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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
X
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For the fiscal year ended December 31, 1994
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the transition period from to
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Commission file number 1-11337
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WPS RESOURCES CORPORATION
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(Exact name of Registrant as specified in its charter)
WISCONSIN 39-1775292
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
700 North Adams St., P. O. Box 19001, Green Bay, Wisconsin 54307
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (414) 433-1445
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock, $1 par value New York Stock Exchange and
Chicago Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None (Title of Classes)
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 .
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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. ( )
State the aggregate market value of the voting stock held by nonaffiliates of
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the Registrant.
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$681,063,417 as of March 15, 1995
Number of shares outstanding of each class of common stock, as of December 31,
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1994:
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Common Stock, $1 par value 23,896,962 Shares
DOCUMENTS INCORPORATED BY REFERENCE
(1) Definitive proxy statement for Annual Meeting of Shareholders on May 4,
1995 (Incorporated into Parts I and III)
WPS RESOURCES CORPORATION
FORM 10-K
ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION
For the Year Ended December 31, 1994
TABLE OF CONTENTS
DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . iv
PART I
1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . 1
A. GENERAL . . . . . . . . . . . . . . . . . . . . . . . . 1
B. ELECTRIC OPERATIONS
General Matters . . . . . . . . . . . . . . . . . 1
Kewaunee Nuclear Power Plant. . . . . . . . . . . 2
Fuel Supply . . . . . . . . . . . . . . . . . . . 3
Rhinelander Energy Center . . . . . . . . . . . . 6
Other Matters . . . . . . . . . . . . . . . . . . 6
Financial Summary . . . . . . . . . . . . . . . . 9
Electric Operating Statistics . . . . . . . . . . 10
C. GAS OPERATIONS
General Matters . . . . . . . . . . . . . . . . . 11
Financial Summary . . . . . . . . . . . . . . . . 14
Gas Consolidated Operating Statistics . . . . . . 15
D. NON-REGULATED BUSINESSES . . . . . . . . . . . . . . . 16
E. ENVIRONMENTAL MATTERS
General Matters . . . . . . . . . . . . . . . . . 16
Air Quality . . . . . . . . . . . . . . . . . . . 17
Water Quality . . . . . . . . . . . . . . . . . . 17
Gas Plant Cleanup . . . . . . . . . . . . . . . . 18
Other Solid Waste Disposal. . . . . . . . . . . . 18
F. REGULATORY MATTERS
General Matters . . . . . . . . . . . . . . . . . 20
Customer Rate Matters . . . . . . . . . . . . . . 20
PSCW Industry Restructuring Proceeding . . . . . 21
Accounting Developments . . . . . . . . . . . . . 21
Dividend Restrictions . . . . . . . . . . . . . . 22
G. CAPITAL REQUIREMENTS . . . . . . . . . . . . . . . . . 22
H. EMPLOYEES. . . . . . . . . . . . . . . . . . . . . . . 22
2. PROPERTIES. . . . . . . . . . . . . . . . . . . . . . . . . 24
3. LEGAL PROCEEDINGS
Sheboygan Gas Plant . . . . . . . . . . . . . . . 25
Oshkosh Gas Plant . . . . . . . . . . . . . . . . 25
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . 26
4A. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. . . . . 26
PART II
5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . 27
6. SELECTED FINANCIAL DATA
COMPARATIVE FINANCIAL STATEMENTS AND
FINANCIAL STATISTICS (1984 AND 1990 TO 1994)
A. CONSOLIDATED STATEMENTS OF INCOME . . . . . . . . . . 29
B. CONSOLIDATED BALANCE SHEETS. . . . . . . . . . . . . . 30
C. FINANCIAL STATISTICS . . . . . . . . . . . . . . . . . 31
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION. . . . . . . . . . . . . 32
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
A. CONSOLIDATED STATEMENTS OF INCOME
AND RETAINED EARNINGS. . . . . . . . . . . . . . . . . 36
B. CONSOLIDATED BALANCE SHEETS . . . . . . . . . . . . . 37
C. CONSOLIDATED STATEMENTS OF CAPITALIZATION . . . . . . 39
D. CONSOLIDATED STATEMENTS OF CASH FLOWS. . . . . . . . . 40
E. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS . . . . . . 41
F. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS . . . . . . . 57
9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . . . 58
PART III
PART IV
14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . . . 58
DESCRIPTION OF DOCUMENTS. . . . . . . . . . . . . . . . . . 60
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . 64
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FINANCIAL STATEMENT SCHEDULES
A. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON
SCHEDULE III - CONDENSED PARENT
COMPANY ONLY FINANCIAL STATEMENTS. . . . . . . . . . . 99
B. STATEMENTS OF INCOME AND RETAINED EARNINGS . . . . . . 100
C. BALANCE SHEETS . . . . . . . . . . . . . . . . . . . . 101
D. STATEMENTS OF CASH FLOWS . . . . . . . . . . . . . . . 102
E. NOTES TO FINANCIAL STATEMENTS. . . . . . . . . . . . . 103
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DEFINITIONS
The following abbreviations and acronyms are used in the text of this
Form 10-K:
Act . . . . . . . . . . . . Federal Clean Air Act Amendments of 1990
ANR . . . . . . . . . . . . ANR Pipeline Company
Columbia* . . . . . . . . . The Columbia Energy Center
Committee . . . . . . . . . Advisory Committee formed by the PSCW to
recommend changes in the structure and
regulation of the electric utility
industry in Wisconsin
Communications. . . . . . . WPS Communications, Inc.
Company . . . . . . . . . . WPS Resources Corporation
CPCN. . . . . . . . . . . . Certificate of Public Convenience and
Necessity
DNR . . . . . . . . . . . . Wisconsin Department of Natural
Resources
DOE . . . . . . . . . . . . U. S. Department of Energy
Edgewater*. . . . . . . . . The Edgewater Unit 4 power plant
Enrichment Corporation. . . United States Enrichment Corporation
EPA . . . . . . . . . . . . U. S. Environmental Protection Agency
FERC. . . . . . . . . . . . Federal Energy Regulatory Commission
INPO. . . . . . . . . . . . Institute of Nuclear Power Operations
Kewaunee* . . . . . . . . . Kewaunee Nuclear Power Plant
MG&E. . . . . . . . . . . . Madison Gas and Electric Company
MPSC. . . . . . . . . . . . Michigan Public Service Commission
NERCO . . . . . . . . . . . NERCO Coal Company
NNAB. . . . . . . . . . . . National Nuclear Accrediting Board
NTS . . . . . . . . . . . . Network Transmission Service
Nuclear Policy Act. . . . . Nuclear Waste Policy Act of 1982
Packerland. . . . . . . . . Packerland Energy Services, Inc.
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Policy Act. . . . . . . . . The National Energy Policy Act of 1992
Polsky. . . . . . . . . . . Polsky Energy Corporation
PRP . . . . . . . . . . . . Potentially responsible party
PSCW. . . . . . . . . . . . Public Service Commission of Wisconsin
Pulliam*. . . . . . . . . . The Pulliam generating facility
Railroads . . . . . . . . . Soo Line and Wisconsin Central railroads
REC . . . . . . . . . . . . The Rhinelander Energy Center, a
cogeneration facility to be built
adjacent to the Rhinelander Paper
Company, Inc. mill in Rhinelander,
Wisconsin
Rhinelander Paper . . . . . Rhinelander Paper Company, Inc.
River Power . . . . . . . . Wisconsin River Power Company
RTG . . . . . . . . . . . . A regional transmission group such as
the one which the Mid-America
Interconnected Network companies are
planning to form
Superfund . . . . . . . . . Comprehensive Environmental Response,
Compensation and Liability Act
Union . . . . . . . . . . . Local 310 of the International Union of
Operating Engineers which represents
certain WPSC employees
Viking. . . . . . . . . . . Viking Gas Transmission Company
WDG . . . . . . . . . . . . Wisconsin Distributors Group
WEPCO . . . . . . . . . . . Wisconsin Electric Power Company
Weston* . . . . . . . . . . The Weston generating facility
Wisconsin*. . . . . . . . . State of Wisconsin
WP&L. . . . . . . . . . . . Wisconsin Power and Light Company
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WPPI. . . . . . . . . . . . Wisconsin Public Power, Inc.
WPSC. . . . . . . . . . . . Wisconsin Public Service Corporation,
the principal subsidiary of the Company
WPSE. . . . . . . . . . . . WPS Energy Services, Inc.
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* Indicates items not defined elsewhere in this report.
-vi-
PART I
ITEM 1. BUSINESS
A. GENERAL
WPS Resources Corporation ("Company"), a Wisconsin corporation,
was incorporated on December 3, 1993 as a subsidiary of Wisconsin
Public Service Corporation ("WPSC"). On September 1, 1994, the
Company, in a share-for-share exchange of common stock, acquired all
of the common stock of WPSC, $4 par value, and issued to the former
shareholders of WPSC shares of the Company's common stock, $1 par
value. The Company operates as a holding company with both utility
and non-regulated business units. It is the parent company of WPSC, a
regulated electric and gas utility, and its non-regulated subsidiary
WPS Leasing, Inc. Immediately after the reorganization there were two
non-regulated subsidiaries of the Company, WPS Communications Inc.
("Communications") and Packerland Energy Services, Inc.("Packerland").
WPS Energy Services, Inc. ("WPSE"), a new subsidiary, was formed on
October 12, 1994 for the purpose of marketing energy and related
services. On January 3, 1995, Packerland was merged into WPSE in an
effort to consolidate the marketing of energy and related services.
At December 31, 1994, WPSC represented 99% of the Company's
consolidated assets, revenues and net income.
B. ELECTRIC OPERATIONS
GENERAL MATTERS. The largest communities served at retail with
electricity are the cities of Green Bay, Oshkosh, Wausau and Stevens
Point.
WPSC's maximum net demand in 1994 was 1,549,000 kw which
occurred on June 16. At that time, system capability was
1,819,900 kw, and after adjustments for firm purchases and sales to
other utilities, WPSC's reserve capacity was 16.6%. This 1994 maximum
net demand was slightly lower than the 1993 summer net peak demand.
WPSC's future reserves, also adjusted for firm purchases and sales and
planned capacity additions, are estimated to be above the planning
criteria of a 15% minimum reserve in 1995 and 1996. See Part I,
Item 2, PROPERTIES, at page 24 for information concerning generating
facilities.
Coordinated planning for generation and transmission is a
function of the Wisconsin Upper Michigan Systems of which WPSC is a
member along with Wisconsin Power and Light Company ("WP&L"), Madison
Gas & Electric Company ("MG&E"), Wisconsin Electric Power Company
("WEPCO"), Upper Peninsula Power Company 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 owns 33.1% of the outstanding capital stock of Wisconsin
River Power Company ("River Power"). The business of River Power
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consists of the ownership and operation of two dams and related
hydroelectric plants on the Wisconsin River having an aggregate
installed capacity of about 35,000 kw. The output of the
hydroelectric plants is sold, at the sites of the plants, to the three
companies which own the outstanding capital stock substantially in
proportion to their stock ownership interests.
KEWAUNEE NUCLEAR POWER PLANT. WPSC is the operator and 41.2%
owner of Kewaunee which is owned jointly with WP&L and MG&E. This
plant began commercial operation in 1974. The Kewaunee capability
factor was 86.6% in 1994, compared to a projected industry average of
73.7%.
WPSC is a member of the Institute of Nuclear Power Operations
("INPO"), an organization of nuclear utilities which promotes
excellence in all aspects of nuclear plant operations. INPO manages
the accreditation process for industry training programs, which
includes periodic accreditation of those training programs by an
independent organization, the National Nuclear Accrediting Board
("NNAB"). All ten accredited training programs at Kewaunee are
currently in good standing with the NNAB.
The steam generator tubes at Kewaunee are susceptible to
corrosion characteristics seen throughout the nuclear industry.
Inspections are performed to identify degraded tubes. Degraded tubes
are either repaired by sleeving or are removed from service by
plugging. The steam generators were designed with approximately 15%
heat transfer margin, meaning that full power should be sustainable
with the equivalent of 15% of the steam generator tubes plugged. Tube
plugging and the build-up of deposits on the tubes affect the heat-
transfer capability of the steam generators to the point where
eventually full power operation is affected. The result will be a
gradual decrease in the capacity of the plant. The plant's capacity
could be reduced by as much as 20% by the year 2013 when the current
operating license expires. Currently, the equivalent of approximately
12% of the tubes in the steam generators are plugged with no loss of
capacity. WPSC recently completed studies evaluating the economics of
replacing the two steam generators at Kewaunee. The studies resulted
in the conclusion that the most prudent course of action is to
continue operation of the existing steam generators. WPSC continues
to evaluate appropriate repair strategies, including replacement, as
well as continued operation of the steam generators without
replacement. WPSC also continues to fund the development of welded
repair technology for steam generator tubes.
WPSC continues to evaluate and implement initiatives to improve
the performance of Kewaunee which already performs at above average
levels for the industry. These initiatives include conversion from a
twelve-month to an eighteen-month operating cycle beginning in the
spring of 1995 and numerous other cost reduction measures. These
initiatives have resulted in approximately a 25% reduction in Kewaunee
operating and maintenance costs since 1991.
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Physical decommissioning of Kewaunee is expected to occur during
the period 2014 to 2021 with additional expenditures being incurred
during the period 2022 to 2050 related to the storage of spent nuclear
fuel at the site. In July of 1994, the Public Service Commission of
Wisconsin ("PSCW") issued an order covering all Wisconsin utilities
that have nuclear generation. The order standardizes cost escalation
assumptions used in determining decommissioning liabilities. Based
upon this new methodology, and considering other assumption changes,
Kewaunee decommissioning costs are estimated to be $357 million in
current dollars and $785 million in year of expenditure dollars.
WPSC's share of Kewaunee decommissioning costs are estimated to be
$147 million in current dollars. These costs are recovered currently
in customer rates and deposited in external trusts. As a result of
the new order, annual funding is expected to increase from
approximately $4.0 million to approximately $8.7 million. On
December 31, 1994, the market value of the investments in the trusts
was $64.1 million.
Spent fuel is currently stored at Kewaunee. The existing
capacity of the spent fuel storage facility will enable storage of the
projected quantities of spent fuel through April 2001. WPSC is
evaluating options for the storage of additional quantities beyond
2001. Several technologies are available. An investment of
approximately $2.5 million in the early 2000s could provide additional
storage sufficient to meet spent fuel storage needs until the
expiration of the current operating license in 2013.
The Low-Level Radioactive Waste Policy Act of 1980 specifies that
states may enter into compacts to provide for regional low level waste
disposal facilities. Wisconsin is a member of the Midwest Low Level
Radioactive Waste Compact. The state of Ohio has been selected as the
host state for the Midwest Compact and is proceeding with the
preliminary phases of site selection. In June of 1994, the Barnwell,
South Carolina disposal facility, which had been accepting Kewaunee
low level radioactive waste materials, discontinued taking waste
materials from outside its region. WPSC expects to have sufficient
storage space of its own to satisfy low level radioactive waste
disposal needs until the Ohio facility accepts low level radioactive
waste materials.
FUEL SUPPLY. WPSC's electric generation mix in 1994 compared to
1993 was: steam plants (coal), 62.6%, down from 64.7%; steam plant
(nuclear), 14.5%, down from 14.6%; hydro, 2.6%, down from 3.2%;
combined natural gas and fuel oil, .7%, up from .4%; and purchased
power, 19.6%, up from 17.1%. Purchased power represents short-term
energy purchases.
WPSC has reduced over-all fuel costs for the fifth consecutive
year. Fuel costs in 1994 compared with 1993, expressed in dollars per
million BTU, were: nuclear, $.49, up from $.45; coal, $1.31, down from
$1.38; natural gas, $2.77, down from $3.41; and No. 2 fuel oil, $4.15,
up from $3.96.
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In 1995, WPSC will purchase almost all of the coal for its
solely-owned plants from Western sources. Delivery of coal at the
Pulliam plant is via railroad or lake vessel and at the Weston,
Columbia and Edgewater plants via railroad.
Pulliam and Weston Units 1 and 2 burn Powder River Basin sub-
bituminous coal. WPSC has a long-term contract with one coal supplier
that is expected to provide approximately two-thirds of the projected
1995 coal requirements for Unit 3 at Weston. The coal contract will
provide low sulfur Powder River Basin coal for a term ending in 2016.
The remainder of the coal for solely-owned generating facilities is
purchased under short-term agreements of two years or less.
During 1991, WPSC bought-out the coal supply agreement with NERCO
Coal Company ("NERCO") and the corresponding rail transportation
contracts with the Soo Line and the Wisconsin Central ("Railroads").
WPSC paid approximately $34 million to NERCO and the Railroads as
compensation for relief of all contractual obligations. The PSCW has
ruled that the railroad and coal contract buyout costs may be
recovered in customer rates subject to a benefits test. Management
believes it will meet the benefits test and therefore recover in
future rates all of the buyout costs because the cost of replacement
coal plus the buyout costs as amortized and a return on the
unamortized portion of the buyout costs are less than the costs under
the original contracts. In the Wisconsin jurisdiction, the remaining
unamortized buyout costs of $15.4 million will be recovered during
1995 and 1996. The Federal Energy Regulatory Commission ("FERC")
issued an order on November 15, 1994 allowing recovery of all but
approximately $3.6 million of NERCO buyout costs through a monthly
surcharge rate over the period January 1993 through December 2005.
