $344,549
=================================================================
Sales (kWh 000) 11,259,327 11,011,842 10,978,131
=================================================================
In spite of a 27.6% decrease in cooling degree days, electric
kilowatt-hour ("kWh") sales increased by 2.2% due to increased demand by
commercial and industrial customers. Commercial and industrial kWh sales
increased 4.8%, while wholesale kWh sales decreased 3.4%. Electric operating
revenues decreased $11.1 million, or 2.3%, due primarily to the electric rate
decrease.
Electric production fuel expense increased $2.1 million, or 2.0%.
Nuclear fuel expense was $2.0 million lower than in 1996 due to decreased
generation at Kewaunee in the first and second quarters of 1997 as a result of
an extended outage. Steam fuel expense was higher by $1.0 million and
combustion turbine generation expense was higher by $3.2 million due to
increased generation requirements from these sources during the extended
outage at Kewaunee.
Purchased power expense increased $8.1 million, or 21.6%, due to
increased purchase requirements and higher costs of purchased power during the
extended outage at Kewaunee.
The PSCW allows WPSC to pass changes in the cost of fuel and purchased
power, within a specified range, on to its customers through a fuel adjustment
clause. WPSC is required to file an application to adjust rates either higher
or lower when costs are plus or minus 2% from forecasted costs on an annual
basis. The additional fuel costs in 1997 did not result in WPSC being outside
this 2% window.
GAS UTILITY OPERATIONS
Gas margins increased $1.4 million (see table below), or 2.2%, due
primarily to implementation of a PSCW rate order which authorized a
$5.7 million, or 2.7%, increase in gas revenues.
=================================================================
GAS MARGINS ($000) 1997 1996 1995
-----------------------------------------------------------------
Revenues $211,090 $211,357 $174,693
Purchase costs 147,755 149,388 116,253
-----------------------------------------------------------------
Margins $ 63,335 $ 61,969 $ 58,440
=================================================================
Volume (Therms 000) 662,008 666,598 631,192
=================================================================
Gas operating revenues remained relatively stable reflecting the rate
increase offset by a 5.5% reduction in heating degree days. Gas revenues also
-41-
reflect a one-time reduction of $0.9 million in the first quarter of 1997 as a
result of a PSCW directive to change the accounting treatment for previous
customer line extensions. This reduction represents a decrease of
approximately $.02 per share after income tax effects.
Gas purchase costs showed a net decrease of $1.6 million, or 1.1%, due
primarily to reduced purchases because of decreased demand as a result of the
reduction in heating degree days. The PSCW allows WPSC to pass changes in the
cost of gas on to customers through a purchased gas adjustment clause
("PGAC").
OTHER UTILITY EXPENSES/INCOME
Other operating expenses at WPSC decreased $24.1 million, or 15.2%. Cost
saving initiatives and decreased amortization of deferred demand-side
management expenditures resulted in lower customer service and sales expenses
of $9.5 million. Administrative expenses decreased $5.8 million due to cost
saving measures and reduced postretirement medical, dental, and other benefit
expenses. Generation operating expenses were lower by $7.3 million primarily
as a result of the completion in 1996 of an amortization of deferred expenses
related to a previous coal contract settlement. Gas operating expenses
decreased $1.5 million as the result of a PSCW directive requiring gas
servicing revenues and expenses to be classified as other income and
deductions beginning in 1997.
Maintenance expense decreased $7.1 million, or 14.5%. Electric
transmission and distribution expenses decreased $3.4 million as a result of
cost saving initiatives and less maintenance of overhead lines in 1997 due to
less storm damage. Expenses were $1.9 million lower at Kewaunee in 1997
because Kewaunee was out of service in 1996 for scheduled maintenance. Gas
distribution had lower expenses of $0.9 million due to cost saving initiatives
and decreased maintenance activities. Steam costs decreased $0.6 million at
WPSC's coal-fired plants due to changes in maintenance schedules as a result
of the extended outage at Kewaunee.
Depreciation and decommissioning expenses increased $12.0 million, or
18.8%, largely due to the accelerated recovery of investment in Kewaunee and
accelerated funding of Kewaunee decommissioning costs.
Other income increased $7.5 million, or 141.7%, due primarily to gains in
1997 on the sale of nonutility property of $4.8 million which represented an
increase of approximately $.12 per share after income tax effects. Also
included in other income in 1997 was interest of $2.2 million resulting from
an income tax audit settlement. Income tax expense increased $1.9 million
reflecting higher net income in 1997.
OVERVIEW OF NONREGULATED OPERATIONS
Nonregulated operations primarily represent the gas and electric sales
of ESI, an energy marketing subsidiary. Nonregulated operations also include
PDI which participates in the development of electric generation projects,
invests in generating projects, and provides services to the electric power
generation industry. Nonregulated operations experienced a loss of $7.9
million in 1997 compared with a loss of $9.5 million in 1996.
-42-
On a stand-alone basis, WPSR incurred a net loss in 1997 of
$1.0 million, compared with net income of $0.8 million in 1996. The 1997 WPSR
stand-alone loss was attributable primarily to costs related to the proposed
merger with Upper Peninsula Energy Corporation ("UPEN").
ESI incurred a loss of $4.9 million in 1997 and $6.3 million in 1996, a
decrease of 22.2%. PDI incurred a loss of $1.9 million in 1997 and
$4.0 million in 1996, a decrease of 52.5%. Operating losses at the
nonregulated subsidiaries were anticipated by management as the companies
develop infrastructure and finance additional working capital needed to
support growth.
NONREGULATED MARGINS
Gas margins at ESI increased $3.2 million from a negative $1.1 million
in 1996 to a positive $2.1 million in 1997. In 1996, customer commitments at
ESI were not fully hedged during a period of volatile gas commodity markets
and certain gas suppliers defaulted which negatively impacted margins.
Electric margins increased $0.9 million in 1997.
Nonregulated energy and other operating revenues increased
$31.5 million, or 20.1%. The increase in nonregulated energy revenues
consisted largely of increased gas sales at ESI of $26.2 million, or 17.1%, as
a result of customer growth and increased electric sales of $5.6 million, or
716.0%.
Nonregulated energy cost of sales increased $27.7 million, or 17.9%, due
primarily to increased gas purchases and purchased power of $20.5 million and
$4.7 million, respectively, at ESI.
OTHER NONREGULATED EXPENSES/INCOME
Other nonregulated operating expenses increased $3.7 million, or 34.6%.
Other operating expenses increased $2.3 million at WPSR due primarily to
expenses associated with the UPEN merger.
Other operating expenses at ESI increased $1.3 million, or 19.4%, due to
expansion of the business and the development of infrastructure as ESI
positions itself for the future. Although increased margins more than offset
other operating expenses, interest costs increased due to the financing of
additional working capital needed to support the growth of ESI.
Other operating expenses at PDI increased $0.4 million as a result of
expansion of the business and operation of the Stoneman Power Plant
("Stoneman"). Project revenues at PDI partially offset costs related to the
investigation of possible energy-related investments and a loss from Stoneman
operations.
ESI experienced trading losses of $1.4 million in 1997 and $2.5 million
in 1996. PDI experienced a loss of $4.0 million in 1996 related to the
write-off of an investment in an industrial processing facility. This
write-off represented a decrease in 1996 earnings of $.10 per share after
income tax effects.
-43-
1996 COMPARED WITH 1995
WPS RESOURCES CORPORATION OVERVIEW
Revenues at WPSR increased 19.2% from $719.8 million in 1995 to
$858.3 million in 1996. Net income was $55.3 million in 1995 compared with
$47.8 million in 1996, a decrease of 13.6%. Basic and diluted earnings per
share were $2.32 in 1995 and $2.00 in 1996, a decrease of 13.8%. The most
significant reasons for the decrease in earnings at WPSR were increased
operating expenses at the nonregulated subsidiaries, decreased gas margins at
ESI, a loss on an industrial processing facility investment at PDI, and
increased operating expenses at WPSC.
Earnings on common stock of WPSC were $57.3 million in 1996 and
$56.1 million in 1995. Nonregulated losses were $9.5 million in 1996 and
$0.8 million in 1995.
WISCONSIN PUBLIC SERVICE CORPORATION OVERVIEW
Revenues at WPSC increased 5.8%, from $663.7 million in 1995 to
$701.9 million in 1996. Earnings on common stock increased 2.1%, from
$56.1 million in 1995 to $57.3 million in 1996.
ELECTRIC UTILITY OPERATIONS
Electric margins increased $2.8 million, or 0.8%, due primarily to
increased sales volumes and decreased purchased power expenses. Electric
operating revenues remained relatively stable between 1996 and 1995. Electric
production fuels and purchased power decreased $1.3 million, or 0.9%, as a
result of $1.9 million lower purchased power costs, $1.8 million lower
generation costs at Kewaunee due to an extended outage, and $1.5 million lower
combustion turbine generation costs. Offsetting these decreases was an
increase in generating costs at coal-fired plants of $3.9 million.
GAS UTILITY OPERATIONS
Gas margins increased $3.5 million, or 6.0%, due to customer growth at
WPSC and colder weather. Based on degree days, the weather was 9.6% colder in
1996 than in 1995. Gas operating revenues increased $36.7 million, or 21.0%,
and gas purchased for resale increased $33.1 million, or 28.5%, both due to
increased volumes as a result of customer growth and higher gas costs.
OTHER UTILITY EXPENSES/INCOME
Other operating expenses at WPSC increased $7.3 million, or 4.8%.
Higher operating expenses included an increase of $4.5 million related to
expansion of certain operating activities in anticipation of more competitive
markets and an increase in gas operating expenses of $1.9 million as a result
of customer growth. Partially offsetting these increases was a decrease in
employee benefit costs of approximately $2.6 million due to a reduction in
postretirement benefit expenses.
Maintenance expense decreased $2.0 million, or 4.0%, due to lower
maintenance activity at WPSC's coal-fired plants of $3.3 million. This
decrease was partially offset by increased maintenance expense at Kewaunee of
$1.0 million.
-44-
OVERVIEW OF NONREGULATED OPERATIONS
Nonregulated energy and other operating revenues increased 178.3%, from
$56.2 million in 1995 to $156.4 million in 1996. The loss at the nonregulated
subsidiaries was $0.8 million in 1995 and $9.5 million in 1996.
NONREGULATED MARGINS
Gas margins at ESI decreased from a positive $1.2 million in 1995 to a
negative $1.1 million in 1996. Gas margins were negatively impacted due
primarily to the volatile gas commodity market experienced during 1996 in
which ESI was not fully hedged for its customer commitments and ESI's decision
to honor customer contracts, despite defaults by certain gas suppliers, during
a period of exceptionally high demand.
Nonregulated energy and other operating revenues increased
$100.2 million, or 178.5%. Nonregulated energy revenues primarily represent
electric and gas sales made by ESI. The increase in nonregulated energy
revenues was due to increased gas sales at ESI from $55.2 million in 1995 to
$153.1 million in 1996, an increase of $97.9 million, or 177.2%. The
increased gas sales resulted from ESI's acquisition of a gas marketing company
in the fourth quarter of 1995, additional customer growth in the wholesale
market, and higher unit prices due to gas commodity market conditions. Other
operating revenues increased $1.5 million, or 167.3%, and were comprised of
consulting and construction revenue from ESI and PDI.
Nonregulated energy cost of sales increased $101.2 million, or 187.4%,
due primarily to increased gas purchases and increased gas costs at ESI from
$54.0 million in 1995 to $154.3 million in 1996, an increase of
$100.3 million, or 185.7%.
OTHER NONREGULATED EXPENSES/INCOME
Other operating expenses increased $7.1 million reflecting the expansion
of ESI's and PDI's business and the development of infrastructure including
personnel and systems.
In 1996, PDI experienced a $4.0 million loss on a write-off of an
investment in an industrial processing facility which had been made in
anticipation of energy sales opportunities. This loss represented a $.10 per
share decrease in earnings after income tax effects. ESI experienced trading
losses of $2.5 million in 1996.
-45-
BALANCE SHEET
1997 COMPARED WITH 1996
Nuclear decommissioning trusts increased $33.5 million due to continued
funding and favorable investment returns. Customer receivables decreased
$19.3 million primarily as a result of decreased sales and increased
collection efforts at WPSC. Regulatory assets decreased $18.4 million due
primarily to gas plant cleanup insurance recoveries recorded as an offset to
regulatory assets in 1997. Investments and other assets increased $16.7
million as a result of increased prepaid pension assets and an increased
unrealized gain on the nuclear decommissioning trust.
Short-term notes payable and commercial paper decreased $16.6 million
and $10.6 million, respectively, due to decreased operational cash needs at
WPSC and decreased notes payable at WPSR. Internally generated funds exceeded
cash requirements at both WPSC and WPSR.
FINANCIAL CONDITION
Internally generated funds exceeded WPSR's cash requirements resulting
in the reduction of short-term borrowings during 1997. Pretax interest
coverage was 4.48 times for the 12 months ended December 31, 1997 for WPSC.
