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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------------- ---------------
Commission Registrant; State of Incorporation IRS Employer
file number Address; and Telephone Number Identification No.
- ----------- ---------------------------------- ------------------
1-11337 WPS RESOURCES CORPORATION 39-1775292
(A Wisconsin Corporation)
700 North Adams Street
P. O. Box 19001
Green Bay, WI 54307-9001
414-433-1466
1-3016 WISCONSIN PUBLIC SERVICE CORPORATION 39-0715160
(A Wisconsin Corporation)
700 North Adams Street
P. O. Box 19001
Green Bay, WI 54307-9001
414-433-1466
Securities registered pursuant to Section 12(b) of the Act:
- -----------------------------------------------------------
Title of Name of each exchange
each class on which registered
---------- ---------------------
WPS RESOURCES CORPORATION Common Stock, New York Stock Exchange and
$1 par value Chicago Stock Exchange
Rights to purchase New York Stock Exchange and
Common Stock pursuant Chicago Stock Exchange
to Rights Agreement
dated December 12, 1996
Securities registered pursuant to Section 12(g) of the Act:
- -----------------------------------------------------------
WISCONSIN PUBLIC SERVICE CORPORATION
Preferred Stock, Cumulative, $100 par value
5.00% Series 5.08% Series
5.04% Series 6.76% Series
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of Registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
State the aggregate market value of the voting stock held by
- ------------------------------------------------------------
nonaffiliates of the Registrant.
- --------------------------------
WPS RESOURCES CORPORATION
$651,192,214 as of March 5, 1997
WISCONSIN PUBLIC SERVICE CORPORATION
None
Number of shares outstanding of each class of common stock, as of
- -----------------------------------------------------------------
December 31, 1996:
- -----------------
WPS RESOURCES CORPORATION Common Stock, $1 par value,
23,896,962 shares
WISCONSIN PUBLIC SERVICE CORPORATION Common Stock, $4 par value,
23,896,962 shares
DOCUMENTS INCORPORATED BY REFERENCE
(1) Definitive proxy statement for the WPS Resources Corporation
Annual Meeting of Shareholders on May 1, 1997 is
incorporated into Parts I and III.
PAGE
WPS RESOURCES CORPORATION
and
WISCONSIN PUBLIC SERVICE CORPORATION
FORM 10-K
ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION
For the Year Ended December 31, 1996
TABLE OF CONTENTS
DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . v
PART I
1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . 1
A. GENERAL
WPS Resources Corporation. . . . . . . . . . . 1
Wisconsin Public Service Corporation . . . . . 1
B. ELECTRIC MATTERS
Industry Restructuring . . . . . . . . . . . . 2
Electric Operations. . . . . . . . . . . . . . 5
Generating Capacity. . . . . . . . . . . . . . 5
Advance Plan . . . . . . . . . . . . . . . . . 6
Kewaunee Nuclear Power Plant . . . . . . . . . 6
Fuel Supply. . . . . . . . . . . . . . . . . . 10
Other Matters. . . . . . . . . . . . . . . . . 14
Electric Financial Summary . . . . . . . . . . 15
Electric Operating Statistics
WPS Resources Corporation . . . . . . . . 16
Wisconsin Public Service Corporation . . 17
C. GAS MATTERS
Industry Restructuring . . . . . . . . . . . . 18
Other Matters. . . . . . . . . . . . . . . . . 18
Gas Financial Summary. . . . . . . . . . . . . 22
Gas Operating Statistics
WPS Resources Corporation . . . . . . . . 23
Wisconsin Public Service Corporation . . 24
D. NON-REGULATED BUSINESS ACTIVITIES . . . . . . . . . 25
E. ENVIRONMENTAL MATTERS
General. . . . . . . . . . . . . . . . . . . . 26
Air Quality. . . . . . . . . . . . . . . . . . 26
Water Quality. . . . . . . . . . . . . . . . . 27
i
Gas Plant Cleanup. . . . . . . . . . . . . . . 27
Other Solid Waste Disposal . . . . . . . . . . 29
F. REGULATORY MATTERS
General. . . . . . . . . . . . . . . . . . . . 30
Customer Rate Matters. . . . . . . . . . . . . 30
Industry Restructuring . . . . . . . . . . . . 30
Accounting Developments. . . . . . . . . . . . 31
Dividend Restrictions. . . . . . . . . . . . . 31
G. CAPITAL REQUIREMENTS. . . . . . . . . . . . . . . . 32
H. EMPLOYEES . . . . . . . . . . . . . . . . . . . . . 33
2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . 34
A. UTILITY . . . . . . . . . . . . . . . . . . . . . . 34
B. NON-REGULATED . . . . . . . . . . . . . . . . . . . 35
3. LEGAL PROCEEDINGS .. . . . . . . . . . . . . . . . . . . 35
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . 35
4A. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . . 36
A. EXECUTIVE OFFICERS OF WPS RESOURCES CORPORATION . . 36
B. EXECUTIVE OFFICERS OF WISCONSIN PUBLIC SERVICE
CORPORATION . . . . . . . . . . . . . . . . . . . . 37
PART II
5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS. . . . . . . . . . . . . . . 39
6. SELECTED FINANCIAL DATA
WPS RESOURCES CORPORATION
COMPARATIVE FINANCIAL STATEMENTS AND
FINANCIAL STATISTICS (1992 TO 1996)
A. CONSOLIDATED STATEMENTS OF INCOME . . . . . . . . . 41
B. CONSOLIDATED BALANCE SHEETS . . . . . . . . . . . . 42
C. FINANCIAL STATISTICS. . . . . . . . . . . . . . . . 43
ii
WISCONSIN PUBLIC SERVICE CORPORATION
COMPARATIVE FINANCIAL DATA AND FINANCIAL
STATISTICS (1992 TO 1996)
D. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . 44
E. FINANCIAL STATISTICS. . . . . . . . . . . . . . . . 45
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION OF
WPS RESOURCES CORPORATION AND
WISCONSIN PUBLIC SERVICE CORPORATION . . . . . . . . . . 46
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WPS RESOURCES CORPORATION
A. CONSOLIDATED STATEMENTS OF INCOME
AND RETAINED EARNINGS . . . . . . . . . . . . . . . 60
B. CONSOLIDATED BALANCE SHEETS . . . . . . . . . . . . 61
C. CONSOLIDATED STATEMENTS OF CAPITALIZATION . . . . . 63
D. CONSOLIDATED STATEMENTS OF CASH FLOWS . . . . . . . 64
E. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. . . . . 65
F. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS. . . . . . 88
WISCONSIN PUBLIC SERVICE CORPORATION
G. CONSOLIDATED STATEMENTS OF INCOME . . . . . . . . . 89
H. CONSOLIDATED BALANCE SHEETS . . . . . . . . . . . . 90
I. CONSOLIDATED STATEMENTS OF CAPITALIZATION . . . . . 92
J. CONSOLIDATED STATEMENTS OF CASH FLOWS . . . . . . . 93
K. CONSOLIDATED STATEMENTS OF RETAINED EARNINGS . . . 94
L. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. . . . . 95
M. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS. . . . . . 96
9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE. . . . . . . . . . . 97
PART III. . . . . . . . . . . . . . . . . . . . . . . . . . . 97
PART IV
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . 97
DESCRIPTION OF DOCUMENTS . . . . . . . . . . . . . . . . 100
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . 106
iii
WPS RESOURCES CORPORATION FINANCIAL STATEMENT SCHEDULES
A. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON
SCHEDULE III - CONDENSED PARENT
COMPANY ONLY FINANCIAL STATEMENTS . . . . . . . . . 107
B. STATEMENTS OF INCOME AND RETAINED EARNINGS. . . . . 108
C. BALANCE SHEETS . . . . . . . . . . . . . . . . . . 109
D. STATEMENTS OF CASH FLOWS . . . . . . . . . . . . . 110
E. NOTES TO PARENT COMPANY FINANCIAL STATEMENTS . . . 111
iv
DEFINITIONS
The following abbreviations and acronyms are used in the text of
this Form 10-K:
Act . . . . . . . . . . . . Federal Clean Air Act Amendments
of 1990
AFUDC . . . . . . . . . . . Allowance for funds used during
construction
ANR . . . . . . . . . . . . ANR Pipeline Company
APBO. . . . . . . . . . . . Accrued post-retirement benefit
obligation
Btu . . . . . . . . . . . . British thermal unit
Columbia* . . . . . . . . . The Columbia Energy Center
Company . . . . . . . . . . WPS Resources Corporation
CPCN. . . . . . . . . . . . Certificate of Public
Convenience and Necessity
CWIP* . . . . . . . . . . . Construction work in progress
Dakota. . . . . . . . . . . Dakota Gasification Plant
DNR . . . . . . . . . . . . Wisconsin Department of Natural
Resources
DOE . . . . . . . . . . . . U. S. Department of Energy
DRP*. . . . . . . . . . . . Dividend Reinvestment and Stock
Purchase Plan of the Company
(subsequently replaced by the
Stock Investment Plan)
DSM . . . . . . . . . . . . Demand-side management of energy
use
Edgewater*. . . . . . . . . The Edgewater Unit 4 power plant
EPA . . . . . . . . . . . . U. S. Environmental Protection
Agency
ESOP. . . . . . . . . . . . Employee Stock Ownership Plan
and Trust of Wisconsin Public
Service Corporation
v
ESI . . . . . . . . . . . . WPS Energy Services, Inc., a
subsidiary of the Company
FERC. . . . . . . . . . . . Federal Energy Regulatory
Commission
GIC . . . . . . . . . . . . Gas Inventory Charge filed by
ANR Pipeline Company
ISO . . . . . . . . . . . . Independent system operator
Kewaunee. . . . . . . . . . Kewaunee Nuclear Power Plant
kVa . . . . . . . . . . . . Kilovolt-ampere
kw. . . . . . . . . . . . . Kilowatts
kWh . . . . . . . . . . . . Kilowatt-hour
Leasing . . . . . . . . . . WPS Leasing, Inc., a subsidiary
of Wisconsin Public Service
Corporation
MAIN. . . . . . . . . . . . Mid America Interconnected
Network
MG&E. . . . . . . . . . . . Madison Gas and Electric Company
MPSC. . . . . . . . . . . . Michigan Public Service
Commission
NERCO . . . . . . . . . . . NERCO Coal Company
NOI . . . . . . . . . . . . Notice of Inquiry
NOPR. . . . . . . . . . . . Notice of Proposed Rulemaking
NRC . . . . . . . . . . . . Nuclear Regulatory Commission
Nuclear Policy Act. . . . . Nuclear Waste Policy Act of 1982
OASIS . . . . . . . . . . . Open Access Same Time
Information System
Oconto. . . . . . . . . . . Oconto Electric Cooperative
Order . . . . . . . . . . . Order No. 636 issued by FERC in
April 1992
PDI . . . . . . . . . . . . WPS Power Development, Inc., a
subsidiary of the Company
vi
PGAC. . . . . . . . . . . . Purchased-gas-adjustment clause
Polsky. . . . . . . . . . . Polsky Energy Corporation
PRB . . . . . . . . . . . . Powder River Basin in Wyoming
PRP . . . . . . . . . . . . Potentially responsible party
PSCW. . . . . . . . . . . . Public Service Commission of
Wisconsin
Pulliam*. . . . . . . . . . The Pulliam generating facility
Railroads . . . . . . . . . Soo Line and Wisconsin Central
railroads
River Power . . . . . . . . Wisconsin River Power Company
SFAS. . . . . . . . . . . . Statement of Financial
Accounting Standards
Sheboygan II Gas Plant. . . Property adjacent to the
Sheboygan River previously used
by Wisconsin Public Service
Corporation for the gasification
of coal
SIP . . . . . . . . . . . . Stock Investment Plan of the
Company
Stoneman. . . . . . . . . . Stoneman Power Plant
Superfund . . . . . . . . . Comprehensive Environmental
Response, Compensation, and
Liability Act
Union . . . . . . . . . . . Local 310 of the International
Union of Operating Engineers
which represents certain
Wisconsin Public Service
Corporation employees
USEC. . . . . . . . . . . . United States Enrichment
Corporation
Viking. . . . . . . . . . . Viking Gas Transmission Company
WCC . . . . . . . . . . . . Wisconsin Capacity Coalition
WDG . . . . . . . . . . . . Wisconsin Distributors Group
WEPCO . . . . . . . . . . . Wisconsin Electric Power Company
Weston* . . . . . . . . . . The Weston generating facility
vii
Wisconsin*. . . . . . . . . State of Wisconsin
WP&L. . . . . . . . . . . . Wisconsin Power and Light
Company
WPPI. . . . . . . . . . . . Wisconsin Public Power, Inc.
WPSC. . . . . . . . . . . . Wisconsin Public Service
Corporation, the principal
subsidiary of the Company
Yankee Atomic . . . . . . . Yankee Atomic Electric Company
- -----
* Indicates items not defined elsewhere in this report.
viii
PART I
ITEM 1. BUSINESS
A. GENERAL
WPS RESOURCES CORPORATION
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 regulated (utility) and non-regulated
business units. The Company's principal subsidiaries are: WPSC,
a regulated electric and gas utility; WPS Energy Services, Inc.
("ESI"), a non-regulated subsidiary, and WPS Power Development,
Inc. ("PDI"), a non-regulated subsidiary. WPSC, ESI, and PDI
represented approximately 82%, 18%, and .2% of the Company's
consolidated revenues and 95%, 4%, and 1% of the Company's
consolidated assets, respectively.
WISCONSIN PUBLIC SERVICE CORPORATION
At December 31, 1996, WPSC served 367,892 electric retail
customers and 212,094 gas retail customers in an 11,000 square
mile service territory in Northeastern Wisconsin and an adjacent
part of Upper Michigan. Additionally, WPSC provides wholesale
(full or partial requirements) electric service, either directly
or indirectly, to 12 municipal utilities, 3 Rural Electrification
Administration financed electric cooperatives, and a privately
held utility. Operating revenues in the year 1996 were derived
97% from Wisconsin customers and 3% from Michigan customers. Of
total revenues in 1996, 70% were from electric operations and 30%
were from gas operations. Of total electric revenues, 93% were
from retail sales and 7% were from wholesale sales.
WPSC's retail service areas are principally protected by
indeterminate permits secured by statute in Wisconsin, and
franchises granted by municipalities in Michigan.
-1-
B. ELECTRIC MATTERS
INDUSTRY RESTRUCTURING. The Federal Energy Regulatory
Commission ("FERC"), in March 1995, issued a notice of proposed
rulemaking ("NOPR") which: (1) required all utilities under the
FERC's jurisdiction, including WPSC, to file non-discriminatory,
open access transmission tariffs which would be available to all
wholesale buyers and sellers of electric energy, (2) required
utilities to take service under the tariffs for their own
wholesale sales and purchases of electric energy, and (3)
provided utilities with an opportunity to recover stranded costs
(i.e., unrecovered investment in facilities that are uneconomical
to operate).
In April 1996, FERC issued Orders 888 and 889 based on the
March 1995 NOPR and the comments of interested parties. These
orders covered: (1) open access transmission tariff rules,
pricing, and procedures, (2) the Open Access Same Time
Information System ("OASIS"), which requires utilities to publish
transmission tariff rules and pricing on a publicly available
electronic bulletin board for all potential buyers to see and
evaluate, (3) standards of conduct, which are rules a utility
must follow when dealing with its own unregulated subsidiaries,
and (4) general principles for Independent System Operators
("ISO"). An ISO is an independent third party which would
operate and regulate, on a real-time basis, the transmission
systems for a number of utility owners. An ISO would operate in
tight power pools, which are geographic areas where the regional
utilities have pooled their generation for centralized purchase
by all parties. The FERC order required utilities which own
transmission facilities, including WPSC, to file open access
transmission compliance tariffs by July 9, 1996. With a few
exceptions, all transmission owning investor-owned utilities have
open access transmission tariffs, all of which must yet be
approved by the FERC. These tariffs provide the terms and
conditions under which utilities will provide transmission
service and associated ancillary generation services to eligible
wholesale customers. Numerous parties have filed exceptions
requesting rehearing on a number of issues. It is anticipated
that FERC will address the rehearing issue requests in the first
quarter of 1997.
As part of implementing the FERC orders, WPSC has
accomplished separation of the transmission system operations
from wholesale purchasing and sales operations by physically
separating and isolating its transmission system operations
center from its generation, wholesale power sales, and purchased
power system operating center.
-2-
On January 3, 1997, WPSC implemented the final requirements
under these orders by developing and implementing formal
standards of conduct, which are rules governing transmission
department dealings with the generation, wholesale purchase, and
sales departments of the utility. WPSC also joined the regional
OASIS operated by Mid America Interconnected Network ("MAIN"),
which is an organization formed by utilities in Wisconsin, Upper
Michigan, Illinois, and Missouri that monitors and communicates
on the reliability of the generation and transmission systems.
The OASIS, which is being developed by MAIN utilities, will
calculate and post on a publicly available bulletin board, the
available regional transmission capacity, along with pricing and
rules for all potential buyers in an attempt to promote robust
generation competition in the region.
WPSC is part of a group of 23 Midwestern utilities designing
an independent system operator to operate and regulate on a
real-time basis the transmission systems in the region. If a
Midwest ISO becomes reality, it will operate, monitor, and
provide real-time regulation ensuring that utilities are
following tariff rules and pricing with respect to the
transmission systems of member owners, and providing transmission
service across the region. The Public Service Commission of
Wisconsin ("PSCW") has also promoted the ISO concept and has
issued a number of ISO principles it believes are important to
promote generation competition and limit generation owner market
power, which is the ability to control the market.
The import capability of Wisconsin's transmission system in
general, and WPSC's transmission system in particular, is
adequate based on historical levels to meet expected firm and
non-firm imports of power. Non-firm imports, usually made for
economic reasons, can be severely restrained during periods of
high transmission system use.