The portion of the $3.6 million disallowance allocable to the FERC
jurisdiction will not be determined until the end of 1995. Management
believes that it is likely that the disallowance allocable to the FERC
jurisdiction will not exceed the $625,000 write off taken in 1993 in
anticipation of the disallowance. WPSC will accrue and recover
carrying charges on the unrecovered balance.
WPSC also has a 31.8% ownership share in Columbia and a 31.8%
ownership share in the Edgewater Unit 4, both of which are operated by
WP&L which has coal procurement responsibilities for these units.
Columbia, with two 527 megawatt units, uses coal from the Wyoming-
Montana coal fields. One hundred percent of the low sulfur coal for
Unit 1 is supplied under terms of a contract which expires in 2004.
The entire low sulfur coal supply for Unit 2 is supplied from the
Southern Powder River Basin under short-term contracts. Edgewater
uses a blend of bituminous and sub-bituminous Powder River Basin coal
both of which are acquired under short-term contracts.
In 1989, the PSCW concluded that WP&L did not properly
administer a coal contract for Columbia, which is owned 31.8% by WPSC,
46.2% by WP&L and 22.0% by MG&E, and ordered WP&L to refund $9 million
to the customers of WPSC, WP&L and MG&E proportionately according to
the ownership shares of each utility in Columbia. WP&L appealed the
PSCW decision, and that PSCW action was found to represent unlawful
-4-
retroactive ratemaking by both the Dane County Circuit Court and the
Wisconsin Court of Appeals. On February 8, 1994, the Wisconsin
Supreme Court upheld the decision of the Wisconsin Court of Appeals.
The supply of nuclear fuel for Kewaunee requires the purchase of
uranium concentrates, the conversion of uranium concentrates to
uranium hexafluoride, enrichment of the uranium hexafluoride and
fabrication of the enriched uranium into usable fuel assemblies.
After a region (approximately one-third of the nuclear fuel assemblies
in the reactor) of spent fuel is removed from the reactor, it is
placed in temporary storage for cooling in a spent fuel pool at the
plant site. Permanent storage is addressed below. There are
presently no operating facilities in the United States reprocessing
commercial nuclear fuel. A discussion of the nuclear fuel supply for
Kewaunee follows:
(a) Requirements for uranium are met through spot or contract
purchases. An inventory policy, which takes advantage of
economical spot market purchases of uranium, results in WPSC
maintaining inventories sufficient for three reactor reloads of
fuel.
(b) Uranium hexafluoride from inventory and from spot market
purchases was used to satisfy converted material requirements in
1994. WPSC intends to purchase future conversion services on the
spot market.
(c) In 1994, enriched uranium was procured from COGEMA, Inc. pursuant
to a contract executed in 1983 and last amended in 1993.
Enrichment services were purchased from the United States
Enrichment Corporation ("Enrichment Corporation") under the terms
of the utility services contract which is in effect for the life
of Kewaunee. WPSC is committed to take 70% of its annual
enrichment requirements in 1995, and in alternate years
thereafter, from the Enrichment Corporation.
(d) Fuel fabrication requirements through June 15, 1995 are covered
by contract. WPSC is finalizing a contract for fuel fabrication
extending through 2001.
(e) Beyond the stated periods set forth above, additional contracts
for uranium concentrates, conversion to uranium hexafluoride,
fabrication and spent fuel storage will have to be procured.
WPSC anticipates the prices for the foregoing will increase.
Pursuant to the Nuclear Waste Policy Act of 1982 ("Nuclear Policy
Act"), the U. S. Department of Energy ("DOE") has entered into a
contract with WPSC to accept, transport and dispose of spent nuclear
fuel beginning no later than January 31, 1998. It is likely that the
DOE will delay the acceptance of spent nuclear fuel beyond 1998. A
fee to offset the costs of the DOE's disposal for all spent fuel used
since April 7, 1983 has been assessed by DOE at one mill per net
kilowatt hour of electricity generated and sold by Kewaunee. An
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additional one-time fee was paid to DOE for the disposal of spent
nuclear fuel used to generate electricity prior to April 7, 1983.
The Nuclear Policy Act provides that both the federal government
and the nuclear utilities fund the decontamination and decommissioning
of the three gaseous diffusion plants in the United States. Utility
contributions will be collected through a special assessment based on
a utility's percentage of uranium enrichment services purchased
through the date of enactment compared to total enrichment sales by
the DOE. The owners of Kewaunee are required to pay approximately
$19.2 million in current dollars over a period of fifteen years. At
December 31, 1994, the remaining liability was $15.4 million of which
WPSC's share is $6.3 million. The payments are subject to adjustment
for inflation.
RHINELANDER ENERGY CENTER. WPSC has identified the need for
additional power supply late in this decade. To satisfy this need,
WPSC has signed a thirty-five year steam and electrical sales
agreement with Rhinelander Paper Company, Inc. ("Rhinelander Paper")
which likely will be amended to reflect continuing negotiations
between the parties. This agreement provides for WPSC to construct,
own and operate the Rhinelander Energy Center ("REC"), a 122 megawatt
cogeneration facility, with an estimated cost of $169 million,
adjacent to Rhinelander Paper's mill in Rhinelander, Wisconsin.
Rhinelander Paper will purchase and use steam from the facility in its
paper processes. On September 24, 1993, WPSC initiated the filing
process for a Certificate of Public Convenience and Necessity ("CPCN")
which must be issued by the PSCW to permit construction of the REC.
Action by the PSCW on the application is being carried out under a
recently developed two-stage CPCN process regulated by the PSCW. In
the first stage, WPSC requested proposals from electric generating
plant project developers and compared them to the proposed REC. On
December 21, 1994, the PSCW issued its order approving WPSC's REC
project as the least cost solution to WPSC's capacity needs. One
unsuccessful bidder, Polsky Energy Corporation ("Polsky") petitioned
for a rehearing of the PSCW's decision. The PSCW has agreed to
consider Polsky's allegations regarding the accuracy of certain
computations related to WPSC's successful bid. On March 9, 1995, in
response to the Polsky petition, the PSCW affirmed their original
decision in holding that the REC remains the least cost alternative
which will satisfy WPSC's additional capacity needs. WPSC is
proceeding with stage two of the CPCN process to obtain PSCW
authorization to construct the REC, a process which is expected to
result in a final decision on the CPCN in the second half of 1995 in
order to have the facility in service in the summer of 1998.
OTHER MATTERS. On January 14, 1994, WPSC submitted its Advance
Plan 7 filing to the PSCW. It was updated on April 29, 1994. This
plan identifies both the demand side and supply side needs of WPSC
through the year 2013. Preliminary plans indicate that demand side
management programs will reduce the need for additional electric
capacity by 269 megawatts. Supply side generation forecasts indicate
the need for peaking generating units in 2001, 2002, 2004 and 2005
(combustion turbines of 75 megawatts each), an intermediate generating
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unit in 2009 (215 megawatt combined-cycle gas-fired unit), and a
peaking generating unit in 2013 (75 megawatt combustion turbine). The
plan also includes 122 megawatts of cogeneration from the REC as
discussed above. Other smaller scale renewable projects are included
in the plan. Pulliam Units 3 and 4 are included in the plan as being
retired in 1998. They began operating in the 1940's. Advance Plan 7
must go through the regulatory review process. Hearings started in
November of 1994 and are scheduled to conclude in May of 1995.
WPSC is developing and implementing strategies to deal with
issues raised by the National Energy Policy Act of 1992 ("Policy
Act"). The Policy Act's provisions for transmission access should
have minimal impact on WPSC because WPSC already has transportation
tariffs on file at the FERC. The generation provisions of the Policy
Act could create additional competition in that market; however,
generation opportunities for WPSC also could increase.
Regionally, the member companies of the Mid-America
Interconnected Network, of which WPSC is a member, are planning the
formation of a regional transmission group ("RTG") that will open up
the entire transmission grid within the network to member companies
and others who choose to participate. It will then be easier than
ever to transport electric power from one purchaser to another. FERC
must approve the agreement for the formation of a RTG.
WPSC faces increased competition in the wholesale power market.
This may result in the loss of certain wholesale customers and reduced
margins. WPSC intends to compete aggressively to retain wholesale
load.
In October of 1992, WPPI notified WPSC that it was ending its
agreement to purchase power effective in October of 1997. WPPI is a
wholesale customer which buys 66 megawatts from WPSC for resale to
municipal utilities in Algoma, Eagle River, New Holstein, Sturgeon Bay
and Two Rivers. WPPI has entered into an agreement to buy power from
another Wisconsin utility during the period 1997 to 2009. Also, WPSC
has negotiated a new power supply agreement with the City of Wisconsin
Rapids.
Although 12% of electric revenues come from sales to twenty 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.
In August of 1994, WPSC received approval from the PSCW to
construct a portion of a jointly owned 138 Kv transmission line
extending from New London to Stevens Point. WPSC's share of the sixty
mile transmission project will cost approximately $14.9 million; the
remaining $9.6 million cost of the project is the responsibility of
WEPCO and WP&L. Completion of the project is expected by early 1997.
In the same order, the PSCW denied an application by WPPI to build and
own the project facilities as a means to reduce its overall power
supply costs. WPSC, WEPCO and WP&L offered, and were ultimately
-7-
ordered, to file Network Transmission Service ("NTS") tariffs with the
FERC that would offer comparable use on their transmission systems.
WPSC tendered its NTS tariff for filing with the FERC in September of
1994. Currently, the NTS tariff is under review by the FERC and
intervenors.
WPSC also is waiting for a ruling from the PSCW regarding the
Wausau to Abbotsford transmission project, which is part of a larger
transmission interface project with Northern States Power Company,
consisting of the rebuild of approximately twenty-three miles of
115 Kv transmission line. The cost of the project is estimated to be
$4.2 million.
Applications for relicensing of WPSC's Caldron Falls, High Falls,
Johnson Falls, Sandstone Rapids, Potato Rapids, Peshtigo, Grand Rapids
and Jersey Projects were submitted to the FERC in December of 1991.
These licenses, representing 30 megawatts of hydroelectric generating
capacity, expired in December of 1993. Since the FERC had not
considered WPSC's applications at the license expiration dates, the
licenses have been extended on an annual basis until FERC acts on the
applications. Application to the FERC for relicensing of WPSC's
Wausau Project was submitted in June of 1993. The license for this
project expires in June of 1995 and represents 5,400 kilowatts of
capacity.
In the fall of 1994, the PSCW initiated a proceeding to assess
the future of utility regulation in Wisconsin and to investigate the
structure necessary for utilities to compete in the new electric
marketplace. Public meetings have been held to identify the relevant
issues. This matter is discussed in more detail in Part I, Item 1E,
REGULATORY MATTERS, at page 21.
Electric research and development expenditures totaled
$2.3 million for 1994, $2.1 million for 1993 and $2.0 million for
1992. These expenditures were made for WPSC sponsored projects and
were primarily charged to electric operations.
-8-
FINANCIAL SUMMARY. The following table sets forth the revenues,
operating income and identifiable assets attributable to electric
utility operations:
YEAR ENDED DECEMBER 31
1994 1993 1992
(thousands)
Electric Operating Revenues $480,816 $493,256 $477,625
Operating Income, Including
Allowance For Funds Used
During Construction $ 95,392 $106,160 $ 98,772
Identifiable Assets $937,481 $938,951 $951,074
See Note 7 in Notes to Consolidated Financial Statements.
-9-
ELECTRIC OPERATING STATISTICS
=========================================================================================================
1994 1993 1992 1991 1990 1984
- ---------------------------------------------------------------------------------------------------------
Operating revenues (Thousands)
Residential and farm $163,381 $165,568 $156,659 $158,014 $145,114 $135,833
Small commercial and industrial 137,323 140,678 136,164 134,314 125,575 107,436
Large commercial and industrial 118,121 123,920 115,147 111,037 108,549 102,032
Resale and other 61,991 63,090 69,655 67,912 69,667 60,119
- ---------------------------------------------------------------------------------------------------------
Total $480,816 $493,256 $477,625 $471,277 $448,905 $405,420
=========================================================================================================
Kilowatt-hour sales (Thousands)
Residential and farm 2,406,479 2,349,307 2,268,685 2,319,972 2,183,644 1,927,985
Small commercial and industrial 2,555,488 2,444,548 2,384,098 2,388,787 2,282,412 1,746,532
Large commercial and industrial 3,468,390 3,296,254 3,016,329 2,854,519 2,819,507 2,325,165
Resale and other 2,121,660 2,060,804 2,078,057 2,004,925 2,002,351 1,470,282
- ---------------------------------------------------------------------------------------------------------
Total 10,552,017 10,150,913 9,747,169 9,568,203 9,287,914 7,469,964
=========================================================================================================
Customers served (End of period)
Residential and farm 316,442 310,336 304,404 298,194 293,733 267,461
Small commercial and industrial 36,491 35,683 34,783 33,981 33,355 29,591
Large commercial and industrial 164 137 129 125 127 111
Resale and other 796 794 825 908 944 475
- ---------------------------------------------------------------------------------------------------------
Total 353,893 346,950 340,141 333,208 328,159 297,638
=========================================================================================================
Annual average use (Kwh)
Residential and farm 7,688 7,649 7,538 7,845 7,495 7,269
Small commercial and industrial 70,931 69,532 69,394 70,962 69,427 59,517
Large commercial and industrial 22,091,659 24,416,697 23,750,625 22,476,532 22,737,961 21,529,302
=========================================================================================================
Average kwh price (Cents)
Residential and farm 6.79 7.05 6.91 6.81 6.65 7.05
Small commercial and industrial 5.37 5.75 5.71 5.62 5.50 6.15
Large commercial and industrial 3.41 3.76 3.82 3.89 3.85 4.39
=========================================================================================================
Production capacity (Kw)
Steam 1,269,240 1,269,240 1,269,240 1,269,240 1,269,240 1,269,240
Nuclear 221,000 221,000 221,000 221,000 221,000 221,000
Hydraulic 64,786 64,786 64,786 64,786 64,786 64,236
Combustion turbine 239,700 239,700 156,200 156,200 156,200 156,200
Other 4,040 4,040 4,040 4,040 4,040 4,040
Interest in Wis. River Power Co. 11,667 11,667 11,667 11,667 11,667 11,667
- ---------------------------------------------------------------------------------------------------------
Total system capacity 1,810,433 1,810,433 1,726,933 1,726,933 1,726,933 1,726,383
=========================================================================================================
Generation and purchases
(Thousands of Kwh)
Steam 7,047,511 7,004,634 6,796,975 6,731,857 6,641,716 5,443,590
Nuclear 1,631,003 1,572,696 1,622,279 1,512,712 1,606,898 1,569,519
Hydraulic 292,617 346,386 325,663 326,212 252,806 307,911
Purchases and other 2,243,021 1,849,047 1,628,326 1,603,161 1,368,396 649,557
- ---------------------------------------------------------------------------------------------------------
Total 11,214,152 10,772,763 10,373,243 10,173,942 9,869,816 7,970,577
=========================================================================================================
System peak - firm (Kw) 1,549,000 1,548,000 1,494,000 1,592,000 1,516,300 1,202,900
=========================================================================================================
Annual load factor 76.66% 74.29% 74.03% 69.44% 72.61% 73.57%
=========================================================================================================
-10-
C. GAS OPERATIONS
GENERAL MATTERS. At December 31, 1994, WPSC provided natural gas
distribution service to 191,551 customers in 138 cities, villages and
towns in Northeastern Wisconsin and 4,998 customers in and around
Menominee, Michigan. The principal Wisconsin cities served include
Green Bay, Oshkosh, Sheboygan, Marinette, Two Rivers, Stevens Point
and Rhinelander.
WPSC transported 58,508,511 dekatherms of gas of which
34,757,372 dekatherms were for resale during the year ended
December 31, 1994. At the end of 1994, WPSC had 117 end-user
customers who purchased their gas directly from suppliers and
contracted with transporters, including WPSC, to transport the gas to
their points of use. A total of 23,751,139 dekatherms was transported
for these customers. During 1994, several transportation customers
returned to purchasing their gas requirements from WPSC. Load loss
due to fuel switching has been minor because customers have been able
to purchase transportation gas from suppliers at competitive prices.
Since WPSC has a purchased gas adjustment provision as part of
its customer rates, it recovers all of its purchased gas costs from
customers. This allows WPSC to receive the same margin (gas revenues
less cost of gas) on therm sales to customers who purchase natural gas
from WPSC as it receives from transportation customers.
WPSC retains a gas supply consultant who assists in creating a
gas supply portfolio to match its gas load profile at the lowest
reasonable cost. The portfolio is based on twenty-year gas peak day
and annual sales forecasts and is structured to place WPSC in an
optimum gas purchasing position. WPSC has entered into seventeen gas
supply contracts with fourteen suppliers with terms from five months
to six years with domestic suppliers and ten years with Canadian
suppliers. There are nine years remaining on the contracts with
Canadian suppliers. The large majority of gas is competitively priced
based on a monthly spot price index. The gas supply contracts contain
a gas inventory charge as well as corporate warranties to assure gas
deliverability for the term of the contract.