WPSC's bond ratings are AA+ (Standard & Poor's and Duff & Phelps) and Aa2
(Moody's).
WPSC is restricted by a PSCW order to paying normal common stock
dividends of no more than 109% of the previous year's common stock dividends
without prior notice to the PSCW. Also, Wisconsin law prohibits WPSC from
making loans to WPSR and its nonregulated subsidiaries and from guaranteeing
their obligations. A special common stock dividend of $10.0 million was paid
by WPSC to WPSR in January 1997. The special dividend allowed WPSC's average
equity capitalization ratio to remain at approximately 54%, the level
approved by the PSCW for ratemaking.
WPSC makes large investments in capital assets. Construction
expenditures for WPSC are expected to continue in the $75.0 million to
$90.0 million range annually during the 1998 through 2000 period. This does
not include expenditures for the replacement of Kewaunee steam generators.
Steam generator replacement, WPSC's share of which would be approximately
$36.7 million in year of occurrence dollars, is contingent upon receipt of
approval from the PSCW to proceed with replacement and agreement among the
owners on a replacement plan. Potential expenditures for gas pipeline
laterals which would connect WPSC's distribution system with the proposed
Viking Voyageur pipeline from Canada are also not included.
In addition, other capital requirements for WPSC during the three-year
period include Kewaunee decommissioning trust fund contributions of
approximately $30.0 million and maturing first-mortgage bonds of
$50.0 million.
WPSR expects that internally-generated funds and short-term borrowing
will satisfy most of its capital requirements. WPSR may periodically issue
additional long-term debt and common stock to reduce short-term debt and to
maintain desired capitalization ratios. The specific forms of financing,
amounts, and timing will depend on the availability of projects, market
-46-
conditions, and other factors. WPSR may expand its leveraged employee stock
ownership plan during the three-year period. Trusted preferred stock may be
issued on behalf of WPSR in 1998 to reduce short-term borrowing.
Investment expenditures for nonregulated projects are uncertain since
there are no material firm commitments at this time. Debt financing for most
nonregulated projects is expected to be on a nonrecourse basis.
Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets to be Disposed of," became
effective in March 1995. This statement imposes a stricter criterion for
regulatory assets by requiring that such assets be probable of future recovery
at each balance sheet date. WPSR adopted this statement on January 1, 1996.
The adoption of this statement did not have a material impact on the financial
position or results of operations based on the current regulatory structure.
SFAS No. 121 may impact WPSR in the future as competitive factors influence
wholesale and retail pricing in the electric and gas industries and as
regulatory policy regarding recovery of stranded investment is developed.
SFAS No. 123, "Accounting for Stock-Based Compensation," became
effective in 1996. This statement permits, but does not require, companies to
change their accounting for stock-based compensation. The statement also
requires additional disclosures. WPSR has adopted only the disclosure
provision of the statement and currently does not provide significant
stock-based compensation.
In February 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 128, "Earnings Per Share." This statement establishes
standards for computing and presenting earnings per share. Adoption of this
standard by WPSR at December 31, 1997 had no impact on the presentation of
earnings per share as basic and diluted earnings per share are identical to
previously reported earnings per share.
In June 1997, the FASB issued SFAS No. 130, "Reporting of Comprehensive
Income," which establishes standards for reporting and display of
comprehensive income and its components of revenues, expenses, gains, and
losses. The statement is effective for fiscal years beginning after
December 15, 1997. WPSR will be adopting the requirements for reporting
comprehensive income in the first quarter of 1998.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." This statement establishes
standards for reporting information about operating segments and is effective
for periods beginning after December 15, 1997. WPSR will be adopting the
requirements of this statement at year-end 1998 and has not yet determined the
segments which will be disclosed.
On July 10, 1997, WPSR announced a merger agreement with UPEN. The S-4
Registration Statement was declared effective by the Securities and Exchange
Commission ("SEC") on December 5, 1997. The shareholders of UPEN approved the
merger on January 29, 1998. The merger is subject to (1) approval by the
Federal Energy Regulatory Commission ("FERC"); (2) approval by the SEC under
the Public Utility Holding Company Act of 1935; (3) the expiration or
termination of the waiting period applicable to the merger under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976; (4) receipt by the
parties of an opinion of counsel that the exchange of stock qualifies as a
-47-
tax-free transaction; (5) receipt by the parties of appropriate assurances
that the transaction will be accounted for as a pooling of interests; and
(6) the satisfaction of various other conditions. The merger is expected to
be completed during the second half of 1998. UPEN will merge with and into
WPSR, and Upper Peninsula Power Company, UPEN's utility subsidiary, will
become a wholly-owned subsidiary of WPSR. Each of the 2,950,001 outstanding
shares of UPEN common stock (no par value) will be converted into 0.90 shares
of WPSR common stock ($1.00 par value), subject to adjustment for fractional
shares, as provided in the merger agreement.
Effective March 20, 1997, WPSC received authorization from the PSCW to
defer all costs associated with the repair of the Kewaunee steam generators.
Repairs are complete and Kewaunee returned to service on June 12, 1997 after
having been out of service since September 21, 1996. Repair costs of
$3.6 million (WPSC's portion) have been deferred. The joint owners of
Kewaunee have requested rate recovery of these deferred costs through a
customer surcharge which would be effective for April and May 1998.
On July 1, 1997, the PSCW authorized WPSC to defer all advertising costs
associated with developing a communication plan to educate customers on the
potential energy shortage. WPSC was also authorized to defer all costs
related to returning its fossil-fueled plant, Pulliam Unit 3, to service and
all subsequent operating costs for Pulliam Unit 3 until the next rate filing.
The recovery of these deferred costs will be considered in a future rate
proceeding. To date, approximately $0.5 million related to advertising costs
and Pulliam Unit 3 operating costs has been deferred.
A PSCW order granting a Certificate of Public Convenience and Necessity
for construction of the De Pere Energy Center was issued on October 9, 1997.
WPSC has a 25-year commitment with Polsky Energy Corporation to purchase the
output of the facility which is scheduled for operation in 1999. The
transaction will be accounted for as a capital lease. WPSC will make any
necessary adjustments to debt and equity levels, and appropriate rate relief
is expected. Should electric retail deregulation occur, this contract may be
deemed uneconomical which could require a loss accrual if the regulator would
not allow recovery as part of the deregulation transition plan.
WPSC's contract with the International Union of Operating Engineers
Local 310 expired on October 28, 1997. Unresolved issues remain and contract
negotiations continue. Approximately 1,200 employees are covered under this
contract. The employees continue to work without a contract.
WPSR has completed an initial assessment of the impact of the year 2000
compliance on its computer systems. WPSR worked with a consultant beginning
in 1996 to analyze the year 2000 problem. Plans have been established to
analyze all in-house and third party software products and applications. A
preliminary plan indicates that all major in-house developed systems are
expected to be compliant by the end of 1998. The plan is intended to enable
all systems to be compliant by the year 2000. The most recent estimated
future internal labor and third party cost of year 2000 compliance is
approximately $13.4 million.
TRENDS
WPSC follows SFAS No. 71, "Accounting for the Effects of Certain Types of
Regulation," and its financial statements reflect the effects of the
-48-
different ratemaking principles followed by the various jurisdictions
regulating the utility. These include the PSCW, 90% of revenues; the Michigan
Public Service Commission ("MPSC"), 3% of revenues; and the FERC, 7% of
revenues. In addition, Kewaunee is regulated by the Nuclear Regulatory
Commission ("NRC"). Environmental matters are primarily governed by the
United States Environmental Protection Agency and the Wisconsin Department of
Natural Resources.
In late 1995, the PSCW outlined its plan for restructuring the electric
industry in Wisconsin. The plan included 32 steps in a 5-year process
concluding with retail competition by the year 2001. In 1997, the 32-step
process was changed to a 7-step process which has not yet been adopted as the
official PSCW restructuring plan.
Should electric deregulation occur such that WPSC would no longer
qualify to reflect the effects of ratemaking under SFAS No. 71 in its
financial statements, no impairment of significant recorded assets or
reduction in reported equity is anticipated. WPSC does not have any
significant assets which it foresees as being potentially stranded and no
potential disparity between the depreciable lives of WPSC's capital assets and
those lives applicable to a competitive environment has been identified.
Increased competition is likely to put pressure on margins at WPSC. However,
at this time, management cannot predict the ultimate results of deregulation.
Part of electric utility restructuring involves establishing independent
system operators ("ISOs"). An ISO is an independent third party which
potentially owns the transmission facilities, oversees the operations of
transmission facilities, administers open access transmission tariffs, and
directs power dispatch. WPSC is working with several groups which are
attempting to form ISOs.
During the past summer, Governor Thompson requested reports from the
PSCW, electric utilities, and industrial customers assessing the electric
capacity problems experienced in eastern Wisconsin during this past spring and
summer. The reports provided analyses and recommendations on how to assure
the future reliability of the electrical supply and made recommendations on
how to improve the effectiveness of the state's utility regulatory process.
WPSC participated in the development of the utility report. The Governor is
expected to make energy supply and regulatory recommendations based on the
reports.
Both the PSCW and the MPSC continue to review gas industry
restructuring. In a current docket, the PSCW is addressing gas restructuring
issues including unbundling of rates, pricing of contracted services in
potential utility bypass situations, and the separation of gas utilities from
their nonregulated gas marketing affiliates. The MPSC is conducting pilot
studies to test the development of competitive retail gas markets in Michigan.
WPSC has historically recovered gas costs through a PGAC. The PSCW has
recently allowed utilities to select either an incentive gas cost recovery
mechanism or a modified one-for-one mechanism for gas cost recovery. WPSC has
selected the modified one-for-one gas cost recovery plan and implementation of
the new mechanism, which is currently under development and is similar to the
recovery received under the existing PGAC, is expected in November 1998.
-49-
WPSC is investigating the environmental cleanup of eight manufactured gas
plant sites. Cleanup estimates have been determined for seven of the sites.
A detailed investigation has not yet been performed for the eighth site.
Future investigation and cleanup costs for all eight sites is estimated in the
range of $34.1 million to $41.1 million. These estimates may be adjusted in
the future contingent upon remedial technology, regulatory requirements, and
experience gained through cleanup activities.
An initial liability of $41.7 million for cleanup had been established
with an offsetting regulatory asset (deferred charge). Of this amount,
approximately $1.5 million has been spent to date. 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. WPSC has received $12.6 million in insurance
recoveries which have been recorded as a reduction in the regulatory asset.
The PSCW has authorized current annualized recovery for gas site cleanup of
$225,000 for 1997 and 1998.
WPSC is in compliance with both the Phase I and II sulfur dioxide and
nitrogen oxide emission limits established by the Federal Clean Air Act
Amendments of 1990. Additional capital expenditures of $1.0 million to
$2.0 million are projected through 1999 for Wisconsin and federal air quality
compliance. Management believes that all costs incurred for additional
compliance will be recoverable in future customer rates.
On March 15, 1996, WPSC filed an application with the PSCW for
permission to replace the Kewaunee steam generators. Public hearings were
held in January of 1998. A decision is expected in March of 1998. The total
cost of replacing the two steam generators would be approximately
$89.0 million. WPSC's share would be $36.7 million in year of occurrence
dollars. The other two owners of Kewaunee do not favor steam generator
replacement.
WPSC received a rate order in the Wisconsin jurisdiction effective in
February 1997. The impact was approximately a $35.5 million decrease in
electric revenues and a $5.7 million increase in gas revenues on an annual
basis. The new rates are effective for 1997 and 1998. WPSC intends to file
an application with the PSCW on April 1, 1998 for electric and gas rate
increases which would be effective in 1999 and 2000.
ESI incurred a $4.9 million loss in 1997 and a $6.3 million loss in
1996. A primary strategy for ESI is rapid growth to gain market presence
which is reflected in a 237.7% growth in revenues during the three-year period
1995 through 1997, from $55.2 million in 1995 to $186.4 million in 1997. To
support this growth, significant expenditures were made for personnel
additions and system improvements. These expenditures, coupled with extreme
gas market volatility, contributed to the losses incurred at ESI. Gas market
volatility was reflected in the NYMEX gas futures prices per dekatherm which,
in 1997, ranged from a high of $3.55 to a low of $1.82. In 1996, gas futures
prices ranged from a high of $4.57 to a low of $1.86. Gas market volatility
has a direct impact on revenue.
PDI expects to improve the overall performance of its investment in
Stoneman due to a multi-year capacity sale agreement. Stoneman was also
grandfathered by the PSCW as a merchant plant which increases the probability
-50-
that the plant will be repowered as a 300-megawatt to 500-megawatt gas-fired
combined cycle generating facility.
IMPACT OF INFLATION
WPSR's current financial statements are prepared in accordance with
generally accepted accounting principles and report operating results in terms
of historic cost. They 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,
WPSC's projected operating costs are recoverable in revenues. Because
forecasts are prepared assuming inflation, the majority of inflationary
effects on normal operating costs are recoverable in rates. However, in these
forecasts, WPSC is only allowed to recover the historic cost of plant via
depreciation.