WPSC has completed negotiations with its major wholesale
customers and has a settlement agreement regarding the July open
access transmission rates and an associated request for
market-based rate authority. It is anticipated that FERC will
approve the settlement in the first quarter of 1997.
In December 1995, the PSCW outlined its plan for
restructuring the electric industry in Wisconsin. The plan
includes a 32-step, 5-year process concluding with retail
competition by the year 2001. In 1996, the PSCW opened dockets
in this process to address: (1) designing the organizational
separation of the generation, transmission, and distribution
portions of the vertically integrated utility, (2) determining
which government agency has siting authority for new generation
and transmission facilities, (3) adopting affiliate
-3-
interest standards, which are the rules for utility dealings with
subsidiaries and affiliates, (4) establishing public benefit
advisory boards to oversee the low income and conservation
efforts presently provided by the regulated utilities,
(5) determining generation market power and taking related
appropriate actions, (6) establishing quality of service
standards, and (7) reforming the advance plan process,which is
the planning process that prepares for transmission and
generation facility additions. Progress on these dockets has
been slow with final PSCW order being issued only on item (7).
The Wisconsin Legislature may consider electric
restructuring in 1997. In the meantime, the PSCW, utility
companies, various advocacy groups, and utility customers
continue to dialogue in an effort to reach consensus on how to
comply with the PSCW introduced plan for restructuring the
electric industry.
In Michigan, the governor asked a commission to study
industrial pressures for competitive electric utility rates,
since the rates in Michigan are higher than the national average
and higher than some neighboring states. Based on the
commission's report, utilities have identified the following
issues: (1) generation access for new loads,(2) Michigan Public
Service Commission ("MPSC") approved tariffs, (3) separating the
tariff rules and pricing into generation, transmission, and
distribution components, (4) determining the maximum and minimum
levels of customer load that can be included in the program, (5)
requiring reciprocity from utilities in neighboring states, (6)
determining levels of stranded cost with respect to generation
assets and/or purchase power contracts with costs in excess of
market recovery levels, (7) replacing cost-based rate regulation
with performance-based regulation, which allows utilities to gain
or lose earnings based on performance, (8) special contracts
between utilities and individual customers based on market
pricing rather than cost, and (9) elimination of utility
subsidized or customer subsidized conservation programs.
The MPSC staff has proposed, and the MPSC is considering a move
to industry restrucuring with retail customer open access to
generation for all customers classes at a rate of 2.5% of each
utility's load per year starting in 1998.
Two merger proposals involving utilities in the region were
moving through the approval process during 1996. In May 1995,
Wisconsin Energy Corporation and Northern States Power Company
filed with the FERC for approval to form Primergy. In March
1996, WPL Holdings, Inc., IES Industries, Inc., and Interstate
Power Company filed with the FERC to form Interstate Energy
Corporation. The FERC issued a Notice of Inquiry ("NOI") in the
Primergy Case in late 1995. Comments on this NOI were due in May
1996. WPSC participated in the
-4-
NOI and was a limited intervenor in the Primergy merger case at
the FERC and at the PSCW. WPSC is also a participant in the IES
merger case at the FERC and the PSCW.
ELECTRIC OPERATIONS. The largest communities served at
retail with electricity are the cities of Green Bay, Oshkosh,
Wausau, and Stevens Point.
WPSC owns 33.1% of the outstanding capital stock of
Wisconsin River Power Company ("River Power"). The business of
River Power consists of the ownership and operation of two dams
and related hydroelectric plants on the Wisconsin River having an
aggregate installed capacity of about 38,700 kilowatts ("kw").
The output of the hydroelectric plants is sold, at the sites of
the plants, to the three companies substantially in proportion to
their stock ownership interests.
GENERATING CAPACITY. Coordinated planning for generation
and transmission is a function of the Wisconsin Upper Michigan
Systems of which WPSC is a member. Other members include Madison
Gas and Electric Company ("MG&E"), Upper Peninsula Power Company,
Wisconsin Electric Power Company ("WEPCO"), Wisconsin Power and
Light Company ("WP&L"), and Wisconsin Public Power, Inc.
("WPPI"). Existing and planned interconnections with other
neighboring utilities provide a further means of sharing reserve
capacities and interchanging energy.
WPSC experienced a 1996 net firm load peak of 1,591,000 Kw
on August 6. Considering a firm purchase of 74,800 Kw and a
total generating capability of 1,799,300 Kw, the system reserve
margin was 18.7%. In addition, 92,000 Kw of opportunity sales
were served during the peak hour. WPSC's future generating
reserves, adjusted for firm purchases, firm sales, and planned
capacity additions, are estimated to be above the planning
criteria of a 15% minimum reserve in 1997 and 1998. See Part I,
Item 2, PROPERTIES, at page 34 for information concerning
generating facilities.
In November 1995, WPSC signed a 25-year agreement to
purchase power from Polsky Energy Corporation ("Polsky"), an
independent power producer proposing to build a plant adjacent to
the Nicolet Paper Company mill in DePere, Wisconsin. The first
phase of the project calls for completion of a 179-megawatt
combustion turbine facility in 1999. The second phase, scheduled
to be in service in 2004, converts the facility to a combined
cycle unit and increases the total capacity to 232 megawatts. A
combined-cycle unit is a type of combustion turbine in which the
hot exhaust gases pass through a heat recovery
-5-
steam generator to produce steam. The steam drives a steam
turbine generator which usually produces one-third of the power
generated.
Construction of the Polsky project is contingent upon PSCW
approval in stage two of the Certificate of Public Convenience
and Necessity ("CPCN") process. The PSCW has stated that during
stage two of the CPCN proceedings, evidence of the need for the
facility will be considered. A recent WPSC load forecast
suggests the capacity may not be needed. A final decision on
stage two of the CPCN process is expected in 1997.
ADVANCE PLAN. In December 1995, the PSCW approved the
Advance Plan 7 order. The transmission and generation plans
submitted by WPSC in Advance Plan 7 were approved. The Advance
Plan order requires that WPSC provide cost effective demand-side
energy management programs. The order stresses use of renewable
resources such as wind, wood residues, leafy residues, and other
similar materials and the state-wide development plans for the
design and feasibility of increased use of solar water heating
and the use of natural light in new building design.
KEWAUNEE NUCLEAR POWER PLANT. WPSC operates and has a 41.2%
ownership interest in the Kewaunee Nuclear Power Plant
("Kewaunee"). Kewaunee operates with a Nuclear Regulatory
Commission ("NRC") license which expires in 2013.
Kewaunee was taken out of service on September 21, 1996 for
a scheduled refueling and maintenance outage which was projected
to be five weeks in duration. During the outage, however,
inspection of previously repaired steam generator tubes disclosed
continued degradation of the tubes at the sleeve/parent tube
joints. The severity of tube degradation prevents further
operation of Kewaunee until the tubes are repaired or the two
steam generators are replaced.
Repair of the tubes using laser welding was undertaken. At
December 31, 1996, it was anticipated that Kewaunee would return
to service with repaired steam generators during the first
quarter of 1997. Welding was completed late in January 1997.
Subsequent testing indicated that repair of a number of the tubes
was not effective. The return of Kewaunee to service will be
delayed while additional repair efforts are undertaken. NRC
approval of the repair process is needed to restart the plant.
It is unknown how long steam generator repairs and NRC approval
of the steam generator repair process will take. It is uncertain
when Kewaunee will return to service with repaired steam
generators. If for any reason the steam generators cannot be
repaired, the ability of the Kewaunee owners to reach consensus
on
-6-
steam generator replacement and to secure the approval of the
PSCW for such replacement would become critical factors affecting
the duration of the current outage because, in that case,
replacement of the steam generators would be essential for the
continued operation of Kewaunee.
Even if the repairs are successful and the plant restarts,
the tube repairs are expected to last only a few years because
corrosion will continue at a rate which cannot be accurately
forecasted. Therefore, Kewaunee would be retired significantly
prior to the expiration of the operating license in 2013 unless
the steam generators are replaced.
If Kewaunee returns to service, it would be shut down at
mid-cycle (within one year after being returned to service)
for tube inspection. If significant further tube degradation
would be discovered during the mid-cycle shutdown, Kewaunee may
not be able to continue to operate without replacement of the
steam generators. Since the earliest date by which the steam
generators could be replaced is 1999, a mid-cycle shutdown and
subsequent requirement that the steam generators be replaced
before startup could result in an extended outage.
WPSC could incur up to $1.8 million in the first quarter of
1997 for its share of Kewaunee steam generator tube repair costs.
In addition, the cost to use other generating units or to
purchase replacement power is expected to exceed the cost of
Kewaunee generated power by approximately $67,000 per day. The
cost of repairs and replacement power are contingent upon a
number of factors including the repair method employed, the
effectiveness of the repairs, and the duration of the outage.
On February 20, 1997, WPSC received a rate order in the
Wisconsin jurisdiction providing a $2.0 million per month
surcharge on customer bills to cover the additional costs to be
incurred by WPSC for acquiring power from other sources while
Kewaunee remains out of service. The order was effective
February 21, 1997.
Continued long-term operation of Kewaunee will require
replacement of both of the Kewaunee steam generators. On March
15, 1996, WPSC filed an application with the PSCW for permission
to replace the Kewaunee steam generators in 1999. Review of this
application is pending and a PSCW decision is expected late in
1997.
The total capital cost of replacing the two generators would
be approximately $89.0 million (WPSC's share being $36.7 million
in year of occurrence dollars). Because of the work already
undertaken, the
-7-
elapsed time from placing a firm steam generator order to
receiving delivery has been shortened to 22 months.
In addition, the owners of Kewaunee have differing views on
the desirability of proceeding with the steam generator
replacement project. WPSC favors replacement of the steam
generators at the earliest possible date, while the other two
joint owners have been unwilling to support replacement. The
joint owners continue to discuss the issues and the related
alternatives. If the steam generator replacement project
receives PSCW approval, the issues relating to the continued
operation and future ownership would still need to be resolved
before the steam generator replacement could proceed. If the
steam generators are replaced, WPSC believes Kewaunee costs would
be recoverable in a competitive generation market.
On January 3, 1997, the PSCW approved acceleration of cost
recovery relative to that portion of the depreciation and
decommissioning costs associated with Kewaunee applicable to the
Wisconsin retail jurisdiction (currently approximately 88.0%).
The PSCW decision directs the owners of Kewaunee to develop
depreciation and decommissioning cost levels in connection with
revised customer rates based on an expected end-of-life of 2002
versus the currently licensed end-of-life of 2013. At December
31, 1996, the net carrying amount of WPSC's Kewaunee investment
was approximately $49.5 million. The current cost of WPSC's share
of the estimated costs to decommission Kewaunee, assuming early
retirement, exceeds the trust assets at December 31, 1996 by
$63.4 million. This decision will result in a significant
acceleration of WPSC's depreciation and decommissioning
collections relative to Kewaunee for 1997 and the succeeding five
years. The total dollar impact of this acceleration results in
an $11.1 million annual increase in WPSC's customer rates. The
decision was based on the substantial uncertainty regarding the
expected useful life of the facility without steam generator
replacement. The PSCW, in reaching its conclusion on this issue,
clearly indicated that this decision was not to be interpreted as
setting precedent with respect to the pending decision it faces
regarding the approval of the steam generator replacement
project. The PSCW indicated that the acceleration of
depreciation and decommissioning at this time in conjunction with
pending rate cases for each of the owners provided it with an
opportunity to hedge against the potential that the decision will
be to not proceed with replacement. Financial assurance of
adequate funds to accomplish decommissioning was a significant
consideration in reaching the decision. In the event the steam
generator project is approved and proceeds, the PSCW indicated an
interest in revisiting the depreciation and decommissioning
decision based on the information available at that time. If the
Kewaunee owners would decide not to
-8-
replace the steam generators, management believes that the
carrying amount of any unfunded decommissioning costs at the date
of Kewaunee's retirement would be recoverable from customers in
rates and that no write-down for impairment would be necessary.
The PSCW decision, which became effective February 21, 1997,
increases depreciation expense, exclusive of decommissioning
expense recorded as depreciation expense, by approximately $3.3
million on an annualized basis. The depreciation of new steam
generators, if approved, would be expected to be over their
remaining useful life.
The funding plan for decommissioning in effect through 1996
was based on physical decommissioning of the facility 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. The revised funding plan for
decommissioning, which became effective February 21, 1997, is
based on an assumption that the plant will be shut down at the
end of 2002 and placed in a dormant state following the transfer
of spent fuel from the spent fuel pool to temporary alternative
storage facilities. The dormancy period is assumed to last until
physical decommissioning begins. Physical decommissioning would
be accomplished during the period 2015 to 2021 with additional
expenditures being incurred during the period 2022 to 2039
related to the storage of spent nuclear fuel at the site. Based
on the standard cost escalation assumptions required by a July
1994 PSCW order, Kewaunee decommissioning costs are estimated to
be $398.0 million in current dollars under the current funding
plan and $419.0 million in current dollars under the revised
funding plan. In year of expenditure dollars, these amounts are
$1.9 billion and $1.5 billion for the current funding plan and
the revised funding plan, respectively. WPSC's share of Kewaunee
decommissioning costs are estimated to be $164.0 million in
current dollars and $785.0 million in year-of-expenditure dollars
for the current funding plan and $172.0 million in current
dollars and $614.0 million in year-of-expenditure dollars for the
revised funding plan. These costs are recovered currently in
customer rates and deposited in external trusts. Such costs
totaled $9.0 million, $9.0 million, and $4.0 million for 1996,
1995, and 1994, respectively. The January 3, 1997 PSCW decision
will increase these costs by approximately $8.3 million on an
annualized basis. In developing these funding plans, long-term
after-tax earnings of approximately 5.5% are assumed. As of
December 31, 1996, the external trusts totaled $101.0 million, or
58.7% of revised estimated decommissioning costs of $172.0
million.
WPSC anticipates that it will have sufficient capacity to
supply electric energy to its firm customers during the present
Kewaunee
-9-
outage. In addition, energy supplies can be purchased
from neighboring utilities and power marketers in order to
supplement sources owned by WPSC.
If Kewaunee were to be retired early for any reason,
management believes it will be able to meet its commitments to
supply power to its customers through one or more of the
following alternatives: (1) contracting for additional purchased
power, (2) investment in new generating facilities, or
(3) changes in commitments to serve customers if the generating
business is deregulated.
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 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 July 1995, the Barnwell, South Carolina, disposal facility
again began to accept low-level radioactive waste materials from
outside its region.
The Kewaunee capability factor was 71.3% in 1996, compared
to a projected industry average of 79.8%. The capability factor
is the percentage of maximum energy generation that a plant is
capable of supplying to the electrical grid limited only by
factors within the control of plant management. The comparable
amounts for 1995 were 83.1% and 84.5%, respectively. The lower
Kewaunee percentage for 1996 reflects the extended shutdown of
Kewaunee for the repair of the steam generator tubes.
FUEL SUPPLY. WPSC's electric generation mix in 1996
compared to 1995 was: steam plants (coal), 67.9%, up from 63.7%;
steam plant (nuclear), 11.2%, down from 13.5%; hydro, 3.1%, up
from 2.6%; combined natural gas and fuel oil, .6%, down from .9%;
and purchased power, 17.3%, down from 19.3%. Purchased power
represents short-term energy purchases.
-10-
Fuel costs in 1996 compared with 1995, expressed in dollars
per million British thermal unit ("Btu"), were: nuclear, $.47,
down from $.50; coal, $1.14, down from $1.18; natural gas, $2.84,
up from $2.29; and No. 2 fuel oil, $4.36, up from $4.35.
WPSC will purchase all of the coal for its solely-owned
plants from the Powder River Basin ("PRB") mines located in
Wyoming. Delivery of coal at the Pulliam plant is via railroad
or lake vessel and at the Weston plant via railroad.
WPSC has a long-term contract with one PRB coal supplier
that is expected to provide approximately two-thirds of the
projected coal requirements for Unit 3 at Weston over the long
term. The remainder of the coal for solely-owned generating
facilities is purchased under short-term agreements of three
years or less. Transportation contracts are in place with
railroads for delivery of PRB coal through 1999.
WPSC also has a 31.8% ownership share in Columbia and a
31.8% ownership share in 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. The entire low sulfur coal
supply for Units 1 and 2 is supplied from the Southern PRB under
short-term contracts of one to three years. Edgewater uses a
blend of bituminous and sub-bituminous PRB coal, both of which
are acquired under short-term contracts.
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 ("Railroads"). WPSC paid approximately $34.0
million to NERCO and the Railroads as compensation for relief of
all contractual obligations. The PSCW ruled that the railroad
and coal contract buyout costs could be recovered in customer
rates subject to a benefits test. In the Wisconsin jurisdiction,
the remaining unamortized buyout costs of $7.7 million were
recovered during 1996. FERC issued a conditional 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 has not been determined. Management believes 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.
-11-
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 of spent fuel (approximately
one-third of the nuclear fuel assemblies in the reactor) is
removed from the reactor, it is placed in temporary storage in a
spent fuel pool at the plant site. Permanent storage is
addressed below. There are presently no operating facilities in
the United States that are 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. WPSC's inventory policy, which
takes advantage of economical spot market purchases of
uranium, results in WPSC maintaining inventories
sufficient for up to two reactor reloads of fuel,
excluding in-process uranium.
(b) Uranium hexafluoride from inventory and from spot
market purchases was used to satisfy converted material
requirements in 1996. WPSC intends to purchase future
conversion services on the spot market, but it has
contracts with primary suppliers for services in 1997,
1998, and 1999.
(c) In 1996, enrichment services were procured from COGEMA,
Inc. pursuant to a contract executed in 1983 and last
amended in 1995. Enrichment services can be purchased
from the United States Enrichment Corporation ("USEC")
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 1997 and, in alternate years
thereafter, from USEC.