Peak day design requirements of 340,777 dekatherms per day is
based on a 1994-1995 peak day forecast at -20 degrees Fahrenheit. An
additional 11,295 dekatherms per day, or 3.3%, of reserve capacity
allows for growth and any unforeseen needs. Peak day requirements
will be served by 117,657 dekatherms per day from transportation gas,
and 223,120 dekatherms per day from storage gas. WPSC has access to
eleven BCF of storage capacity in Michigan. Storage gas is purchased
and stored during the summer for redelivery during the heating season.
WPSC has purchased 0.1 BCF of underground salt dome storage in
Louisiana to protect against a supply area gas shortage.
WPSC transports gas from Louisiana, the Gulf of Mexico, the
Texas-Oklahoma Panhandle area and Canada under contracts with ANR
Pipeline Company ("ANR") for domestic gas and Viking Gas Transmission
Company ("Viking") for Canadian supplies. On November 1, 1993, FERC
-11-
Order 636 became effective for ANR. Order 636 prohibits pipeline
companies, such as ANR, from bundling gas merchant services with
transportation services. Thus, Order 636 shifts gas supply
responsibilities to local distribution companies, such as WPSC, while
the pipeline companies continue to transport gas owned by others.
Pipeline transportation rates are governed by tariffs which are
subject to adjustment by the pipeline companies with the approval of
the FERC. As a result of restructuring under Order 636, effective
November 1, 1993, WPSC contracted for its pro rata share of pipeline
capacity from each of ANR's three supply areas: Southeast, Southwest,
and Canada. The initial term of each contract was for ten years with
the right to extend in five-year increments. In addition, WPSC has
preexisting capacity on Viking for delivery of Canadian gas with a
term of four years with a right to extend.
Order 636 mandates a straight fixed variable rate design which
loads all fixed costs into the reservation charge. Based on rates
effective May 1, 1994, pipeline company reservation charges for 1995
will total approximately $41.3 million. WPSC also has a no-notice
service to accommodate load swings caused by unexpected system
requirements.
On December 30, 1994, in FERC Docket No. TM 95-3-48-000, ANR
filed its sixth annual reconciliation of the take-or-pay
buyout/buydown costs recovered through monthly charges. These costs,
which represent 75% of ANR's total take-or-pay buyout/buydown costs
paid to their gas suppliers, are being passed on to ANR's customers,
including WPSC. WPSC's remaining fixed charge obligation for the two
take-or-pay dockets still outstanding is $41,930. Monthly fixed
charge payments and volumetric payments are scheduled to be made
through April 1998. All such costs are expected to be recovered from
customers pursuant to established policies of the PSCW.
ANR, as a result of its FERC Order 636 compliance filing, will
recover various transition costs from its customers, including WPSC.
WPSC expects to recover ANR transition costs in future customer rates.
These costs include purchased gas adjustment costs of which WPSC's
share is approximately $3.7 million. In addition, ANR has upstream
pipeline capacity costs of between $85 million and $275 million of
which WPSC's share is approximately 10%. The exact amount cannot be
determined at this time.
WPSC is currently being billed for ANR's above-market costs of
gas purchases from the Dakota Gasification Plant. The potential total
amount of these billings is undetermined at this time. The 1994
allocation of these costs was $3.2 million, and the 1995 allocation is
expected to be $3.3 million. WPSC, as part of the Wisconsin
Distributors Group ("WDG"), is contesting the legality of the Dakota
Gasification Plant costs provision and is paying these costs under
protest subject to refund. A hearing before the District of Columbia
Circuit Court could take place in 1995.
-12-
WPSC is a member of the WDG which utilizes a Washington, D.C.
legal counsel to monitor FERC activities and advise the group. The
group files testimony and interventions in cases that impact its
members. WPSC is also advised by the same Washington, D.C. legal
counsel. WPSC files interventions in cases to protect its interests
as they may be different from the group.
All of WPSC's Wisconsin retail natural gas rates contain a
purchased gas adjustment clause which provides for tracking changes
for wholesale costs and an annual true-up of such costs. The PSCW
reaffirmed this purchased gas adjustment clause/true-up mechanism in
WPSC's 1994 rate order. WPSC's Michigan retail rates include a gas
cost recovery plan under procedures authorized by the Michigan Public
Service Commission ("MPSC") in 1983. Both the PSCW and the MPSC have
approved mechanisms to allow for full recovery of take-or-pay and
transition related costs which the FERC has authorized ANR to pass on
to its customers.
WPSC is aggressively seeking new natural gas customers resulting
in the addition of about 6,557 new customers in 1994. Growth in
natural gas customers results from adding new customers in existing
service areas and from the acquisition of new natural gas distribution
franchises. At December 31, 1994, five applications for new gas
distribution franchises were pending before the PSCW.
WPSC uses gas for power generation in peaking turbines and for
ignition and flame stabilization at its Weston Unit 3 and Pulliam
generating plants.
One large industrial customer is in a geographical location which
would allow for its direct connection to the ANR system. A special
rate designed to keep this customer on WPSC's distribution system has
been approved by the PSCW. The customer has requested a bypass to
connect directly to the ANR system, but remains a WPSC transportation
customer. There is no single customer or small group of customers,
the loss of which would have a materially adverse effect on the
natural gas business of WPSC.
-13-
FINANCIAL SUMMARY. The following table sets forth the amounts of
revenues, operating income and identifiable assets attributable to gas
utility operations:
YEAR ENDED DECEMBER 31
1994 1993 1992
(thousands)
Gas Operating Revenues $192,979 $187,376 $157,177
Operating Income, Including
Allowance For Funds Used During
Construction $ 10,419 $ 10,691 $ 7,579
Identifiable Assets $191,349 $184,880 $158,314
See Note 7 in Notes to Consolidated Financial Statements.
-14-
GAS CONSOLIDATED OPERATING STATISTICS
=========================================================================================================
1994 1993 1992 1991 1990 1984
- ---------------------------------------------------------------------------------------------------------
Operating revenues (Thousands)
Residential $104,020 $110,541 $93,234 $94,274 $84,030 $97,114
Small commercial and industrial 18,586 20,254 15,796 15,557 13,833 17,941
Large commercial and industrial 45,115 47,091 33,676 34,396 31,789 121,721
Other 25,258 9,490 14,471 7,995 10,416 1,995
- ---------------------------------------------------------------------------------------------------------
Total $192,979 $187,376 $157,177 $152,222 $140,068 $238,771
=========================================================================================================
Therms delivered (Thousands)
Residential 187,355 192,053 182,603 184,042 169,406 165,808
Small commercial and industrial 38,568 41,385 38,060 36,743 33,301 35,168
Large commercial and industrial 115,939 108,068 88,516 87,506 82,496 267,951
Other 56,961 6,337 3,718 5,414 5,729 1,985
- ---------------------------------------------------------------------------------------------------------
Total therm sales 398,823 347,843 312,897 313,705 290,932 470,912
Transportation 234,149 220,672 232,578 228,991 215,421 -
- ---------------------------------------------------------------------------------------------------------
Total 632,972 568,515 545,475 542,696 506,353 470,912
=========================================================================================================
Customers served (End of period)
Residential 178,992 172,902 168,349 164,392 160,956 143,229
Small commercial and industrial 14,689 14,571 14,248 13,635 13,084 11,301
Large commercial and industrial 2,867 2,508 2,178 2,360 2,388 2,491
Interdepartmental 30 1 1 1 1 1
Transportation customers 117 127 161 165 170 -
- ---------------------------------------------------------------------------------------------------------
Total 196,695 190,109 184,937 180,553 176,599 157,022
=========================================================================================================
-15-
D. NON-REGULATED BUSINESSES
WPSE is engaged in the marketing of energy and related services.
Packerland, which had been formed to take advantage of the natural gas
marketing opportunities created by FERC Order 636 which became
effective in November of 1993, was merged into WPSE on January 3,
1995.
Communications was formed in 1985 to be a partner in the NorLight
fiber optics telecommunications partnership. In 1991, the assets of
NorLight were sold. After certain administrative matters are settled,
which have insignificant financial impacts, it is anticipated that
Communications will be dissolved.
In December 1994, the Company committed $4 million for a non-
controlling interest in a limited liability corporation that will own
and operate a waste-paper recycling facility.
Rapidly changing technologies have been associated recently with
the electric and gas utility industry. That is why the Company
continues its support of UTECH, a venture capital partnership which
invests in new technologies that could be applied to utility
operations. The Company has $2.5 million invested in UTECH.
The Company intends additional participation in non-regulated
energy related markets and is taking steps to establish a power
development business unit.
E. ENVIRONMENTAL MATTERS
GENERAL MATTERS. 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 U. S. 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.
They may also require substantial investments for proposed new
projects and may delay or prevent authorization and completion of the
projects. WPSC cannot forecast other effects of all such regulation
upon its generating, transmission and other facilities, or its
operations, but believes that it is presently meeting existing
requirements.
-16-
AIR QUALITY. The plants which WPSC operates are in compliance
with all current sulfur dioxide and nitrogen oxide emission standards.
The Federal Clean Air Act Amendments of 1990 ("Act") were enacted
in 1990. The Act requires reductions in sulfur dioxide in 1995
(Phase I) to meet limitations based on an emission rate of 2.5 pounds
per million BTUs 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).
These limits are set based on an emission rate of 1.2 pounds per
million BTUs multiplied by a historical generation baseline for all
generating units. WPSC's generating facilities met the year 2000
standard in 1994. WPSC has 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 are expected to be available to aid in compliance with the
requirements of Phase II. To the 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 these excess allowances.
The PSCW has ordered that profits from the sale of allowances must 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 at Pulliam
Unit 7 in 1994. Expenditure of $15 million to $25 million are
projected through 1999 to assure continued federal and Wisconsin
emission compliance under all normal operating conditions at Pulliam
and Weston. Based on past experience, it is anticipated that
expenditures related to sulfur dioxide and nitrogen oxide emission
compliance will be recoverable in customer rates.
Air toxic provisions in the Act will not be applied until the EPA
conducts a three-year study to determine 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 from WPSC's power
plants into Lake Michigan and other waters of Wisconsin. Permits were
reissued to WPSC for its Pulliam and Weston power plants. Various
portions of those permits were challenged. These challenges have not
been formally resolved, although many of the issues raised in the
challenges have been resolved through informal discussions with the
DNR, additional testing by WPSC and regulatory changes. Under
Wisconsin law, the challenged portions of the permits are stayed, and
the administrative review process is completed. It is not anticipated
that any of the outstanding issues will have a material cost
associated with them.
-17-
GAS PLANT CLEANUP. WPSC is currently investigating the need for
environmental cleanup of eight manufactured gas plant sites which it
previously operated. WPSC engaged an environmental consultant to
develop cleanup cost estimates for the two sites at which Phase II
site investigations have been completed. The cleanup cost estimates
for the Stevens Point and the Oshkosh sites are $1.7 million and
$2.6 million, respectively. With respect to Stevens Point, the
estimate assumes excavation of contaminated soils, thermal treatment
of soils, disposal of treatment residuals, on-site groundwater
extraction and treatment and post-cleanup monitoring for twenty-five
years. The cost estimate for the Oshkosh site assumes, in addition to
those items noted for Stevens Point, removal and disposal of
contaminated river sediments. The consultant has yet to perform
detailed investigations of the remaining six sites, and comparable
information on these sites is not available.
WPSC used the estimates for these two sites as a basis for making
projections on cleanup costs at the other sites. Six of the eight
sites are located adjacent to rivers. Using the Oshkosh cleanup
estimate, which includes remediation of contaminated river sediments,
and assuming all six sites have sediment contamination, and using the
Stevens Point estimate for the two sites not adjacent to rivers, the
range of future investigation and cleanup costs for all eight sites is
estimated to be from $14.8 million to $29.3 million. Remediation
expenditures would be made over the next thirty-four years. WPSC has
recorded as a liability with an offsetting deferred charge, i.e., a
regulatory asset, of $26.9 million, which represents WPSC's current
estimate of cleanup costs for all eight sites. Based on discussions
with regulators and a recent rate order in Wisconsin, management
believes that these costs, but not the carrying costs associated with
the deferred charges, will be recoverable in future customer rates.
As additional detailed investigations are completed, three having
been initiated in 1994, these estimates will be adjusted to reflect
specific site data. These adjustments could be significant. Other
factors that can affect these estimates are changes in remedial
technology and regulatory requirements. The estimates presented above
do not take into consideration any recovery from insurance carriers or
other third parties which WPSC is pursuing.
See also Part I, Item 3, LEGAL PROCEEDINGS, at page 25, for
discussion of the Sheboygan Gas Plant and Oshkosh Gas Plant sites.
OTHER SOLID WASTE DISPOSAL. On December 1, 1986, WPSC received
notice from EPA-Region V that it was one of 832 potentially
responsible parties ("PRP") for the cleanup of the Maxey Flats Waste
Disposal Site. Documents obtained to date indicate that WPSC
contributed 0.0162% of the waste disposed of at the site. A remedial
investigation and feasibility study has been completed. At this time,
the cost of the remedial action and EPA oversight is estimated to be
about $77.5 million. The EPA has offered a buyout agreement to de
minimis PRPs. Although a final agreement has not been executed,
WPSC's buyout cost will be about $28,000. While liability for cleanup
under the Comprehensive Environmental Response, Compensation and
-18-
Liability Act ("Superfund") program is joint and several, the amounts
paid by the PRPs are usually related to their volumetric contribution
of waste to the site.
In November of 1986, WPSC was notified by the DNR that it was one
of the several PRPs involved in the Holtz & Krause Landfill located in
Wausau, Wisconsin. WPSC disposed of 12,516 cubic yards of non-
hazardous office waste and construction debris at the site. This
represents 1.02% of the total amount of waste at the site. The
landfill is currently being addressed only by the DNR. The current
work is not being conducted as part of the EPA's Superfund program.
The DNR has selected a remedy which is estimated to cost a total of
$11 million to $12 million. The DNR has agreed to contribute
approximately $4.5 million toward the remedy. Also, the county in
which the landfill is located has adopted a surcharge on the waste
disposal fee charged at the county's landfill to raise funds to assist
in the remediation. Clean Sites, Inc., a neutral cost allocation
expert, was retained by the Holtz & Krause PRP Group to develop an
allocation. The amount to be allocated to WPSC, $37,163, was paid to
the cleanup fund in October of 1993. The DNR has indicated that it
will pursue a cost-recovery action against entities that do not settle
with the Holtz & Krause PRP Group. In 1994, WPSC entered into a
Consent Decree that acknowledges the payment of the settlement amount,
requires the settling parties to clean up the site and requires the
state to pay its agreed upon contribution. In addition, WPSC entered
into a "buyout" agreement with the larger contributors of waste to the
site in which the larger contributors agreed to indemnify WPSC for any
cost overruns up to a total site remedial cost of $20 million. If
site remedial costs exceed $20 million, the cost allocation may be
reopened. Most of the site work was completed in 1994.
In March of 1987, WPSC was notified by the EPA that it was a PRP
for the cost of cleaning up the Rose Chemical site in Holden,
Missouri. Based on records that are available, a small amount of
polychlorinated biphenyl material, about 39,000 pounds, was sent to
the site. At this time, WPSC has signed a participation agreement for
the cleanup and contributed $60,192 which is based on the volumetric
contribution of waste and the expected total cleanup cost.
In November of 1988, WPSC received notice from the DNR that the
Sherman Street property located in Wausau, Wisconsin, had levels of
lead contamination present. Based on an investigation conducted by a
neighboring business, Wausau Steel, it appears that this contamination
originates on an adjacent Wausau Steel property. The cleanup of the
property by Wausau Steel has been completed, pending DNR approval.
In January 1995, WPSC was notified that the EPA was seeking to
recover $775,442 from several companies, not including WPSC, that sent
waste drums to the J. K. Drum site in New London, Wisconsin. One of
the companies notified by EPA requested WPSC to join a group to
negotiate a settlement with the EPA. WPSC's records indicate that it
contributed drums to the site which it believes were empty. WPSC is
evaluating a response to the notice.
-19-
F. REGULATORY MATTERS
GENERAL MATTERS. Utility rates, service and securities issues of
WPSC are subject to regulation by the PSCW and the MPSC, and WPSC is
subject to regulation of its wholesale electric rates, hydroelectric
projects and certain other matters by the FERC. It is also subject to
limited regulation by local authorities. WPSC follows Statement of
Financial Accounting Standard No. 71, Accounting for the Effects of
Certain Types of Regulation, and its financial statements reflect the
effects of the different ratemaking principles of the various
jurisdictions. These include the PSCW, 89% of revenues, the MPSC, 2%
of revenues and FERC, 9% of revenues. The operation of Kewaunee is
subject to the jurisdiction of the U. S. Nuclear Regulatory
Commission.
In the Wisconsin jurisdiction, the rate process has been changed
effective in 1995 such that retail electric and natural gas rates will
be set every two years, rather than annually as has been the practice
in the past. The earliest that the rates which took effect January 1,
1995 could change would be for the year 1997. Customer rates are set
based on forecasted expenses and capital costs.
Wisconsin retail rates include an electric fuel-adjustment clause
based on a "cost variance range approach." This range is based on a
specific estimated fuel cost for the next year. If actual fuel costs
fall outside this range, a hearing may be held and an adjustment to
future rates may result. Automatic fuel-adjustment clauses are used
for FERC wholesale-electric and Michigan retail-electric portions of
WPSC's business. WPSC has a purchased gas adjustment clause which
allows it to pass on to all classes of gas customers changes in the
cost of gas purchased from its suppliers, subject to PSCW and MPSC
review.