-51-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WPS RESOURCES CORPORATION
A. CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
===========================================================================================================
Year Ended December 31 (Thousands, except share amounts) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
Operating revenues
Electric utility $479,388 $490,506 $489,000
Gas utility 211,090 211,357 174,693
Nonregulated energy and other 187,862 156,391 56,155
- -----------------------------------------------------------------------------------------------------------
Total operating revenues 878,340 858,254 719,848
===========================================================================================================
Operating expenses
Electric production fuels 107,538 105,418 104,858
Purchased power 45,876 37,737 39,593
Gas purchased for resale 147,755 149,388 116,253
Nonregulated energy cost of sales 182,863 155,133 53,983
Other operating expenses 148,569 168,905 154,445
Maintenance 41,661 48,806 50,761
Depreciation and decommissioning 77,541 65,178 65,627
Taxes other than income 26,448 26,868 25,921
- -----------------------------------------------------------------------------------------------------------
Total operating expenses 778,251 757,433 611,441
===========================================================================================================
Operating income 100,089 100,821 108,407
- -----------------------------------------------------------------------------------------------------------
Other income
Allowance for equity funds used during construction 129 139 170
Other, net 11,511 (1,084) 6,080
- -----------------------------------------------------------------------------------------------------------
Total other income 11,640 (945) 6,250
===========================================================================================================
Income before interest expense 111,729 99,876 114,657
- -----------------------------------------------------------------------------------------------------------
Interest on long-term debt 22,331 21,532 22,859
Other interest 4,172 3,596 2,604
Allowance for borrowed funds used during construction (100) (128) (68)
- -----------------------------------------------------------------------------------------------------------
Total interest expense 26,403 25,000 25,395
===========================================================================================================
Income before income taxes 85,326 74,876 89,262
Income taxes 29,270 24,358 30,808
Minority interest (797) (348) -
Preferred stock dividends of subsidiary 3,111 3,111 3,111
- -----------------------------------------------------------------------------------------------------------
Net income 53,742 47,755 55,343
===========================================================================================================
Retained earnings at beginning of year 311,794 308,965 297,592
Cash dividends on common stock (45,882) (44,926) (43,970)
- -----------------------------------------------------------------------------------------------------------
Retained earnings at end of year $319,654 $311,794 $308,965
===========================================================================================================
Average shares of common stock 23,873 23,891 23,897
Basic and diluted earnings per average share of common stock $2.25 $2.00 $2.32
Dividend per share of common stock 1.92 1.88 1.84
===========================================================================================================
The accompanying notes are an integral part of these statements.
-52-
PAGE
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WPS RESOURCES CORPORATION
B. CONSOLIDATED BALANCE SHEETS
=================================================================================================
Assets
- -------------------------------------------------------------------------------------------------
At December 31 (Thousands) 1997 1996
- -------------------------------------------------------------------------------------------------
Utility plant
Electric $1,506,470 $1,474,104
Gas 251,603 240,791
- -------------------------------------------------------------------------------------------------
Total 1,758,073 1,714,895
Less - Accumulated depreciation and decommissioning 1,032,149 952,296
- -------------------------------------------------------------------------------------------------
Total 725,924 762,599
Nuclear decommissioning trusts 134,108 100,570
Construction in progress 7,266 10,301
Nuclear fuel, less accumulated amortization 19,062 19,381
- -------------------------------------------------------------------------------------------------
Net utility plant 886,360 892,851
=================================================================================================
Current assets
Cash and equivalents 6,424 5,978
Customer and other receivables, net of reserves 87,709 106,967
Accrued utility revenues 30,750 35,386
Fossil fuel, at average cost 10,336 8,224
Gas in storage, at average cost 22,080 19,987
Materials and supplies, at average cost 18,793 19,944
Prepayments and other 20,499 22,658
- -------------------------------------------------------------------------------------------------
Total current assets 196,591 219,144
=================================================================================================
Regulatory assets 78,544 96,920
Net nonutility and nonregulated plant 19,194 19,738
Investments and other assets 118,913 102,212
=================================================================================================
Total $1,299,602 $1,330,865
=================================================================================================
-53-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WPS RESOURCES CORPORATION
B. CONSOLIDATED BALANCE SHEETS (CONTINUED)
=================================================================================================
Capitalization and Liabilities
- -------------------------------------------------------------------------------------------------
At December 31 (Thousands) 1997 1996
- -------------------------------------------------------------------------------------------------
Capitalization
Common stock equity $ 477,823 $ 467,524
Preferred stock of subsidiary with no mandatory redemption 51,200 51,200
Long-term debt 304,008 305,788
- -------------------------------------------------------------------------------------------------
Total capitalization 833,031 824,512
=================================================================================================
Current liabilities
Notes payable 10,000 26,600
Commercial paper 20,706 31,350
Accounts payable 85,651 96,531
Accrued taxes 3,514 1,350
Accrued interest 7,801 8,134
Other 9,536 12,771
- -------------------------------------------------------------------------------------------------
Total current liabilities 137,208 176,736
=================================================================================================
Long-term liabilities and deferred credits
Accumulated deferred income taxes 125,804 130,208
Accumulated deferred investment tax credits 26,901 28,669
Regulatory liabilities 50,279 48,870
Environmental remediation liabilities 40,215 41,697
Other long-term liabilities 86,164 80,173
- -------------------------------------------------------------------------------------------------
Total long-term liabilities and deferred credits 329,363 329,617
=================================================================================================
Commitments and contingencies (See Note 9)
=================================================================================================
Total $1,299,602 $1,330,865
=================================================================================================
The accompanying notes are an integral part of these statements.
-54-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WPS RESOURCES CORPORATION
C. CONSOLIDATED STATEMENTS OF CAPITALIZATION
===========================================================================================
At December 31 (Thousands, except share amounts) 1997 1996
- -------------------------------------------------------------------------------------------
Common stock equity
Common stock, $1 par value, 100,000,000 shares authorized;
23,896,962 shares outstanding $ 23,897 $ 23,897
Premium on capital stock 145,021 145,021
Retained earnings 319,654 311,794
Shares in deferred compensation trust, 33,430 and 14,223 shares
at an average cost of $28.44 and $31.16 per
share at December 31, 1997 and 1996, respectively (951) (443)
ESOP loan guarantees (9,798) (12,745)
- -------------------------------------------------------------------------------------------
Total common stock equity 477,823 467,524
===========================================================================================
Preferred stock - Wisconsin Public Service Corporation
Cumulative, $100 par value, 1,000,000 shares authorized;
with no mandatory redemption
Series Shares Outstanding
------ ------------------
5.00% 132,000 13,200 13,200
5.04% 30,000 3,000 3,000
5.08% 50,000 5,000 5,000
6.76% 150,000 15,000 15,000
6.88% 150,000 15,000 15,000
- -------------------------------------------------------------------------------------------
Total preferred stock 51,200 51,200
===========================================================================================
Long-term debt
First mortgage bonds - Wisconsin Public Service Corporation
Series Year Due
------ --------
5-1/4% 1998 50,000 50,000
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
- -------------------------------------------------------------------------------------------
Total 284,175 284,175
Unamortized discount and premium on bonds, net (890) (978)
- -------------------------------------------------------------------------------------------
Total first mortgage bonds 283,285 283,197
- -------------------------------------------------------------------------------------------
ESOP loan guarantees 9,798 12,745
Notes payable to bank, secured by nonregulated plant 10,710 9,581
Other long-term debt 215 265
- -------------------------------------------------------------------------------------------
Total long-term debt 304,008 305,788
===========================================================================================
Total capitalization $833,031 $824,512
===========================================================================================
The accompanying notes are an integral part of these statements.
-55-
PAGE
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WPS RESOURCES CORPORATION
D. CONSOLIDATED STATEMENTS OF CASH FLOWS
=============================================================================================================
Year Ended December 31 (Thousands) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net income $ 53,742 $ 47,755 $ 55,343
Adjustments to reconcile net income to net cash from
operating activities
Depreciation and decommissioning 77,541 65,178 65,627
Amortization of nuclear fuel and other 14,665 28,691 33,499
Deferred income taxes (5,917) (7,715) 319
Investment tax credit restored (1,767) (1,778) (1,725)
Allowance for equity funds used during construction (129) (139) (170)
Pension income (11,432) (12,413) (11,678)
Postretirement liability 4,952 7,150 6,917
Deferred demand-side management expenditures (5) (6,250) (8,595)
(Gain)/loss on sale of nonutility property (4,802) (8) 13
Other, net (6,936) 7,954 7,150
Changes in
Customer and other receivables 19,258 (27,666) (19,272)
Accrued utility revenues 4,636 2,200 (8,766)
Fossil fuel inventory (2,112) 477 1,804
Gas in storage (2,093) (9,911) 5,711
Accounts payable (10,880) 29,048 840
Accrued taxes 2,164 (394) 592
Environmental remediation insurance recovery 12,374 200 -
Gas refunds (318) (6,175) 4,926
- -------------------------------------------------------------------------------------------------------------
Net cash from operating activities 142,941 116,204 132,535
=============================================================================================================
Cash flows from (used for) investing activities
Construction of utility plant and nuclear fuel expenditures (58,258) (84,750) (80,226)
Purchase of other property and equipment (2,030) (16,431) (1,089)
Decommissioning funding (16,059) (8,978) (8,181)
Purchase of investments and acquisitions - (728) (10,217)
Proceeds from sale of nonutility property 6,255 10 29
Other (558) (359) 485
- -------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (70,650) (111,236) (99,199)
=============================================================================================================
Cash flows from (used for) financing activities
Redemption of first mortgage bonds - (6,900) -
Issuance of notes payable 92,760 141,225 15,000
Redemption of notes payable (109,360) (129,625) (10,000)
Issuance of other long-term debt 1,789 15,296 -
Issuance of commercial paper 700,540 345,339 51,500
Redemption of commercial paper (711,184) (325,489) (52,500)
Cash dividends on common stock (45,882) (44,926) (43,970)
Purchase of deferred compensation stock (508) (443) -
- -------------------------------------------------------------------------------------------------------------
Net cash used for financing activities (71,845) (5,523) (39,970)
=============================================================================================================
Net increase (decrease) in cash and equivalents 446 (555) (6,634)
=============================================================================================================
Cash and equivalents at beginning of year 5,978 6,533 13,167
=============================================================================================================
Cash and equivalents at end of year $ 6,424 $ 5,978 $ 6,533
=============================================================================================================
Cash paid during year for
Interest, less amount capitalized $ 22,089 $ 21,983 $ 21,255
Income taxes 35,374 31,735 34,300
Preferred stock dividends of subsidiary 3,111 3,111 3,111
Other information
Construction and nuclear fuel expenditures,
including accruals, allowance for funds used during
construction, and customer contributions $ 65,646 $ 81,714 $ 73,251
=============================================================================================================
The accompanying notes are an integral part of these statements.
-56-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WPS RESOURCES CORPORATION AND
WISCONSIN PUBLIC SERVICE CORPORATION
E. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) NATURE OF OPERATIONS--WPS Resources Corporation ("WPSR") is a
holding company. Approximately 79% and 95% of WPSR's 1997
revenues and assets, respectively, and all of its net income are
derived from Wisconsin Public Service Corporation ("WPSC"), all of
the outstanding common stock of which is owned by WPSR. WPSC is
an electric and gas utility engaged in the supply and distribution
of electric power and natural gas in its franchised service
territory. WPSR also provides gas and electric marketing and
energy-related services in nonregulated markets through its
wholly-owned subsidiary, WPS Energy Services, Inc. ("ESI").
WPS Power Development, Inc. ("PDI"), another wholly-owned
subsidiary of WPSR, participates in the development of electric
generation projects, provides service to the electric power
generation industry, and owns a two-thirds interest in a merchant
generating plant, the Stoneman Power Plant ("Stoneman").
The term "utility" refers to the regulated activities of WPSC,
while the term "nonutility" refers to the activities of WPSC which
are not regulated. The term "nonregulated" refers to activities
other than those of WPSC.
(b) USE OF ESTIMATES--The preparation of WPSR's financial statements
is in conformity with generally accepted accounting principles.
Management may make estimates and assumptions that affect the
reported amounts of assets and liabilities and 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 could differ from
those estimates.
(c) ACQUISITIONS AND NONREGULATED INVESTMENTS--In the fourth quarter
of 1995, ESI acquired interests in a producing gas reserves
operation and in a gas marketing operation. The acquisitions have
been accounted for under the purchase method of accounting. The
price paid in excess of the fair value of identifiable assets
acquired for the gas marketing operation is being amortized over a
five-year period.
(d) CONSOLIDATION--WPSR consolidates all majority-owned subsidiaries.
All significant intercompany transactions and accounts have been
eliminated.