(d) Fuel fabrication services through March 15, 2001 are
covered by contract with Siemens Power Corporation.
(e) Beyond the stated periods set forth above, additional
contracts for uranium concentrates, conversion to
uranium hexafluoride, enrichment, fabrication, and
spent fuel storage will have to be procured. WPSC
anticipates the prices for the foregoing will modestly
increase.
Pursuant to the Nuclear Waste Policy Act of 1982 ("Nuclear
Policy Act"), the U. S. Department of Energy ("DOE") entered into
a contract with WPSC to accept, transport, and dispose of spent
nuclear fuel beginning no later than January 31, 1998. The DOE
has announced that
-12-
it 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 the DOE at one
mill per net kilowatt-hour of electricity generated and sold by
Kewaunee. An additional one-time fee was paid to the DOE for
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 15 years. At December 31, 1996,
the remaining liability was $14.9 million of which WPSC's share
was $6.0 million. The payments are subject to adjustment for
inflation.
In 1995, Yankee Atomic Electric Company ("Yankee Atomic")
received a U. S. Court of Federal Claims decision holding that
Yankee Atomic was entitled to a refund from the DOE of $3.0
million paid to the Decontamination and Decommissioning Fund.
The court ruled that by entering into contracts with utilities,
the government agreed to charge certain prices for uranium
enrichment services that could not be legislatively changed after
performance and payment were completed. The Yankee Atomic
decision only addresses a refund to Yankee Atomic. Based on the
Yankee Atomic decision, WPSC has filed a claim against the DOE
for a refund of its payments to the Decontamination and
Decommissioning Fund.
Utility customers of the USEC have challenged the pricing of
enrichment services, subsequent to the Energy Policy Act of 1992.
The position of the utilities is that the charges by the USEC are
higher than the terms of the contracts originally entered into
with the DOE. WPSC has filed a claim that has been denied by the
USEC. Subsequently, a complaint was filed in the U. S. Court of
Federal Claims. Action on this complaint by the Claims Court is
expected after the Court of Appeals rules in the Yankee Atomic
case.
If for any reason the Kewaunee Nuclear Power Plant were
forced to suspend operations permanently, fuel related
obligations are as follows: (1) there are no financial penalties
associated with the present uranium supply, conversion service,
and enrichment agreements, and (2) the fuel fabrication contract
contains force majeure and termination for convenience
provisions. The maximum exposure could be
-13-
as much as $550,000 as of the end of 1996. Uranium inventories
could be sold on the spot market.
OTHER MATTERS. The Company has received FERC power
"marketer" status. This status gives WPSC, ESI, and PDI the
flexibility to sell electric energy and capacity at market rates.
In recent years, WPSC has experienced increased competition
and reduced margins in the wholesale power market. WPSC's
objective is to compete aggressively to retain existing wholesale
customer load, obtain new customers, maintain margins, and
optimize the use of generating assets by developing innovative
supply contracts. Transmission availability, pricing and policy,
the availability of economically priced energy and capacity in
the region, new competitors entering the market, the development
of risk management tools, and regulatory and legislative
developments are forces that will influence the wholesale market
in the future. In 1996, wholesale sales represented 16% of
WPSC's electric sales volume.
During 1996, WPSC, the Oconto Electric Cooperative
("Oconto"), and a third party entered into an agreement to serve
the power needs of Oconto for the period May 1996 through April
2005. The peak demand for Oconto is 17 megawatts.
Also during 1996, WPSC entered into agreements with Upper
Peninsula Power Company covering the handling of after-hours
calls, system operating services, and a multi-year power supply
agreement beginning in 1998.
In October 1992, Wisconsin Public Power, Inc. ("WPPI")
notified WPSC that it was ending its agreement to purchase power
effective in October 1997. WPPI is a wholesale customer which
buys 66 megawatts of electricity from WPSC for resale to
municipal utilities.
Although 11% of electric revenues come from sales to 24
paper mills, resulting in a relatively high and favorable load
factor, there is no single customer or small group of customers,
the loss of which would have a materially adverse effect on the
electric business of WPSC under the current regulatory
environment.
Applications for relicensing of WPSC's Caldron Falls, High
Falls, Johnson Falls, Sandstone Rapids, Potato Rapids, Peshtigo,
Grand Rapids, and Jersey hydroelectric projects were submitted to
the FERC in December 1991. These licenses, representing 30
megawatts of hydroelectric generating capacity, expired in
December 1993. Application to the FERC for relicensing of WPSC's
Wausau Project was
-14-
submitted in June 1993. The license for this project expired in
June 1995 and represents 5,400 kw of capacity. New licenses
have been received from the FERC for only the Jersey and Wausau
projects. The remaining hydroelectric projects' license
applications are still pending at the FERC. These licenses are
being extended on an annual basis until FERC acts on the
applications.
Electric research and development expenditures totaled
$1.9 million for 1996, $2.6 million for 1995, and $2.3 million
for 1994. These expenditures were made for WPSC sponsored
projects and were primarily charged to electric operations.
ELECTRIC FINANCIAL SUMMARY. The following table sets forth
the revenues, operating income, and identifiable assets
attributable to electric utility operations:
YEAR ENDED DECEMBER 31
----------------------------
1996 1995 1994
---- ---- ----
(THOUSANDS)
Electric Operating Revenues $490,506 $489,628 $480,816
Operating Income, Including
Allowance For Funds Used During
Construction $101,425 $ 98,556 $ 95,392
Identifiable Assets $905,325 $906,029 $937,525
See Note 9 in Notes to Consolidated Financial Statements.
-15-
ELECTRIC OPERATING STATISTICS
WPS RESOURCES CORPORATION
==========================================================================================================================
Electric 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------------
Operating revenues (Thousands)
Residential and farm $169,587 $168,391 $163,381 $165,568 $156,659
Small commercial and industrial 144,055 140,280 137,323 140,678 136,164
Large commercial and industrial 118,997 117,978 118,121 123,920 115,147
Resale and other 58,648 62,351 61,991 63,090 69,655
- --------------------------------------------------------------------------------------------------------------------------
Total $491,287 $489,000 $480,816 $493,256 $477,625
==========================================================================================================================
Kilowatt-hour sales (Thousands)
Residential and farm 2,570,397 2,548,373 2,406,479 2,349,307 2,268,685
Small commercial and industrial 2,761,278 2,672,359 2,555,488 2,444,548 2,384,098
Large commercial and industrial 3,744,153 3,644,764 3,468,390 3,296,254 3,016,329
Resale and other 1,970,083 2,112,635 2,121,660 2,060,804 2,078,057
- --------------------------------------------------------------------------------------------------------------------------
Total 11,045,911 10,978,131 10,552,017 10,150,913 9,747,169
==========================================================================================================================
-16-
ELECTRIC OPERATING STATISTICS
WISCONSIN PUBLIC SERVICE CORPORATION
==============================================================================================================================
Electric 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------
Operating revenues (Thousands)
Residential and farm $169,587 $168,391 $163,381 $165,568 $156,659
Small commercial and industrial 144,055 140,280 137,323 140,678 136,164
Large commercial and industrial 118,997 117,978 118,121 123,920 115,147
Resale and other 57,867 62,351 61,991 63,090 69,655
- ------------------------------------------------------------------------------------------------------------------------------
Total $490,506 $489,000 $480,816 $493,256 $477,625
==============================================================================================================================
Kilowatt-hour sales (Thousands)
Residential and farm 2,570,397 2,548,373 2,406,479 2,349,307 2,268,685
Small commercial and industrial 2,761,278 2,672,359 2,555,488 2,444,548 2,384,098
Large commercial and industrial 3,744,153 3,644,764 3,468,390 3,296,254 3,016,329
Resale and other 1,936,014 2,112,635 2,121,660 2,060,804 2,078,057
- ------------------------------------------------------------------------------------------------------------------------------
Total 11,011,842 10,978,131 10,552,017 10,150,913 9,747,169
==============================================================================================================================
Customers served (End of period)
Residential and farm 328,522 322,550 316,442 310,336 304,404
Small commercial and industrial 38,376 37,455 36,491 35,683 34,783
Large commercial and industrial 168 170 164 137 129
Resale and other 826 802 796 794 825
- ------------------------------------------------------------------------------------------------------------------------------
Total 367,892 360,977 353,893 346,950 340,141
==============================================================================================================================
Annual average use (kWh)
Residential and farm 7,905 7,982 7,688 7,649 7,538
Small commercial and industrial 72,995 72,326 70,931 69,532 69,394
Large commercial and industrial 22,115,491 21,824,937 22,091,659 24,416,697 23,750,625
- ------------------------------------------------------------------------------------------------------------------------------
Average kilowatt-hour price (Cents)
Residential and farm 6.60 6.61 6.79 7.05 6.91
Small commercial and industrial 5.22 5.25 5.37 5.75 5.71
Large commercial and industrial 3.18 3.24 3.41 3.76 3.82
- ------------------------------------------------------------------------------------------------------------------------------
Production capacity (Summer - kilowatts)
Steam 1,325,400 1,325,400 1,318,300 1,315,300 1,302,200
Nuclear 213,800 216,700 215,100 215,100 213,800
Hydraulic 53,100 52,900 53,400 53,100 52,000
Combustion turbine 208,600 207,480 201,200 177,200 148,900
Other 4,200 4,240 4,240 4,240 4,240
Purchased capacity 27,250 26,400 26,400 27,700 26,900
- ------------------------------------------------------------------------------------------------------------------------------
Total system capacity 1,832,350 1,833,120 1,818,640 1,792,640 1,748,040
==============================================================================================================================
Generation and purchases
(Thousands of kilowatt-hours)
Steam 7,956,378 7,428,612 7,047,511 7,004,634 6,796,975
Nuclear 1,305,751 1,564,268 1,631,003 1,572,696 1,622,279
Hydraulic 359,750 306,101 292,617 346,386 325,663
Purchases and other 2,050,762 2,310,399 2,243,021 1,849,047 1,628,326
- ------------------------------------------------------------------------------------------------------------------------------
Total 11,672,641 11,609,380 11,214,152 10,772,763 10,373,243
==============================================================================================================================
Steam fuel costs
(Cents per million Btu)
Fossil 115.132 118.365 132.360 139.038 160.144
Nuclear 46.674 49.539 49.168 44.888 40.528
Total 105.439 106.320 116.782 121.949 136.965
- ------------------------------------------------------------------------------------------------------------------------------
System peak - firm (kilowatts) 1,561,000 1,670,000 1,543,000 1,569,000 1,494,000
==============================================================================================================================
Annual load factor 79.05% 73.32% 76.96% 73.29% 74.03%
==============================================================================================================================
-17-
C. GAS MATTERS
INDUSTRY RESTRUCTURING. The re-regulation of the natural
gas business on the federal level prompted the PSCW to examine
the future regulation of the natural gas distribution business in
Wisconsin. In 1996, the PSCW issued orders: (1) defining the
level of interruption testing required of interruptible gas
customers, (2) modifying the presently required purchased gas
adjustment clause which allows recovery of gas supply and
capacity costs, (3) determining whether utilities and their
affiliated marketers should be required to have separate
resources for gas purchases and sales or if allocation of common
resources between these two markets is adequate, and (4) defining
a generic set of standards of conduct for the state's utilities
and their affiliates. The PSCW also opened a docket on the
definition of a competitive market and mitigation of barriers to
competition.
The MPSC initiated a similar process to look at gas industry
restructuring by forming a committee of interested parties which
considered changes in the gas cost recovery mechanism, service
unbundling, curtailment issues, and storage issues. The MPSC
opened a formal docket on this issue and began prehearings in
February 1996. The MPSC issued a final report which indicated
that there was consensus on the issues, but there was not
consensus on the remedies to resolve the issues.
The MPSC initiated a docket to investigate opening of
transport gas to all customers. Subsequently, the resulting
order suggested that the largest utilities should develop pilots
to test the move to open access transportation for all customer
classes.
OTHER MATTERS. At December 31, 1996, WPSC provided natural
gas distribution service to 206,867 customers in 157 cities,
villages, and towns in Northeastern Wisconsin, and 5,056
customers in and around Menominee, Michigan. The principal
Wisconsin cities served include Green Bay, Oshkosh, Sheboygan,
Marinette, Two Rivers, Stevens Point, and Rhinelander. The
principal Michigan city is Menominee.
WPSC transported 67,567,071 dekatherms of gas of which
41,579,031 dekatherms were for resale during the year ended
December 31, 1996. At the end of 1996, WPSC had 168 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 25,988,040 dekatherms was
transported for these customers. Load loss due to fuel switching
has been minor
-18-
because customers have been able to purchase transportation gas
from suppliers at competitive prices.
Because WPSC has a purchased gas adjustment provision as
part of its customer rates, it recovers all of its purchased gas
costs from customers. Due to industry restructuring, the PSCW
has opened a docket to examine the appropriateness of continuing
to employ a purchased gas adjustment clause in today's industry.
In an order dated November 5, 1996, the PSCW concluded that the
majority of gas utilities in the state must use either an
incentive gas cost recovery mechanism or a modified
dollar-for-dollar gas cost recovery mechanism. WPSC will
evaluate the options provided in the PSCW order and will make
appropriate changes to its current gas cost recovery mechanism
or purchased gas adjustment clause.
WPSC has created a gas supply portfolio to match its gas
load profile at the lowest reasonable cost. The portfolio is
based on a 20-year gas peak day and annual sales forecasts and is
structured to place WPSC in an optimum gas purchasing position.
In 1996, WPSC had 17 gas supply contracts with 15 suppliers with
terms from 3 months to 3 years with domestic suppliers and 1 to 7
years with Canadian suppliers. The 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 338,992 dekatherms per day
are based on a 1996-1997 peak day forecast. An additional
13,080 dekatherms per day, or 3.9%, of reserve capacity allows
for growth and unforeseen needs. Peak day requirements will be
served by 115,872 dekatherms per day from transportation gas, and
223,120 dekatherms per day from storage gas. WPSC has access to
11.3 billion cubic feet of storage capacity in Michigan. Storage
gas is purchased and stored during the summer for redelivery
during the heating season. WPSC has purchased 0.22 billion cubic
feet of underground salt dome storage in the production area to
protect against a supply area gas shortage, (i.e., a shortage
caused by wellhead freeze-offs which occurs when moisture in the
gas freezes in low tempatures as it leaves the wellhead).
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 Order 636 became effective for ANR. Order
636 prohibits pipeline companies (such as ANR) from bundling gas
merchant services with
-19-
transportation services. Thus, Order 636 shifted 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
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. There are seven years remaining on these initial
capacity contracts. In addition, WPSC has pre-existing capacity
with Viking for delivery of Canadian gas for a remaining term of
one year with a right to extend.
Order 636 mandates a straight fixed-variable rate design for
interstate pipelines which loads all fixed costs into the
reservation charge and all variable costs into the commodity
charge. Based on rates effective May 1, 1994, pipeline company
reservation charges for 1996 totaled $41.3 million. WPSC also
utilizes ANR's no-notice service to accommodate load swings
caused by unexpected system requirements such as weather changes.
On December 31, 1996, in FERC Docket No. RP97-222-000, ANR
filed its eighth annual reconciliation of the take-or-pay
buyout/buydown costs recovered through monthly charges. These
costs, representing 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 fixed charge obligation for the
take-or-pay docket is paid off. Volumetric payments are
scheduled to be made through April 1998. All such costs are
expected to be recovered from WPSC's customers pursuant to
established policies of the PSCW and the MPSC.
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 $2.5
million. In addition, ANR has upstream pipeline capacity costs
of between $40.0 million and $230.0 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 ("Dakota").
On December 18, 1996, FERC, in Opinion 410, approved a settlement
agreement between Dakota, the U. S. Department of Energy, and
ANR, for resolution of litigation between and among those
parties. The
-20-
settlement agreement establishes the price ANR is to pay Dakota
for Dakota gas as the Ventura, Iowa spot market price less $0.25
per dekatherm through the termination date of ANR's gas purchase
contract with Dakota in 2009. The settlement agreement approved
by FERC also establishes a fixed monthly demand charge payable by
ANR to Dakota for 84 months beginning January 1, 1997. It is
anticipated that ANR will bill WPSC a fixed monthly demand charge
based upon a share of an amount that has not yet been determined.
Based on available public information, WPSC anticipates that its
allocable share of the fixed monthly demand charge payable by ANR
to Dakota, as a result of the FERC approved settlement, will be
on the order of 50% of the average monthly surcharge for Dakota
costs billed by ANR to WPSC in 1996.
On April 29, 1994, ANR filed its Reconciliation Report of
activity under its previously effective Gas Inventory Charge
("GIC"). As a result, WPSC received a GIC refund of $4.7 million
of the $9.0 million WPSC had previously paid. WPSC and the
Wisconsin Distributors' Group ("WDG") intervened and protested
relative to the formula used to allocate the refunds. Hearings
in FERC Docket RP89-161-030 were held in May 1996. A decision is
expected soon. WPSC expects to recover additional refund dollars
which would be passed on to WPSC's customers.
On November 29, 1993, ANR filed for a general rate increase
in Docket RP94-43-000. WPSC, and other parties intervened and
protested the filing. Hearings have been completed and the
administrative law judge has issued an initial decision. The
initial decision reduces ANR's cost of service by up to $69.0
million per year, for WDG members which could result in a
significant rate decrease. Final settlement could take place in
1997.
Unbundling of gas service in Wisconsin has become an issue.
WPSC is studying the alternatives. At times, WPSC has gas supply
and unused pipeline capacity which is not needed to serve system
customers. This gas and capacity is then brokered on the market.
WPSC expects to recover $1.3 million in 1997 through such
activities. These amounts will be passed on to WPSC customers.
The Company has established a non-regulated subsidiary, ESI, to
market natural gas, other fuels, and related services to
transportation customers. See Part I, Item D, NON-REGULATED
BUSINESS ACTIVITIES, at page 25.