CUSTOMER RATE MATTERS. In the Wisconsin jurisdiction, a
$17.4 million, or 4% electric rate reduction, and a $1 million, or
.6% natural gas rate increase, covering a one-year period, became
effective on January 1, 1994. Electric revenues were also reduced
$2 million, or .5% in May of 1994 as a result of reduced fuel costs.
Customer rates for 1994 reflected an authorized rate of return of
11.3% on common equity, down from 12.3% in 1993. The return on common
equity, when adjusted to reflect allowed earnings on deferred
investment tax credits, amounted to 11.9% and 13.0%, respectively, for
the years 1994 and 1993.
On December 19, 1994, the PSCW approved an electric rate
reduction of $10.9 million, or 2.6% to be effective on January 1, 1995
for the years 1995 and 1996. Natural gas rates remained unchanged.
The rates for 1995 and 1996 reflect an authorized rate of return on
common equity of 11.5% which when adjusted to reflect allowed earnings
on deferred investment tax credits is 12.18%. A capital structure
including 54% common equity was also approved.
-20-
No changes were made to Michigan electric and gas rates during
1994 other than through the fuel adjustment clauses. Likewise,
wholesale electric rates remained unchanged except for reductions
related to fuel costs.
PSCW INDUSTRY RESTRUCTURING PROCEEDING. On September 8, 1994,
the PSCW commenced a proceeding to consider the probable costs and
benefits of changing the structure and regulation of the electric
utility industry in Wisconsin. Changes in federal law, improvements
in the electric transmission system and technological advances suggest
that now is the time to prepare for, capture and maximize the benefits
of a changing and more market-oriented industry.
At its January 24, 1995 meeting, the PSCW identified the primary
objectives of the proceeding to be the creation of a system that sends
accurate price signals to customers resulting in the most economically
efficient use of resources; the creation of a system which maximizes,
within the public interest, the number and diversity of service
offerings to customers; and the creation of a system in which
providers maximize economic efficiency and environmental stewardship.
The PSCW has created an Advisory Committee ("Committee"),
consisting of twenty-two members, representing various constituencies,
including a WPSC member, which will examine every aspect of electric
service and determine which functions, if any, should be performed by
a competitive market and identify specific transitional mechanisms
that may be needed to create a workable competitive market for these
services. For services that have natural monopoly characteristics,
the Committee will explore whether new institutional or regulatory
policies could further benefit the public.
Following a period that includes public comment on the
Committee's recommendations, the Committee will submit its recommended
alternatives to the PSCW which will review the recommendations along
with outside comments before deciding the appropriate public policy
and commencing with implementation of its decision. The work of the
Committee is intended to be finished in time to allow the PSCW to
prepare a final report for the legislature on recommendations for
legislative changes by December 1, 1995.
ACCOUNTING DEVELOPMENTS. See Part II, Item 7, MANAGEMENT S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION, at page 32, for a discussion of accounting developments.
In addition, the staff of the U. S. Securities and Exchange
Commission has questioned certain of the current accounting practices
of the electric utility industry, including those of WPSC, regarding
the recognition, measurement and classification of nuclear
decommissioning costs for nuclear generation facilities in the
financial statements of electric utilities. In response to these
questions, the Financial Accounting Standards Board has agreed to
review the accounting for nuclear decommissioning costs. If current
electric utility industry accounting practices for such
decommissioning are changed: (1) the annual provisions for
-21-
decommissioning could increase; and (2) the estimated cost for
decommissioning could be recorded as a liability rather than as
accumulated depreciation. WPSC does not believe that such changes, if
required, would have an adverse effect on results of operations due to
its current and future ability to recover decommissioning costs
through customer rates.
The PSCW certified new straight-line depreciation rates which
became effective January 1, 1994 concurrent with the implementation of
new customer rates. The result was a reduction in annual depreciation
expense of approximately $5.8 million.
Regulatory assets represent probable future revenue associated
with certain costs which will be recovered from customers through the
ratemaking process. Regulatory liabilities represent costs previously
collected that are refundable in future rates. At December 31, 1994,
regulatory assets and liabilities amounted to $109.1 million and
$66.0 million, respectively. Based on prior and current rate
treatment of such deferred charges, management believes it is probable
that WPSC will continue to recover these costs from ratepayers.
Pursuant to a PSCW rate order, effective January 1, 1995, WPSC is to
recover approximately $23.6 million of deferred regulatory costs each
year.
DIVIDEND RESTRICTIONS. WPSC is restricted by a PSCW order to
paying normal 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 the Company and its
non-regulated subsidiaries and from guaranteeing their obligations.
G. CAPITAL REQUIREMENTS
Anticipated construction expenditures for 1995 are $84.2 million,
of which $53.1 million, $1.3 million, $24.4 million, and $5.4 million
are for electric construction, nuclear fuel, gas construction, and
other construction expenditures, respectively. Approximately 60% of
the expenditures for 1995, and 97% of the anticipated total capital
expenditures of $150.6 million during 1996 and 1997, are expected to
be financed through internal sources. WPSC does not expect to sell
equity or long-term debt during this period. Expenditures related to
the REC are not reflected in the above amounts because a subsidiary of
WPSC anticipates entering into a project financing arrangement with
respect to the $169 million facility.
H. EMPLOYEES
At December 31, 1994, WPSC employed 2,572 persons. Of this
number, 2,093 and 479 were considered electric and gas utility
employees, respectively.
-22-
Approximately 1,070 WPSC employees are represented by Local 310
of the International Union of Operating Engineers ("Union"). During
1994, the Union ratified a new contract with WPSC which provides for
work force flexibility in that, for the duration of the contract,
Union employees can perform traditional union work across craft lines,
perform non-union work and perform work traditionally performed by
contractors; and non-union employees can perform some union work.
The current contract runs through October of 1997. There has never
been a strike against WPSC by its employees.
-23-
ITEM 2. PROPERTIES
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 397,000 (b)
Weston Wausau, WI Coal or Gas 493,800 (c)
Kewaunee Kewaunee, WI Nuclear 216,300 (d)
Columbia -
Units 1 & 2 Portage, WI Coal 334,000 (d)
Edgewater
Unit 4 Sheboygan, WI Coal 104,600 (d)
---------
Total Steam 1,545,700
Hydro Various 68,900
(15 Plants)
Combustion Various Gas or Oil 264,400 (e)
Turbine (6 Plants)
& Diesel
---------
Total System 1,879,000
=========
(a) Based on 1994 winter capacity.
(b) This plant contains six units.
(c) This plant contains three units. Two units burn only coal and the
other 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) WPSC and the Marshfield Electric and Water Department jointly own
113,300 kilowatts of combustion turbine peaking capacity which WPSC
operates. The capacity included is WPSC's portion of total plant
capacity based on percent of ownership.
WPSC owns 51 transmission substations with a transformer capacity
of 5,253,000 kva; 107 distribution substations with a transformer
capacity of 2,821,000 kva; and 20,316 route miles of electric
transmission and distribution lines. Gas properties include
approximately 3,532 miles of main, 70 gate and city regulator stations
and 181,078 services. All gas facilities are located in Wisconsin
except for distribution facilities in and near the city of Menominee,
Michigan.
-24-
Substantially all of WPSC's utility plant is subject to a first
mortgage lien.
ITEM 3. LEGAL PROCEEDINGS
SHEBOYGAN GAS PLANT. In November of 1990, WPSC was notified by
the DNR that it may be a PRP for environmental contamination found on
property next to the Sheboygan River previously used by WPSC for the
gasification of coal in the City of Sheboygan, Wisconsin (the
"Sheboygan II Gas Plant"). WPSC last used the property for this
purpose in approximately 1930. In 1966, the property was sold and is
now owned by the City of Sheboygan. The DNR has offered WPSC the
opportunity to investigate and remediate the property under an
agreement with the State of Wisconsin as opposed to having the site
handled by the EPA as part of the larger Sheboygan River and Harbor
Superfund site. WPSC, the City of Sheboygan and the State of Wisconsin
have negotiated an agreement for performing the work, and therefore,
Wisconsin, and not the EPA, will be handling this matter.
An initial study was completed on the site which confirmed the
presence of contaminants that appear to be related to the Sheboygan II
Gas Plant. A follow-up investigation was recommended by the
environmental consultant to determine more precisely the scope of the
contamination and to determine if any contamination is migrating from
off-site. WPSC is awaiting approval from the DNR for the additional
work. After the follow-up investigation is completed, the City of
Sheboygan and WPSC will negotiate an allocation of the costs
associated with cleanup of the site. Based on the initial study, and
a more detailed investigation of WPSC's former Oshkosh site, it is
believed that the cost of cleanup for the Sheboygan II Gas Plant site
could be as much as $2.6 million. The estimates presented above do
not take into consideration any recovery from insurance carriers or
other third parties which WPSC is pursuing.
OSHKOSH GAS PLANT. In April of 1992, WPSC received an order from
the DNR directing it to complete an investigation and implement
remedial activities on property owned by WPSC in the City of Oshkosh,
Wisconsin. Previously, WPSC had operated a manufactured gas plant on
the property from 1883 until 1946. A challenge to the order was filed
on May 8, 1992, and WPSC and the DNR have negotiated the terms of a
consent order. An environmental consultant conducted an investigation
in late 1993 and a more detailed investigation in 1994. Based on the
more detailed investigation, the cost of remediation is estimated to
be as much as $2.6 million. Additional studies are planned to define
further the area of contamination (primary river sediments). The
results of these studies may affect the cost estimate for remediation
based on the nature and extent of contamination. The City of Oshkosh
has claimed that contaminated groundwater from the former gas plant
property has migrated onto city-owned land. WPSC has agreed to stay
the statute of limitations that may be applicable to the City of
Oshkosh's claim in order to avoid the filing of a lawsuit by the City
of Oshkosh. WPSC is continuing to evaluate the validity of the City
-25-
of Oshkosh's claim as additional data is received. The estimates
presented above do not take into consideration any recovery from
insurance carriers or other third parties which WPSC is pursuing.
Incorporated herein by reference are the descriptions of the
various proceedings relating to environmental matters described under
D. ENVIRONMENTAL MATTERS, at pages 16 through 19, Item 1.
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.
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 the shareholders which is scheduled to be held on
May 4, 1995.
EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------
Current Position and Business Effective
Name and Age Experience During Past Five Years Date
- ---------------------------- ------------------------------------ ---------
DANIEL A. BOLLOM 58 President and Chief Executive Officer 12-09-93
PATRICK D. SCHRICKEL 50 Vice President 12-09-93
ROBERT H. KNUTH 61 Assistant Vice President-Secretary 12-09-93
RALPH G. BAETEN 51 Treasurer 12-09-93
DIANE L. FORD 41 Controller 12-15-94
[FN]
NOTE: All ages are as of December 31, 1994. None of the executives
listed above are related by blood, marriage, or adoption to
any of the other officers listed or to any director of the
Registrant. Each officer shall hold office until his or her
successor shall have been duly elected and qualified, or until
his or her death, resignation, disqualification or removal.
-26-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
COMMON STOCK Two-Year Comparison (1)
Dividends
Share Data Per Share Price Range
1994 High Low
1st Quarter $.445 33-5/8 28
2nd Quarter .445 30-3/4 27-3/8
3rd Quarter .455 30-3/8 27
4th Quarter .455 28-3/8 26-1/4
------
Total $1.80
1993
1st Quarter $ .435 34-3/4 30-1/8
2nd Quarter .435 35-3/8 32-1/8
3rd Quarter .445 36-1/2 33-3/4
4th Quarter .445 36 31-3/4
------
Total $1.76
- -----
(1) The dividends paid to public shareholders for all of 1993 and the first
three quarters of 1994 were paid by WPSC. As the result of the
reorganization described in Part I, Item 1A, GENERAL, at page 1, the
dividend for the fourth quarter of 1994 was paid by the Company.
WPSC, the Company's principal subsidiary, is restricted by a PSCW order to
paying normal 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 the Company and its subsidiaries and from
guaranteeing their obligations.
-27-
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, 1994, there were 25,395 common stock shareholders of
record.
See also Items 6 and 8 below.
-28-
ITEM 6. SELECTED FINANCIAL DATA
A. CONSOLIDATED STATEMENTS OF INCOME
=========================================================================================================
CONSOLIDATED STATEMENTS OF INCOME
=========================================================================================================
Year Ended December 31 (Thousands) 1994 1993 1992 1991 1990 1984
- ---------------------------------------------------------------------------------------------------------
Operating revenues
Electric $480,816 $493,256 $477,625 $471,277 $448,905 $405,420
Gas 192,979 187,376 157,177 152,222 140,068 238,771
- ---------------------------------------------------------------------------------------------------------
Total operating revenues 673,795 680,632 634,802 623,499 588,973 644,191
=========================================================================================================
Operating expenses
Electric production fuels 111,011 114,051 123,866 131,054 129,792 125,457
Purchased power 38,631 30,703 29,594 32,886 27,145 6,276
Gas purchased for resale 137,014 133,347 109,890 103,189 97,443 198,172
Other operating expenses 148,917 148,270 135,614 128,820 117,494 83,404
Maintenance 49,983 51,597 46,436 48,223 44,265 34,634
Depreciation and decommissioning 56,365 60,609 58,592 55,687 55,363 53,567
Taxes other than income 26,063 25,204 24,459 23,034 23,138 20,313
- ---------------------------------------------------------------------------------------------------------
Total operating expenses 567,984 563,781 528,451 522,893 494,640 521,823
=========================================================================================================
Operating income 105,811 116,851 106,351 100,606 94,333 122,368
- ---------------------------------------------------------------------------------------------------------
Other income and (deductions)
Allowance for equity funds
used during construction 108 287 494 113 451 -
Other, net 4,473 3,356 6,076 4,351 2,845 (1,956)
- ---------------------------------------------------------------------------------------------------------
Total other income 4,581 3,643 6,570 4,464 3,296 (1,956)
=========================================================================================================
Income before interest expense 110,392 120,494 112,921 105,070 97,629 120,412
- ---------------------------------------------------------------------------------------------------------
Interest on long-term debt 23,407 24,393 25,662 22,127 21,289 16,205
Other interest 1,796 1,562 1,477 2,908 3,901 4,301
Allowance for borrowed funds
used during construction (139) (200) (542) (193) (306) (154)
- ---------------------------------------------------------------------------------------------------------
Total interest expense 25,064 25,755 26,597 24,842 24,884 20,352
=========================================================================================================
Income before income taxes 85,328 94,739 86,324 80,228 72,745 100,060
Income taxes 29,526 32,539 28,322 26,056 23,722 43,790
Preferred stock dividends of subsidiary 3,111 3,311 3,237 3,237 3,293 5,789
- ---------------------------------------------------------------------------------------------------------
Net income $52,691 $58,889 $54,765 $50,935 $45,730 $50,481
=========================================================================================================
Shares of common stock outstanding
At December 31 23,897 23,897 23,846 22,889 22,889 23,644
Average 23,897 23,888 23,350 22,889 22,889 23,644
Earnings per average share of common $2.21 $2.47 $2.35 $2.23 $2.00 $2.14
Dividends per share of common stock 1.80 1.76 1.72 1.68 1.64 1.22
=========================================================================================================
-29-
B. CONSOLIDATED BALANCE SHEETS
=========================================================================================================
Consolidated Balance Sheets
=========================================================================================================
Assets
=========================================================================================================
At December 31 (Thousands) 1994 1993 1992 1991 1990 1984
- ---------------------------------------------------------------------------------------------------------
Utility plant
Electric $1,423,316 $1,386,007 $1,354,579 $1,277,913 $1,241,346 $1,000,596
Gas 203,384 184,234 173,012 164,038 156,428 122,742
- ---------------------------------------------------------------------------------------------------------
Total 1,626,700 1,570,241 1,527,591 1,441,951 1,397,774 1,123,338
Less - Accumulated provisions for
depreciation and decommissioning 846,505 801,056 748,427 695,586 648,398 494,931
Total 780,195 769,185 779,164 746,365 749,376 628,407
Nuclear decommissioning trusts, at cost 64,147 56,699 51,023 45,504 40,587 -
Nuclear fuel, net 19,417 17,981 16,880 18,704 19,531 12,805
- ---------------------------------------------------------------------------------------------------------
Net utility plant 863,759 843,865 847,067 810,573 809,494 641,212
=========================================================================================================
Current assets 170,015 180,140 160,331 165,393 148,303 137,905
Regulatory and other assets 183,501 174,836 138,152 97,571 51,442 14,179
- ---------------------------------------------------------------------------------------------------------
Total assets $1,217,275 $1,198,841 $1,145,550 $1,073,537 $1,009,239 $793,296
=========================================================================================================
=========================================================================================================
Capitalization and Liabilities
=========================================================================================================
Capitalization
Common stock equity $446,540 $433,724 $413,226 $369,298 $372,132 $321,609
Preferred stock of subsidiary
with no mandatory redemption 51,200 51,200 51,200 51,200 51,200 51,200
Preferred stock of subsidiary
with mandatory redemption - - - - - 21,684
Long-term debt of subsidiary 309,945 314,225 321,498 332,907 273,349 210,481
- ---------------------------------------------------------------------------------------------------------
Total capitalization 807,685 799,149 785,924 753,405 696,681 604,974
=========================================================================================================
Liabilities
Short-term borrowings 22,500 21,000 20,000 13,000 35,000 36,470
Bond sinking fund requirements and
maturing first mortgage bonds of
subsidiary - - 8,726 235 235 -
Deferred income taxes 126,639 138,952 169,012 160,703 150,199 51,872
Other liabilities and credits 260,451 239,740 161,888 146,194 127,124 99,980
- ---------------------------------------------------------------------------------------------------------
Total liabilities 409,590 399,692 359,626 320,132 312,558 188,322
=========================================================================================================
Total capitalization and liabilities $1,217,275 $1,198,841 $1,145,550 $1,073,537 $1,009,239 $793,296
=========================================================================================================
-30-
C. FINANCIAL STATISTICS
=========================================================================================================
Year Ended December 31 1994 1993 1992 1991 1990 1984
- ---------------------------------------------------------------------------------------------------------
Stock price $26-3/4 $33-5/8 $31-3/4 $28-1/4 $23-5/8 $15-5/8
=========================================================================================================
Coverage
Times interest earned before income taxes 4.19 4.49 3.99 4.00 3.74 6.27
Times interest earned after income taxes 3.09 3.29 3.01 3.03 2.84 3.74
Times interest and preferred dividends
earned after income taxes 2.77 2.93 2.71 2.70 2.53 2.92
=========================================================================================================
Book value per share $18.69 $18.18 $17.33 $16.14 $16.26 $13.60
=========================================================================================================
Return on average equity 11.4% 13.1% 13.2% 13.1% 12.1% 16.2%
=========================================================================================================
Capitalization ratios
Common equity including ESOP 55.3 54.3 52.6 49.0 53.4 53.2
Preferred stock 6.3 6.4 6.5 6.8 7.4 12.0
Long-term debt 38.4 39.3 40.9 44.2 39.2 34.8
=========================================================================================================
Percent long-term debt to net utility
plant 35.9 37.2 38.0 41.1 33.8 32.8
=========================================================================================================
Average rate
Bonds 7.1 7.1 7.8 8.2 8.0 7.6
Preferred stock 6.1 6.1 6.3 6.3 6.3 7.6
=========================================================================================================
Shareholders
Common stock 25,395 25,240 25,983 24,943 25,248 31,440
Preferred stock 3,372 3,577 4,167 4,332 4,538 6,553
=========================================================================================================
Number of employees 2,578 2,603 2,631 2,619 2,500 2,390
=========================================================================================================
-31-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
RESULTS OF OPERATIONS
WPS Resources Corporation ("Company") is a holding company. Over 99%
of the Company's assets and revenues are derived from Wisconsin Public
Service Corporation ("WPSC"), an electric and gas utility.