(e) PRICE RISK MANAGEMENT ACTIVITIES--ESI utilizes derivative
financial and commodity instruments (derivatives), including
futures and forward contracts, to reduce market risk associated
with fluctuations in the price of natural gas and electricity sold
-57-
under firm commitments with certain of its customers. ESI also
utilizes derivatives, including price swap agreements, call and
put option contracts, and futures and forward contracts, to manage
market risk associated with a portion of its anticipated supply
requirements. In addition, ESI utilizes derivatives, within
specified guidelines, for trading purposes.
Gains or losses on derivatives associated with firm commitments
are recognized as adjustments to the cost of sales or to revenues
when the related transactions affect earnings. Gains and losses
on derivatives associated with forecasted transactions are
recognized when such forecasted transactions affect earnings. At
December 31, 1997, $0.5 million in losses related to firm
commitments and forecasted transactions were deferred. If it is
no longer probable that a forecasted transaction will occur, any
gain or loss on the derivative instrument as of such date is
immediately recognized in earnings. Derivatives for trading
purposes are marked to market each accounting period, and gains
and losses are recognized as a component of other income at that
time. In 1997 and 1996, trading losses of $1.4 million and
$2.5 million, respectively, were recognized.
At December 31, 1997, ESI had outstanding 3.9 million notional
dekatherms of natural gas under futures and option agreements and
3.2 million notional dekatherms of natural gas under basis swap
agreements for purposes of managing market risk. The financial
instruments outstanding at December 31, 1997 expire at various
times through May 1999. ESI has certain gas sales commitments
through May 1999 with a range of sale prices from $2.25 to $3.58
per dekatherm and a range of associated gas purchase costs of
$2.18 to $3.51 per dekatherm.
As of December 31, 1997, the fair value of trading instruments
included assets of $0.5 million. The average fair value of
trading instruments during 1997 included assets of $0.5 million
and liabilities of $0.5 million. Except for an insignificant
level of electric trading instruments, financial instruments used
for trading in 1997 and 1996 were natural gas derivatives. At
December 31, 1997, ESI had outstanding 0.9 million notional
dekatherms of natural gas under futures and option agreements and
3.9 million notional dekatherms of natural gas under basis swap
agreements for trading purposes.
(f) UTILITY PLANT--Utility plant is stated at the original cost of
construction which includes an allowance for funds used during
construction ("AFUDC"). Approximately 50% of retail
jurisdictional construction work in progress ("CWIP") expenditures
are subject to AFUDC using a rate based on WPSC's overall cost of
capital. Major new generating facilities earn AFUDC on total CWIP
expenditures. For 1997, the AFUDC retail rate was approximately
10.4%.
-58-
AFUDC is recorded on wholesale jurisdictional electric CWIP at
debt and equity percentages specified in the Federal Energy
Regulatory Commission ("FERC") Uniform System of Accounts. For
1997, the AFUDC wholesale rate was approximately 5.7%.
Substantially all of WPSC's utility plant is subject to a first
mortgage lien.
(g) PROPERTY ADDITIONS, MAINTENANCE, AND RETIREMENTS OF UTILITY
PLANT--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. No gain or loss is
recognized in connection with ordinary retirements of utility
property units. The cost of units of property retired, sold, or
otherwise disposed of, plus removal cost, less salvage, are
charged to the accumulated provision for depreciation.
Maintenance and repair costs and replacement and renewal costs
associated with items not qualifying as units of property are
generally charged to operating expense.
Nonutility property and nonregulated property follow a similar
policy except that gains and losses are recognized in connection
with retirements.
(h) DEPRECIATION--Straight-line composite depreciation expense is
recorded over the estimated useful life of utility property and
includes estimated salvage and cost of removal. Except for the
Kewaunee Nuclear Power Plant ("Kewaunee"), rates approved by the
Public Service Commission of Wisconsin ("PSCW") on January 1, 1994
remain in effect.
============================================================
1997 1996 1995
------------------------------------------------------------
Annual composite
depreciation rates
Electric 3.52% 3.33% 3.43%
Gas 3.26% 3.35% 3.46%
============================================================
Nonutility property and nonregulated property are depreciated
using straight-line depreciation. Most assets have depreciation
lives ranging from five to ten years.
Property at Stoneman is depreciated using various lives, certain
of which are as long as 40 years.
Depreciation and nuclear decommissioning costs are accrued over
the estimated service life of Kewaunee. On January 3, 1997, the
PSCW accepted WPSC's recommendation to accelerate cost recovery of
the remaining unrecovered investment in Kewaunee and accelerate
funding of Kewaunee decommissioning costs. The PSCW order directs
the owners of Kewaunee to develop depreciation and decommissioning
estimates to provide for full recovery by the end of 2002. Prior
to 1997, the service life of Kewaunee was estimated to end in
2013, the year its license expires. This decision results in a
-59-
significant acceleration of the Wisconsin retail jurisdictional
portion of Kewaunee depreciation and decommissioning collections
in customer rates for 1997 and future years. Depreciation
expense, exclusive of depreciation expense related to nuclear
decommissioning costs, increased by approximately $3.3 million on
an annualized basis from $4.7 million in 1996 to $8.0 million in
1997.
(i) IMPAIRMENT--WPSR follows the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of." SFAS No. 121 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
application of this statement are reported in income in the period
in which the recognition criteria are first applied and met. This
statement does not have a material impact on the current carrying
amount of WPSR's assets.
(j) NUCLEAR FUEL--The cost of nuclear fuel is amortized to electric
production fuel expense based on the quantity of heat produced for
the generation of electric energy by Kewaunee. Costs amortized to
electric fuel expense (which assume no salvage values for uranium
and plutonium) include an amount for ultimate disposal and are
recovered through current customer rates. As required by the
Nuclear Waste Policy Act of 1982, a contract has been signed with
the United States Department of Energy ("DOE") for the ultimate
storage of the fuel; and quarterly payments, based on generation,
are made to the DOE for fuel storage. Interim storage space for
spent nuclear fuel is provided at Kewaunee, and expenses
associated with this storage are recognized as current operating
costs. Currently, there is on-site storage capacity for spent
fuel through the year 2013. As of December 31, 1997 and 1996, the
accumulated provisions for nuclear fuel totaled $151.2 million and
$147.7 million, respectively.
(k) NUCLEAR DECOMMISSIONING--Nuclear decommissioning costs to date
have been accrued over the estimated service life of Kewaunee,
recovered currently from customers in rates, and deposited in
external trusts. Such costs totaled $16.1 million in 1997 and
$9.0 million in both 1996 and 1995. The increase in 1997 was the
result of the PSCW's approval of the acceleration of Kewaunee
depreciation and decommissioning funding as described in
note 1(h). The increase is $8.3 million on an annualized basis,
from $9.0 million to $17.3 million.
Based on the standard cost escalation assumptions required by a
July 1994 PSCW order, the undiscounted amount of WPSC's
decommissioning costs forecasted to be expended between the years
2003 and 2039 is $614.0 million under the revised funding plan
which became effective in 1997. In developing the funding plan, a
long-term after-tax earnings rate of approximately 5.5% was
assumed.
-60-
WPSC's share of Kewaunee decommissioning is estimated to be
$182.2 million in current dollars based on a site-specific study.
The study, which was performed in 1992, uses immediate
dismantlement as the method of decommissioning beginning after a
dormant period extending from 2002 until 2015. As of December 31,
1997, the market value of the external nuclear decommissioning
trusts totaled $134.1 million.
Depreciation expense includes future decommissioning costs
collected in customer rates and an offsetting charge for earnings
from external trusts. As of December 31, 1997, the accumulated
provision for depreciation and decommissioning included
accumulated provisions for decommissioning totaling
$134.1 million. Realized trust earnings totaled $3.7 million,
$3.0 million, and $4.0 million, and unrealized trust earnings
totaled $13.8 million, $6.5 million, and $5.0 million for the
years ended December 31, 1997, 1996, and 1995, respectively.
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. 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.
(l) CASH AND EQUIVALENTS--WPSR considers short-term investments with
an original maturity of three months or less to be cash
equivalents.
(m) REVENUE AND CUSTOMER RECEIVABLES--WPSR accrues revenues related to
electric and gas service, including estimated amounts for service
rendered but not billed.
Automatic fuel adjustment clauses are used for FERC
wholesale-electric and Michigan Public Service Commission ("MPSC")
retail-electric portions of WPSC's business. The PSCW
retail-electric portion of the business uses a "cost variance
range" approach. This range is based on a specific estimated fuel
cost for the forecast year. If WPSC's actual fuel costs fall
outside this range, a hearing may be held and an adjustment to
future rates may result. WPSC has a purchased gas adjustment
clause ("PGAC") which allows it to pass changes in the cost of gas
purchased from its suppliers on to system gas customers, subject
to PSCW and MPSC review. The continued use of a PGAC for all
Wisconsin utilities has been reexamined by the PSCW and 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. WPSC has applied for a modified
one-for-one gas cost recovery plan which is similar to cost
-61-
recovery under the existing PGAC. Implementation of the modified
one-for-one gas cost recovery plan is expected in November 1998.
WPSC is required to provide service and grant credit to customers
within its service territory and is precluded from discontinuing
service to residential customers during certain periods of the
year. WPSC continually reviews its customers' credit-worthiness
and obtains deposits or refunds deposits accordingly. WPSC is
permitted to recover bad debts in utility rates.
Approximately 12% of WPSC's total revenues are from companies in
the paper products industry.
In October 1997, WPSC lost a major wholesale customer representing
annual sales of approximately 380,000 megawatt-hours. An effort
is being made to replace these lost sales with additional
opportunity sales.
(n) REGULATORY ASSETS AND LIABILITIES--WPSC is subject to the
provisions of SFAS No. 71, "Accounting for the Effects of Certain
Types of Regulation." Regulatory assets represent probable future
revenue associated with certain incurred costs which will be
recovered from customers through the ratemaking process.
Regulatory liabilities represent costs previously collected that
are refundable in future customer rates. The following regulatory
assets and liabilities were reflected in the Consolidated Balance
Sheets as of December 31:
============================================================
(Thousands) 1997 1996
------------------------------------------------------------
Regulatory assets
Demand-side management expenditures $31,360 $39,355
Environmental remediation costs
(net of insurance recoveries) 29,249 43,062
Coal and rail contract buy-out costs 2,293 2,404
Debt refinancing costs 1,859 2,919
Enrichment facility fee 5,544 5,979
Kewaunee steam generator
resleeving costs 3,577 -
Other 4,662 3,201
------------------------------------------------------------
Total $78,544 $96,920
============================================================
Regulatory liabilities
Income tax related items $26,119 $30,056
Pensions 2,443 4,885
Conservation costs 6,491 9,101
Unrealized gain on decommissioning
trust 11,348 3,587
Other 3,878 1,241
------------------------------------------------------------
Total $50,279 $48,870
============================================================
-62-
As of December 31, 1997, the majority of WPSC's regulatory assets
are being recovered through rates charged to customers over
periods ranging from two to ten years. Carrying costs for all
regulatory assets are being recovered except for those associated
with environmental costs. Based on prior and current rate
treatment of such costs, management believes it is probable that
WPSC will continue to recover from ratepayers the regulatory
assets described above.
See notes 7 and 8 for specific information on pension and deferred
tax regulatory liabilities. See note 9 for information on
environmental remediation deferred costs.
(o) INVESTMENTS AND OTHER ASSETS--Investments include 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 prepaid pension assets,
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.
(p) RECLASSIFICATIONS--Certain prior year financial statement amounts
have been reclassified to conform to current year presentation.
(q) RETIREMENT OF DEBT--Historically, gains or losses resulting from
the settlement of long-term debt obligations have been deferred
and amortized concurrent with rate recovery as required by
regulators.
(r) COMPREHENSIVE INCOME--In June 1997, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 130, "Reporting of
Comprehensive Income," which establishes standards for reporting
and displaying comprehensive income and its components of
revenues, expenses, gains, and losses. The statement is effective
for fiscal years beginning after December 15, 1997. WPSR will be
adopting the requirements for reporting comprehensive income in
the first quarter of 1998. WPSR currently has no components of
comprehensive income other than net income.
(s) SEGMENT DISCLOSURES--In June 1997, the FASB issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related
Information." This statement establishes standards for reporting
information about operating segments and is effective for periods
beginning after December 15, 1997. WPSR will be adopting the
requirements of this statement at year-end 1998 and has not yet
determined the segments which will be disclosed.
-63-
NOTE 2--JOINTLY-OWNED FACILITIES
Information regarding WPSC's share of major jointly-owned electric
generating facilities in service at December 31, 1997 is set forth
below.
===========================================================================================
(Thousands, West Marinette Columbia Edgewater
except for percentages) Unit No. 33 Energy Center Unit No. 4 Kewaunee
- -------------------------------------------------------------------------------------------
Ownership 68% 31.8% 31.8% 41.2%
Plant capacity (Megawatts) 83.5 335.2 104.9 221.0
Utility plant in service $15,914 $110,045 $22,209 $132,898
Accumulated depreciation $ 2,774 $ 63,432 $13,204 $ 89,858
In-service date 1993 1975 and 1978 1969 1974
===========================================================================================
WPSC's share of direct expenses for these plants is included in the
corresponding operating expenses in the consolidated statements of
income. WPSC has supplied its own financing for all jointly-owned
projects.