WPSC is a member of the WDG which utilizes a Washington,
D.C. legal counsel to monitor the 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
-21-
counsel. WPSC files interventions in cases to protect its
interests when appropriate.
All of WPSC's Wisconsin retail natural gas rates contain a
purchased gas adjustment clause which provides for the tracking
of wholesale costs and a true-up of such costs. WPSC's Michigan
retail rates include a gas cost recovery plan under procedures
authorized by the 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's aggressive program to connect new natural gas
customers resulted in the addition of about 7,300 new residential
customers in 1996. Growth in the number of natural gas customers
comes from the addition of new customers in existing service
areas and from the acquisition of new natural gas distribution
franchises. At December 31, 1996, 11 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.
GAS 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
------------------------
1996 1995 1994
---- ---- ----
(THOUSANDS)
Gas Operating Revenues $211,357 $174,065 $182,058
Operating Income, Including
Allowance For Funds Used During
Construction $ 10,191 $ 11,488 $ 10,673
Identifiable Assets $255,200 $232,983 $188,971
See Note 9 in Notes to Consolidated Financial Statements.
-22-
GAS OPERATING STATISTICS
WPS RESOURCES CORPORATION
=======================================================================================================================
1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------
Operating revenues (Thousands)
Residential $122,224 $109,998 $104,020 $110,541 $ 93,234
Small commercial and industrial 22,392 19,933 18,586 20,254 15,796
Large commercial and industrial 55,211 47,627 45,115 47,091 33,676
Other 164,673 52,367 25,258 9,490 14,471
- -----------------------------------------------------------------------------------------------------------------------
Total $364,500 $229,925 $192,979 $187,376 $157,177
=======================================================================================================================
Therms delivered (Thousands)
Residential 216,963 202,152 187,355 192,053 182,603
Small commercial and industrial 46,614 42,600 38,568 41,385 38,060
Large commercial and industrial 142,033 129,494 115,939 108,068 88,516
Other 527,069 294,372 56,961 6,337 3,718
- -----------------------------------------------------------------------------------------------------------------------
Total therm sales 932,679 668,618 398,823 347,843 312,897
Transportation 251,279 241,531 234,149 220,672 232,578
- -----------------------------------------------------------------------------------------------------------------------
Total 1,183,958 910,149 632,972 568,515 545,475
=======================================================================================================================
-23-
GAS OPERATING STATISTICS
WISCONSIN PUBLIC SERVICE CORPORATION
===============================================================================================================================
Gas 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------------------
Operating revenues (Thousands)
Residential $122,224 $109,998 $104,020 $110,541 $ 93,234
Small commercial and industrial 22,392 19,933 18,586 20,254 15,796
Large commercial and industrial 55,211 47,627 45,115 47,091 33,676
Other 11,530 (2,865) 14,337 9,490 14,471
- -------------------------------------------------------------------------------------------------------------------------------
Total $211,357 $174,693 $182,058 $187,376 $157,177
===============================================================================================================================
Therms delivered (Thousands)
Residential 216,963 202,152 187,355 192,053 182,603
Small commercial and industrial 46,614 42,600 38,568 41,385 38,060
Large commercial and industrial 142,033 129,494 115,939 108,068 88,516
Other 9,709 15,415 9,810 6,337 3,718
- -------------------------------------------------------------------------------------------------------------------------------
Total therm sales 415,319 389,661 351,672 347,843 312,897
Transportation 251,279 241,531 234,149 220,672 232,578
- -------------------------------------------------------------------------------------------------------------------------------
Total 666,598 631,192 585,821 568,515 545,475
===============================================================================================================================
Customers served (End of period)
Residential 192,947 186,267 178,992 172,902 168,349
Small commercial and industrial 16,133 15,905 14,689 14,571 14,248
Large commercial and industrial 2,846 2,432 2,867 2,508 2,178
Other 1 1 1 1 1
Transportation customers 167 121 117 127 161
- -------------------------------------------------------------------------------------------------------------------------------
Total 212,094 204,726 196,666 190,109 184,937
===============================================================================================================================
Average annual use (Therms)
Residential 1,146.6 1,112.3 1,068.8 1,128.4 1,099.4
Small commercial and industrial 2,937.2 2,770.8 2,673.9 2,888.8 2,737.4
Large commercial and industrial 37,163.7 39,707.6 34,651.2 41,354.4 38,680.8
===============================================================================================================================
Average therm price (cents)
Residential 56.33 54.41 55.52 57.56 51.06
Small commercial and industrial 48.04 46.79 48.19 48.94 41.50
Large commercial and industrial 42.84 40.63 41.84 44.97 38.30
===============================================================================================================================
-24-
D. NON-REGULATED BUSINESS ACTIVITIES
At the end of 1996, the Company had two principal
non-regulated subsidiaries: WPS Energy Services, Inc. ("ESI")
and WPS Power Development, Inc. ("PDI").
ESI is a diversified energy company organized to offer
electric and gas marketing services, energy management services,
project management, and energy consulting services to wholesale
and retail participants in the non-regulated energy marketplace.
Currently, ESI's principal activity is gas marketing. Today's
gas marketing activities are characterized by narrow margins and
volatile commodity and transportation prices. During 1996,
natural gas revenues totaled $159.9 million and sales totaled
517.4 million therms. For the year, ESI incurred a net loss as
the result of: (1) incurring substantial costs associated with
the expansion of the business and the development of
infrastructure necessary to operate effectively in the
non-regulated energy environment, (2) volatile gas commodity
markets in which ESI was not fully hedged for its customer
commitments, and (3) ESI's decision to honor customer contracts
despite defaults by certain gas suppliers during a period of
exceptionly high demand. ESI uses various financial instruments
to minimize the risks present in the gas marketplace. ESI
received an electric power marketers license from the FERC on
April 16, 1996. Limited electric power transactions began in
August. All power transactions for the period ending
December 31, have been at wholesale.
PDI is a company organized in the fourth quarter of 1995 to
participate in the development of electric generation and to
provide services to the power generation industry. Services
include acquisition and investment analysis; project development,
engineering, and management services; and operations and
maintenance services. Areas of expertise include cogeneration,
distributed generation, repowering projects, generation from
renewable resources, and paper mill waste disposal. During 1996,
PDI acquired a two-thirds interest in a 2-unit, 53-megawatt
merchant generating facility in Cassville, Wisconsin. For the
year, PDI incurred a net loss. A major factor was a loss on an
industrial processing facility investment made in anticipation of
energy sales opportunities.
The ESI and PDI combined losses for 1996 amounted to
$10.2 million or $.43 cents per share.
-25-
E. ENVIRONMENTAL MATTERS
GENERAL. WPSC is subject to regulation with regard to the
impact of its operations on air and water quality and solid waste
disposal, and may be subject to regulation with regard to other
environmental considerations by various federal, state, and local
authorities. The application of federal and state restrictions
to protect the environment involves or may involve review,
certification or issuance of permits by various federal and state
authorities, including the 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.
AIR QUALITY. The plants which WPSC operates are in
compliance with all current sulfur dioxide, nitrogen oxide, and
particulate emission standards.
The Federal Clean Air Act Amendments of 1990 ("Act") were
enacted in 1990. The Act required reductions in sulfur dioxide
in 1995 (Phase I) to meet limitations based on an emission rate
of 2.5 pounds per Btu multiplied by a historical generation
baseline for Pulliam Unit 8 and Edgewater Unit 4 generating
units. The Act requires further reductions beginning in the year
2000 (Phase II). The year 2000 limits are based on an emission
rate of 1.2 pounds per million Btu multiplied by a historical
generation baseline for all generating units. WPSC's generating
facilities met the year 2000 standard in 1995. WPSC achieved
compliance with Wisconsin and federal sulfur dioxide emission
limitations by switching to low sulfur coal.
Because of the emission allowance system included in the
Act, operations during Phase I are expected to produce surplus
allowances which 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.
-26-
The PSCW has ordered that profits from the sale of allowances be
used to benefit utility customers.
The Act also requires the installation of low nitrogen oxide
burners on several units. Low nitrogen oxide burners were
installed at Pulliam Unit 8 early in 1994. Phase I of the Act
allows units smaller than 100 megawatts, such as Pulliam Unit 7,
to be designated Phase I units, thus building up sulfur dioxide
credits. Having made this election, low nitrogen oxide burners
were installed on Pulliam Unit 7 in 1994. Low nitrogen oxide
emissions from Pulliam Units 7 and 8 and Weston Unit 3 are
averaged with Weston Units 1 and 2. This averaging plan
generates additional emission allowances in Phase I and locks in
Phase I nitrogen oxide limits for these units. This should
reduce Phase II compliance costs.
Expenditures of $3.0 million to $5.0 million are projected
through 1999 to assure nitrogen oxide 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 into Lake
Michigan and other waters of Wisconsin from WPSC's power plants.
Permits were reissued to WPSC for its Pulliam and Weston power
plants in 1996. It is not anticipated that any permit conditions
will have a material cost associated with them. Revisions to
state water quality rules as a result of the Great Lakes
Initiative are expected in 1997. The incorporation of these
rules in the permits to be renewed in 2001 should not result in
any significant changes.
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 seven sites
at which Phase I or Phase II site investigations have been
completed. The estimated cleanup cost range for each of the
seven sites are, Green Bay from $4.1 to $5.3 million, Two Rivers
from $3.9 to $4.0 million, Oshkosh from $3.3 to $4.5 million,
Marinette from $5.6 to $6.8 million, Sheboygan I from $2.7 to
$3.9 million, Sheboygan II from $12.2 to $13.4 million, and
Stevens Point from $1.4 to $1.9 million. The
-27-
estimates assume excavation of contaminated soils, thermal
treatment of soils, disposal of treatment residuals, on-site
groundwater extraction and treatment, and post-cleanup monitoring
for a minimum of 3 years and a maximum of 10 or 25 years,
depending on site conditions. The cost estimate for five of the
sites (Green Bay, Two Rivers, Oshkosh, Marinette, and
Sheboygan II) assumes, in addition to those items noted
previously, removal and disposal of contaminated river sediments.
The consultant has yet to perform a detailed investigation of the
Menominee site and comparable information on this site is not
available. WPSC used the estimate for the Stevens Point site as
a basis for making a projection of $1.5 million to $1.9 million
on cleanup costs at the Menominee site, if cleanup is required.
Both sites are relatively small and are not located adjacent to
rivers.
The range of future investigation and cleanup costs for all
eight sites is estimated to be from $34.7 million to $41.7
million. Remediation expenditures would be made over the next 32
years. WPSC has recorded as a liability with an offsetting
deferred charge (i.e., a regulatory asset) $41.7 million, which
represents WPSC's current estimate of cleanup costs for all eight
sites. Based on discussions with regulators and a rate order in
Wisconsin, management believes that these costs, but not the cost
of money associated with the deferred charges, will be
recoverable in future customer rates.
As remedial feasibility studies and initial remedial actions
are completed, these estimates may be adjusted and these
adjustments could be significant. Other factors that can affect
these estimates are changes in remedial technology and regulatory
requirements. The estimates presented above do not take into
consideration any recovery from insurance carriers or other third
parties which WPSC has obtained or is still pursuing. Insurance
recoveries are deferred as an offset to the regulatory asset.
Due to the regulatory treatment, neither adjustments to the
estimated liability nor insurance recoveries have an immediate
impact on net income. Currently, WPSC has insurance
settlement agreements of approximately $12.0 million which it
expects to receive in 1997. The PSCW has authorized recovery of
$225,000 per year for gas site cleanup effective with the rate
order which became effective in February 1997.
For two of the sites, agreements have been executed with the
DNR covering the conduct of the investigations and remediation
activities. In November 1990, WPSC was notified by the DNR that
it may be a potentially responsible party ("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
-28-
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 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
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 Phase II 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 and whether sediments are impacted.
This Phase II investigation has been completed. WPSC and the
City of Sheboygan will negotiate an allocation of the costs
associated with cleanup of the site. Based on the Phase II
study, it is believed that the cost of cleanup for the
Sheboygan II Gas Plant site could be as much as $13.4 million.
The estimate presented above does not take into consideration any
recovery from insurance carriers or other third parties which
WPSC has obtained or is still pursuing.
In April 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, with sediment sampling conducted in 1995. Based on
these investigations, the cost of remediation is estimated to be
as much as $4.5 million. 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 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 has obtained or is still pursuing.
OTHER SOLID WASTE DISPOSAL. On December 1, 1986, WPSC
received notice from the EPA - Region V that it was one of 832
PRP's for the cleanup of the Maxey Flats Waste Disposal Site.
Documents obtained to
-29-
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 offered a buyout agreement to de minimis PRPs. A final
agreement with payment has been executed. WPSC's total buyout
assessment was $27,791.
F. REGULATORY MATTERS
GENERAL. 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.
WPSC is also subject to limited regulation by local authorities.
WPSC follows Statement of Financial Accounting Standards No. 71,
"Accounting for the Effects of Certain Types of Regulation," and
its financial statements reflect the effects of the different
ratemaking principles of various jurisdictions. These include
the PSCW, 91% of revenues, the MPSC, 2% of revenues, and the
FERC, 7% of revenues. The operation of Kewaunee is subject to
the jurisdiction of the NRC.
CUSTOMER RATE MATTERS. Customer rates are based on
forecasted expenses and capital costs. On April 1, 1996, WPSC
filed a biennial rate case in the Wisconsin jurisdiction to be
effective for the years 1997 and 1998. Hearings were held in
October 1996. On February 20, 1997, the PSCW authorized a $35.5
million, or 8.1%, decrease in retail electric rates and a $5.7
million, or 2.7%, increase in retail natural gas rates.
The PSCW approved an electric surcharge effective
February 21, 1997 to allow WPSC to recover costs of acquiring
replacement power during the extended outage at Kewaunee. The
surcharge will be approximately $.23 per kWh, which amounts to
approximately $2.0 million per month.
The Company's return on common equity was 9.9% and 11.7% for
1996 and 1995, respectively. The Company's return on common
equity is determined in large part by the return authorized for
WPSC by the PSCW. The authorized return was 11.5% for 1996 and
1995, before giving consideration to earnings on deferred
investment tax credits. The authorized return on equity for 1997
and 1998 is 11.8%.
INDUSTRY RESTRUCTURING. See Part I, Item 1B, ELECTRIC
MATTERS - Industry Restructuring, at page 2, and Part I, Item 1C,
GAS MATTERS - Industry Restructuring, at page 18, for discussions
of electric and gas utility restructuring.
-30-
ACCOUNTING DEVELOPMENTS. See Part II, Item 7, MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION, at page 46, for a discussion of accounting
developments.
The staff of the U. S. Securities and Exchange Commission
has questioned certain of the current accounting practices of the
electric utility industry 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, the annual provisions for decommissioning could increase
and 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 and remain in effect. The
PSCW's February 1997 rate order also provided for the accelerated
funding of Kewaunee decommissioning costs and the accelerated
recovery of the remaining investment in the plant such that both
would be complete by the end of the year 2002. This treatment of
Kewaunee expenses recognizes the uncertain future of nuclear
generation. See Part I, Item 1B, ELECTRIC MATTERS - Kewaunee
Nuclear Power Plant, at page 6, for an extended discussion of
this development.
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, 1996, regulatory assets and
liabilities amounted to $96.9 million and $48.9 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 regulatory assets from ratepayers.
Pursuant to a PSCW rate order, effective February 21, 1997, WPSC
will recover approximately $39.4 million of deferred regulatory
costs over the next five years.
DIVIDEND RESTRICTIONS. WPSC is restricted by a PSCW order
to paying normal common stock dividends of no more than 109% of
the previous year's common stock dividend without prior notice to
the PSCW. Also, Wisconsin law prohibits WPSC from making loans
to the
-31-
Company and its non-regulated subsidiaries and from guaranteeing
their obligations.
On January 15, 1997 and January 15, 1996, special
common stock dividends of $10,000,000 and $11,000,000,
respectively, were declared by WPSC to be paid to the Company.
The special dividends allowed WPSC's equity capitalization ratio
to remain at approximately 54%, the level approved by the PSCW
for ratemaking. The dividends were paid in January 1997 and
January 1996.
G. CAPITAL REQUIREMENTS
The Company's subsidiary, WPSC, requires large investments
in capital assets. Most of the Company's significant capital
requirements relate to WPSC construction expenditures.
Anticipated construction expenditures for WPSC are $74.0
million, $110.0 million, and $74.7 million for 1997, 1998, and
1999, respectively. The 1997 expenditures includes $43.0 million
for electric construction, $8.0 million for nuclear fuel, $16.0
million for gas construction, and $7.0 million for other
construction expenditures. Included in these expenditures is
$36.7 million for WPSC's share of the Kewaunee steam generator
replacement. Anticipated investment expenditures for non-utility
subsidiaries could be as high as $7.0 million, $68.0 million, and
$64.0 million for 1997, 1998, and 1999, respectively.
Although the Company has no plans for permanent financings
during 1997, issuance of up to $150.0 million of bonds and
debentures and $100.0 million of common stock sales may be
necessary in 1998 and 1999 to cover WPSC's expenditures, maturing
bonds, and currently forecasted non-regulated projects.
-32-
H. EMPLOYEES
At December 31, 1996, the Company, including its
subsidiaries, employed 2,606 persons. Of this number,
2,518 employees were employed by WPSC.
Of the employees of WPSC, 1,970 were considered electric
utility employees and 548 were considered gas utility employees.
Approximately 1,277 WPSC employees are represented by Local 310
of the International Union of Operating Engineers ("Union"). The
current agreement between the Union and WPSC runs through October
1997. There has never been a strike against WPSC by its
employees.