Overview of 1994 Compared to 1993
Earnings per share declined from $2.47 in 1993 to $2.21 in 1994, or
10.5%. The most significant reason for this decrease was a Public
Service Commission of Wisconsin ("PSCW") order decreasing the
authorized return on common equity for WPSC from 12.3% to 11.3%,
thereby reducing earnings approximately $.16 per share.
1994 Compared to 1993
Electric margins declined by $17.3 million, or 5.0%, due primarily to
reduced electric rates.
______________________________________________________________________
ELECTRIC MARGINS ($000) 1994 1993 1992
______________________________________________________________________
Revenues $480,816 $493,256 $477,625
Fuel and purchases 149,642 144,754 153,460
______________________________________________________________________
Margin $331,174 $348,502 $324,165
______________________________________________________________________
Sales (Kwh 000) 10,552,017 10,150,913 9,747,169
______________________________________________________________________
Electric operating revenues decreased $12.4 million, or 2.5%,
primarily due to a 4.2% reduction in Wisconsin retail rates that took
effect January 1, 1994. Electric revenues also were reduced .5% in
May 1994 as a result of reduced fuel costs. These decreases were
partially offset by a 4.0% increase in kilowatt-hour ("kwh") sales.
Residential, commercial and industrial kwh sales increased 2.4% and
4.9%, respectively, due to a warmer summer and customer growth.
Wholesale kwh sales increased 3.0%.
Electric fuels and purchases increased $4.9 million, or 3.4%,
reflecting increased sales, offset in part by reduced production
costs. Electric production fuels decreased $3.0 million, or 2.7%,
even though generation was up 1.3%. This decrease in fuel costs per
kwh of 5.4% primarily was the result of purchasing less expensive coal
on the spot market. Purchased power costs were higher by
$7.9 million, or 25.8%. This was the result of a 19.9% increase in
kwh purchases, due to the severe cold weather in the first quarter of
the year, which forced WPSC to purchase expensive spot market
electricity, and the Soo Line railroad strike during the second half
of the year which impacted WPSC's ability to operate its coal-fired units.
Gas margins increased by $1.9 million, or 3.6%, due to customer
growth.
________________________________________________________________________
GAS MARGINS ($000) 1994 1993 1992
________________________________________________________________________
Revenues $192,979 $187,376 $157,177
Purchase costs 137,014 133,347 109,890
________________________________________________________________________
Margin $ 55,965 $ 54,029 $ 47,287
________________________________________________________________________
Volume (Therms 000) 632,972 568,515 545,475
________________________________________________________________________
The PSCW allows WPSC to pass on to its customers, through a purchased
gas adjustment clause, changes in the cost of gas.
Maintenance expense decreased $1.6 million, or 3.1%, due to lower
maintenance activity at the Kewaunee Nuclear Power Plant ("Kewaunee")
and to less electric transmission and distribution maintenance.
Depreciation and decommissioning expense decreased $4.2 million, or
7.0%. The primary cause was a rate order from the PSCW which took
effect January 1, 1994 reducing the annual depreciation provision by
an estimated $5.8 million. This was offset by higher decommissioning
expense of approximately $1.1 million.
Federal and state income taxes decreased $3.0 million, or 9.4%, due to
lower earnings.
1993 Compared to 1992
Electric operating revenues increased $15.6 million, or 3.3%. This
increase was the result of a 4.2% increase in kwh sales and a 2.1%
rate increase for WPSC's Wisconsin retail customers that was effective
January 1, 1993. This was partially offset by rate reductions
totaling $1.1 million in September and November 1993 for Wisconsin
retail customers due to reduced fuel costs. Residential sales
increased $8.9 million, or 5.7%, due primarily to warmer summer
weather. Commercial and industrial sales rose $13.3 million, or 5.3%,
reflecting customer growth and the impact of the warmer weather.
Wholesale sales decreased $4.5 million, or 7.4%, due to an average
rate reduction for this customer class of 6.7%.
Electric production fuel costs decreased $9.8 million, or 7.9%, even
though electric generation was up 2.1%. This decrease primarily was
the result of less expensive coal which was purchased on the spot
market. Such purchases decreased overall coal-related costs per kwh
by 11.8% and reduced coal costs by approximately $14.2 million between
years.
-32-
Gas operating revenues increased $30.2 million, or 19.2%. This
increase primarily is due to a 10.1% increase in the cost of gas
($12.2 million), reflecting spot market volatility, a 3.2% increase in
heating-degree days ($12.5 million) and a 2.3% Wisconsin retail rate
increase ($5.5 million) effective January 1, 1993. Residential gas
revenues increased $17.3 million, and commercial and industrial gas
revenues increased $14.6 million.
Gas purchased for resale increased $23.5 million, or 21.3%, due to
higher gas volumes of 10.4% and to a 10.1% higher average cost of gas
per therm.
Other operating expenses increased $12.7 million, or 9.3%, primarily
due to increased amortization of 1991 coal and associated rail
contract buy-out costs of $2.9 million and increased electric and gas
conservation expenses of $9.7 million.
Maintenance expense increased $5.1 million, or 10.9%, primarily due to
additional maintenance activities at WPSC's coal-fired power plants.
Federal and state income taxes increased $5.9 million, or 21.7%, due
to higher pre-tax income and the effect of an increase in the federal
income tax rate from 34% to 35%, as provided in the Revenue
Reconciliation Act of 1993.
BALANCE SHEET
1994 Compared to 1993
Accrued utility revenues decreased $8.5 million as a result of
unseasonably warm weather experienced in December 1994.
Long-term liabilities increased $20.6 million primarily due to higher
estimates for environmental remediation of $10.4 million and post-
retirement health care costs of $7.0 million.
FINANCIAL CONDITION
WPSC requires large investments in capital assets used to deliver
electric and gas services. Most of the Company's capital requirements
relate to WPSC's construction expenditures. WPSC maintains good
liquidity levels and a financial condition considered to be strong by
analysts. Internally generated funds closely approximate the
utility's cash requirements. No external funding difficulties are
anticipated in the future. Pre-tax interest coverage was 4.2 times
for the year ended December 31, 1994. WPSC's bond ratings are AA+
(Standard & Poor's), Aa2 (Moody's) and AA+ (Duff & Phelps).
WPSC is restricted by a PSCW order from paying dividends, without PSCW
approval, of more than 109% of the previous year's common stock
dividend. Also, Wisconsin law prohibits WPSC from making loans to the
Company and its subsidiaries and from guaranteeing their obligations.
For the three-year period 1995 to 1997, internally-generated funds at
WPSC are expected to lag behind construction expenditures, which total
$235 million, by $38 million. WPSC currently expects to finance this
shortfall in internally-generated funds with short-term debt. These
expenditures are comprised of $148 million for electric construction,
$20 million for nuclear fuel, $48 million for gas construction and
$19 million for other construction expenditures. These construction
costs exclude the Rhinelander Energy Center ("REC") which will be
substantially funded with non-recourse project financing debt.
The PSCW has approved the REC as the preferred electric generating
project to meet WPSC's expanding capacity and energy needs. This
approval followed a competitive bidding process. The REC will be
built and operated by non-regulated subsidiaries of WPSC. REC will be
a coal-fired, 122-megawatt, $169 million cogeneration facility which
will produce steam and electricity for sale to the Rhinelander Paper
Company and electricity for sale to utility customers. Before
construction commences, the PSCW must certify that the REC satisfies a
public need. PSCW approval is expected in the second half of 1995.
The plant is expected to be placed in service in 1998.
Kewaunee is currently licensed through the year 2013. Physical
decommissioning is expected to occur during the period 2014 to 2021
with additional expenditures being incurred during the period 2022 to
2050. Decommissioning costs in current dollars are $147 million, and
the undiscounted amount is $785 million. As of December 31, 1994,
$64.1 million has been placed in external trusts to cover these future
costs. Management
-33-
does not anticipate decommissioning to have any negative impacts on
WPSC's liquidity or capital resources, since these costs are currently
funded through external decommissioning trusts.
WPSC received a two-year rate order from the PSCW which became
effective January 1, 1995. This rate order decreased electric retail
rates by 2.6% and kept retail gas rates at current levels. This order
also increased the authorized rate of return on common equity from
11.3% to 11.5%.
Statement of Financial Accounting Standards ("SFAS") No. 112,
Employers' Accounting for Post-Employment Benefits, became effective
in 1994. This statement establishes the accounting and reporting
standard for the estimated cost of benefits provided by an employer to
former or inactive employees after employment but before retirement.
The effect of this statement was not material.
SFAS No. 115, Accounting for Certain Investments in Debt and Equity
Securities, became effective in 1994. This statement establishes the
accounting and reporting standard for investments in debt and
marketable equity securities. This standard primarily impacts nuclear
decommissioning investments. The effect of this statement was not
material.
SFAS No. 119, Disclosure about Derivative Financial Instruments and
Fair Value of Financial Instruments, also became effective in 1994.
This statement establishes disclosure requirements for derivatives.
As of December 31, 1994, the Company had no derivatives.
TRENDS
WPSC follows SFAS No. 71, Accounting for the Effects of Certain Types
of Regulation, and its financial statements reflect the effects of the
different ratemaking principles followed by the various jurisdictions
regulating the utility. These include the PSCW, 89% of revenues, the
Michigan Public Service Commission, 2% of revenues, and the Federal
Energy Regulatory Commission ("FERC"), 9% of revenues. In addition,
Kewaunee is regulated by the Nuclear Regulatory Commission.
Environmental matters are primarily governed by the Environmental
Protection Agency and the Wisconsin Department of Natural Resources.
The single most important development in the electric utility industry
is the trend toward increased competition brought about by a
combination of new legislation, changing regulation and market forces.
Transmission access, mandated by the Energy Policy Act of 1992,
increased competition in the wholesale power segment of the business
and put pressure on profit margins. Certain segments of the industry
could become deregulated. Low-cost energy producers, such as WPSC,
are in a position to benefit from competitive markets.
The PSCW has initiated a proceeding to consider restructuring electric
utility regulation in Wisconsin. Matters to be addressed include:
- Whether generation, transmission and distribution functions
will be allowed to exist together in the same company.
- Whether retail wheeling should be allowed.
- Whether utilities should be obligated to serve those customers
who have the ability to choose between alternate suppliers.
- Whether utilities will be given the ability to price services
based on market factors rather than the traditional
regulatory-pricing model.
- The treatment of stranded investment in utility plant and
regulatory assets.
In order to address the complexities in the natural gas market
resulting from FERC Order 636, which became effective in November
1993, the Company formed a non-regulated subsidiary, WPS Energy
Services, Inc., to market energy and related services.
WPSC has accrued $26.9 million for the future environmental
remediation of eight manufactured gas plant sites which it operated
previously. This accrual is based on studies at two sites and was
used as the basis for projecting costs on the remaining six sites.
The range of cleanup costs for all eight sites is estimated to be from
$14.8 million to $29.3 million.
These estimates will be adjusted as additional site-specific studies
are completed, three of which are anticipated in 1995. Factors that
can impact future cost estimates include the volume of contaminated
soil and changes in remedial technology and regulatory requirements.
A recent Wisconsin rate order provides that these costs may be
recovered from customers over a five-year period after expenditures
are incurred, but that no return on unrecovered costs is permitted.
The estimated cleanup costs presented do not take into consideration
recovery from insurance carriers or
-34-
other third parties. In June 1994, the Wisconsin Supreme Court
("Court") held that insurance coverage was not available for
environmental cleanup costs to the extent the clean up is done to
prevent or mitigate future injury. The Court also held that a
notification letter from a government agency about an environmental
situation did not constitute a suit, triggering the insurers' duty to
defend. WPSC is exploring alternative approaches for pursuing claims
against carriers in light of the decision.
In addition, WPSC has been notified that it is a minor participant in
a number of waste disposal site cleanup efforts. However, no
significant costs are anticipated to clean up these sites.
Federal Clean Air Act Amendments ("Act") were enacted in 1990. The
Act establishes stringent sulfur dioxide and nitrogen oxide emission
limitations. Wisconsin previously had enacted laws to limit sulfur
emissions. WPSC meets the sulfur dioxide emission standards scheduled
to take effect in the year 2000 as a result of switching to lower-
sulfur fuels. However, some additional capital expenditures will be
required to upgrade existing equipment and to monitor emission levels.
These expenditures are estimated to be in the range of $15 million to
$25 million between 1995 and 1999.
The steam generator tubes at Kewaunee are susceptible to corrosion
characteristics seen throughout the nuclear industry. Annual
inspections are performed to identify degraded tubes which are either
repaired by sleeving or are removed from service by plugging. The
steam generators were designed with approximately a 15% heat-transfer
margin, meaning that full power should be sustainable with the
equivalent of 15% of the steam generator tubes plugged. Tube plugging
and the build-up of deposits on the tubes affect the heat-transfer
capability of the steam generators to the point where eventually full
power operation is not possible, and there is a gradual decrease in
the capacity of the plant. The plant's capacity could be reduced by as
much as 20% by the year 2013. To date, approximately 12% of the tubes
have been plugged, with no reduction in capacity. WPSC continues to
evaluate the operation of the steam generators without replacement and
appropriate repair strategies, including replacement. WPSC also
continues to evaluate and implement initiatives to improve the
performance of Kewaunee which already performs at above-average levels
for the industry. These initiatives include conversion from a twelve-
month to an eighteen-month refueling and major maintenance cycle,
beginning in the spring of 1995, and numerous other cost-reduction
measures. These initiatives have resulted in approximately a 25%
reduction in Kewaunee operating and maintenance costs since 1991. WPSC
intends to operate Kewaunee until at least the expiration of the
present operating license in 2013.
In 1995, WPSC is initiating a new demand-side management ("DSM")
program which involves loans and shared savings. Prior to 1995, DSM
expenditures were recovered from all customers. The new program
provides that those who benefit from energy-saving programs will
finance them. As of December 31, 1994, WPSC had $46.5 million of
deferred DSM expenditures which will be recovered in future rates.
Local 310 of the International Union of Operating Engineers,
representing 1,070 of WPSC's employees, ratified a new three-year
contract with WPSC. The agreement provides for work force flexibility
in that, for the duration of the contract, union employees can perform
traditional union work across craft lines, perform non-union work and
perform work traditionally performed by contractors; and non-union
employees can perform some union work. The flexibility that this
contract provides will allow WPSC to more easily adapt to the changing
utility environment.
IMPACT OF INFLATION
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 the
utility's regulatory commissions, 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 only
is allowed to recover the historical cost of plant via depreciation.
Although new rates will not be implemented in 1996 due to the two-year
rate order in the Wisconsin jurisdiction, management believes
inflation will be offset by the impact of customer growth and
increased productivity.