NOTE 3--SHORT-TERM DEBT AND LINES OF CREDIT
To provide short-term borrowing flexibility and security for commercial
paper outstanding, WPSR and its subsidiaries maintain bank lines of
credit. Most of 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) 1997 1996 1995
- ------------------------------------------------------------------------------------------------
As of end of year
Commercial paper outstanding $20,706 $31,350 $11,500
Discount rate on outstanding commercial paper 6.55% 5.73% 5.65%
Notes payable outstanding $10,000 $26,600 $15,000
Interest rate on notes payable 5.92% 5.81% 5.77%-6.18%
Available lines of credit $23,500 $40,400 $28,050
================================================================================================
For the year
Maximum amount of short-term debt $75,017 $70,250 $32,500
Average amount of short-term debt $30,092 $28,424 $14,305
Average interest rate on short-term debt 5.50% 4.89% 5.97%
================================================================================================
NOTE 4--LONG-TERM DEBT
Substantially all utility plant assets are secured by first mortgage
bonds.
In June 1996, WPSC repurchased $6.9 million of the First Mortgage Bonds,
8.80% Series, due in 2021. The repurchase was funded through short-term
borrowings. The repurchase premium and the unamortized discount from
the original issue have been deferred and are being amortized over
approximately a two-year period to correspond with ratemaking treatment.
In 1998, $50.0 million of 5-1/4% bonds will mature.
As of December 31, 1997, $8.2 million has been drawn against PDI's
revolving credit note of $11.5 million which is secured by the assets of
-64-
Stoneman. An additional $3.3 million, which is to be paid in the year
2000, has been committed against this note. The note, which is
guaranteed by WPSR, is due in the year 2000 when the plant may be
converted to a 300-megawatt to 500-megawatt gas-fired combined cycle
facility.
NOTE 5--COMMON EQUITY
Under WPSR's Stock Investment Plan, WPSR's common stock is purchased in
the open market to satisfy shareholder and employee purchase
requirements.
In December 1996, WPSR adopted a Shareholder Rights Plan designed to
enhance the ability of the Board of Directors to protect shareholders
and WPSR if efforts are made to gain control of WPSR in a manner that is
not in the best interests of WPSR and its shareholders. The plan gives
existing shareholders, under certain circumstances, the right to
purchase stock at a discounted price. The rights expire on December 11,
2006.
At December 31, 1997, WPSR had $318.6 million of retained earnings
available for dividends. WPSC is restricted by a PSCW order to paying
normal common stock dividends of no more than 109.0% of the previous
year's common stock dividend without PSCW approval. Also, Wisconsin law
prohibits WPSC from making loans to WPSR and its subsidiaries and from
guaranteeing their obligations. In January 1997, WPSC paid to WPSR a
special common dividend of $10.0 million. The special dividend allowed
WPSC's average common equity capitalization ratio to remain at
approximately 54.0%, the level approved by the PSCW for ratemaking.
NOTE 6--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 WPSC's nuclear
decommissioning trust investments is recorded at market value.
Long-Term Debt, Preferred Stock, and ESOP Loan Guarantees: The fair
value of WPSC's long-term debt, preferred stock, and ESOP loan
guarantees is estimated based on the quoted market price for the same or
similar issues or on the current rates offered to WPSC for debt of the
same remaining maturity.
-65-
The estimated fair values of WPSR's financial instruments as of
December 31 were:
=================================================================================================
(Thousands) 1997 1996
- -------------------------------------------------------------------------------------------------
Carrying Amount Fair Value Carrying Amount Fair Value
- -------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 6,424 $ 6,424 $ 5,978 $ 5,978
Energy conservation loans 7,195 7,195 5,388 5,388
Nuclear decommissioning
trusts - utility plant 134,108 134,108 100,570 100,570
Nuclear decommissioning
trusts - other assets 11,348 11,348 5,991 5,991
Notes payable 10,000 10,000 26,600 26,600
Commercial paper 20,706 20,706 31,350 31,350
ESOP loan guarantees 9,798 10,243 12,745 13,412
Long-term debt 294,210 309,206 293,043 300,906
Preferred stock 51,200 48,595 51,200 45,314
Gas commodity instruments 504 436 (61) 650
=================================================================================================
NOTE 7--EMPLOYEE BENEFIT PLANS
WPSC has non-contributory retirement plans covering substantially all
employees under which annual contributions may be made to an irrevocable
trust established to provide retired employees with a monthly payment if
conditions relating to age and length of service have been met. The
plans are fully funded, and no contributions were made in 1997, 1996, or
1995. WPSC recovers pension costs in customer rates under SFAS No. 87,
"Employers' Accounting for Pensions," and is returning to ratepayers
through 1998 the amounts previously recovered from customers in excess
of SFAS No. 87 costs.
The retirement plans hold assets with a fair market value of
$488.6 million as of December 31, 1997. These assets consist of
domestic and international equity and fixed income investments, and
domestic real estate investments.
The following table sets forth the plans' funded status and expense
(income).
-66-
============================================================================
As of December 31 1997 1996 1995
(Thousands, except for percentages)
- ----------------------------------------------------------------------------
Vested benefit obligation $(218,541) $(189,097) $(177,490)
Non-vested benefit obligation (13,112) (10,213) (8,980)
- ----------------------------------------------------------------------------
Total actuarial present value of
accumulated benefit obligation $(231,653) $(199,310) $(186,470)
============================================================================
Projected benefit obligation for
service rendered to date $(296,711) $(252,268) $(255,188)
Plan assets at fair value 488,555 429,948 391,070
- ----------------------------------------------------------------------------
Plan assets in excess of projected
benefit obligation 191,844 177,680 135,882
Unrecognized net gain (136,264) (121,066) (84,098)
Unrecognized prior service cost 13,813 7,254 8,020
Unrecognized net transition asset (16,526) (19,991) (23,455)
- ----------------------------------------------------------------------------
Prepaid retirement plan asset $ 52,867 $ 43,877 $ 36,349
============================================================================
The net retirement plan expense
(income) includes the following
components
Service cost $ 5,854 $ 6,371 $ 5,888
Interest cost 19,363 19,097 18,211
Actual return on plan assets (71,729) (48,244) (73,242)
Net amortization and deferral 37,522 15,248 42,791
Regulatory adjustment (2,442) (4,885) (5,326)
- ---------------------------------------------------------------------------
Net retirement plan (income) $ (11,432) $ (12,413) $ (11,678)
===========================================================================
The assumed rates for calculations
used in the above tables were
Expected long-term return on
investments 8.75% 8.50% 9.00%
Average rate for future salary
increases 5.50% 5.50% 6.25%
Discount rate to compute projected
benefit obligation 7.25% 7.75% 7.75%
==========================================================================
WPSC also offers medical, dental, and life insurance benefits to
employees, retirees, and their dependents. The expenses for active
employees are expensed as incurred.
WPSC accounts for retiree benefits using SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," which
requires the cost of postretirement benefits for employees to be accrued
as expense over the period in which the employee renders service and
becomes eligible to receive benefits. WPSC elected to recognize the
transition obligation for current and future retirees over 20 years
beginning in 1993.
-67-
WPSC funds amounts to irrevocable trusts as allowed for income tax
purposes. These funded amounts have been expensed and recovered through
customer rates. The 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.
The postretirement plans hold assets with a fair market value of
$121.0 million as of December 31, 1997. These assets consist of
domestic and international equity securities and domestic fixed income
investments.
The table below sets forth the plans' accrued postretirement benefit
obligation ("APBO") and the expense provisions.
=========================================================================
(Thousands) 1997 1996 1995
- -------------------------------------------------------------------------
APBO attributable to
Retirees and dependents $ (44,414) $ (43,746) $ (46,681)
Fully eligible active plan
participants (11,637) (5,273) (5,983)
Other active plan participants (57,594) (52,112) (58,611)
- -------------------------------------------------------------------------
Total APBO (113,645) (101,131) (111,275)
Fair value of plan assets 120,960 103,748 91,038
- -------------------------------------------------------------------------
APBO in excess of plan assets 7,315 2,617 (20,237)
Unrecognized net (gain)/loss (80,090) (66,045) (38,371)
Unrecognized transition
obligation 36,018 38,453 40,887
Unrecognized prior service cost 4,583 (1,897) (2,027)
- -------------------------------------------------------------------------
Accrued postretirement
benefit obligation $ (32,174) $ (26,872) $ (19,748)
=========================================================================
Service cost $ 3,192 $ 3,613 $ 4,392
Interest cost 8,220 8,488 9,833
Actual return on plan assets (20,176) (18,136) (20,918)
Net amortization and deferral 14,241 13,726 17,809
- -------------------------------------------------------------------------
Postretirement benefit cost $ 5,477 $ 7,691 $ 11,116
=========================================================================
The assumed before tax expected long-term return on investments and the
discount rate used to measure the APBO under SFAS No. 106 are consistent
with rates used to calculate the pension plans' funded status and
expense under SFAS No. 87. Only the administrative plan is subject to
federal income taxes which are reflected in the expense and funding
status. The assumed health care cost trend rates for 1998 are 8.0% for
medical and 7.5% for dental, both decreasing to 5.0% by the year 2006.
Increasing each of the medical and dental cost trend rates by 1.0% in
each year would increase the total APBO as of December 31, 1997 by
$20.0 million and the total net periodic postretirement benefit cost for
the year then ended by $2.3 million.
-68-
WPSC has a leveraged Employee Stock Ownership Plan and Trust ("ESOP")
that held 2,070,144 shares of WPSR common stock (market value of
approximately $70.0 million) at December 31, 1997. At that date, the
ESOP also had one loan guaranteed by WPSC and secured by common stock.
Principal and interest on the loan are to be paid using contributions
from WPSC and dividends on WPSR common stock held by the ESOP. Shares
in the ESOP are allocated to participants as the loan is repaid. Tax
benefits from dividends paid to the ESOP are recognized as a reduction
in WPSC's cost of providing service to customers. The PSCW has allowed
WPSC 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 8--INCOME TAXES
WPSR accounts for income taxes using the liability method as prescribed
by SFAS 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 bases 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 totaled $26.1 million as of December 31, 1997.
As of December 31, 1997 and 1996, WPSR had the following significant
temporary differences that created deferred tax assets and liabilities:
===================================================================
(Thousands) 1997 1996
-------------------------------------------------------------------
Deferred tax assets
Plant related $ 68,175 $ 55,040
Customer advances 8,187 8,232
Postretirement medical and dental 12,831 10,844
Other 16,522 14,752
-------------------------------------------------------------------
Total $105,715 $ 88,868
===================================================================
Deferred tax liabilities
Plant related $192,347 $179,573
Demand-side management expenditures 12,383 15,540
Pension 20,054 13,676
Other 6,735 10,287
-------------------------------------------------------------------
Total $231,519 $219,076
===================================================================
Net deferred tax liabilities $125,804 $130,208
===================================================================
Previously deferred investment tax credits are being amortized as
a reduction to income tax expense over the life of the related
utility plant. The components of income tax expense are set forth
in the tables below.
-69-
============================================================================================
(Thousands,
except for percentages) 1997 1996 1995
- --------------------------------------------------------------------------------------------
Rate Amount Rate Amount Rate Amount
- --------------------------------------------------------------------------------------------
Statutory federal income tax 35.0% $30,143 35.0% $26,329 35.0% $31,242
State income taxes, net 5.7 4,862 5.7 4,275 5.4 4,850
Investment tax credit restored (2.1) (1,768) (2.4) (1,778) (1.9) (1,725)
Rate difference on reversal
of income tax temporary
differences (2.2) (1,888) (2.1) (1,579) (1.9) (1,656)
Dividends paid to ESOP (1.6) (1,381) (1.9) (1,424) (1.6) (1,444)
Other differences, net (0.8) (698) (2.0) (1,465) (0.5) (459)
- --------------------------------------------------------------------------------------------
Effective income tax 34.0% $29,270 32.3% $24,358 34.5% $30,808
============================================================================================
Current provision
Federal $29,427 $26,122 $25,628
State 7,527 7,729 6,586
- --------------------------------------------------------------------------------------------
Total current provision 36,954 33,851 32,214
Deferred (benefit) provision (5,917) (7,715) 319
Investment tax credit
restored, net (1,767) (1,778) (1,725)
- --------------------------------------------------------------------------------------------
Total income tax expense $29,270 $24,358 $30,808
============================================================================================
NOTE 9--COMMITMENTS AND CONTINGENCIES
COAL CONTRACTS
To ensure a reliable, low-cost supply of coal, WPSC entered into a long-term
contract that has take-or-pay obligations totaling $198.4 million from 1998
through 2016. The obligations are subject to force majeure provisions which
provide WPSC other options if the specified coal does not meet emission limits
which may be mandated in future legislation. In the opinion of management,
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
WPSC has several take-or-pay contracts for either capacity or energy related
to purchased power. These contracts total $38.5 million through 1999.