-33-
ITEM 2. PROPERTIES
A. UTILITY
The following table includes information about electric
generation facilities of WPSC (including those jointly-owned):
RATED
CAPACITY (a)
TYPE NAME LOCATION FUEL (KILOWATTS)
----- ---------------- ------------- ----------- ------------
Steam Pulliam Green Bay, WI Coal 370,100 (b)
Weston Wausau, WI Coal or Gas 491,300 (c)
Kewaunee Kewaunee, WI Nuclear 213,800 (d)
Columbia -
Units No. 1 & 2 Portage, WI Coal 324,700 (d)
Edgewater
Unit No. 4 Sheboygan Coal 102,500 (d)
---------
Total Steam 1,502,400
Hydro Various 68,000 (e)
(15 Plants)
Combustion Various Gas or Oil 265,340 (f)
Turbine (7 Plants)
& Diesel ---------
Total System 1,835,740
=========
(a) Based on 1996 winter capacity (through February 1997).
(b) This plant has six units. Pulliam Unit 3 (28.2 megawatts) is out of
service for maintenance, but is expected to be available for the
1997 summer season.
(c) This plant has three units. Two units burn only coal and the other
unit can burn coal or natural gas.
(d) These facilities are jointly-owned. Kewaunee is operated by WPSC.
WP&L is operator of the Columbia and Edgewater units. The capacity
indicated is WPSC's portion of total plant capacity based on percent
of ownership.
(e) Includes 12,900 kv purchased from Wisconsin River Power Company.
(f) WPSC and the Marshfield Electric and Water Department jointly own
115,500 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 55 transmission substations with a
transformer capacity of 5,459,640 kilovolt-ampere ("Kva");
110 distribution substations with a transformer capacity of
2,807,770 Kva; and 20,751 route miles of electric transmission
and distribution lines. Gas properties include approximately
4,187 miles of main, 71 gate and city regulator stations, and
195,945 services. All gas facilities are
-34-
located in Wisconsin except for distribution facilities in and
near the city of Menominee, Michigan.
Substantially all of WPSC's utility plant is subject to a
first mortgage lien.
B. NON-REGULATED
RATED
CAPACITY
TYPE NAME LOCATION FUEL (KILOWATTS)
- ----- -------------- ------------ ---- ----------
Steam E.J. Stoneman Cassville, WI Coal 53,000 (a)
(a) The E. J. Stoneman generation facility is owned by
Mid-American Power, LLC. Mid-American Power, LLC is
owned jointly and equally by PDI Stoneman, Inc. (a
wholly-owned subsidiary of WPS Power Development,
Inc.), LB Mid-American, Inc. (a wholly-owned subsidiary
of PDI Stoneman Inc.), and B. M. Stoneman, Inc., (a
wholly-owned subsidiary of Burns and McDonnell).
ITEM 3. LEGAL PROCEEDINGS
See Part I, Item 1E, ENVIRONMENTAL MATTERS, at page 26, for
a description of various proceedings relating to environmental
matters.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders
during the fourth quarter of the fiscal year.
-35-
ITEM 4A. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information about outside directors is omitted for the
reason that such information will be included in a proxy
statement for the Annual Meeting of Shareholders of the Company
which is scheduled to be held on May 1, 1997.
A. EXECUTIVE OFFICERS OF WPS RESOURCES CORPORATION ("Company")
Current Position and Business Effective
Name and Age Experience During Past Five Years Date
- --------------------------- ------------------------------------ ---------
DANIEL A. BOLLOM ** 60 Chairman and Chief Executive Officer 01-01-96
President and Chief Executive Officer 12-09-93
LARRY L. WEYERS 51 President and Chief Operating Officer 01-01-96
PATRICK D. SCHRICKEL 52 Executive Vice President 12-29-96
Vice President 12-09-93
DANIEL P. BITTNER 53 Vice President 12-29-96
RICHARD E. JAMES 43 Vice President-Corporate Planning 12-29-96
Vice President-Corporate Planning 08-01-95 *
Assistant Vice President-Corporate
Planning 05-09-94 *
Assistant Vice President-Rates and
Economic Evaluation 03-01-92 *
RICHARD A. KRUEGER ** 59 Vice President 05-02-96
PHILLIP M. MIKULSKY 48 Vice President-Development 09-01-95
Manager-System Operations 10-01-91 *
Director-System Operations 09-28-91 *
GLEN R. SCHWALBACH 51 Assistant Vice President-Corporate
Planning 12-29-96
Assistant Vice President Corporate
Planning 07-28-96 *
Assistant Vice President-Gas
Engineering and Supply 06-01-90 *
FRANCIS J. KICSAR 57 Secretary 01-01-96
RALPH G. BAETEN 53 Treasurer 12-09-93
DIANE L. FORD 43 Controller 12-15-93
GEORGE R. WIESNER 39 Assistant Controller 12-15-96
Director-Financial Accounting ESI/PDI 08-25-96 *
Financial Reporting Supervisor 05-01-87 *
* Identifies experience with Wisconsin Public Service Corporation
("WPSC") for Richard E. James, Phillip M. Mikulsky, Glen R. Schwalbach,
and George R. Wiesner. The other listed officers of the Company are
also officers of WPSC and their experience with WPSC is indicated below.
-36-
** Daniel A. Bollom and Richard A. Krueger have announced their
intention to retire effective June 30, 1996. Daniel A. Bollom
will remain a Director after his retirement. He will be succeeded
as Chief Executive Officer by Larry L. Weyers.
B. EXECUTIVE OFFICERS OF WISCONSIN PUBLIC SERVICE CORPORATION ("WPSC")
Current Position and Business Effective
Name and Age Experience During Past Five Years Date
- --------------------------- ------------------------------------ ---------
DANIEL A. BOLLOM ** 60 Chairman and Chief Executive Officer 01-01-96
President and Chief Executive Officer 03-01-91
LARRY L. WEYERS 51 President and Chief Operating Officer 01-01-96
Senior Vice President-Power Supply
and Engineering 08-01-95
Vice President-Power Supply
and Engineering 05-09-94
Vice President-Energy Supply 01-01-92
PATRICK D. SCHRICKEL 52 Executive Vice President 12-29-96
Senior Vice President-Finance and
Corporate Services 05-09-94
Senior Vice President-Operations 06-01-89
DANIEL P. BITTNER 53 Senior Vice President-Finance and
Corporate Services 12-29-96
Senior Vice President-Customer
Service 05-09-94
Senior Vice President-Finance 03-01-92
Vice President-Treasurer 02-01-89
RICHARD A. KRUEGER ** 59 Senior Vice President-Sales
and Marketing 05-09-94
Senior Vice President-Power Supply
and Engineering 07-01-89
CLARK R. STEINHARDT 55 Senior Vice President-Nuclear Power 06-01-91
J. GUS SWOBODA ** 61 Senior Vice President-Human and
Corporate Development 05-09-94
Senior Vice President-Marketing and
Corporate Services 10-01-89
RALPH G. BAETEN 53 Vice President-Treasurer 08-01-95
Treasurer 03-01-92
Insurance and Benefits Director 05-01-87
THOMAS P. MEINZ 50 Vice President-Power Supply
and Engineering 02-23-97
Power Supply and Engineering
Executive 01-14-96
Senior Corporate Planning Executive 05-09-94
Manager-System Planning and Licensing 03-01-91
-37-
Current Position and Business Effective
Name and Age Experience During Past Five Years Date
- --------------------------- ------------------------------------ ---------
BERNARD J. TREML 47 Vice President-Human Resources 05-09-94
Assistant Vice President-Human
Resources 07-01-93
Manager-Human Resources 08-01-92
Manager-Marketing Programs and
Services 08-01-91
WAYNE J. PETERSON 38 Assistant Vice President-Customer
Service 02-23-97
Manager-System Operations 10-01-95
Site Leader 10-01-94
Electric Superintendent 04-01-92
Director-Distribution Services 01-02-92
DAVID W. SCHONKE 63 Assistant Vice President-Electric
Distribution Engineering 06-01-86
FRANCIS J. KICSAR 57 Secretary 01-01-96
Assistant Secretary 03-01-92
Director-Corporate Tax 10-01-76
DIANE L. FORD 43 Controller 03-01-92
Administrator-Corporate Accounting 05-01-87
** Daniel A. Bollom, Richard A. Krueger, and J. Gus Swoboda have announced
their intention to retire effective June 30, 1996. Daniel A. Bollom will be
succeeded as Chief Executive Officer by Larry L. Weyers.
NOTE: All ages for the officers of the Company and WPSC are as of December 31, 1996.
None of the executives listed above for the Company or for WPSC are
related by blood, marriage, or adoption to any of the other officers listed
or to any director of the Registrant. Each officer shall hold office until
his or her successor shall have been duly elected and qualified, or until
his or her death, resignation, disqualification, or removal.
-38-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
WPS RESOURCES CORPORATION COMMON STOCK Two-Year Comparison
Dividends
Share Data Per Share Price Range
- ---------- --------- ------------------
High Low
------ ------
1996
1st Quarter $ .465 34-3/8 31-7/8
2nd Quarter .465 33-1/2 30-1/8
3rd Quarter .475 32-1/8 30-3/8
4th Quarter .475 30-5/8 28-1/4
-----
Total $1.88
1995
1st Quarter $ .455 29-3/4 26-3/4
2nd Quarter .455 29-7/8 27-7/8
3rd Quarter .465 30-3/4 28-1/8
4th Quarter .465 34-1/4 30-1/4
-----
Total $1.84
WPSC, the Company's principal subsidiary, is restricted by a
PSCW order to paying normal common stock dividends of no more
than 109% of the previous year's common stock dividend without
prior notice to the PSCW.
On January 15, 1997 and January 15, 1996, special common
stock dividends of $10,000,000 and $11,000,000, respectively,
were declared by WPSC to be paid to the Company, the parent
holding company. The special dividends allowed WPSC's equity
capitalization ratio to remain at approximately 54%, the level
approved by the PSCW for ratemaking. The dividends were paid in
January 1997 and January 1996.
-39-
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, 1996, there were 23,998 common stock
shareholders of record.
See also ITEMS 6 and 8 below.
-40-
ITEM 6. SELECTED FINANCIAL DATA
WPS RESOURCES CORPORATION
COMPARATIVE FINANCIAL STATEMENTS AND
FINANCIAL STATISTICS (1992 TO 1996)
A. CONSOLIDATED STATEMENTS OF INCOME
===========================================================================================================================
Consolidated Statements of Income
Year Ended December 31 (Thousands, except share amounts) 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------
Operating revenues
Electric utility $490,506 $489,000 $480,816 $493,256 $477,625
Gas utility 211,357 174,693 182,058 187,376 157,177
Non-regulated energy and other 156,391 56,155 10,921 - -
- ---------------------------------------------------------------------------------------------------------------------------
Total operating revenues 858,254 719,848 673,795 680,632 634,802
===========================================================================================================================
Operating expenses
Electric production fuels 105,418 104,858 111,011 114,051 123,866
Purchased power 37,737 39,593 38,631 30,703 29,594
Gas purchased for resale 149,388 116,253 126,351 133,347 109,890
Non-regulated energy cost of sales 157,612 53,983 10,663 - -
Other operating expenses 168,905 154,445 148,917 148,270 135,614
Maintenance 48,806 50,761 49,983 51,597 46,436
Depreciation and decommissioning 65,178 65,627 56,365 60,609 58,592
Taxes other than income 26,868 25,921 26,063 25,204 24,459
- ---------------------------------------------------------------------------------------------------------------------------
Total operating expenses 759,912 611,441 567,984 563,781 528,451
===========================================================================================================================
Operating income 98,342 108,407 105,811 116,851 106,351
- ---------------------------------------------------------------------------------------------------------------------------
Other income
Allowance for equity funds
used during construction 139 170 108 287 494
Other, net 1,395 6,080 4,473 3,356 6,076
- ---------------------------------------------------------------------------------------------------------------------------
Total other income 1,534 6,250 4,581 3,643 6,570
===========================================================================================================================
Income before interest expense 99,876 114,657 110,392 120,494 112,921
- ---------------------------------------------------------------------------------------------------------------------------
Interest on long-term debt 21,532 22,859 23,407 24,393 25,662
Other interest 3,596 2,604 1,796 1,562 1,477
Allowance for borrowed funds
used during construction (128) (68) (139) (200) (542)
- ---------------------------------------------------------------------------------------------------------------------------
Total interest expense 25,000 25,395 25,064 25,755 26,597
===========================================================================================================================
Income before income taxes 74,876 89,262 85,328 94,739 86,324
Income taxes 24,358 30,808 29,526 32,539 28,322
Minority interest (348) - - - -
Preferred stock dividends of subsidiary 3,111 3,111 3,111 3,311 3,237
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 47,755 $ 55,343 $ 52,691 $ 58,889 $ 54,765
===========================================================================================================================
Shares of common stock
Outstanding at December 31 23,897 23,897 23,897 23,897 23,846
Average 23,891 23,897 23,897 23,888 23,350
Earnings per average share of common stock $2.00 $2.32 $2.21 $2.47 $2.35
Dividend per share of common stock 1.88 1.84 1.80 1.76 1.72
===========================================================================================================================
-41-
ITEM 6. SELECTED FINANCIAL DATA
WPS RESOURCES CORPORATION
COMPARATIVE FINANCIAL STATEMENTS AND
FINANCIAL STATISTICS (1992 TO 1996)
B. CONSOLIDATED BALANCE SHEETS
===========================================================================================================================
Consolidated Balance Sheets
At December 31 (Thousands)
===========================================================================================================================
Assets 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------
Utility plant
Electric $1,483,829 $1,449,201 $1,423,316 $1,386,007 $1,354,579
Gas 241,367 228,734 203,384 184,234 173,012
- ---------------------------------------------------------------------------------------------------------------------------
Total 1,725,196 1,677,935 1,626,700 1,570,241 1,527,591
Less - Accumulated depreciation and decommissioning 952,296 905,427 846,505 801,056 748,427
- ---------------------------------------------------------------------------------------------------------------------------
Total 772,900 772,508 780,195 769,185 779,164
Nuclear decommissioning trusts 100,570 82,109 64,147 56,699 51,023
Nuclear fuel, net 19,381 14,275 19,417 17,981 16,880
- ---------------------------------------------------------------------------------------------------------------------------
Net utility plant 892,851 868,892 863,759 843,865 847,067
===========================================================================================================================
Current assets 219,144 186,085 170,015 180,140 160,331
Net non-utility and non-regulated plant 19,738 3,307 2,218 2,121 2,133
Regulatory and other assets 198,931 208,459 181,283 172,715 136,019
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $1,330,664 $1,266,743 $1,217,275 $1,198,841 $1,145,550
===========================================================================================================================
===========================================================================================================================
Capitalization and Liabilities
===========================================================================================================================
Capitalization
Common stock equity $ 467,524 $ 463,441 $ 446,540 $ 433,724 $ 413,226
Preferred stock of subsidiary
with no mandatory redemption 51,200 51,200 51,200 51,200 51,200
Long-term debt of subsidiary 305,788 306,590 309,945 314,225 321,498
- ---------------------------------------------------------------------------------------------------------------------------
Total capitalization 824,512 821,231 807,685 799,149 785,924
===========================================================================================================================
Liabilities
Short-term borrowings 57,950 26,500 22,500 21,000 20,000
Bond sinking fund requirements and
maturing first mortgage bonds of subsidiary - - - - 8,726
Deferred income taxes 130,208 135,958 126,639 138,952 169,012
Other liabilities and credits 317,994 283,054 260,451 239,740 161,888
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 506,152 445,512 409,590 399,692 359,626
===========================================================================================================================
Total capitalization and liabilities $1,330,664 $1,266,743 $1,217,275 $1,198,841 $1,145,550
===========================================================================================================================
-42-
ITEM 6. SELECTED FINANCIAL DATA
WPS RESOURCES CORPORATION
COMPARATIVE FINANCIAL STATEMENTS AND
FINANCIAL STATISTICS (1992 TO 1996)
C. FINANCIAL STATISTICS
================================================================================================================================
Year Ended December 31 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------------------
Stock price $28-1/2 $34 $26-3/4 $33-5/8 $31-3/4
Book value per share $19.56 $19.39 $18.69 $18.18 $17.33
Return on average equity 9.9% 11.7% 11.4% 13.1% 13.2%
Number of common stock shareholders 23,998 24,341 25,395 25,240 25,983
Number of employees 2,606 2,547 2,578 2,603 2,631
================================================================================================================================
-43-
ITEM 6. SELECTED FINANCIAL DATA
WISCONSIN PUBLIC SERVICE CORPORATION
COMPARATIVE FINANCIAL DATA AND
FINANCIAL STATISTICS (1992 TO 1996)
D. SELECTED FINANCIAL DATA
============================================================================================================
(Millions) 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------
Operating Revenues 701.9 663.7 662.8 680.6 634.8
Net Income 60.4 59.2 55.8 62.2 58.0
Total Assets (At December 31) 1,258.9 1,233.4 1,205.2 1,198.8 1,145.6
Long-Term Debt, Net (At December 31) 310.8 312.7 316.1 314.2 321.5
============================================================================================================
-44-
PAGE
ITEM 6. SELECTED FINANCIAL DATA
WISCONSIN PUBLIC SERVICE CORPORATION
COMPARATIVE FINANCIAL DATA AND
FINANCIAL STATISTICS (1992 TO 1996)
E. FINANCIAL STATISTICS
============================================================================================================
(Millions) 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------
Coverage
Times interest earned before income taxes 4.36 4.00 4.19 4.49 3.99
Times interest earned after income taxes 3.21 3.03 3.09 3.29 3.01
Times interest and preferred dividends
earned after income taxes 2.88 2.70 2.77 2.93 2.71
============================================================================================================
Capitalization ratios
Common equity including ESOP 55.3 55.0 53.9 54.3 52.6
Preferred stock 6.3 6.3 6.4 6.4 6.5
Long-term debt 38.4 38.7 39.7 39.3 40.9
============================================================================================================
Percent long-term debt to net utility plant 34.8 36.0 36.6 37.2 38.0
============================================================================================================
Average rate
Bonds 7.0 7.1 7.1 7.1 7.8
Preferred stock 6.1 6.1 6.1 6.1 6.3
============================================================================================================
Number of preferred stock shareholders 2,965 3,165 3,372 3,577 4,167
============================================================================================================
Weather information
Cooling degree days 352 808 519 432 213
Cooling degree days as a percent of normal 73.6% 170.1% 107.0% 86.2% 43.3%
Heating degree days 8,566 7,813 7,578 7,916 7,670
Heating degree days as a percent of normal 107.5% 98.0% 95.5% 100.2% 96.2%
============================================================================================================
-45-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION OF
WPS RESOURCES CORPORATION AND
WISCONSIN PUBLIC SERVICE CORPORATION
RESULTS OF OPERATIONS
WPS Resources Corporation (the "Company") is a holding company.