-35-
- ----------------------------------------------------------------------
Description of Graphs Accompanying Management Discussion and Analysis
- ----------------------------------------------------------------------
Heading
-------
RETURN ON COMMON EQUITY
1990-1994
Percent
Scale
-----
Scale is shown on right side of graph running from 0 to 16 in
increments of two.
Description of Graph
--------------------
There are two bars for each year covering the years 1990 to 1994.
The black bars represent the authorized return in the Wisconsin
jurisdiction of 12.9%, 13.1%, 12.8%, 12.3% and 11.3%,
respectively, adjusted for allowed earnings on deferred investment
tax credits. The grey bars represent the earned return based on
common equity excluding ESOP.
Data Values
-----------
On the black bars are shown the following values, 14.0, 14.1,
13.6, 13.0 and 11.9, respectively, for the years 1990 through
1994.
The data values for the grey bars are shown above and to the left
of the bars. The values are 12.1, 13.1, 13.2, 13.1, and 11.4,
respectively, for the years 1990 through 1994.
- ----------------------------------------------------------------------
Heading
-------
ELECTRIC SALES
1990-1994
Megawatt-Hours (Thousands)
Scale
-----
Scale is shown on right side of graph running from 0 to 12 in
increments of two.
Data Values
-----------
There is one black bar for each year. The values are 9,288,
9,568, 9,747, 10,151 and 10,552, respectively, for the years 1990
through 1994.
- ----------------------------------------------------------------------
Heading
-------
GAS DELIVERIES
1990-1994
Therms (Millions)
Scale
-----
Scale is shown on right side of graph running from 0 to 400 in
increments of one-hundred.
Data Values
-----------
There is one bar for each year. Each bar has two parts, a lower
back part that represents natural gas transported for others, and
an upper grey part that represents natural gas sold to customers.
On the black bars are shown the following values, 215, 229, 233,
221 and 234, respectively, for the years 1990 through 1994.
The data values for the grey bars are shown above and to the left
of the bars. The values are 291, 314, 313, 348 and 399,
respectively, for the years 1990 through 1994.
- ---------------------------------------------------------------------
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
A. CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
=========================================================================================================
Year Ended December 31 (Thousands, except share amounts) 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------
Operating revenues
Electric $480,816 $493,256 $477,625
Gas 192,979 187,376 157,177
- ---------------------------------------------------------------------------------------------------------
Total operating revenues 673,795 680,632 634,802
=========================================================================================================
Operating expenses
Electric production fuels 111,011 114,051 123,866
Purchased power 38,631 30,703 29,594
Gas purchased for resale 137,014 133,347 109,890
Other operating expenses 148,917 148,270 135,614
Maintenance 49,983 51,597 46,436
Depreciation and decommissioning 56,365 60,609 58,592
Taxes other than income 26,063 25,204 24,459
- ---------------------------------------------------------------------------------------------------------
Total operating expenses 567,984 563,781 528,451
=========================================================================================================
Operating income 105,811 116,851 106,351
- ---------------------------------------------------------------------------------------------------------
Other income
Allowance for equity funds used during construction 108 287 494
Other, net 4,473 3,356 6,076
- ---------------------------------------------------------------------------------------------------------
Total other income 4,581 3,643 6,570
=========================================================================================================
Income before interest expense 110,392 120,494 112,921
- ---------------------------------------------------------------------------------------------------------
Interest on long-term debt 23,407 24,393 25,662
Other interest 1,796 1,562 1,477
Allowance for borrowed funds used during construction (139) (200) (542)
- ---------------------------------------------------------------------------------------------------------
Total interest expense 25,064 25,755 26,597
=========================================================================================================
Income before income taxes 85,328 94,739 86,324
Income taxes 29,526 32,539 28,322
Preferred stock dividends of subsidiary 3,111 3,311 3,237
- ---------------------------------------------------------------------------------------------------------
Net income 52,691 58,889 54,765
=========================================================================================================
Retained earnings at beginning of year 287,915 271,220 256,605
Cash dividends on common stock (43,014) (42,045) (40,150)
Other - (149) -
- ---------------------------------------------------------------------------------------------------------
Retained earnings at end of year $297,592 $287,915 $271,220
=========================================================================================================
Average shares of common stock outstanding 23,897 23,888 23,350
Earnings per average share of common stock $2.21 $2.47 $2.35
Dividend per share of common stock 1.80 1.76 1.72
=========================================================================================================
The accompanying notes are an integral part of these statements.
-36-
B. CONSOLIDATED BALANCE SHEETS
=========================================================================================================
Assets
- ---------------------------------------------------------------------------------------------------------
At December 31 (Thousands) 1994 1993
- ---------------------------------------------------------------------------------------------------------
Utility plant
Electric $1,412,666 $1,374,662
Gas 202,903 183,798
- ---------------------------------------------------------------------------------------------------------
Total 1,615,569 1,558,460
Less - Accumulated provision for depreciation
and decommissioning 846,505 801,056
- ---------------------------------------------------------------------------------------------------------
Total 769,064 757,404
Nuclear decommissioning trusts 64,147 56,699
Construction in progress 11,131 11,781
Nuclear fuel, less accumulated amortization 19,417 17,981
- ---------------------------------------------------------------------------------------------------------
Net utility plant 863,759 843,865
=========================================================================================================
Current assets
Cash and equivalents 13,167 5,391
Customer and other receivables, net of reserves 60,029 66,511
Accrued utility revenues 28,820 37,314
Fossil fuel, at average cost 10,505 10,208
Gas in storage, at average cost 15,787 19,885
Materials and supplies, at average cost 20,585 19,411
Prepayments and other 21,122 21,420
- ---------------------------------------------------------------------------------------------------------
Total current assets 170,015 180,140
=========================================================================================================
Regulatory assets 109,135 110,750
Investments and other assets 74,366 64,086
=========================================================================================================
Total $1,217,275 $1,198,841
=========================================================================================================
-37-
=========================================================================================================
Capitalization And Liabilities
- ---------------------------------------------------------------------------------------------------------
At December 31 (Thousands) 1994 1993
- ---------------------------------------------------------------------------------------------------------
Capitalization
Common stock equity $446,540 $433,724
Preferred stock of subsidiary
with no mandatory redemption 51,200 51,200
Long-term debt 309,945 314,225
- ---------------------------------------------------------------------------------------------------------
Total capitalization 807,685 799,149
=========================================================================================================
Current liabilities
Note payable 10,000 10,000
Commercial paper 12,500 11,000
Accounts payable 66,643 64,113
Accrued taxes 1,152 3,266
Accrued interest 8,068 7,695
Other 7,494 10,735
- ---------------------------------------------------------------------------------------------------------
Total current liabilities 105,857 106,809
=========================================================================================================
Long-term liabilities and deferred credits
Accumulated deferred income taxes 126,639 138,952
Accumulated deferred investment tax credits 32,172 34,210
Regulatory liabilities 65,995 61,434
Long-term liabilities 78,927 58,287
- ---------------------------------------------------------------------------------------------------------
Total long-term liabilities and deferred credits 303,733 292,883
=========================================================================================================
Commitments and contingencies (See note 6)
=========================================================================================================
Total $1,217,275 $1,198,841
=========================================================================================================
The accompanying notes are an integral part of these statements.
-38-
C. CONSOLIDATED STATEMENT OF CAPITALIZATION
=========================================================================================================
At December 31 (Thousands, except share amounts) 1994 1993
- ---------------------------------------------------------------------------------------------------------
Common stock equity
Common stock, $1 par value, 100,000,000 shares authorized;
and 23,896,962 shares outstanding $23,897 $23,897
Premium on capital stock 145,021 145,295
Retained earnings 297,592 287,915
ESOP loan guarantees (19,970) (23,383)
- ---------------------------------------------------------------------------------------------------------
Total common stock equity 446,540 433,724
========================================================================================================
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
10-1/8% 2014 - 1,000
8.80% 2021 60,000 60,000
7-1/8% 2023 50,000 50,000
- ---------------------------------------------------------------------------------------------------------
Total 291,075 292,075
Unamortized discount and premium on bonds, net (1,154) (1,257)
- ---------------------------------------------------------------------------------------------------------
Total first mortgage bonds 289,921 290,818
- ---------------------------------------------------------------------------------------------------------
ESOP loan guarantees 19,970 23,383
Other long-term debt 54 24
- ---------------------------------------------------------------------------------------------------------
Total long-term debt 309,945 314,225
=========================================================================================================
Total capitalization $807,685 $799,149
=========================================================================================================
The accompanying notes are an integral part of these statements.
-39-
D. CONSOLIDATED STATEMENTS OF CASH FLOWS
=========================================================================================================
Year Ended December 31 (Thousands) 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net income $52,691 $58,889 $54,765
Adjustments to reconcile net income to net cash from
operating activities
Depreciation and decommissioning 56,365 60,609 58,592
Amortization of nuclear fuel and other 28,811 27,693 20,522
Deferred income taxes (4,562) (867) 7,266
Investment credit restored (2,038) (1,860) (2,022)
AFUDC equity (108) (287) (494)
Pension funding (10,808) (9,830) -
Post-retirement funding 7,036 5,915 -
Deferred demand-side management expenditures (9,659) (18,988) (32,073)
Other, net (8,695) 6,322 (3,601)
Changes in
Customer and other receivables 6,482 (3,938) 3,100
Accrued utility revenues 8,494 (3,434) (4,335)
Fossil fuel inventory (297) (5,565) 2,788
Accounts payable 2,530 8,813 (6,886)
Accrued taxes (2,114) 2,032 3,425
- ---------------------------------------------------------------------------------------------------------
Net cash from operating activities 124,128 125,504 101,047
=========================================================================================================
Cash flows from (used for) investing activities
Construction and nuclear fuel expenditures (68,680) (68,454) (94,669)
Allowance for borrowed funds used during construction (139) (200) (542)
Decommissioning funding (7,448) (5,676) (5,518)
Sale of interest in combustion turbine - 7,849 -
Other 2,429 3,515 2,784
- ---------------------------------------------------------------------------------------------------------
Net cash from (used for) investing activities (73,838) (62,966) (97,945)
=========================================================================================================
Cash flows from (used for) financing activities
Proceeds from issuance of common stock - 1,693 26,439
Proceeds from issuance of preferred stock - 15,000 -
Redemption of preferred stock - (15,000) -
Sale of first mortgage bonds - 172,000 59,075
Redemption and maturities of first mortgage bonds (1,000) (189,973) (55,765)
Change in commercial paper 1,500 1,000 7,000
Common stock dividends (43,014) (42,045) (40,150)
- ---------------------------------------------------------------------------------------------------------
Net cash from (used for) financing activities (42,514) (57,325) (3,401)
=========================================================================================================
Net increase (decrease) in cash and equivalents 7,776 5,213 (299)
Cash and equivalents at beginning of year 5,391 178 477
=========================================================================================================
Cash and equivalents at end of year $13,167 $5,391 $178
=========================================================================================================
Cash paid during year for
Interest, less amount capitalized $20,693 $21,973 $22,678
Income taxes 40,333 33,177 18,301
Preferred stock dividends of subsidiary 3,111 3,332 3,287
Construction and nuclear fuel expenditures, including
accruals, AFUDC and customer contributions 78,286 72,731 102,281
========================================================================================================
The accompanying notes are an integral part of these statements.
-40-
E. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Corporate Reorganization - On September 1, 1994, WPS
Resources Corporation ("Company"), pursuant to a one-for-one
share exchange, acquired all of the common stock of
Wisconsin Public Service Corporation ("WPSC"). As a result,
WPSC became a wholly-owned subsidiary of the Company. The
financial statements of the Company have been consolidated
with the operations of its subsidiaries for all periods
presented. As of December 31, 1994, WPSC, an electric and
gas utility, represented over 99% of the Company s
consolidated assets, revenues and net income.
Preferred stock dividends of WPSC have been retroactively
restated as a nonoperating expense. Thus, the Company's net
income is $3.3 million and $3.2 million less than WPSC's net
income for the years ended December 31, 1993 and 1992,
respectively. This restatement does not impact earnings per
share of common stock.
Certain prior-period amounts in the consolidated financial
statements have been reclassified to conform with current-
year presentations.
(b) Consolidation - The consolidated financial statements
include the Company and its wholly-owned subsidiaries,
WPS Energy Services, Inc. ("WPSE"), WPSC and WPSC's wholly-
owned subsidiary, WPS Leasing, Inc. All significant
intercompany transactions and accounts have been eliminated.
(c) 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"),
except for major new generating facilities which earn AFUDC
on the full amount, is subject to AFUDC using a rate based
on WPSC's overall cost of capital. For 1994, the retail
AFUDC rate was approximately 10.1%.
AFUDC is recorded on wholesale jurisdictional electric CWIP
at debt and equity percentages specified in the FERC Uniform
System of Accounts. For 1994, this rate was approximately
4.3%.
Substantially all of WPSC's utility plant is subject to a
first mortgage lien.
(d) Property Additions, Maintenance and Retirements - The cost
of renewals and betterments of units of property (as
distinguished from minor items of property) is charged to
utility plant accounts. The cost of units of property
retired, sold or otherwise disposed of, plus removal costs,
-41-
less salvage, is charged to the accumulated provision for
depreciation. No profit or loss is recognized in connection
with ordinary retirements of utility property units.
Maintenance and repair costs and replacement and renewal of
items less than units of property are generally charged to
operating expense.
In October 1993, WPSC sold, at cost, a 32% interest in a
combustion turbine to a municipality for $7.8 million.
(e) Depreciation - Straight-line composite depreciation expense
is recorded over the estimated useful life of the property
and includes estimated salvage and cost of removal. These
rates have been approved by the Public Service Commission of
Wisconsin ("PSCW"). Effective January 1, 1994, depreciation
rates were revised based on new estimates which decreased
annual depreciation expense by approximately $5.8 million.
This decrease was considered in setting customer rates.
============================================================
1994 1993 1992
------------------------------------------------------------
Annual composite
depreciation rates
Electric 3.41% 3.89% 3.87%
Gas 3.37% 3.81% 3.81%
============================================================
(f) Nuclear Decommissioning - Nuclear decommissioning costs are
accrued over the estimated service life of the Kewaunee
Nuclear Power Plant ("Kewaunee"), currently recovered from
customers in rates and deposited in external trusts. Such
costs totaled $4.0, $2.4 and $2.4 million for 1994, 1993 and
1992, respectively. In July 1994, the PSCW issued a generic
order covering utilities with nuclear generation. This order
standardizes the escalation assumptions used in determining
nuclear decommissioning liabilities. The undiscounted
amount of decommissioning costs estimated to be expended
between the years 2014 to 2050 are $785 million. Long-term
after-tax earnings of 5.5% are assumed. As a result of this
change, annual decommissioning costs recovered in customer
rates in 1995 will be approximately $8.7 million. As of
December 31, 1994, the accumulated provision for
depreciation and decommissioning included accumulated
provisions for decommissioning totaling $64.1 million.
WPSC's share of Kewaunee decommissioning costs are estimated
to be $147 million in current dollars based on a site-
specific study, performed in 1992, using immediate
dismantlement as the method of decommissioning. As of
December 31, 1994, the external trusts totaled $64.1 million
and were valued at market.
-42-
Depreciation expense includes decommissioning costs
recovered in customer rates and a charge to offset earnings
from the external trusts. Trust earnings totaled $2.4, $3.5
and $3.3 million for the years ended December 31, 1994, 1993
and 1992, respectively.
(g) 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. The costs amortized to electric fuel expense
(which assume no salvage values for uranium or plutonium)
include an amount for ultimate disposal and are recovered
through current rates. As required by the Nuclear Waste
Policy Act of 1982, a contract with the Department of Energy
("DOE") has been signed, and quarterly payments are being
made to the DOE for the fuel storage based on generation.
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, 1994 and 1993, the accumulated
provisions for nuclear fuel totaled $136.5 million and
$130.0 million, respectively.
(h) Cash and Equivalents - The Company considers short-term
investments with an original maturity of three months or
less to be cash equivalents.
(i) Revenue and Customer Receivables - WPSC accrues revenues
related to electric and gas service, including estimated
amounts for service rendered but not billed.
As of December 31, 1994, energy conservation loans to
customers amounting to $1.7 million are included in customer
receivables and in investments and other assets. The
carrying amount of the loans closely approximates their
market value.
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 next 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 which allows it to pass on
to all classes of gas customers changes in the cost of gas
purchased from its suppliers, subject to PSCW and MPSC
review.
WPSC is required to provide service and grant credit to
customers within its defined service territory and is
precluded from discontinuing service to residential
-43-
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 8% of WPSC's total revenues are from companies
in the paper products industry.
(j) Regulatory Assets and Liabilities - WPSC is subject to the
provisions of Statement of Financial Accounting Standard
("SFAS") No. 71, Accounting for the Effects of Certain Types
of Regulation. Regulatory assets represent probable future
revenue associated with certain costs which will be
recovered from customers through the ratemaking process.
Regulatory liabilities represent costs previously collected
that are refundable in future rates. The following
regulatory assets and liabilities were reflected in the
Consolidated Balance Sheets as of December 31:
============================================================
(Thousands) 1994 1993
------------------------------------------------------------
Regulatory assets
DSM expenditures $46,510 $ 46,219
Coal and rail contract
buy-out costs 18,228 24,269
Environmental remediation
costs 27,361 16,667
Debt refinancing costs 5,314 7,725
Enrichment facility fee 6,744 5,830
Natural gas obligations 1,856 3,713
Other 3,122 6,327
------------------------------------------------------------
Total $109,135 $110,750
============================================================
Regulatory liabilities
Income tax related $38,599 $33,030
Pensions 17,342 22,021
Conservation costs 7,221 3,494
Other 2,833 2,889
------------------------------------------------------------
Total $65,995 $61,434
============================================================
As of December 31, 1994, most of WPSC's regulatory assets
are being recovered through rates charged to customers over
periods ranging from two to ten years. Pursuant to a PSCW
rate order, effective January 1, 1995, WPSC is to recover
approximately $23.6 million of regulatory costs per year.