Management expects to recover these costs in future customer rates.
LONG-TERM POWER SUPPLY
In November 1995, WPSC signed a 25-year agreement to purchase power from
Polsky Energy Corporation ("Polsky"), an independent power producer proposing
to build a cogeneration facility and sell electrical power to WPSC. In
October 1997, the PSCW issued a Certificate of Public Convenience and
Necessity authorizing construction of the project. Phase I of the project,
which is expected to be operational during 1999, will be accounted for as a
capitalized lease with the capitalized amount being approximately
$77.0 million. If Phase II becomes operational (Phase II is currently
projected to be operational within five years of the start of Phase I), an
additional plant asset of approximately $77.0 million will be recorded.
-70-
GAS COSTS
WPSC has natural gas supply and transportation contracts that will require
total estimated demand payments of $238.9 million through October 2008.
The FERC has allowed ANR Pipeline Company ("ANR"), WPSC's primary pipeline
supplier, to recover from its customers, including WPSC, a portion of certain
take-or-pay costs it incurred from renegotiating its long-term gas supply
contracts. To date, the PSCW and MPSC have granted WPSC recovery of all ANR
take-or-pay costs. WPSC has satisfied all current direct billed take-or-pay
costs from ANR. Remaining take-or-pay volumetric surcharges are estimated to
be $0.5 million during 1998.
In April 1992, the FERC issued Order No. 636 ("Order") which required natural
gas pipelines to restructure their sales and transportation services. As a
result, WPSC was obligated to pay for a portion of ANR's transition costs
incurred to comply with the Order. ANR recovers these transition costs
through a Gas Supply Realignment ("GSR") surcharge and a Pricing Differential
("PD") surcharge, with most charges recovered through the PD mechanism. On
December 31, 1997, ANR made its seventh PD cost recovery filing. WPSC
believes this may be ANR's final PD filing as most PD eligible contracts have
now expired, and ANR's PD mechanism ends effective January 31, 1999. WPSC's
estimated remaining PD costs are $0.7 million. Though there may be additional
PD and GSR transition costs, which could be significant, the amount and timing
of these costs are unknown at this time. Management expects to recover these
costs in future customer rates since the PSCW and MPSC have allowed such
recovery to date.
In December 1996, FERC approved a settlement agreement which establishes the
price for ANR's gas purchases and demand charges from the Dakota Gasification
Plant. Demand charges for WPSC through 2003 are estimated to be $1.5 million.
NUCLEAR LIABILITY
The Price-Anderson Act provides for the payment of funds for public liability
claims arising out of a nuclear incident. In the event of a nuclear incident
involving any of the nation's licensed reactors, WPSC is subject to a
proportional assessment which is approximately $32.7 million per incident, not
to exceed $4.1 million per incident, per calendar year. These amounts
represent WPSC's 41.2% ownership share in Kewaunee.
NUCLEAR PLANT OPERATION
On March 15, 1996, WPSC filed an application with the PSCW for permission to
replace the Kewaunee steam generators. Public hearings were held in
January 1998. A decision is expected in March 1998. The total cost of
replacing the two steam generators is approximately $89.0 million. WPSC's
share is $36.7 million in year of occurrence dollars. The other two owners of
Kewaunee do not favor steam generator replacement.
The net book value of WPSC's share of Kewaunee at December 31, 1997 is
$43.0 million. In addition, the current cost of WPSC's share of the estimated
costs to decommission Kewaunee, assuming early retirement, exceeds the trust
assets at December 31, 1997 by $48.1 million. If retired early, Kewaunee
would be placed in a dormant state following the transfer of spent fuel to
temporary storage facilities. Under this plan, Kewaunee would remain intact
-71-
with minimal monitoring and maintenance until physical decommissioning begins.
Actual decommissioning would probably not begin until approximately 2015. If
the owners of Kewaunee decide not to replace the steam generators or if the
PSCW does not authorize replacement, management believes the carrying amount
and any unfunded decommissioning costs at the date of Kewaunee's retirement
would be recoverable from customers in rates, and that no write-down for
impairment would be necessary. On January 3, 1997, the PSCW accepted WPSC'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.
CLEAN AIR REGULATIONS
WPSC 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
Amendments of 1990. Additional capital expenditures of $1.0 million to
$2.0 million are projected through 1999 for Wisconsin and federal air quality
compliance. Management believes that all costs incurred for additional
compliance will be recoverable in future customer rates.
MANUFACTURED GAS PLANT REMEDIATION
WPSC is investigating the environmental cleanup of eight manufactured gas
plant sites. A detailed investigation has not yet been performed for the
eighth site. Future investigation and cleanup costs for all eight sites is
estimated to be in the range of $34.1 million to $41.1 million. These
estimates may be adjusted in the future contingent upon remedial technology,
regulatory requirements, and experience gained through cleanup activities.
A liability for cleanup of $41.7 million had been established with an
offsetting regulatory asset (deferred charge). Of this amount, approximately
$1.5 million has been spent to date. 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. WPSC has received $12.6 million in insurance recoveries which have
been recorded as a reduction in the regulatory asset. The PSCW has authorized
current annualized recovery for gas site cleanup of $225,000 for each of the
years 1997 and 1998.
FUTURE UTILITY EXPENDITURES
Management estimates 1998 utility plant construction expenditures to be
approximately $88.3 million. Demand-side management ("DSM") expenditures are
estimated to be $8.0 million. No DSM expenditures will be deferred in 1998,
and the outstanding deferred asset balance at December 31, 1997 of
$31.4 million will be amortized over the next four years consistent with rate
recovery.
NOTE 10--REGULATORY ENVIRONMENT
WPSC received a rate order in the Wisconsin jurisdiction in February 1997.
The impact was approximately a $35.5 million decrease in electric revenues and
a $5.7 million increase in gas revenues on an annualized basis. The new rates
were effective for 1997 and will be effective for 1998. WPSC intends to file
an application with the PSCW on April 1, 1998, for electric and gas rate
increases which would be effective in 1999 and 2000.
-72-
NOTE 11--AGREEMENT TO MERGE WITH UPPER PENINSULA ENERGY CORPORATION
On July 10, 1997, WPSR announced an agreement to merge with Upper Peninsula
Energy Corporation ("UPEN"). The S-4 Registration Statement was declared
effective by the Securities and Exchange Commission ("SEC") on
December 5, 1997. The shareholders of UPEN approved the merger on
January 29, 1998. The merger is subject to (1) approval by the FERC;
(2) approval by the SEC under the Public Utility Holding Company Act of 1935;
(3) the expiration or termination of the waiting period applicable to the
merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976;
(4) receipt by the parties of an opinion of counsel that the exchange of stock
qualifies as a tax-free transaction; (5) receipt by the parties of appropriate
assurances that the transaction will be accounted for as a pooling of
interests; and (6) the satisfaction of various other conditions. The merger
is expected to be completed in the second half of 1998. UPEN will merge with
and into WPSR, and Upper Peninsula Power Company ("UPPCO"), UPEN's utility
subsidiary, will become a wholly-owned subsidiary of WPSR.
The summary below contains selected unaudited pro forma financial data for the
year ended December 31, 1997. The financial data should be read in
conjunction with the historical WPSR and UPEN consolidated financial
statements and related notes. The pro forma combined earnings per share
reflect the issuance of shares associated with the merger agreement.
Under the terms of the merger agreement, each of the 2,950,001 outstanding
shares of UPEN common stock (no par value) will be converted into 0.90 shares
of WPSR common stock ($1.00 par value), subject to adjustment for fractional
shares.
==========================================================================================
Pro Forma
WPSR UPEN Combined
(In thousands, except per share data) (as reported) (as reported) (unaudited)
- ------------------------------------------------------------------------------------------
Operating revenues $ 878,340 $ 60,104 $ 938,444
Net income $ 53,742 $ 2,067 $ 55,809
Basic and diluted earnings per share $2.25 $0.70 $2.10
Assets at December 31, 1997 $1,299,602 $136,844 $1,435,804
Long-term obligations at December 31, 1997 $ 304,008 $ 43,007 $ 347,015
==========================================================================================
UPEN is a holding company incorporated under the laws of the
State of Michigan. UPEN's principal subsidiary, UPPCO, is
an electric utility engaged in the generation, purchase,
transmission, distribution, and sale of electric energy in
the Upper Peninsula of Michigan. UPPCO serves approximately
48,000 customers in two-thirds of Michigan's Upper Peninsula.
UPPCO's service territory covers approximately 4,460 square
miles of primarily rural areas. UPPCO furnishes energy to
99 communities and adjacent areas and provides energy for
resale to 2 other investor-owned electric utilities,
2 cooperatives, and 4 municipalities. The main industries
in UPPCO's service territory are forest products, iron
mining and processing, tourism, and small manufacturing.
-73-
NOTE 12--SEGMENTS OF BUSINESS
The table below presents information for the respective years pertaining to
WPSR's operations segmented by lines of business.
===========================================================================================
(Thousands) 1997
- -------------------------------------------------------------------------------------------
Electric Gas Nonregulated
Utility Utility Operations Total
- -------------------------------------------------------------------------------------------
Operating revenues $479,388 $211,090 $187,862 $ 878,340
Operating expenses
Operation and maintenance 294,897 181,784 197,581 674,262
Depreciation 68,469 7,350 1,722 77,541
Other taxes 23,024 3,372 52 26,448
- -------------------------------------------------------------------------------------------
Total operating expenses 386,390 192,506 199,355 778,251
- -------------------------------------------------------------------------------------------
Operating income $ 92,998 $ 18,584 $(11,493) $ 100,089
===========================================================================================
Identifiable assets(a) $906,198 $235,490 $ 65,648 $1,207,336
- --------------------------------------------------------------------------
Assets not allocated(b) 92,266
- -------------------------------------------------------------------------------------------
Total assets $1,299,602
===========================================================================================
Construction and nuclear fuel
expenditures including AFUDC $ 48,696 $ 16,950 $ - $ 65,646
===========================================================================================
===========================================================================================
(Thousands) 1996
- -------------------------------------------------------------------------------------------
Electric Gas Nonregulated
Utility Utility Operations Total
- -------------------------------------------------------------------------------------------
Operating revenues $490,506 $211,357 $156,391 $ 858,254
Operating expenses
Operation and maintenance 309,212 190,331 165,844 665,387
Depreciation 56,708 7,127 1,343 65,178
Other taxes 23,161 3,708 (1) 26,868
- -------------------------------------------------------------------------------------------
Total operating expenses 389,081 201,166 167,186 757,433
- -------------------------------------------------------------------------------------------
Operating income $101,425 $ 10,191 $(10,795) $ 100,821
===========================================================================================
Identifiable assets(a) $905,325 $255,200 $ 71,917 $1,232,442
- --------------------------------------------------------------------------
Assets not allocated(b) 98,423
- -------------------------------------------------------------------------------------------
Total assets $1,330,865
===========================================================================================
Construction and nuclear fuel
expenditures including AFUDC $ 63,941 $ 17,773 $ - $ 81,714
===========================================================================================
-74-
===========================================================================================
(Thousands) 1995
- -------------------------------------------------------------------------------------------
Electric Gas Nonregulated
Utility Utility Operations Total
- -------------------------------------------------------------------------------------------
Operating revenues $489,000 $174,693 $56,155 $ 719,848
Operating expenses
Operation and maintenance 310,293 152,062 57,538 519,893
Depreciation 58,608 6,766 253 65,627
Other taxes 22,171 3,749 1 25,921
- -------------------------------------------------------------------------------------------
Total operating expenses 391,072 162,577 57,792 611,441
- -------------------------------------------------------------------------------------------
Operating income $ 97,928 $ 12,116 $(1,637) $ 108,407
===========================================================================================
Identifiable assets(a) $906,029 $232,983 $33,332 $1,172,344
- -------------------------------------------------------------------------
Assets not allocated(b) 94,399
- -------------------------------------------------------------------------------------------
Total assets $1,266,743
===========================================================================================
Construction and nuclear fuel
expenditures including AFUDC $ 56,916 $ 16,335 $ - $ 73,251
===========================================================================================
(a) At December 31 and net of the respective accumulated depreciation.
(b) Primarily includes cash, investments, pension assets, nonutility property, and other receivables.