Approximately 82% and 95% of the Company's 1996 revenues and
assets, respectively, are derived from Wisconsin Public Service
Corporation ("WPSC"), an electric and gas utility.
1996 Compared to 1995
Revenues at the Company increased from $719.8 million in 1995 to
$858.3 million in 1996. Net income at the Company decreased from
$55.3 million in 1995 to $47.8 million in 1996. Earnings per
share decreased 13.8% from $2.32 in 1995 to $2.00 in 1996. The
most significant reasons for the decrease in earnings at the
Company were increased operating expenses at the non-regulated
subsidiaries, decreased gas margins at WPS Energy Services, Inc.
("ESI"), a loss on an industrial processing facility investment,
and increased operating expenses at WPSC. Revenues at WPSC
increased from $663.7 million in 1995 to $701.9 million in 1996.
Earnings on common stock at WPSC increased from $56.1 million in
1995 to $57.3 million in 1996.
Electric Utility Operations
Electric margins increased $2.8 million (see table below), or
.8%, due primarily to increased sales volumes and decreased
purchased power costs.
=================================================================
ELECTRIC MARGINS ($000) 1996 1995 1994
- -----------------------------------------------------------------
Revenues $490,506 $489,000 $480,816
Fuel and purchased power 143,155 144,451 149,642
- -----------------------------------------------------------------
Margins $347,351 $344,549 $331,174
=================================================================
Sales (kWh 000) 11,011,842 10,978,131 10,552,017
=================================================================
The Public Service Commission of Wisconsin ("PSCW") allows WPSC
to pass on to its customers, through a fuel adjustment clause,
changes in
-46-
the cost of fuel and purchased power within a specified range.
WPSC is required to file an application to adjust rates either
higher or lower when costs are plus or minus 2% from forecasted
costs on an annual basis.
Electric operating revenues remained relatively stable between
1996 and 1995.
Electric production fuels and purchased power decreased
$1.3 million, or .9%, as a result of $1.9 million lower purchased
power costs, $1.8 million lower generation costs at the Kewaunee
Nuclear Power Plant ("Kewaunee") due to an extended outage for
maintenance, and $1.5 million lower combustion turbine generation
costs due to increased generation at WPSC's coal-fired plants.
Offsetting these decreases was a $3.9 million increase in
generation costs at coal-fired plants.
Gas Utility Operations
Gas margins increased $3.5 million (see table below), or 6.0%,
due to customer growth at WPSC and colder weather. The weather
was 9.6% colder in 1996 than in 1995, based on degree days.
=================================================================
GAS MARGINS ($000) 1996 1995 1994
- -----------------------------------------------------------------
Revenues $211,357 $174,693 $182,058
Purchase costs 149,388 116,253 126,351
- -----------------------------------------------------------------
Margins $ 61,969 $ 58,440 $ 55,707
=================================================================
Volume (Therms 000) 666,598 631,192 585,821
=================================================================
The PSCW allows WPSC to pass changes in the cost of gas on to
customers through a purchased gas adjustment clause ("PGAC").
Gas operating revenues increased $36.7 million, or 21.0%, due to
increased volumes as a result of customer growth and higher gas
costs. Gas purchased for resale showed a net increase of
$33.1 million, or 28.5%, due to increased volumes as a result of
customer growth and higher gas costs.
-47-
Non-Regulated Operations
Non-regulated energy and other operating revenues increased
$100.2 million, or 178.5%. Non-regulated energy revenues
primarily represent the electric and gas sales of ESI, an energy
marketing subsidiary which began operations in 1994. The
increase in non-regulated energy revenues was due primarily to
increased gas sales at ESI from $55.2 million in 1995 to
$153.1 million in 1996, an increase of $97.9 million, or 177.2%.
Such increased gas sales resulted from ESI's acquisition of a gas
marketing company in the fourth quarter of 1995, additional
customer growth in the wholesale market, and higher unit prices
due to gas commodity market conditions. Other operating revenues
increased $1.5 million, or 167.3%, and are comprised of
consulting and construction revenue from ESI and WPS Power
Development, Inc. ("PDI"), a company organized to participate in
the development of electric generation projects and to provide
services to the non-regulated electric power generation industry.
Non-regulated energy cost of sales increased $103.6 million, or
192.0%, due primarily to increased gas purchases and increased
gas costs at ESI from $54.0 million in 1995 to $156.7 million in
1996, an increase of $102.7 million, or 190.3%. Negative gas
margins on ESI sales were due primarily to the volatile gas
commodity market experienced during 1996 in which ESI was not
fully hedged for its customer commitments and ESI's decision to
honor customer contracts, despite defaults by certain gas
suppliers, during a period of exceptionally high demand.
Other Expenses
Other operating expenses increased $14.5 million, or 9.4%. At
ESI and PDI, there was a $7.1 million increase in expenses
reflecting the expansion of their businesses and the development
of infrastructure including personnel and systems. Included in
other operating expenses at WPSC was an increase of $4.5 million
related to expansion of certain operating activities in
anticipation of more competitive markets and an increase in gas
operating expenses of $1.9 million as a result of customer
growth. Partially offsetting these increases was a decrease in
employee benefit costs of approximately $2.6 million due to a
reduction in post-retirement benefit expenses.
Maintenance expense decreased $2.0 million, or 3.9%, due to lower
maintenance activity at WPSC's coal-fired plants of $3.3 million.
This decrease was partially offset by increased maintenance
expense at Kewaunee of $1.0 million.
-48-
Other income decreased $4.7 million, or 75.5%, reflecting a
$4.0 million loss on an industrial processing facility investment
which had been made in anticipation of energy sales
opportunities.
1995 Compared to 1994
Earnings per share increased 5.0% from $2.21 in 1994 to $2.32 in
1995. The most significant reasons for this change were higher
electric margins due to burning less expensive low sulfur coal
and increased sales volume.
Electric Utility Operations
Electric margins increased $13.4 million, or 4.0%, due primarily
to increased sales volumes and decreased coal costs which were
partially offset by a 2.6% Wisconsin retail rate reduction
effective January 1, 1995.
Electric operating revenues increased $8.2 million, or 1.7%.
Electric revenues were higher due to a 4.0% increase in
kilowatt-hour ("kWh") sales. This was partially offset by a
2.6% decrease in Wisconsin retail rates that took effect on
January 1, 1995. Residential kWh sales and commercial and
industrial kWh sales increased 5.9% and 4.9%, respectively, due
to warmer summer weather and customer growth. Wholesale kWh
sales decreased .4% due primarily to lower demand by WPSC's
largest wholesale customer.
Electric fuels and purchases decreased $5.2 million, or 3.5%.
Coal-related costs decreased $12.1 million, or 11.4%, due to
burning less expensive low sulfur coal. However, this was
partially offset by increased coal-fired generation expenses of
$4.8 million, or 5.4%, and higher purchased power expense of
$1.0 million, or 2.5%, due to warmer weather and increased plant
outages resulting from maintenance at certain plants.
Gas Utility Operations
Gas margins increased $2.7 million, or 4.9%, due to customer
growth at WPSC and colder weather.
Gas operating revenues decreased $7.4 million, or 4.0%, due to
lower gas costs.
Gas purchased for resale showed a net decrease of $10.1 million,
or 8.0%, due to lower gas costs.
-49-
Non-Regulated Operations
Non-regulated energy and other operating revenues increased
$45.2 million, or 414.2%, due to increased sales at ESI and
increased consulting, construction, and investment revenue of
$.9 million from ESI and PDI.
Non-regulated energy cost of sales increased $43.3 million or
406.3% due to increased gas purchases at ESI.
Other Expenses
Other operating expenses increased $5.5 million, or 3.7%. The
majority of this increase is attributable to increased operating
expenses at ESI and PDI.
Depreciation and decommissioning expense increased $9.2 million
or 16.4%. There were two primary reasons for this increase. The
first factor was an increase in decommissioning funding of
$5.0 million that was reflected in customer rates which became
effective January 1, 1995. The second factor was additional
decommissioning expense recorded to offset a $1.1 million gain on
the decommissioning portfolio discussed below and higher trust
earnings of $2.4 million.
There were three significant non-recurring items impacting other
income in 1995. First, a pretax gain of $1.6 million was
realized on the decommissioning portfolio from the sale of
certain investments. Second, insurance proceeds of $1.2 million
were received as the result of the death of a retired WPSC
executive. Third, these gains were partially offset by a
$2.7 million loss resulting from cancellation of the Rhinelander
Energy Center project.
BALANCE SHEET
1996 Compared to 1995
Nuclear decommissioning trusts increased $18.5 million due to
continued funding and favorable investment returns. Customer
receivables and accounts payable increased $27.7 million and
$29.0 million, respectively, primarily as a result of business
growth at ESI. Gas in storage increased $9.9 million as a result
of an increase in the cost of gas at both WPSC and ESI.
Regulatory assets decreased $14.2 million due to amortization of
deferred conservation expenses and final amortization and
recovery of the retail portion of deferred coal contract buyouts.
Net non-utility and non-regulated plant increased $16.4 million
due to increased non-utility assets at
-50-
WPSC and the 1996 purchase of a merchant generating facility by
PDI. Investments and other assets increased $4.7 million as a
result of increased prepaid pension assets.
Short-term notes payable and commercial paper increased
$11.6 million and $19.9 million, respectively, due to increased
operational cash needs at ESI and refinancing $6.9 million of
WPSC's First Mortgage Bonds, 8.80% Series, due in 2021, with
short-term borrowings. Gas refunds decreased $6.2 million as
WPSC has returned the majority of these refunds to its customers.
Other long-term liabilities increased $18.3 million due to
reduced funding of the post-retirement medical liability and
increased customer advances for construction at WPSC. In
connection with its 1996 purchase of the Stoneman Power Plant,
PDI recorded a long-term liability to the seller.
FINANCIAL CONDITION - WPSC
WPSC requires large investments in capital assets used to deliver
electric and gas services. As a result, 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. Pre-tax interest coverage
was 4.36 times for the year ended December 31, 1996. 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 normal common
stock dividends of more than 109% of the previous year's common
stock dividends without PSCW approval. Also, Wisconsin law
prohibits WPSC from making loans to the Company and its
subsidiaries and from guaranteeing their obligations. A special
common stock dividend of $10 million was paid by WPSC to the
Company in January 1997. The special dividend allows WPSC's
average equity capitalization ratio to remain at approximately
54%, the level approved by the PSCW for ratemaking.
Anticipated construction expenditures for WPSC are $74.0 million,
$110.0 million, and $74.7 million for 1997, 1998, and 1999,
respectively. The 1997 expenditures include $43.0 million for
electric construction, $8.0 million for nuclear fuel,
$16.0 million for gas construction, and $7.0 million for other
construction. Included in these expenditures is $36.7 million
for WPSC's share of the Kewaunee steam generator replacement.
-51-
Anticipated investment expenditures for the non-regulated
subsidiaries could be as high as $7.0 million, $68.0 million, and
$64.0 million for 1997, 1998, and 1999, respectively.
Although the Company has no plans for permanent financing in
1997, up to $150.0 million of bonds and debentures and
$100.0 million of common stock sales may be necessary during 1998
and 1999 to finance WPSC's expenditures, maturing bonds, and
currently forecasted non-regulated projects.
In the second quarter of 1996, WPSC repurchased $6.9 million of
First Mortgage Bonds, 8.80% Series, due in 2021. This repurchase
was funded through short-term borrowings.
In early 1996, WPS Leasing, Inc., a subsidiary of WPSC, purchased
an additional unit train for approximately $8.9 million. This
purchase was partially funded with a long-term note from the
Company. As of December 31, 1996, the loan balance was
$8.6 million and it carried an interest rate of 7.35%.
Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets to be
Disposed Of," became effective in March 1995. This statement
imposes a stricter criterion for regulatory assets by requiring
that such assets be probable of future recovery at each balance
sheet date. The Company adopted this standard on
January 1, 1996. The adoption of this statement did not have a
material impact on the financial position or results of
operations based on the current regulatory structure. SFAS
No. 121 may impact the Company in the future as competitive
factors influence wholesale and retail pricing in the electric
and gas industries and as regulatory policy regarding recovery of
stranded investment is developed.
SFAS No. 123, "Accounting for Stock-Based Compensation," became
effective in 1996. This statement permits, but does not require,
companies to change their accounting for stock-based
compensation. The statement also requires additional
disclosures. The Company has adopted only the disclosure
provision of the statement and currently does not provide
significant stock-based compensation.
Plans to construct the Rhinelander Energy Center were cancelled
in 1995. As a result of this cancellation, WPSC signed a 25-year
agreement in November 1995 to purchase power from Polsky Energy
Corporation ("Polsky"), an independent power producer proposing
to build a plant adjacent to the Nicolet Paper Company mill in
De Pere, Wisconsin. Polsky is in the second stage of a two-stage
Certificate
-52-
of Public Convenience and Necessity ("CPCN") permitting process
prescribed by the PSCW. Construction of the Polsky project is
contingent upon a PSCW determination in stage two of the CPCN
process that WPSC will need the electric capacity which would be
provided by the proposed plant. A recent WPSC load forecast
suggests the capacity may not be needed. A final decision is
expected in 1997. If the PSCW approves the Polsky project, it
will be accounted for as a capitalized lease. This would result
in the recording of a plant asset of approximately
$110.0 million, with an offsetting amount of long-term debt.
In 1996, WPSC entered into a competitively-priced contract with a
new wholesale customer to provide fixed price power over a
ten-year period. The PSCW did not agree with establishing
contract pricing based on anything other than fully allocated
costs. Subsequently, WPSC entered into an arrangement with an
outside party to fulfill most of the customer's requirements for
this contract and thereby mitigate any regulatory exposure. The
PSCW did not recognize the subsequent agreement and, as part of
the rate decision which will become effective in 1997, has
assumed full cost allocation pricing that ignores the outside
party's sales to the customer when determining new Wisconsin
retail rates. If the PSCW continues to take this position, the
impact over the next 10 years could be a reduction in Wisconsin
retail revenues of up to a maximum of $12.0 million. Management
does not agree with the PSCW decision and plans to work with the
PSCW to demonstrate that the PSCW method of allocating costs for
this wholesale customer should be changed so that there is no
negative impact on Wisconsin retail revenues.
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, 91% of revenues; the Michigan Public Service Commission
("MPSC"), 2% of revenues; and the Federal Energy Regulatory
Commission ("FERC"), 7% of revenues. In addition, Kewaunee is
regulated by the Nuclear Regulatory Commission ("NRC").
Environmental matters are primarily governed by the Environmental
Protection Agency and the Wisconsin Department of Natural
Resources.
In 1996, the Company received "marketer" status from the FERC
which gives WPSC, ESI, and PDI the flexibility to sell electric
energy and capacity to wholesale customers at market rates.
-53-
The single most important development in the electric utility
industry is the continuing trend toward increased competition
brought about by a combination of new legislation, changing
regulation, new technology, and market forces. Transmission
access, mandated by the Energy Policy Act of 1992, and increased
competition in the wholesale power segment of the business have
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.
In April 1996, the FERC issued Order No. 888 which addresses both
open access and stranded cost issues. A second rule, Order
No. 889, also issued in April 1996, requires utilities to
establish electronic systems to share information about available
transmission capacity and establishes standards of conduct.
As a result of these orders, WPSC has developed and implemented
strategies to deal with transmission access and potential
stranded investment. WPSC has developed a separate internal
transmission group to fulfill the FERC's requirement for
functional unbundling. WPSC has also filed comparable
transmission access tariffs which have been accepted for use,
subject to refund. Comparable transmission access tariffs, as
defined by the FERC, provide transmission access to other parties
on the same terms and conditions that WPSC provides transmission
service to itself. WPSC is participating in the Midwest
Independent System Operator ("ISO") initiative, a group of
23 Midwestern utilities who are designing an ISO concept for
transmission service in the region.
In December 1995, the PSCW outlined its plan for restructuring
the electric industry in Wisconsin. The plan includes 32 steps
in a 5-year process concluding with retail competition by the
year 2001. Certain aspects of the plan will require state
legislative changes.
The Wisconsin Legislature is expected to consider electric
restructuring in 1997. In the meantime, the PSCW, utility
companies, various advocacy groups, and utility customers will
continue to dialogue in an effort to reach a consensus on when
and how to comply with the PSCW introduced plan for restructuring
the electric industry.
Changes in the regulation of the natural gas business on the
federal level prompted the PSCW to examine the future regulation
of the natural gas distribution business in Wisconsin. In 1996,
the PSCW issued orders (1) defining the level of interruption
testing required for interruptible gas customers, (2) modifying
the presently required PGAC which allows total recovery of gas
supply and capacity costs to allow for other gas supply and
capacity cost recovery mechanisms,
-54-
(3) determining whether utilities and their affiliated marketers
should be required to have separate resources for gas purchases
and sales, or if allocation of common resources between these two
entities is adequate, and (4) defining a generic set of Standards
of Conduct for the state's utilities and their affiliates. The
PSCW also opened a docket to determine the definition of a
competitive market, as well as the steps necessary to mitigate
barriers to competition in Wisconsin.