Based on prior and current rate treatment of such costs,
management believes it is probable that WPSC will continue
to recover from ratepayers the deferred charges described
above.
-44-
See notes (1)(l) and (1)(m) for specific discussion of
pension and deferred tax regulatory liabilities, and note 6
for discussion of environmental-remediation deferred costs.
(k) Investments and Other Assets - Investments include various
immaterial affiliates whose income 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 and the long-term portion of
energy conservation loans to customers.
(l) Employee Benefit Plans - WPSC has non-contributory
retirement plans covering substantially all employees under
which annual contributions are 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 1994, 1993 or 1992. Prior to
January 1, 1993, the PSCW required the recognition of the
funded amounts for ratemaking purposes. Concurrent with a
rate order, effective January 1, 1993, WPSC began recovering
pension costs in customer rates under SFAS No. 87,
Employers' Accounting for Pensions, and began returning to
ratepayers, over five years, the cumulative excess of
amounts recovered from customers over SFAS No. 87 costs.
The tables below set forth the plans' funded status and
expense (income).
-45-
========================================================================
As of December 31 1994 1993 1992
(Thousands, except for percentages)
------------------------------------------------------------------------
Vested benefit obligation $(162,435) $(162,304)
Non-vested benefit obligation (7,868) (8,084)
------------------------------------------------------------------------
Total actuarial present value of
accumulated benefit obligation $(170,303) $(170,388)
========================================================================
Projected benefit obligation for
service rendered to date $(231,134) $(235,661)
Plan assets at fair value 329,424 342,540
------------------------------------------------------------------------
Plan assets in excess of projected
benefit obligation 98,290 106,879
Unrecognized net gain (47,670) (59,024)
Prior service cost not yet recognized 6,297 7,044
Unrecognized net asset (26,920) (30,384)
------------------------------------------------------------------------
Prepaid retirement plan cost $ 29,997 $ 24,515
========================================================================
The net retirement plan expense
(income) includes the following
components
Service cost $ 6,333 $ 5,935 $ 4,251
Interest cost 17,308 16,375 15,003
Actual return on plan assets 2,555 (37,856) (25,826)
Net amortization and deferral (31,678) 11,042 463
Regulatory adjustment to funded amount (5,326) (5,326) 6,109
------------------------------------------------------------------------
Net retirement plan expense
(income) $(10,808) $ (9,830)$ --
========================================================================
The assumed rates for calculations
used in the above tables were
Expected long-term return on
investments 9.00% 9.00% 9.00%
Average rate for future salary increases 6.25% 6.25% 6.25%
Discount rate to compute projected
benefit obligation 8.00% 7.50% 7.50%
========================================================================
WPSC also offers medical, dental and life insurance benefits
to employees, retirees and their dependents. The expenses
for active employees are expensed as incurred. Prior to
1993, WPSC expensed amounts related to post-retirement
health and welfare plans to the extent that such amounts
were funded to external trusts.
Effective January 1, 1993, and concurrent with a rate order,
WPSC adopted SFAS No. 106, Employers' Accounting for Post-
Retirement Benefits Other Than Pensions, which requires the
cost of post-retirement benefits for employees to be accrued
as expense over the period in which the employee renders
service and becomes eligible to receive benefits. In
adopting SFAS No. 106, WPSC elected to recognize the
transition obligation for current and future retirees over
twenty years.
-46-
Since 1981, WPSC has been funding amounts to irrevocable
trusts as allowed for income tax purposes.
These funded amounts have been expensed and recovered
through customer rates. The investments in the trust
covering administrative employees are subject to federal
income taxes at a 39.6% tax rate, while the non-
administrative trust is tax-exempt.
The tables below set forth the plans' accrued post-
retirement benefit obligation ("APBO") as of December 31,
1994 and 1993 and the expense provision for the years then
ended.
============================================================
(Thousands) 1994 1993
------------------------------------------------------------
APBO attributable to
Retirees and dependents $ (53,060) $ (47,095)
Fully eligible active plan
participants (5,559) (5,671)
Other active plan participants (68,084) (66,681)
------------------------------------------------------------
Total APBO (126,703) (119,447)
Fair value of plan assets 70,460 68,408
------------------------------------------------------------
APBO in excess of plan assets (56,243) (51,039)
Unrecognized net loss 63 (632)
Unrecognized transition
obligation 43,321 45,756
------------------------------------------------------------
Accrued post-retirement
benefit obligation $ (12,859) $ (5,915)
============================================================
Service cost $ 4,853 $ 4,379
Interest cost 8,830 8,248
Actual return on plan assets (946) (3,993)
Net amortization and deferral (1,774) 1,394
------------------------------------------------------------
Post-retirement benefit cost $ 10,963 $ 10,028
============================================================
The assumed 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. The
assumed health care cost trend rates for 1995 are 11.5% for
medical and 8.5% for dental, decreasing to 7.0% and 5.0%,
respectively, by the year 2006. Increasing each of the
medical and dental cost trend rates by 1% in each year would
increase the total APBO as of December 31, 1994 by
$24.7 million and the total net periodic post-retirement
benefit cost for the year then ended by $4.1 million.
-47-
During 1992, the cost of post-retirement health care
benefits was $2.7 million. As of December 31, 1994, WPSC
had approximately 1,000 retirees eligible to receive health
care benefits.
Concurrent with a rate order which was effective January 1,
1994, WPSC adopted SFAS No. 112, Employers' Accounting for
Post-Employment Benefits, which establishes accounting and
reporting standards for post-employment benefits other than
those covered by SFAS Nos. 87 and 106. In connection
therewith, WPSC expensed in 1994 the transition obligation
of $1.8 million and recovered this cost through its customer
rates.
WPSC has a leveraged Employee Stock Ownership Plan and Trust
("ESOP") that held 2,240,500 shares of Company common stock
(market value of approximately $59.9 million) at
December 31, 1994. At that date, the ESOP also had loans
guaranteed by WPSC and secured by the common stock. At
December 31, 1994, these loans had recorded values of
$1.8 million (bearing an interest rate of 73.5% of prime
rate) and $18.2 million (bearing an interest rate of 9.33%).
The estimated market value of these loans at December 31,
1994 totaled $20.5 million.
Principal and interest on the loans are to be paid through
WPSC contributions and through dividends on Company common
stock held by the ESOP. Shares in the ESOP are allocated to
participants as the loans are 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 employee contribution is an
approximately equal sharing of benefits of the program
between customers and employees.
(m) Income Taxes - Effective January 1, 1993, WPSC adopted the
liability method of accounting for income taxes as
prescribed by SFAS No. 109, Accounting for Income Taxes.
Under the liability method, deferred income tax liabilities
are established based upon enacted tax laws and rates
applicable to the periods in which the taxes become payable.
The adoption of this accounting standard had an
insignificant impact on the Company's net income. The
excess deferred income taxes, resulting from taxes provided
at rates greater than current rates, and the previously
unrecorded deferred income taxes, have been recorded as a
net regulatory liability to be refunded to customers in
future years. Such net regulatory liability totaled
$38.6 million as of December 31, 1994.
The effective income tax rates are computed by dividing
total income tax expense, including investment credit
-48-
restored, by the sum of such expense and net income.
Previously deferred investment tax credits are being
restored over the life of the related utility plant. The
components of income tax expense are set forth in the tables
below.
==========================================================================================
(Thousands,
except for percentages) 1994 1993 1992
------------------------------------------------------------------------------------------
Rate Amount Rate Amount Rate Amount
------------------------------------------------------------------------------------------
Statutory federal income tax 35.0% $29,865 35.0% $33,159 34.0% $29,350
State income taxes, net 6.2 5,232 4.9 4,636 5.2 4,518
Investment credit restored (2.4) (2,038) (2.0) (1,860) (2.3) (2,022)
Rate difference on reversal
of income tax temporary
differences (1.6) (1,344) (1.5) (1,441) (2.1) (1,843)
Dividends paid to ESOP (1.7) (1,445) (1.5) (1,434) (1.6) (1,381)
Other differences, net (0.9) (744) (0.5) (521) (0.4) (300)
------------------------------------------------------------------------------------------
Effective income tax 34.6% $29,526 34.4% $32,539 32.8% $28,322
==========================================================================================
Current provision
Federal $28,681 $28,212 $18,284
State 7,445 7,054 4,794
------------------------------------------------------------------------------------------
Total current provision 36,126 35,266 23,078
==========================================================================================
Deferred provision
(benefit) (4,562) (867) 7,266
Investment credit
restored, net (2,038) (1,860) (2,022)
------------------------------------------------------------------------------------------
Total income tax expense $29,526 $32,539 $28,322
==========================================================================================
As of December 31, 1994 and 1993, the Company had the
following significant temporary differences that created
deferred tax assets and liabilities:
============================================================
(Thousands) 1994 1993
------------------------------------------------------------
Deferred tax assets
Plant related $ 50,537 $ 48,853
Other 26,637 17,207
------------------------------------------------------------
Total 77,174 66,060
============================================================
Deferred tax liabilities
Plant related 161,605 162,752
DSM expenditures 18,359 18,242
Coal and rail contract
buy-out costs 7,043 9,154
Other 16,806 14,864
------------------------------------------------------------
Total 203,813 205,012
============================================================
Net deferred tax liabilities $ 126,639 $ 138,952
============================================================
-49-
(2) COMMERCIAL PAPER AND LINES OF CREDIT
To support outstanding commercial paper, the Company maintains
unused bank lines of credit. Some of these lines may be
withdrawn at the discretion of the lenders. While some cash
balances represent compensating balances for credit lines and
bank services, there are no legal restrictions as to withdrawal
of these funds. The majority of the lines of credit require a
fee based on the unused balance.
The following information relates to short-term borrowings and
lines of credit for the years indicated:
=================================================================================================
(Thousands, except for percentages) 1994 1993 1992
-------------------------------------------------------------------------------------------------
As of end of year
Discount rate on outstanding commercial paper 6.0% 3.4% 3.4%
Interest rate on note payable 6.0% 3.3% 3.5%
Unused lines of credit $22,870 $22,970 $23,150
Compensating balance requirements $94 $99 $108
=================================================================================================
For the year
Maximum amount of borrowings $26,000 $27,000 $22,500
Average amount of borrowings $10,844 $12,263 $12,414
Weighted average interest rate on borrowings 4.3% 3.2% 3.8%
=================================================================================================
Included in the above lines of credit are agreements with
commercial banks that permit the Company to borrow up to
$16 million at any time provided there is compliance with certain
financial covenants. These agreements extend for thirteen months
or more. As of December 31, 1994, no borrowings were outstanding
under these agreements.
(3) JOINTLY-OWNED FACILITIES
Information regarding WPSC's share of major jointly-owned
electric generating facilities in service at December 31, 1994 is
as follows:
=============================================================================
(Thousands, Columbia Edgewater
except for percentages) Energy Center Unit No. 4 Kewaunee
------------------------------------------------------------------------------
Ownership 31.8% 31.8% 41.2%
Plant capacity (Mw) 335.2 104.9 221.0
Utility plant in service $107,868 $21,874 $132,227
Accumulated provision
for depreciation $ 56,361 $11,562 $ 74,449
In-service date 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, and WPSC has supplied its own financing for
all jointly-owned projects.
-50-
(4) LONG-TERM DEBT
Sinking fund requirements on first mortgage bonds may be
satisfied by the deposit of cash or reacquired bonds with the
trustee and, for certain series, by the application of net
expenditures for bondable property in an amount equal to 166-2/3%
of the annual requirements.
All series requiring the deposit of cash or reacquired bonds for
sinking fund purposes have been satisfied to maturity. For those
series requiring unpledged property to satisfy sinking fund
requirements, the Company has adequate unpledged property to
satisfy the requirement for at least ten years.
In 1998, $50 million of 5-1/4% bonds will mature.
As of December 31, 1994, the market value of WPSC's first
mortgage bonds was $273.0 million. These bonds have a recorded
value of $291.1 million. Historically, gains or losses resulting
from the settlement on long-term debt obligations have been
deferred as required by regulators.
(5) COMMON EQUITY
In June 1992, 800,000 shares of new common stock were issued.
This sale increased the common stock balance by $3.2 million
($4 par per share) and premium on capital by $19.4 million
($24.25 per share). Also, beginning in June 1992, WPSC commenced
a sale of shares to meet dividend reinvestment program ("DRP")
requirements. During 1994 and 1993, no and 50,818 new shares of
common stock, respectively, were issued under the DRP and 391,658
shares were available for issuance at December 31, 1994. In
April 1993, WPSC stopped issuing common stock under the DRP and
began purchasing common stock on the open market for shareholder
reinvested dividends.
At December 31, 1994, the Company had $296.6 million of retained
earnings available for dividends; however, WPSC is restricted by
a PSCW order to paying dividends of no more than 109% of the
previous year's common stock dividend without PSCW approval.
Also, Wisconsin law prohibits WPSC from making loans to the
Company and its subsidiaries and from guaranteeing their
obligations. The WPSC equity capitalization ratio at December 31,
1994 was 54% which is the same rate approved by the PSCW for
ratemaking purposes.
(6) COMMITMENTS AND CONTINGENCIES
COAL CONTRACTS
To ensure a reliable, low-cost supply of coal, WPSC entered into
certain long-term contracts that have take-or-pay obligations
totaling $323.7 million from 1995 through 2016. The obligations
-51-
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 legitimate costs of service subject to
recovery in customer rates.
GAS COSTS
WPSC also has natural gas supply and transportation contracts
that require total demand payments of $412.3 million through
October 2003. Management believes that these costs will be
recoverable in future customer rates.
ANR Pipeline Company ("ANR"), WPSC's primary pipeline supplier,
filed with the FERC for approval to recover a portion of certain
take-or-pay costs it incurred from renegotiating its long-term
gas contracts. As a result of the filing, ANR was allowed to
recover a portion of these costs from its customers. WPSC began
paying its share of these take-or-pay costs to ANR in 1989 and
recovering these costs directly from customers through its
purchased gas adjustment clause. In March 1991, the FERC
approved the settlement under which WPSC will pay ANR monthly
take-or-pay amounts. Additional take-or-pay claims by ANR may be
filed with FERC. To date, the PSCW has granted WPSC recovery of
all take-or-pay costs.
In April 1992, the FERC issued Order No. 636 ("Order") which
requires natural gas pipelines to restructure their sales and
transportation services. As a result of this Order, WPSC is
obligated to pay for a portion of ANRs transition costs incurred
to comply with the Order. At December 31, 1994, WPSC has an
accrued liability with an offsetting regulatory asset in the
amount of $1.9 million for a portion of these transition costs.
Though there may be additional 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.
WPSC will be billed $3.3 million in 1995 for their allocation of
ANR's above-market costs of gas purchases from the Dakota
Gasification Plant. WPSC is protesting the legality of these
costs which could total $49.0 million through 2009.
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.
-52-
CLEAN AIR REGULATIONS
In 1990, the Federal Clean Air Act Amendments ("Act") were signed
into law. The Act requires WPSC to meet new emission limits for
sulfur dioxide and nitrogen oxide in 1995 (Phase I) and in the
year 2000 (Phase II). Since Wisconsin had already mandated
reduced sulfur dioxide emissions by 1993, which were lower than
the Federal levels mandated for 1995, WPSC was already working on
lowering emissions. WPSC has complied cost effectively with both
the Federal and Wisconsin sulfur dioxide laws primarily through
fuel-switching. WPSC was in compliance with the Wisconsin sulfur
dioxide limits and the Federal Phase II limits in 1994.
The final Federal regulations for nitrogen oxide are not known at
this time; however, based on draft rules, WPSC expects to make
additional capital expenditures in the range of $15 million to
$25 million between 1995 and 1999 for Wisconsin and Federal air
quality compliance. Management believes that all costs incurred
to comply with these laws will be recoverable in future customer
rates.
MANUFACTURED GAS PLANT REMEDIATION
WPSC currently is investigating the need for environmental clean
up of eight manufactured gas plant sites which it previously
operated. An environmental consultant has been engaged to
develop cost estimates. These estimates are based upon an
investigation of two of the sites and assumes excavation of
impacted soils, thermal treatment of soils, on-site groundwater
extraction and treatment and post-clean up and monitoring for
twenty-five years. The consultant has not yet performed detailed
investigations of the remaining six sites and, therefore,
comparable information on these sites is not available.
WPSC used the estimates for these two sites as a basis for making
projections on cleanup costs at the other sites because of
certain similar characteristics at the other sites. Thus, for
all sites, cleanup costs reflecting anticipated inflation,
current technology and no change in regulatory requirements are
estimated to be in the range of $14.8 million to $29.3 million.
Management has accrued $26.9 million for future cleanup costs for
all eight sites which will be spent over the next thirty-four
years. However, as further investigations are performed on all
sites, this estimate may change significantly.