NOTE 13--QUARTERLY FINANCIAL INFORMATION
==================================================================================================================
(Thousands, except for share amounts) Three Months Ended
- ------------------------------------------------------------------------------------------------------------------
1997
March June September December Total
- ------------------------------------------------------------------------------------------------------------------
Operating revenues $263,013 $191,360 $185,225 $238,742 $878,340
Operating income $ 33,270 $ 15,620 $ 26,390 $ 24,809 $100,089
Net income $ 18,235 $ 9,571 $ 12,903 $ 13,033 $ 53,742
Average number of shares of common stock 23,880 23,875 23,870 23,866 23,873
Basic and diluted earnings per share $.76 $.40 $.54 $.55 $2.25
==================================================================================================================
- ------------------------------------------------------------------------------------------------------------------
1996
March June September December Total
- ------------------------------------------------------------------------------------------------------------------
Operating revenues $251,337 $181,628 $178,980 $246,309 $858,254
Operating income $ 40,999 $ 20,606 $ 23,695 $ 15,521 $100,821
Net income $ 23,520 $ 10,120 $ 10,385 $ 3,730 $ 47,755
Average number of shares of common stock 23,896 23,893 23,893 23,885 23,891
Basic and diluted earnings per share $.98 $.42 $.43 $.17 $2.00
==================================================================================================================
Because of various factors which affect the utility business, the quarterly results of operations are not necessarily
comparable. Fourth quarter 1996 results include a loss of $.25 per share at WPSR's nonregulated subsidiaries due to
trading losses and a loss on the write-off of an investment.
-75-
PAGE
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, 1997 and 1996, and the
related consolidated statements of income and retained earnings and cash flows
for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the 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, 1997 and 1996
and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin
January 29, 1998
-76-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WISCONSIN PUBLIC SERVICE CORPORATION
G. CONSOLIDATED STATEMENTS OF INCOME
===================================================================================================
Year Ended December 31 (Thousands) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------
Operating revenues
Electric $479,388 $490,506 $489,000
Gas 211,090 211,357 174,693
- ---------------------------------------------------------------------------------------------------
Total operating revenues 690,478 701,863 663,693
===================================================================================================
Operating expenses
Electric production fuels 107,538 105,418 104,858
Purchased power 45,876 37,737 39,593
Gas purchased for resale 147,493 149,388 116,253
Other operating expenses 134,113 158,167 150,880
Maintenance 41,661 48,734 50,761
Depreciation and decommissioning 75,819 63,835 65,374
Federal income taxes 26,460 25,267 25,645
Investment tax credit restored (1,768) (1,778) (1,725)
State income taxes 7,569 7,732 7,378
Gross receipts tax and other 26,396 26,869 25,920
- ---------------------------------------------------------------------------------------------------
Total operating expense 611,157 621,369 584,937
===================================================================================================
Operating income 79,321 80,494 78,756
- ---------------------------------------------------------------------------------------------------
Other income and (deductions)
Allowance for equity funds used during construction 129 139 170
Other, net 12,591 5,123 6,019
Income taxes (1,110) (294) 160
- ---------------------------------------------------------------------------------------------------
Total other income and (deductions) 11,610 4,968 6,349
===================================================================================================
Income before interest expense 90,931 85,462 85,105
- ---------------------------------------------------------------------------------------------------
Interest expense
Interest on long-term debt 22,530 22,512 23,409
Other interest 3,759 2,688 2,526
Allowance for borrowed funds used during construction (100) (128) (68)
- ---------------------------------------------------------------------------------------------------
Total interest expense 26,189 25,072 25,867
===================================================================================================
Net income 64,742 60,390 59,238
===================================================================================================
Preferred stock dividend requirements 3,111 3,111 3,111
Earnings on common stock $ 61,631 $ 57,279 $ 56,127
===================================================================================================
The accompanying WPS Resources Corporation notes are an integral part of these statements.
-77-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WISCONSIN PUBLIC SERVICE CORPORATION
H. CONSOLIDATED BALANCE SHEETS
===============================================================================================
Assets
- -----------------------------------------------------------------------------------------------
At December 31 (Thousands) 1997 1996
===============================================================================================
Utility plant
Electric $1,506,470 $1,474,104
Gas 251,603 240,791
- -----------------------------------------------------------------------------------------------
Total 1,758,073 1,714,895
Less - Accumulated depreciation and decommissioning 1,032,149 952,296
- -----------------------------------------------------------------------------------------------
Total 725,924 762,599
Nuclear decommissioning trusts 134,108 100,570
Construction in progress 7,266 10,301
Nuclear fuel, less accumulated amortization 19,062 19,381
- -----------------------------------------------------------------------------------------------
Net utility plant 886,360 892,851
===============================================================================================
Current assets
Cash and equivalents 3,921 4,165
Customer and other receivables, net of reserves 55,893 66,234
Accrued utility revenues 30,750 35,326
Fossil fuel, at average cost 9,964 8,224
Gas in storage, at average cost 17,194 16,440
Materials and supplies, at average cost 18,793 19,796
Prepayments and other 20,155 22,189
- -----------------------------------------------------------------------------------------------
Total current assets 156,670 172,374
===============================================================================================
Regulatory assets 78,544 96,920
Net nonutility plant 2,972 4,191
Investments and other assets 109,408 92,612
===============================================================================================
Total $1,233,954 $1,258,948
===============================================================================================
-78-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WISCONSIN PUBLIC SERVICE CORPORATION
H. CONSOLIDATED BALANCE SHEETS (CONTINUED)
===============================================================================================
Capitalization and Liabilities
- -----------------------------------------------------------------------------------------------
At December 31 (Thousands) 1997 1996
- -----------------------------------------------------------------------------------------------
Capitalization
Common stock equity $ 457,121 $ 448,425
Preferred stock with no mandatory redemption 51,200 51,200
Long-term debt to parent 14,321 14,612
Long-term debt 293,298 296,207
- -----------------------------------------------------------------------------------------------
Total capitalization 815,940 810,444
===============================================================================================
Current liabilities
Note payable 10,000 10,000
Commercial paper 15,500 29,000
Accounts payable 46,453 62,500
Accrued taxes 3,514 1,350
Accrued interest 7,801 8,134
Other 10,049 12,324
- -----------------------------------------------------------------------------------------------
Total current liabilities 93,317 123,308
===============================================================================================
Long-term liabilities and deferred credits
Accumulated deferred income taxes 127,512 131,549
Accumulated deferred investment tax credits 26,901 28,669
Regulatory liabilities 50,279 48,870
Environmental remediation liabilities 40,215 41,697
Other long-term liabilities 79,790 74,411
- -----------------------------------------------------------------------------------------------
Total long-term liabilities and deferred credits 324,697 325,196
===============================================================================================
Commitments and contingencies (See Note 9)
===============================================================================================
Total $1,233,954 $1,258,948
===============================================================================================
The accompanying WPS Resources Corporation notes are an integral part of these balance sheets.
-79-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WISCONSIN PUBLIC SERVICE CORPORATION
I. CONSOLIDATED STATEMENTS OF CAPITALIZATION
=======================================================================================
At December 31 (Thousands, except share amounts) 1997 1996
- ---------------------------------------------------------------------------------------
Common stock equity
Common stock $ 95,588 $ 95,588
Premium on capital stock 73,842 73,842
Retained earnings 297,489 291,740
ESOP loan guarantees (9,798) (12,745)
- ---------------------------------------------------------------------------------------
Total common stock equity 457,121 448,425
=======================================================================================
Preferred stock
Cumulative, $100 par value, 1,000,000 shares authorized:
with no mandatory redemption -
Series Shares Outstanding
------ ------------------
5.00% 132,000 13,200 13,200
5.04% 30,000 3,000 3,000
5.08% 50,000 5,000 5,000
6.76% 150,000 15,000 15,000
6.88% 150,000 15,000 15,000
- ---------------------------------------------------------------------------------------
Total preferred stock 51,200 51,200
=======================================================================================
Long-term debt to parent
Series Year Due
------ --------
8.76% 2015 5,914 6,012
7.35% 2016 8,407 8,600
- ---------------------------------------------------------------------------------------
Total long-term debt to parent 14,321 14,612
=======================================================================================
Long-term debt
First mortgage bonds
Series Year Due
------ --------
5-1/4% 1998 50,000 50,000
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
- ---------------------------------------------------------------------------------------
Total 284,175 284,175
Unamortized discount and premium on bonds, net (890) (978)
- ---------------------------------------------------------------------------------------
Total first mortgage bonds 283,285 283,197
- ---------------------------------------------------------------------------------------
ESOP loan guarantees 9,798 12,745
Other long-term debt 215 265
- ---------------------------------------------------------------------------------------
Total long-term debt 293,298 296,207
=======================================================================================
Total capitalization $815,940 $810,444
=======================================================================================
The accompanying WPS Resources Corporation notes are an integral
part of these statements.
-80-
PAGE
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WISCONSIN PUBLIC SERVICE CORPORATION
J. CONSOLIDATED STATEMENTS OF CASH FLOWS
========================================================================================================
Year Ended December 31 (Thousands) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 64,742 $ 60,390 $ 59,238
Adjustments to reconcile net income to net cash from
operating activities -
Depreciation and decommissioning 75,819 63,835 65,374
Amortization of nuclear fuel and other 14,665 27,687 33,344
Deferred income taxes (5,846) (6,623) 103
Investment tax credit restored (1,767) (1,778) (1,725)
Allowance for equity funds used during construction (129) (139) (170)
Pension income (11,432) (12,413) (11,678)
Postretirement liability 4,952 7,150 6,917
Deferred demand-side management expenditures (5) (6,250) (8,595)
(Gain)/loss on sale of nonutility property (4,802) (8) 13
Other, net (6,196) 7,069 6,627
Changes in -
Customer and other receivables 10,341 (4,078) (4,120)
Accrued utility revenues 4,576 2,260 (8,766)
Fossil fuel inventory (1,740) 477 1,804
Gas in storage (754) (6,537) 5,880
Accounts payable (16,047) 9,619 (12,455)
Accrued taxes 2,164 (394) 545
Environmental remediation insurance recovery 12,374 200 -
Gas refunds (318) (6,175) 4,926
- --------------------------------------------------------------------------------------------------------
Net cash from operating activities 140,597 134,292 137,262
========================================================================================================
Cash flows from (used for) investing activities:
Construction of utility plant and nuclear fuel expenditures (58,258) (84,750) (80,226)
Decommissioning funding (16,059) (8,978) (8,181)
Purchase of other property and equipment (111) (2,050) 77
Proceeds from sale of nonutility property 6,255 10 29
Other (175) 939 142
- --------------------------------------------------------------------------------------------------------
Net cash used for investing activities (68,348) (94,829) (88,159)
========================================================================================================
Cash flows from (used for) financing activities:
Redemption of first mortgage bonds - (6,900) -
Proceeds of long-term debt from parent - 8,668 -
Proceeds from issuance of commercial paper 257,100 153,300 51,500
Redemptions of commercial paper (270,600) (135,800) (52,500)
Preferred stock dividends (3,111) (3,111) (3,111)
Common stock dividends (55,882) (55,926) (43,970)
- --------------------------------------------------------------------------------------------------------
Net cash used for financing activities (72,493) (39,769) (48,081)
========================================================================================================
Net increase (decrease) in cash and equivalents (244) (306) 1,022
========================================================================================================
Cash and equivalents at beginning of year 4,165 4,471 3,449
========================================================================================================
Cash and equivalents at end of year $ 3,921 $ 4,165 $ 4,471
========================================================================================================
Cash paid during year for:
Interest, less amount capitalized $ 22,311 $ 22,100 $ 21,177
Income taxes $ 41,151 $ 35,662 $ 34,562
Other information
Construction and nuclear fuel expenditures, including
accruals, allowance for funds used during
construction and customer contributions $ 65,646 $ 81,714 $ 73,251
========================================================================================================
The accompanying WPS Resources Corporation notes are an integral part of these statements.
-81-
PAGE
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WISCONSIN PUBLIC SERVICE CORPORATION
K. CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
====================================================================================
Year Ended December 31 (Thousands) 1997 1996 1995
- ------------------------------------------------------------------------------------
Balance at beginning of year $291,740 $290,387 $280,730
Add - Net income 64,742 60,390 59,238
- ------------------------------------------------------------------------------------
356,482 350,777 339,968
- ------------------------------------------------------------------------------------
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
Dividends declared on common stock 45,882 44,926 43,970
Dividend to parent 10,000 11,000 2,500
- ------------------------------------------------------------------------------------
58,993 59,037 49,581
- ------------------------------------------------------------------------------------
Balance at end of year $297,489 $291,740 $290,387
====================================================================================
The accompanying WPS Resources Corporation notes are an integral part of these statements.
-82-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WISCONSIN PUBLIC SERVICE CORPORATION
L. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Notes to Consolidated Financial Statements for Wisconsin Public Service
Corporation are incorporated in the Notes to Consolidated Financial Statements
for WPS Resources Corporation at page 57 of this report.
-83-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WISCONSIN PUBLIC SERVICE CORPORATION
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 subsidiary as of December 31, 1997 and 1996, and
the related consolidated statements of income and retained earnings and cash
flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Wisconsin
Public Service Corporation and subsidiary as of December 31, 1997 and 1996,
and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin
January 29, 1998
-84-
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 about WPSR's directors and those Class A directors seeking
re-election may be found on pages 3 and 4 of WPSR's March 23, 1998 Proxy
Statement. Such information is incorporated by reference as if fully set
forth herein.
Information regarding the executive officers, which is not a part of
WPSR's Proxy Statement, is set forth in Part I, Item 4A, at page 32.