WPSC has historically recovered gas costs through a PGAC. The
PSCW is examining the appropriateness of the PGAC and issued an
order in November 1996 concluding that the majority of state gas
utilities must use either an incentive gas cost recovery
mechanism or a modified PGAC mechanism. WPSC is evaluating its
options and will adjust its gas cost recovery mechanism
accordingly.
The MPSC initiated a similar process to address gas industry
restructuring by forming a committee of interested parties to
consider changes in the gas cost recovery mechanism, service
unbundling, curtailment issues, and storage issues. The MPSC
issued a final document indicating consensus on the
identification of the issues but not on the resolution of the
issues.
As a result of the changes occurring in the electric industry,
several mergers have been announced in the region and are in
various stages of the regulatory approval process.
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 seven sites at which either a
Phase I or Phase II site investigation had been completed. The
consultant has yet to perform a detailed investigation of the
eighth site, and comparable information on this site is not
available.
The range of future investigation and cleanup costs for all eight
sites is estimated to be from $34.7 million to $41.7 million.
Minimal amounts have been spent to date. Remediation
expenditures would be made over the next 32 years. WPSC has
recorded a liability with an offsetting regulatory asset
(deferred charge) which represents WPSC's current estimate of
cleanup costs for all eight sites. Based on discussions with
regulators and a rate order in Wisconsin, management believes
that these costs (net of any insurance recoveries), but not the
carrying costs associated with the expenditures, will be
recoverable in future customer rates.
-55-
As remedial feasibility studies and initial remedial actions are
completed, these estimates may be adjusted and these adjustments
could be significant. Other factors that can affect these
estimates are changes in remedial technology and regulatory
requirements. The estimates presented above do not take into
consideration any recovery from insurance carriers or other third
parties which WPSC has obtained or is pursuing. Insurance
recoveries are deferred as an offset to the regulatory asset.
Due to the regulatory treatment, neither adjustments to the
estimated liability nor insurance recoveries have an immediate
impact on net income. Currently, WPSC has insurance settlement
agreements of approximately $12.0 million which it expects to
receive in 1997. The PSCW has authorized recovery of
$225,000 per year for gas site cleanup effective with the rate
order which is expected to become effective in February 1997.
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 ("the 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 currently 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 related to nitrogen oxide
emissions will be required to upgrade existing equipment and to
monitor emission levels. These expenditures are estimated to be
in the range from $3.0 million to $5.0 million between 1998 and
1999.
In 1995, WPSC initiated a new demand-side management ("DSM")
program which involves loans and shared savings. The new program
provides that those who participate and directly benefit from
energy-saving programs will pay for the cost of the programs.
Prior to 1995, DSM expenditures were recovered from all customers
through their electric and gas retail rates. As of
December 31, 1996, WPSC had $39.4 million of deferred DSM
expenditures which will be recovered in future customer rates.
Kewaunee was taken out of service on September 21, 1996 for
scheduled refueling and maintenance. Inspection of previously
repaired steam generator tubes disclosed more extensive tube
degradation than had been anticipated. Repair of the tubes using
laser welding was undertaken. As of December 31, 1996, it was
anticipated that repairs would be completed sometime during the
first quarter of 1997. Welding was completed late in January
1997. Subsequent testing indicated that
-56-
repair of a number of the tubes was not effective. The return of
Kewaunee to service will be delayed while additional repair
efforts are undertaken. NRC approval of the process is needed to
restart the plant. It is unknown how long steam generator
repairs and NRC approval of the steam generator repair process
will take. It is uncertain when Kewaunee will return to service
with repaired steam generators. If for any reason the steam
generators cannot be repaired, the ability of the Kewaunee owners
to reach consensus on steam generator replacement and to secure
the approval of the PSCW for such replacement would become
critical factors affecting the duration of the current outage
because, in that case, replacement of the steam generators would
be essential for the continued operation of Kewaunee. The
elapsed time from placing a firm steam generator order to
receiving delivery of replacement steam generators is 22 months.
Even if the repairs are successful and the plant restarts, the
tube repairs are expected to last only a few years. Therefore,
Kewaunee would be retired significantly prior to the expiration
of the operating license in 2013 unless the steam generators are
replaced.
If Kewaunee returns to service, it would be shut down at
mid-cycle (within one year after being returned to service) for
tube inspection. If significant further tube degradation would
be discovered during the mid-cycle shutdown, the NRC may not
permit Kewaunee to continue to operate without replacement of the
steam generators. Since the earliest date by which the steam
generators could be replaced is sometime in 1999, a mid-cycle
shutdown and subsequent requirement that the steam generators be
replaced before startup could result in an extended outage.
An extended Kewaunee outage subjects WPSC to the possibility of
increased fuel and purchased power costs. WPSC could incur up to
$1.8 million in the first quarter of 1997 for its share of
Kewaunee steam generator tube repair costs. In addition, the
cost to use other generating units or to purchase replacement
power is expected to exceed the cost of Kewaunee generated power
by approximately $65,000 a day. The effectiveness, timing, and
cost of repairs and the cost of replacement power are subject to
a number of uncertainties including the duration of the outage.
WPSC anticipates receipt of a rate order in the Wisconsin
jurisdiction effective in February 1997. The order is expected
to provide a $2.0 million per month surcharge on customer bills
to cover the additional costs to be incurred by WPSC for
acquiring power from other sources while Kewaunee remains out of
service. WPSC anticipates that it will have sufficient capacity
to meet its customers' energy requirements during the outage.
-57-
The joint owners of Kewaunee continue to evaluate the economics
of whether or not to invest approximately $89.0 million to
replace the steam generators. Replacement must also be approved
by the PSCW. WPSC favors replacing the steam generators, while
the other two joint owners do not favor replacement. WPSC
requested and was granted regulatory approval to accelerate the
recovery of the Wisconsin retail portion of the current
undepreciated Kewaunee plant balance and the unfunded estimated
costs to decommission the plant over a six-year period beginning
in 1997.
If Kewaunee is retired early, WPSC believes it would be granted
regulatory approval to recover from customers the net carrying
amount and the estimated costs to decommission Kewaunee in excess
of the trust assets. At December 31, 1996, the net carrying
amount was approximately $49.5 million. The current cost of
WPSC's share of the estimated costs to decommission Kewaunee,
assuming early retirement, exceeds the trust assets at
December 31, 1996 by $63.4 million. If Kewaunee is retired
early, WPSC believes that it will be able to meet its commitments
to supply energy to its customers through either (1) possible
investments in new generating units, (2) contracting for
additional purchased power, or (3) changes in commitments to
serve its customers if the generation business is deregulated.
If WPSC increases its investment in Kewaunee and the steam
generators are replaced, WPSC believes Kewaunee costs would be
recoverable in a competitive generation market.
WPSC anticipates receipt of a rate order in the Wisconsin
jurisdiction effective in February 1997. The impact is
approximately a $35.5 million decrease in electric revenues and a
$5.7 million increase in gas revenues on an annual basis. The
new rates will be effective for 1997 and 1998. A brief summary
of the more significant rate case decisions and their estimated
impacts follows.
WPSC will be granted a $2.0 million per month surcharge on
customer bills to cover the additional costs to be incurred by
WPSC for acquiring power from other sources while Kewaunee
remains out of service.
The PSCW is also expected to reaffirm its decision to allow WPSC
to accelerate the funding of decommissioning and the recovery of
investment for Kewaunee assuming a year 2002 shutdown. The total
dollar impact of this acceleration results in an $11.1 million
annual increase in WPSC's customer rates.
WPSC will be granted an 11.8% return on equity for 1997 and 1998.
The PSCW has also agreed to allow WPSC to file a 1998 rate case
should
-58-
WPSC experience severe detrimental financial conditions as
a result of the constraints placed on it by the 1997 rate order.
IMPACT OF INFLATION
The Company's current financial statements are prepared in
accordance with generally accepted accounting principles and
report operating results in terms of historic cost. They provide
a reasonable, objective, and quantifiable statement of financial
results; but they do not evaluate the impact of inflation. Under
rate treatment prescribed by utility regulatory commissions,
WPSC's projected operating costs are recoverable in revenues.
Because forecasts are prepared assuming inflation, the majority
of inflationary effects on normal operating costs are recoverable
in rates. However, in these forecasts, WPSC is only allowed to
recover the historic cost of plant via depreciation.
-59-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WPS RESOURCES CORPORATION
A. CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
=============================================================================================================
Year Ended December 31 (Thousands, except share amounts) 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------
Operating revenues
Electric utility $490,506 $489,000 $480,816
Gas utility 211,357 174,693 182,058
Non-regulated energy and other 156,391 56,155 10,921
- -------------------------------------------------------------------------------------------------------------
Total operating revenues 858,254 719,848 673,795
=============================================================================================================
Operating expenses
Electric production fuels 105,418 104,858 111,011
Purchased power 37,737 39,593 38,631
Gas purchased for resale 149,388 116,253 126,351
Non-regulated energy cost of sales 157,612 53,983 10,663
Other operating expenses 168,905 154,445 148,917
Maintenance 48,806 50,761 49,983
Depreciation and decommissioning 65,178 65,627 56,365
Taxes other than income 26,868 25,921 26,063
- -------------------------------------------------------------------------------------------------------------
Total operating expenses 759,912 611,441 567,984
=============================================================================================================
Operating income 98,342 108,407 105,811
- -------------------------------------------------------------------------------------------------------------
Other income
Allowance for equity funds used during construction 139 170 108
Other, net 1,395 6,080 4,473
- -------------------------------------------------------------------------------------------------------------
Total other income 1,534 6,250 4,581
=============================================================================================================
Income before interest expense 99,876 114,657 110,392
- -------------------------------------------------------------------------------------------------------------
Interest on long-term debt 21,532 22,859 23,407
Other interest 3,596 2,604 1,796
Allowance for borrowed funds used during construction (128) (68) (139)
- -------------------------------------------------------------------------------------------------------------
Total interest expense 25,000 25,395 25,064
=============================================================================================================
Income before income taxes 74,876 89,262 85,328
Income taxes 24,358 30,808 29,526
Minority interest (348) - -
Preferred stock dividends of subsidiary 3,111 3,111 3,111
- -------------------------------------------------------------------------------------------------------------
Net income 47,755 55,343 52,691
=============================================================================================================
Retained earnings at beginning of year 308,965 297,592 287,915
Cash dividend on common stock (44,926) (43,970) (43,014)
- -------------------------------------------------------------------------------------------------------------
Retained earnings at end of year $311,794 $308,965 $297,592
=============================================================================================================
Average shares of common stock 23,891 23,897 23,897
Earnings per average share of common stock $2.00 $2.32 $2.21
Dividend per share of common stock 1.88 1.84 1.80
=============================================================================================================
The accompanying notes are an integral part of these statements.
-60-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WPS RESOURCES CORPORATION
B. CONSOLIDATED BALANCE SHEETS
=======================================================================================================
Assets
- -------------------------------------------------------------------------------------------------------
At December 31 (Thousands) 1996 1995
- -------------------------------------------------------------------------------------------------------
Utility plant
Electric $1,474,104 $1,441,126
Gas 240,791 228,346
- -------------------------------------------------------------------------------------------------------
Total 1,714,895 1,669,472
Less - Accumulated depreciation and decommissioning 952,296 905,427
- -------------------------------------------------------------------------------------------------------
Total 762,599 764,045
Nuclear decommissioning trusts 100,570 82,109
Construction in progress 10,301 8,463
Nuclear fuel, less accumulated amortization 19,381 14,275
- -------------------------------------------------------------------------------------------------------
Net utility plant 892,851 868,892
=======================================================================================================
Current assets
Cash and equivalents 5,978 6,533
Customer and other receivables, net of reserves 106,967 79,301
Accrued utility revenues 35,386 37,586
Fossil fuel, at average cost 8,224 8,701
Gas in storage, at average cost 19,987 10,076
Materials and supplies, at average cost 19,944 20,312
Prepayments and other 22,658 23,576
- -------------------------------------------------------------------------------------------------------
Total current assets 219,144 186,085
=======================================================================================================
Regulatory assets 96,920 111,101
Net non-utility and non-regulated plant 19,738 3,307
Investments and other assets 102,011 97,358
=======================================================================================================
Total $1,330,664 $1,266,743
=======================================================================================================
-61-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WPS RESOURCES CORPORATION
B. CONSOLIDATED BALANCE SHEETS (CONTINUED)
=======================================================================================================
Capitalization and Liabilities
- -------------------------------------------------------------------------------------------------------
At December 31 (Thousands) 1996 1995
- -------------------------------------------------------------------------------------------------------
Capitalization
Common stock equity $ 467,524 $ 463,441
Preferred stock of subsidiary
with no mandatory redemption 51,200 51,200
Long-term debt 305,788 306,590
- -------------------------------------------------------------------------------------------------------
Total capitalization 824,512 821,231
=======================================================================================================
Current liabilities
Notes payable 26,600 15,000
Commercial paper 31,350 11,500
Accounts payable 96,531 67,483
Accrued taxes 1,350 1,744
Accrued interest 8,134 8,378
Gas refunds 704 6,879
Other 12,067 14,668
- -------------------------------------------------------------------------------------------------------
Total current liabilities 176,736 125,652
=======================================================================================================
Long-term liabilities and deferred credits
Accumulated deferred income taxes 130,208 135,958
Accumulated deferred investment tax credits 28,669 30,447
Regulatory liabilities 48,870 49,924
Environmental remediation liabilities 41,697 41,697
Other long-term liabilities 80,173 61,834
- -------------------------------------------------------------------------------------------------------
Total long-term liabilities and deferred credits 329,617 319,860
=======================================================================================================
Minority interest (201) -
Commitments and contingencies (See Note 7)
=======================================================================================================
Total $1,330,664 $1,266,743
=======================================================================================================
The accompanying notes are an integral part of these statements.
-62-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WPS RESOURCES CORPORATION
C. CONSOLIDATED STATEMENTS OF CAPITALIZATION
========================================================================================================
At December 31 (Thousands, except share amounts) 1996 1995
- --------------------------------------------------------------------------------------------------------
Common stock equity
Common stock, $1 par value, 100,000,000 shares
authorized; 23,896,962 shares outstanding $ 23,897 $ 23,897
Premium on capital stock 145,021 145,021
Retained earnings 311,794 308,965
Shares in deferred compensation trust, 14,223 shares at an average
cost of $31.16 per share (443) -
ESOP loan guarantees (12,745) (16,346)
Other - 1,904
- --------------------------------------------------------------------------------------------------------
Total common stock equity 467,524 463,441
========================================================================================================
Preferred stock - Wisconsin Public Service Corporation
Cumulative, $100 par value, 1,000,000 shares authorized;
with no mandatory redemption
Series Shares Outstanding
------ ------------------
5.00% 132,000 13,200 13,200
5.04% 30,000 3,000 3,000
5.08% 50,000 5,000 5,000
6.76% 150,000 15,000 15,000
6.88% 150,000 15,000 15,000
- --------------------------------------------------------------------------------------------------------
Total preferred stock 51,200 51,200
========================================================================================================
Long-term debt
First mortgage bonds - Wisconsin Public Service Corporation
Series Year Due
------ --------
5-1/4% 1998 50,000 50,000
7.30% 2002 50,000 50,000
6.80% 2003 50,000 50,000
6-1/8% 2005 9,075 9,075
6.90% 2013 22,000 22,000
8.80% 2021 53,100 60,000
7-1/8% 2023 50,000 50,000
- --------------------------------------------------------------------------------------------------------
Total 284,175 291,075
Unamortized discount and premium on bonds, net (978) (1,066)
- --------------------------------------------------------------------------------------------------------
Total first mortgage bonds 283,197 290,009
- --------------------------------------------------------------------------------------------------------
ESOP loan guarantees 12,745 16,346
Notes payable to bank, secured by non-regulated plant 9,581 -
Other long-term debt 265 235
- --------------------------------------------------------------------------------------------------------
Total long-term debt 305,788 306,590
========================================================================================================
Total capitalization $824,512 $821,231
========================================================================================================
The accompanying notes are an integral part of these statements.
-63-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WPS RESOURCES CORPORATION
D. CONSOLIDATED STATEMENTS OF CASH FLOWS
============================================================================================================
Year Ended December 31 (Thousands) 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net income $ 47,755 $ 55,343 $ 52,691
Adjustments to reconcile net income to net cash from
operating activities
Depreciation and decommissioning 65,178 65,627 56,365
Amortization of nuclear fuel and other 28,691 33,499 28,811
Deferred income taxes (7,715) 319 (4,562)
Investment tax credit restored (1,778) (1,725) (2,038)
Allowance for equity funds used during construction (139) (170) (108)
Pension income (12,413) (11,678) (10,808)
Post-retirement funding 7,150 6,917 7,036
Deferred demand-side management expenditures (6,250) (8,595) (9,659)
Other, net 8,146 7,163 (4,735)
Changes in
Customer and other receivables (27,666) (19,272) 6,482
Accrued utility revenues 2,200 (8,766) 8,494
Fossil fuel inventory 477 1,804 (297)
Gas in storage (9,911) 5,711 (4,098)
Accounts payable 29,048 840 2,530
Accrued taxes (394) 592 (2,114)
Gas refunds (6,175) 4,926 138
- ------------------------------------------------------------------------------------------------------------
Net cash from operating activities 116,204 132,535 124,128
============================================================================================================
Cash flows from (used for) investing activities
Construction of utility plant and nuclear fuel expenditures (84,750) (80,226) (68,819)
Purchase of other property and equipment (16,431) (1,089) (97)
Decommissioning funding (8,978) (8,181) (7,448)
Purchase of investments and acquisitions (728) (10,217) -
Other (349) 514 2,526
- ------------------------------------------------------------------------------------------------------------
Net cash from (used for) investing activities (111,236) (99,199) (73,838)
============================================================================================================
Cash flows from (used for) financing activities
Redemption and maturities of first mortgage bonds (6,900) - (1,000)
Change in notes payable 11,600 5,000 -
Change in other long-term debt 15,296 - -
Change in commercial paper 19,850 (1,000) 1,500
Cash dividends on common stock (44,926) (43,970) (43,014)
Purchase of deferred compensation stock (443) - -
- ------------------------------------------------------------------------------------------------------------
Net cash from (used for) financing activities (5,523) (39,970) (42,514)
============================================================================================================
Net increase (decrease) in cash and equivalents (555) (6,634) 7,776
============================================================================================================
Cash and equivalents at beginning of year 6,533 13,167 5,391
============================================================================================================
Cash and equivalents at end of year $ 5,978 $ 6,533 $ 13,167
============================================================================================================
Cash paid during year for
Interest, less amount capitalized $ 21,983 $ 21,255 $ 20,693
Income taxes 31,735 34,300 40,333
Preferred stock dividends of subsidiary 3,111 3,111 3,111
Other information
Construction and nuclear fuel expenditures, including
accruals, allowance for funds used during construction,
and customer contributions 81,714 73,251 78,286
============================================================================================================
The accompanying notes are an integral part of these statements.