The $26.9 million estimate has been recorded as a liability with
an offsetting deferred charge (regulatory asset). Based on a
recent rate order, these costs (less any insurance recoveries)
will be recoverable in future rates as expenditures are made.
However, carrying costs are not recoverable.
As additional site-specific studies are completed (three are
anticipated in 1995), these estimates will be adjusted to reflect
site-specific data. Other factors that can impact these estimates
-53-
are the volume of contaminated soil, changes in remediation
technology and regulatory requirements.
In June, the Wisconsin Supreme Court ("Court") issued a decision
regarding recoveries from insurance companies for environmental
remediation costs. The Court held that insurance coverage was
not available for environmental cleanup costs to the extent the
clean up is done to prevent or mitigate future injury. In
addition, the Court held that a notification letter from a
government agency about an environmental situation did not
constitute a suit which triggers the insurers' duty to defend.
WPSC is exploring alternative approaches to pursuing claims
against its carriers in light of the decision.
WPSC has made minor payments for the investigation and potential
clean up of certain other waste disposal sites. Management
believes WPSC has been a minor contributor to the total
contamination at these sites and, accordingly, does not believe
its share of cleanup costs to be material.
LONG-TERM POWER SUPPLY
WPSC has signed a contract to build a 122-megawatt cogeneration
facility with Rhinelander Paper Company and has filed an
application for a Certificate of Public Convenience and Necessity
with the PSCW requesting approval for the project. Estimated
cost for the project is $169 million.
Management estimates 1995 utility plant construction expenditures
to be approximately $84.2 million. DSM expenditures are
estimated to be $25.8 million, of which approximately
$15.0 million will be deferred and amortized over the next ten
years consistent with rate recovery.
-54-
(7) SEGMENTS OF BUSINESS
The following table presents information for the respective years
pertaining to the Company's operations segmented by lines of
business. The gas segment includes the nonutility operations of
WPSE which commenced operations in 1994.
=======================================================================================================================
(Thousands) 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------
Electric Gas Total Electric Gas Total Electric Gas Total
- -----------------------------------------------------------------------------------------------------------------------
Operating revenues $480,816 $192,979 $ 673,795 $493,256 $187,376 $ 680,632 $477,625 $157,177 $ 634,802
Operating expenses
Operation and
maintenance 312,368 173,188 485,556 310,534 167,434 477,968 304,347 141,053 445,400
Depreciation 50,540 5,825 56,365 4,498 6,111 60,609 52,819 5,773 58,592
Other taxes 22,516 3,547 26,063 22,064 3,140 25,204 1,687 2,772 24,459
- -----------------------------------------------------------------------------------------------------------------------
385,424 182,560 567,984 387,096 176,685 563,781 378,853 149,598 528,451
- -----------------------------------------------------------------------------------------------------------------------
Operating income $ 95,392 $ 10,419 $105,811 $106,160 $ 10,691 $116,851 $ 98,772 $ 7,579 $ 106,351
=======================================================================================================================
Identifiable assets(a) $937,481 $191,349 $1,128,830 $938,951 $184,880 $1,123,831 $951,074 $158,314 $1,109,388
- -------------------------------------------- ---------------------- -------------------- -
Assets not allocated(b) 88,445 75,010 36,162
- -----------------------------------------------------------------------------------------------------------------------
Total assets $1,217,275 $1,198,841 $1,145,550
=======================================================================================================================
Construction and
nuclear fuel
expenditures
including AFUDC $ 58,674 $ 19,612 $ 78,286 $ 59,038 $ 13,693 $ 72,731 $ 91,272 $ 11,009 $ 102,281
=======================================================================================================================
(a) At December 31 and net of the respective accumulated provisions for depreciation.
(b) Primarily includes cash, investments, pension assets, nonutility property and other receivables.
-55-
(8) QUARTERLY FINANCIAL INFORMATION
=======================================================================================================================
(Thousands, except for share amounts) Three Months Ended
- -----------------------------------------------------------------------------------------------------------------------
1994
March June September December Total
- -----------------------------------------------------------------------------------------------------------------------
Operating revenues $200,730 $147,569 $152,257 $177,627 $673,795
Operating income $ 39,568 $ 17,843 $ 25,255 $ 26,773 $105,811
Net income $ 21,597 $ 7,410 $ 12,950 $ 12,162 $ 52,691
Average number of shares of common stock outstanding 23,897 23,897 23,897 23,897 23,897
Earnings per average share of common stock $ .90 $ .31 $ .54 $ .51 $ 2.21
=======================================================================================================================
1993
March June September December(1) Total
Operating revenues $189,003 $157,692 $156,310 $177,627 $680,632
Operating income $ 35,388 $ 22,698 $ 31,992 $ 26,773 $116,851
Net income $ 20,171 $ 10,883 $ 15,673 $ 12,162 $ 58,889
Average number of shares of common stock outstanding 23,861 23,897 23,897 23,897 23,888
Earnings on common stock $ .85 $ .45 $ .66 $ .51 $ 2.47
=======================================================================================================================
Because of various factors which affect the utility business, the quarterly results of operations are not necessarily
comparable.
(1) In the quarter ended December 1993, WPSC recorded an adjustment as a result of its annual coal inventory
observation. This adjustment increased net income and earnings per average share of common stock by $1.2 million
and $.05, respectively, for 1993.
-56-
F. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To 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, 1994 and
1993, 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, 1994. 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, 1994
and 1993, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1994 in
conformity with generally accepted accounting principles.
As discussed in notes (1)(l) and (1)(m) to the consolidated financial
statements, effective January 1, 1993, WPS Resources Corporation
changed its method of accounting for post-retirement benefits other
than pensions and income taxes.
Milwaukee, Wisconsin,
January 26, 1995
ARTHUR ANDERSEN LLP
-57-
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
All information required by Part III, with the exception of
information concerning executive officers which appears in Item 4A of
Part I hereof, is incorporated by reference to the Company's proxy
statement which was filed on March 6, 1995 in anticipation of the
annual meeting which will be held on May 4, 1995.
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 consolidated financial statements are
included in Part II at Item 8 above:
DESCRIPTION PAGES IN 10-K
----------- -------------
Consolidated Statements of Income and 36
Retained Earnings for the three years
ended December 31, 1994, 1993 and 1992
Consolidated Balance Sheets as of 37-38
December 31, 1994 and 1993
Consolidated Statements of Capitalization 39
as of December 31, 1994 and 1993
Consolidated Statements of Cash Flows 40
for the three years ended December 31, 1994,
1993 and 1992
Notes to Consolidated Financial Statements 41
Report of Independent Public Accountants 57
-58-
(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
Report of Independent Public
Accountants 99
Statements of Income and Retained
Earnings 100
Balance Sheets 101
Statement of Cash Flows 102
Notes 103
(3) All exhibits, including those incorporated by reference.
-59-
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENTS
3A Restated Articles of Incorporation of the Company.
(Incorporated by reference from Appendix B to Amendment No.1
to the Company's Registration Statement on Form S-4, filed
February 28, 1994 [Reg. No. 33-52199]).
3B By-Laws of the Company. (Incorporated by reference to
Exhibit 3B to the Company's Registration Statement on
Form S-4, filed February 8, 1994 [Reg. No. 33-52199]).
4A Copy of First Mortgage and Deed of Trust, dated as of
January 1, 1941 from Wisconsin Public Service Corporation to
First Wisconsin Trust Company, Trustee (Incorporated by
reference to Exhibit 7.01 - File No. 2-7229); Supplemental
Indenture, dated as of November 1, 1947 (Incorporated by
reference to Exhibit 7.02 - File No. 2-7602); Supplemental
Indenture, dated as of November 1, 1950 (Incorporated by
reference to Exhibit 4.04 - File No. 2-10174); Supplemental
Indenture, dated as of May 1, 1953 (Incorporated by
reference to Exhibit 4.03 - File No. 2-10716); Supplemental
Indenture, dated as of October 1, 1954 (Incorporated by
reference to Exhibit 4.03 - File No. 2-13572); Supplemental
Indenture, dated as of December 1, 1957 (Incorporated by
reference to Exhibit 4.03 - File No. 2-14527); Supplemental
Indenture, dated as of October 1, 1963 (Incorporated by
reference to Exhibit 2.02B - File No. 2-65710); Supplemental
Indenture, dated as of June 1, 1964 (Incorporated by
reference to Exhibit 2.02B - File No. 2-65710); Supplemental
Indenture, dated as of November 1, 1967 (Incorporated by
reference to Exhibit 2.02B - File No. 2-65710); Supplemental
Indenture, dated as of April 1, 1969 (Incorporated by
reference to Exhibit 2.02B - File No. 2-65710); Fifteenth
Supplemental Indenture, dated as of May 1, 1971
(Incorporated by reference to Exhibit 2.02B - File
No. 2-65710); Sixteenth Supplemental Indenture, dated as of
August 1, 1973 (Incorporated by reference to Exhibit 2.02B -
File No. 2-65710); Seventeenth Supplemental Indenture, dated
as of September 1, 1973 (Incorporated by reference to
Exhibit 2.02B - File No. 2-65710); Eighteenth Supplemental
Indenture, dated as of October 1, 1975 (Incorporated by
reference to Exhibit 2.02B - File No. 2-65710); Nineteenth
Supplemental Indenture, dated as of February 1, 1977
(Incorporated by reference to Exhibit 2.02B - File
No. 2-65710); Twentieth Supplemental Indenture, dated as of
July 15, 1980 (Incorporated by reference to Exhibit 4B to
Form 10-K for the year ended December 31, 1980);
Twenty-First Supplemental Indenture, dated as of December 1,
1980 (Incorporated by reference to Exhibit 4B to Form 10-K
for the year ended December 31, 1980); Twenty-Second
Supplemental Indenture dated as of April 1, 1981
(Incorporated by reference to Exhibit 4B to Form 10-K for
the year ended December 31, 1981); Twenty-Third Supplemental
-60-
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENTS
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).
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
-61-
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENTS
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]).
Executive Compensation Plans and Arrangements
10F-1 Copy of Form of Deferred Compensation Agreement (Plan 008)
with certain executive officers of Wisconsin Public Service
Corporation. (Incorporated by reference to Exhibit 10F-1 to
Form 8 of Wisconsin Public Service Corporation, amending
Form 10-K for the year ended December 31, 1992 [File
No. 1-3016]).
10F-2 Copy of Form of Supplemental Benefits and Deferred
Compensation Agreement (Plan 009) with certain executive
officers of Wisconsin Public Service Corporation including
the named executive officers of the registrant, as defined
by item 402(a)(3) of Regulation S-K. (Incorporated by
reference to Exhibit 10F-2 to Form 8 of Wisconsin Public
Service Corporation, amending Form 10-K for the year ended
December 31, 1992 [File No. 1-3016]).
10F-3 Copy of Form of Deferred Compensation Agreement (Plan 010)
with certain executive officers of Wisconsin Public Service
Corporation. (Incorporated by reference to Exhibit 10F-3 to
Form 8 of Wisconsin Public Service Corporation, amending
Form 10-K for the year ended December 31, 1992 [File
No. 1-3016]).
-62-
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT PAGES IN 10-K
10F-4 Copy of Form of Director Deferred
Compensation Agreement (Plan 011) with
certain non-employee directors of
Wisconsin Public Service Corporation.
(Incorporated by reference to
Exhibit 10F-4 to Form 8 of Wisconsin
Public Service Corporation, amending
Form 10-K for the year ended December 31,
1992 [File No. 1-3016]).
10F-5 Copy of WPS Resources Corporation Form of 65
Deferred Compensation Agreement with
executives and non-employee directors
effective January 1, 1996.
11A Statement re computation of per share
earnings (Not applicable).
12 Statement re computation of ratios
(Not applicable).
13 Annual report to security holders
(Not applicable).
18 Letter re change in accounting principles
(Not applicable).
19 Previously unfiled documents (None).
22 Subsidiaries of the Registrant. 89
24.1 Consent of Independent Public Accountants. 90
25 Powers of Attorney. 91
27 Financial Data Schedule. 97
-63-
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
(Registrant)
By /s/ D. A. Bollom
--------------------------------
D. A. Bollom
President and
Chief Executive Officer
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 23, 1995
Michael S. Ariens Director
Richard A. Bemis Director
M. Lois Bush Director
Robert C. Gallagher Director By /s/ D. A. Bollom
Kathryn M. Hasselblad-Pascale Director --------------------------------
D. A. Bollom
Director Attorney-in-Fact
- -------------------------------
James L. Kemerling
Director
- -------------------------------
Linus M. Stoll
/s/ D. A. Bollom Principal Executive March 23, 1995
- -------------------------------Officer and Director
D. A. Bollom
/s/ P. D. Schrickel Principal Financial March 23, 1995
- -------------------------------Officer
P. D. Schrickel
/s/ D. L. Ford Principal Accounting March 23, 1995
- -------------------------------Officer
D. L. Ford
-64-
A. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To WPS Resources Corporation:
We have audited in accordance with generally accepted auditing
standards, the consolidated financial statements included in this
Form 10-K, and have issued our report thereon dated January 26, 1995.
Our report on the consolidated financial statements includes an
explanatory paragraph with respect to the change in the methods of
accounting for income taxes and post-retirement benefits other than
pensions in 1993 as discussed in Notes 1(l) and 1(m) to the
consolidated financial statements. Our audit was made for the purpose
of forming an opinion on those 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 26, 1995
-99-
Schedule III - Condensed
Parent Company Financial Statements
WPS Resources Corporation
(Parent Company Only)
Statements of Income and Retained Earnings
Year ended December 31,
1994 1993
---- ----
(In thousands)
Income:
Equity in earnings of subsidiaries after dividends $ (9,353) $ -
Cash dividends from subsidiaries 23,873 -
---------- ---------
Income from subsidiaries 14,520 -
Investment income and other 37 -
---------- ---------
14,557 -
---------- ---------
Operating expenses 19 652
---------- ---------
Income before income taxes 14,538 652
Income taxes 6 (201)
---------- ---------
Net Income 14,532 (451)
Retained earnings, beginning of year (451) -
Common stock dividend (10,873) -
Share exchange with WPSC (see note 1) 294,384 -
---------- ---------
Retained earnings at end of year $ 297,592 $ (451)
========== =========
-100-
Schedule III - Condensed
Parent Company Financial Statements
WPS Resources Corporation
(Parent Company Only)
Balance Sheets
As of December 31,
1994 1993
---- ----
(In thousands)
Assets
Current assets:
Cash and equivalents $ 9,564 $ 1
Accounts receivable - affiliates 5 -
Other receivables 29 -
Notes receivable - affiliates 299 -
---------- ---------
9,897 1
Long-term notes - affiliates (see note 2) 6,176 -
Investments in subsidiaries, at equity:
Wisconsin Public Service Corporation 449,923 -
WPS Energy Services, Inc. 757 -
WPS Communications, Inc. 366 -
---------- ---------
451,046 -
Deferred income taxes 237 301
---------- ---------
Total Assets $ 467,356 $ 302
========== =========
Liabilities and Capitalization
Current liabilities:
Accounts payable - affiliates 12 105
Accounts payable 8 -
Dividends payable 826 -
Accrued expenses - 647
---------- ---------
846 752
Capitalization:
Common stock, $1 par value, 100,000,000
shares authorized; and 23,896,962 and
1,000 shares outstanding, respectively 23,897 1
Premium on capital stock 145,021 -
Retained earnings 297,592 (451)
---------- ---------
466,510 (450)
Total Liabilities and Capitalization $ 467,356 $ 302
========== =========
-101-
Schedule III - Condensed
Parent Company Financial Statements
WPS Resources Corporation
(Parent Company Only)
Statements of Cash Flows
Year ended December 31
1994 1993
---- ----
(In thousands)
Operating
Net Income $ 14,532 $ (451)
Add equity in earnings of subsidiaries after dividends 9,353 -
Deferred income taxes 64 (301)
Other - net 871 -
Changes in other items:
Receivables (333) -
Accounts payable (85) 105
Other 179 647
--------- --------
Net Cash - Operating 24,581 -
Investing
Long-term notes receivable - affiliates (6,176) -
--------- --------
Net Cash - Investing (6,176) -
Financing
Common stock - 1
Capital contribution from WPSC (see note 3) 2,031 -
Common stock dividends (10,873) -
--------- --------
Net Cash - Financing (8,842) 1
Net Change in Cash 9,563 1
Cash, beginning of period 1 -
--------- --------
Cash, end of period $ 9,564 $ 1
========= ========
-102-
SCHEDULE III
CONDENSED PARENT COMPANY FINANCIAL STATEMENTS
WPS RESOURCES CORPORATION
NOTES TO PARENT COMPANY ONLY 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
1. WPS Resources Corporation (the "Company") as formed in December
1993, as a wholly-owned subsidiary of Wisconsin Public Service
Corporation ("WPSC"). Effective September 1994, pursuant to a
one-for-one share exchange, the Company acquired all of the common
stock of WPSC. The accompanying condensed financial statements
reflect the equity income, and cash dividends from subsidiaries
subsequent to the September 1994, share exchange.
2. The Company has a note receivable from Wisconsin Public Service
Corporation (WPSC) totaling $6.2 million and bearing interest at
8.76%. The note is to be repaid in monthly payments of $51,670
through January 2015.
3. Prior to the one-for-one share exchange, WPSC contributed
$2.0 million in cash to WPSR to fund operations.
-103-