ITEM 11. EXECUTIVE COMPENSATION
Information required under Item 11 regarding compensation paid by WPSR
to its Chief Executive Officer and other executive officers of WPSR may be
found in WPSR's March 23, 1998 Proxy Statement, which information is
incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning principal securities holders and securities
holdings of management which may be found on pages 2 and 3 of WPSR's March 23,
1998 Proxy Statement 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 1997,
or any currently proposed transactions, or series of similar transactions, to
which WPSR or any of its subsidiaries was or is to be party 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 WPSR, or any member of the
immediate family of any of the foregoing persons had or will have a direct
material interest.
-85-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
(1) The following financial consolidated statements are included
in Part II at Item 8 above:
Description Pages in 10-K
----------- -------------
WPS RESOURCES CORPORATION
Consolidated Statements of Income and 52
Retained Earnings for the three years
ended December 31, 1997, 1996, and 1995
Consolidated Balance Sheets as of 53
December 31, 1997 and 1996
Consolidated Statements of Capitalization 55
as of December 31, 1997 and 1996
Consolidated Statements of Cash Flows for 56
the three years ended December 31, 1997,
1996, and 1995
Notes to Consolidated Financial Statements 57
Report of Independent Public Accountants 76
WISCONSIN PUBLIC SERVICE CORPORATION
Consolidated Statements of Income for the 77
three years ended December 31, 1997, 1996,
and 1995
Consolidated Balance Sheets as of 78
December 31, 1997 and 1996
Consolidated Statements of Capitalization 80
as of December 31, 1997 and 1996
Consolidated Statements of Cash Flows for 81
the three years ended December 31, 1997,
1996, and 1995
Consolidated Statements of Retained Earnings 82
Notes to Consolidated Financial Statements 83
Report of Independent Public Accountants 84
-86-
(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 III - Condensed Parent
Company Only Financial Statements
A. Report of Independent Public 95
Accountants
B. Statements of Income and Retained 96
Earnings
C. Balance Sheets 97
D. Statements of Cash Flows 98
E. Notes to Parent Company Financial 99
Statements
(3) All exhibits, including those incorporated by reference.
-87-
Exhibit
Number Description of Documents
- ------- ------------------------
3A-1 Restated Articles of Incorporation of the Company. (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 the Company as in effect July 11, 1996. (Incorporated
by reference to Exhibit 3(ii) to Form 10-Q for the quarter ended
September 30, 1996). (File No. 1-11337)
3B-2 By-Laws of Wisconsin Public Service Corporation as in effect
July 11, 1996. (Incorporated by reference to Exhibit 3(ii) to
Form 10-Q for the quarter ended September 30, 1996). (File
No. 1-3016)
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,
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
-88-
Exhibit
Number Description of Documents
- ------- ------------------------
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 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). All
references to periodic reports are to those of Wisconsin Public
Service Corporation (File No. 1-3016).
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 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).
-89-
Exhibit
Number Description of Documents
- ------- ------------------------
10C-1 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]).
10C-2 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]).
10D 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).
10E 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]).
10F-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. (Included
as Exhibit 10F-1 to this Form 10-K for the year ended December 31,
1997, filed March 6, 1998 [File No. 1-3016]).
10F-2 Agreement and Plan of Merger, dated as of July 10, 1997, by and
among WPS Resources Corporation and Upper Peninsula Energy
Corporation (Incorporated by reference to Appendix A to the Proxy
Statement/Prospectus forming part of Amendment 2 to the
Registration Statement on Form S-4, filed November 21, 1997
[Reg. No. 333-3401]).
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
10G-1 Copy of amended and restated WPS Resources Corporation Deferred
Compensation Plan for executives and non-employee directors,
effective January 1, 1998. (Included as Exhibit 10G-1 to this
Form 10-K for the year ended December 31, 1997, filed March 6,
1998 [File No. 1-11337]).
-90-
Exhibit
Number Description of Documents
- ------- ------------------------
10G-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]).
10G-3 Copy of WPS Resources Corporation Short-Term Variable Pay Plan
effective January 1, 1998. (Included as Exhibit 10G-3 to this
Form 10-K for the year ended December 31, 1997, filed March 6,
1998 [File No. 1-11337]).
-91-
Exhibit
Number Description of Document Pages in 10-K
- ------- ----------------------- -------------
10F-1 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
Wisconsin Public Service Corporation 100
10G-1 WPS Resources Corporation Amended and Restated
Deferred Compensation Plan Effective January 1,
1998
WPS Resources Corporation 213
10G-3 WPS Resources Corporation Short-Term Variable
Pay Plan Effective January 1, 1998
WPS Resources Corporation 240
11 Statement Regarding Computation of Per Share
Earnings
WPS Resources Corporation 248
21 Subsidiaries of the Registrant 249
23 Consent of Independent Public Accountants 250
24 Powers of Attorney 251
27 Financial Data Schedule
WPS Resources Corporation 259
Wisconsin Public Service Corporation 260
-92-
(b) Reports on Form 8-K
Form 8-K dated October 20, 1997 and filed October 21, 1997
transmitting a press release dated October 20, 1997 regarding the
financial results of WPS Resources Corporation for the quarterly
period ended September 30, 1997.
-93-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
WPS RESOURCES CORPORATION
and
WISCONSIN PUBLIC SERVICE CORPORATION
(Registrant)
By /s/ L. L. Weyers
--------------------------------------------------------------------
L. L. Weyers L. L. Weyers
Chairman, President, and Chairman and
Chief Executive Officer Chief Executive Officer
WPS Resources Corporation Wisconsin Public Service Corporation
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 Date
- ------------------------------------------------------------------------------
A. Dean Arganbright Director March 6, 1998
Michael S. Ariens Director
Richard A. Bemis Director
Daniel A. Bollom Director
M. Lois Bush Director
Robert C. Gallagher Director By /s/ L. L. Weyers
Kathryn M. Hasselblad-Pascale Director --------------------------
James L. Kemerling Director L. L. Weyers
Attorney-in-Fact
/s/ L. L. Weyers Principal Executive March 6, 1998
- ---------------------------------Officer and Director
L. L. Weyers
/s/ D. P. Bittner Principal Financial March 6, 1998
- ---------------------------------Officer
D. P. Bittner
/s/ D. L. Ford Principal Accounting March 6, 1998
- ---------------------------------Officer
D. L. Ford
-94-
SCHEDULE III - CONDENSED
PARENT COMPANY FINANCIAL STATEMENTS
WPS RESOURCES CORPORATION (PARENT COMPANY ONLY)
A. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of WPS Resources Corporation:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of WPS Resources Corporation included in
this Form 10-K, and have issued our report thereon dated January 29, 1998.
Our audit was made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. Supplemental Schedule III
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 part of the basic consolidated financial statements. This schedule has
been subjected to the auditing procedures applied in the 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.
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin
January 29, 1998
-95-
SCHEDULE III - CONDENSED
PARENT COMPANY FINANCIAL STATEMENTS
WPS RESOURCES CORPORATION (PARENT COMPANY ONLY)
B. STATEMENTS OF INCOME AND RETAINED EARNINGS
===============================================================================================
Year Ended December 31 (Thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------------
Income
Equity in earnings of subsidiaries after dividends $ (1,432) $ (8,941) $ 11,236
Cash dividends from subsidiaries 55,882 55,926 43,970
- -----------------------------------------------------------------------------------------------
Income from subsidiaries 54,450 46,985 55,206
- -----------------------------------------------------------------------------------------------
Investment income and other 2,901 2,251 872
- -----------------------------------------------------------------------------------------------
Total income 57,351 49,236 56,078
===============================================================================================
Operating expenses 2,864 585 589
- -----------------------------------------------------------------------------------------------
Income before interest expense 54,487 48,651 55,489
Interest expense 417 454 68
- -----------------------------------------------------------------------------------------------
Income before income taxes 54,070 48,197 55,421
Income taxes 328 442 78
- -----------------------------------------------------------------------------------------------
Net Income 53,742 47,755 55,343
===============================================================================================
Retained earnings, beginning of year 311,794 308,965 297,592
Common stock dividend (45,882) (44,926) (43,970)
- -----------------------------------------------------------------------------------------------
Retained earnings at end of year $319,654 $311,794 $308,965
===============================================================================================
-96-
PAGE
SCHEDULE III - CONDENSED
PARENT COMPANY FINANCIAL STATEMENTS
WPS RESOURCES CORPORATION (PARENT COMPANY ONLY)
C. BALANCE SHEETS
==============================================================================
At December 31 (Thousands) 1997 1996
- ------------------------------------------------------------------------------
Assets
- ------------------------------------------------------------------------------
Current assets
Cash and equivalents $ 5 $ 3
Accounts receivable - affiliates 417 614
Other receivables 217 12
Notes receivable - affiliates (note 1) 4,498 14,875
- ------------------------------------------------------------------------------
Total current assets 5,137 15,504
==============================================================================
Long-term notes receivable - affiliates (note 2) 15,950 16,382
==============================================================================
Investments in subsidiaries, at equity
Wisconsin Public Service Corporation 457,121 448,425
WPS Energy Services, Inc. 4,495 2,443
WPS Power Development, Inc. 7 2,238
- ------------------------------------------------------------------------------
Total investments in subsidiaries, at equity 461,623 453,106
==============================================================================
Net equipment 321 68
Other investments 2,856 3,025
Deferred income taxes 45 52
- ------------------------------------------------------------------------------
Total assets $485,932 $488,137
==============================================================================
==============================================================================
Liabilities and Capitalization
- ------------------------------------------------------------------------------
Current liabilities
Notes payable $ 5,206 $ 18,950
Accounts payable - affiliates 549 86
Accounts payable 1,699 519
Dividends payable 626 948
Other 29 62
- ------------------------------------------------------------------------------
Total current liabilities 8,109 20,565
==============================================================================
Other liabilities - 48
==============================================================================
Capitalization
Common stock, $1 par value, 100,000,000 shares
authorized; 23,896,962 shares outstanding 23,897 23,897
Premium on capital stock 145,021 145,021
Retained earnings 319,654 311,794
ESOP loan guarantees (9,798) (12,745)
Shares in deferred compensation trust (951) (443)
- ------------------------------------------------------------------------------
Total capitalization 477,823 467,524
==============================================================================
Total liabilities and capitalization $485,932 $488,137
==============================================================================
-97-
PAGE
SCHEDULE III - CONDENSED
PARENT COMPANY FINANCIAL STATEMENTS
WPS RESOURCES CORPORATION (PARENT COMPANY ONLY)
D. STATEMENTS OF CASH FLOWS
=====================================================================================================
Year Ended December 31 (Thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------
Operating
Net income $ 53,742 $ 47,755 $ 55,343
Add equity in earnings of subsidiaries after dividends 1,432 8,941 (11,236)
Deferred income taxes 7 46 139
Other - net 3 1,883 (30)
Changes in other items
Receivables (8) (463) (1,740)
Accounts payable 1,258 357 64
Other (16) 110 285
- -----------------------------------------------------------------------------------------------------
Net cash - operating 56,418 58,629 42,825
=====================================================================================================
Investing
Notes receivable - affiliates 10,809 (21,346) (1,825)
Capital contributions - affiliates (7,005) (5,250) (5,400)
Investments - other (87) (2,371) (4,434)
- -----------------------------------------------------------------------------------------------------
Net cash - investing 3,717 (28,967) (11,659)
=====================================================================================================
Financing
Proceeds from short-term debt 536,200 333,264 15,000
Payments on short-term debt (549,944) (319,314) (10,000)
Purchase of deferred compensation stock (507) (443) -
Common stock dividends (45,882) (44,926) (43,970)
- -----------------------------------------------------------------------------------------------------
Net cash - financing (60,133) (31,419) (38,970)
=====================================================================================================
Net change in cash 2 (1,757) (7,804)
Cash, beginning of period 3 1,760 9,564
- -----------------------------------------------------------------------------------------------------
Cash, end of period $ 5 $ 3 $ 1,760
=====================================================================================================
-98-
PAGE
SCHEDULE III - CONDENSED
PARENT COMPANY FINANCIAL STATEMENTS
WPS RESOURCES CORPORATION (PARENT COMPANY ONLY)
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 the
WPS Resources Corporation Consolidated Financial Statements and Notes thereto
included herein:
SUPPLEMENTAL NOTES
Note 1 WPS Resources Corporation ("WPSR") has short-term notes receivable
from WPS Energy Services, Inc. ("ESI") and WPS Power Development,
Inc. for $3.2 million and $1.3 million, respectively. These notes
bear interest at between 6.90% and 8.50%, depending upon the
operational use of the loaned funds.
Note 2 WPSR has long-term notes receivable from Wisconsin Public Service
Corporation for $5.9 million and $8.4 million bearing interest at
8.76% and 7.35%, respectively. The notes are to be repaid in
monthly payments of $51,670 and $63,896 through January 2015 and
May 2016, respectively. WPSR also has a long-term note receivable
from ESI totaling $1.6 million and bearing interest at 7-7/8%.
The note is to be repaid in quarterly payments of $69,076 through
October 2005.
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