-64-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WPS RESOURCES CORPORATION AND
WISCONSIN PUBLIC SERVICE CORPORATION
E. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Nature of Operations--WPS Resources Corporation (the
"Company") is a holding company. Approximately 82% and
95% of the Company's 1996 revenues and assets,
respectively, are derived from Wisconsin Public Service
Corporation ("WPSC"), an electric and gas utility. The
Company's primary business is the supply and
distribution of electric power and natural gas in its
franchised service territory. The Company also
provides electric and gas marketing and energy-related
services in non-regulated markets through WPS Energy
Services, Inc. ("ESI"). WPS Power Development, Inc.
("PDI") participates in the development of electric
generation projects and provides services to the
non-regulated electric power generation industry.
The term "utility" refers to regulated activities of
WPSC, while the term "non-utility" refers to activities
of WPSC which are not regulated. The term
"non-regulated" refers to activities other than those
of WPSC.
(b) Use of Estimates--The preparation of the Company's
financial statements is in conformity with generally
accepted accounting principles. Management may make
estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of
revenues and expenses during the reporting period.
Actual results could differ from those estimates.
(c) Acquisitions and Non-Regulated Investments--In the
fourth quarter of 1995, ESI acquired interests in a
producing gas reserves operation and in a gas marketing
operation. The acquisitions have been accounted for
under the purchase method of accounting. The price
paid in excess of the fair value of identifiable assets
acquired for the gas marketing operation is being
amortized over a five-year period. During 1996, PDI
purchased a two-thirds interest in a
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2-unit, 53-megawatt merchant generating facility, the
Stoneman Power Plant ("Stoneman").
(d) Consolidation--The Company consolidates all
majority-owned subsidiaries. All significant
intercompany transactions and accounts have been
eliminated.
(e) Price Risk Management Activities--To manage the price
risk associated with its gas marketing activities, ESI
uses financial instruments to hedge the impact of
market fluctuations in the price of gas and
transportation. Changes in the market value of these
financial instruments are deferred until the gain or
loss on the hedged item is recognized. ESI also uses
financial instruments for trading purposes. These
activities are deemed speculative and, therefore,
changes in the market value of these financial
instruments are recognized as a gain or a loss in the
period of change. The market prices used to value
these contracts reflect management's best estimate,
including closing exchange quotations. The primary
financial instruments ESI utilizes in its price risk
management activities are exchange traded futures and
option contracts used primarily to lock in or cap the
purchase price or sales price of the gas commodity at a
specified location and basis swaps that are used to
mitigate gas price differentials between the location
where gas is purchased and the location where gas is
sold to the customer.
The financial instruments outstanding at December 31,
1996 expire at various times through November 1997. At
December 31, 1996 ESI had outstanding
1,040,000 notional dekatherms of natural gas under
futures and option agreements and 835,000 notional
dekatherms of natural gas under basis swap agreements.
(f) Utility Plant--Utility plant is stated at the original
cost of construction which includes an allowance for
funds used during construction ("AFUDC").
Approximately 50% of retail jurisdictional construction
work in progress ("CWIP") expenditures are subject to
AFUDC using a rate based on WPSC s overall cost of
capital. Major new generating facilities earn AFUDC on
total CWIP expenditures. For 1996, the AFUDC retail
rate was approximately 10.3%.
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AFUDC is recorded on wholesale jurisdictional electric
CWIP at debt and equity percentages specified in the
Federal Energy Regulatory Commission ("FERC") Uniform
System of Accounts. For 1996, the AFUDC wholesale rate
was approximately 5.5%.
Substantially all of WPSC's utility plant is subject to
a first mortgage lien.
(g) Property Additions, Maintenance, and Retirements of
Utility Plant--The cost of renewals and betterments of
units of property (as distinguished from minor items of
property) is capitalized as an addition to the utility
plant accounts. No gain or loss is recognized in
connection with ordinary retirements of utility
property units. The cost of units of property retired,
sold, or otherwise disposed of, plus removal costs,
less salvage, are charged to the accumulated provision
for depreciation. Maintenance and repair costs and
replacement and renewal costs associated with items not
qualifying as units of property are generally charged
to operating expense.
Non-utility property and non-regulated property follow
a similar policy except that gains and losses are
recognized in connection with retirements.
(h) Depreciation--Straight-line composite depreciation
expense is recorded over the estimated useful life of
utility property and includes estimated salvage and
cost of removal. Rates approved by the Public Service
Commission of Wisconsin ("PSCW") on January 1, 1994
remain in effect.
=========================================================
1996 1995 1994
---------------------------------------------------------
Annual composite
depreciation rates
Electric 3.33% 3.43% 3.41%
Gas 3.35% 3.46% 3.37%
=========================================================
Non-utility property and non-regulated property are
depreciated using straight-line depreciation. Most of
the assets have depreciation lives ranging from five to
ten years. Stoneman is depreciated over 40 years.
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Depreciation and nuclear decommissioning costs are
accrued over the estimated service life of the Kewaunee
Nuclear Power Plant ("Kewaunee"). On January 3, 1997,
the PSCW agreed with WPSC's recommendation to
accelerate cost recovery of the remaining unrecovered
investment in Kewaunee and accelerate funding of
Kewaunee decommissioning costs. The PSCW order directs
the owners of Kewaunee to develop depreciation and
decommissioning estimates based on an expected end of
service life of 2002. Prior to 1997, the service life
of Kewaunee was estimated to end in 2013, the year its
license expires. This decision will result in a
significant acceleration of Kewaunee depreciation and
decommissioning collections in customer rates for 1997
and future years. Depreciation expense, exclusive of
that depreciation expense related to nuclear
decommissioning costs, will increase by approximately
$3.3 million on an annualized basis.
(i) Impairment--Effective January 1, 1996, the Company
adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." SFAS No. 121 requires that
long-lived assets and certain identifiable intangibles
be reviewed for impairment whenever circumstances
indicate that the carrying amount of an asset may not
be recoverable. Impairment losses resulting from
application of this statement are reported in income in
the period in which the recognition criteria are first
applied and met. This statement does not have a
material impact on the current carrying amount of the
Company's assets.
(j) Nuclear Decommissioning--Nuclear decommissioning costs
to date have been accrued over the estimated service
life of Kewaunee, recovered currently from customers in
rates, and deposited in external trusts. Such costs
totaled $9.0 million in both 1996 and 1995 and
$4.0 million in 1994. As described in note (1)(h), the
PSCW has approved the acceleration of Kewaunee
depreciation and decommissioning funding. As a result
of this acceleration, the amount deposited in external
trusts will increase to $17.3 million on an annualized
basis once this order becomes effective.
Based on the standard cost escalation assumptions
required by a July 1994 PSCW order, the undiscounted
amount of WPSC's decommissioning costs estimated to be
expended between the
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years 2014 and 2050 is $785.0 million under the funding
plans which were effective for 1994 through 1996.
Based on the revised funding plan which will become
effective in 1997, decommissioning costs estimated to
be expended between the years 2003 and 2039 will total
$614.0 million. In developing these funding plans,
long-term after-tax earnings of approximately 5.5% are
assumed. As of December 31, 1996, the accumulated
provision for depreciation and decommissioning
included accumulated provisions for decommissioning
totaling $100.6 million.
WPSC's share of Kewaunee decommissioning is estimated
to be $164.0 million in current dollars under the
funding plan in effect for 1996 and $172.0 million in
current dollars under the funding plan which will go
into effect in 1997. Both plans are based on a
site-specific study performed in 1992. The current
funding plan assumes the immediate dismantlement
method of decommissioning commencing after an
assumed shutdown in 2013.
As of December 31, 1996, the market value of the
external trusts totaled $100.6 million. Unrealized
gains, net of tax, in the external trusts are reflected
as an increase to the decommissioning reserve, since
decommissioning expense will be recognized as the gains
are realized, in accordance with regulatory
requirements. Depreciation expense includes future
decommissioning costs collected in customer rates and
an offsetting charge for earnings from the external
trusts. Trust earnings totaled $3.0 million, $4.8
million, and $2.4 million for the years ended
December 31, 1996, 1995, and 1994, respectively.
(k) 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 and
plutonium) include an amount for ultimate disposal and
are recovered through current customer rates. As
required by the Nuclear Waste Policy Act of 1982, a
contract has been signed with the Department of Energy
("DOE") for the ultimate storage of the fuel; and
quarterly payments, based on generation, are made to
the DOE for fuel storage. Interim storage space for
spent nuclear fuel is provided at Kewaunee, and
expenses associated with this storage are recognized as
current operating costs. Currently, there is on-site
storage
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capacity for spent fuel through the year 2013.
As of December 31, 1996 and 1995, the accumulated
provisions for nuclear fuel totaled $147.7 million and
$142.8 million, respectively.
(l) Cash and Equivalents--The Company considers short-term
investments with an original maturity of three months
or less to be cash equivalents.
(m) Revenue and Customer Receivables--WPSC accrues revenues
related to electric and gas service, including
estimated amounts for service rendered but not billed.
Automatic fuel adjustment clauses are used for FERC
wholesale-electric and Michigan Public Service
Commission ("MPSC") retail-electric portions of WPSC's
business. The PSCW retail-electric portion of the
business uses a "cost variance range approach." This
range is based on a specific estimated fuel cost for
the forecast year. If WPSC's actual fuel costs fall
outside this range, a hearing may be held and an
adjustment to future rates may result. WPSC has a
purchased-gas-adjustment clause ("PGAC") which allows
it to pass on to all classes of gas customers changes
in the cost of gas purchased from its suppliers,
subject to PSCW and MPSC review. The continued use of
a PGAC for all Wisconsin utilities is currently under
review by the PSCW.
WPSC is required to provide service and grant credit to
customers within its defined service territory and is
precluded from discontinuing service to residential
customers during certain periods of the year. WPSC
continually reviews its customers' credit-worthiness
and obtains deposits or refunds deposits accordingly.
WPSC is permitted to recover bad debts in utility
rates.
Approximately 11% of WPSC's total revenues are from
companies in the paper products industry.
(n) Regulatory Assets and Liabilities--WPSC is subject to
the provisions of SFAS No. 71, "Accounting for the
Effects of Certain Types of Regulation." Regulatory
assets represent probable future revenue associated
with certain incurred costs which will be recovered
from customers through the ratemaking process.
Regulatory liabilities represent costs previously
collected that are refundable in future customer rates.
The following regulatory assets and liabilities were
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reflected in the Consolidated Balance Sheets as of
December 31:
=========================================================
(Thousands) 1996 1995
---------------------------------------------------------
Regulatory assets
Demand-side management expenditures $39,355 $ 44,105
Environmental remediation costs 43,062 42,606
Coal and rail contract buy-out
costs 2,404 10,208
Debt refinancing costs 2,919 3,414
Enrichment facility fee 5,979 6,353
Other 3,201 4,415
---------------------------------------------------------
Total $96,920 $111,101
=========================================================
Regulatory liabilities
Income tax related items $30,056 $ 30,874
Pensions 4,885 9,770
Conservation costs 9,101 7,033
Other 4,828 2,247
---------------------------------------------------------
Total $48,870 $ 49,924
=========================================================
As of December 31, 1996, the majority of WPSC's
regulatory assets are being recovered through rates
charged to customers over periods ranging from two to
ten years.
Based on prior and current rate treatment of such
costs, management believes it is probable that WPSC
will continue to recover from ratepayers the regulatory
assets described above.
See notes (1)(p) and (1)(q) for specific discussion of
pension and deferred tax regulatory liabilities, and
note 7 for discussion of environmental remediation
deferred costs.
(o) Investments and Other Assets--Investments include
ownership interests in Wisconsin River Power Company
and Wisconsin Valley Improvement Company. Income
related to these investments is included in other
income and deductions using the equity method of
accounting. Other assets include prepaid pension
assets, operating deposits for jointly-owned plants,
the cash surrender value of life insurance policies,
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and the long-term portion of energy conservation loans
to customers.
(p) Employee Benefit Plans--WPSC has non-contributory
retirement plans covering substantially all employees
under which annual contributions may be made to an
irrevocable trust established to provide retired
employees with a monthly payment if conditions relating
to age and length of service have been met. The plans
are fully funded, and no contributions were made in
1996, 1995, or 1994. WPSC recovers pension costs in
customer rates under SFAS No. 87, "Employers'
Accounting for Pensions," and is returning to
ratepayers through 1998 the amounts previously
recovered from customers in excess of SFAS No. 87
costs.
The following table sets forth the plans' funded status
and expense (income).
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=================================================================================
As of December 31 1996 1995 1994
(Thousands, except for percentages)
---------------------------------------------------------------------------------
Vested benefit obligation $(189,097) $(177,490) $(162,435)
Non-vested benefit obligation (10,213) (8,980) (7,868)
---------------------------------------------------------------------------------
Total actuarial present value of
accumulated benefit obligation $(199,310) $(186,470) $(170,303)
=================================================================================
Projected benefit obligation for
service rendered to date $(252,268) $(255,188) $(231,134)
Plan assets at fair value 429,948 391,070 329,424
---------------------------------------------------------------------------------
Plan assets in excess of projected
benefit obligation 177,680 135,882 98,290
Unrecognized net gain (121,066) (84,098) (47,670)
Unrecognized prior service cost 7,254 8,020 6,297
Unrecognized net asset (19,991) (23,455) (26,920)
---------------------------------------------------------------------------------
Prepaid retirement plan cost $ 43,877 $ 36,349 $ 29,997
=================================================================================
The net retirement plan expense
(income) includes the following
components
Service cost $ 6,371 $ 5,888 $ 6,333
Interest cost 19,097 18,211 17,308
Actual return on plan assets (48,244) (73,242) 2,555
Net amortization and deferral 15,248 42,791 (31,678)
Regulatory adjustment (4,885) (5,326) (5,326)
---------------------------------------------------------------------------------
Net retirement plan (income) $ (12,413) $ (11,678) $ (10,808)
=================================================================================
The assumed rates for calculations
used in the above tables were
Expected long-term return on
investments 8.50% 9.00% 9.00%
Average rate for future salary
increases 5.50% 6.25% 6.25%
Discount rate to compute projected
benefit obligation 7.75% 7.75% 8.00%
=================================================================================
WPSC also offers medical, dental, and life insurance
benefits to employees, retirees, and their dependents.
The expenses for active employees are expensed as
incurred.
WPSC accounts for retiree benefits using SFAS No. 106,
"Employers' Accounting for Post-Retirement Benefits
Other Than Pensions," which requires the cost of
post-retirement benefits for employees to be accrued as
expense over the
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period in which the employee renders service and
becomes eligible to receive benefits. WPSC
elected to recognize the transition obligation for
current and future retirees over 20 years beginning in
1993.
WPSC funds amounts to irrevocable trusts as allowed for
income tax purposes. These funded amounts have been
expensed and recovered through customer rates. The
non-administrative plan is a collectively bargained
plan and, therefore, is tax exempt. The investments in
the trust covering administrative employees are subject
to federal unrelated business income taxes at a 39.6%
tax rate.
The table below sets forth the plans' accrued
post-retirement benefit obligation ("APBO") and the
expense provisions.
=============================================================================
(Thousands) 1996 1995 1994
-----------------------------------------------------------------------------
APBO attributable to
Retirees and dependents $ (43,746) $ (46,681) $ (53,060)
Fully eligible active plan
participants (5,273) (5,983) (5,559)
Other active plan participants (52,112) (58,611) (68,084)
-----------------------------------------------------------------------------
Total APBO (101,131) (111,275) (126,703)
Fair value of plan assets 103,748 91,038 70,460
-----------------------------------------------------------------------------
APBO in excess of plan assets 2,617 (20,237) (56,243)
Unrecognized net (gain) loss (66,045) (38,371) 63
Unrecognized transition
obligation 38,453 40,887 43,321
Unrecognized prior service cost (1,897) (2,027) -
-----------------------------------------------------------------------------
Accrued post-retirement
benefit obligation $ (26,872) $ (19,748) $ (12,859)
=============================================================================
Service cost $ 3,613 $ 4,392 $ 4,853
Interest cost 8,488 9,833 8,830
Actual return on plan assets (18,136) (20,918) (946)
Net amortization and deferral 13,726 17,809 (1,774)
-----------------------------------------------------------------------------
Post-retirement benefit cost $ 7,691 $ 11,116 $ 10,963
=============================================================================
The assumed before tax expected long-term return on
investments and the discount rate used to measure the
APBO under SFAS No. 106 are consistent with rates used
to calculate the pension plans' funded status and
expense under SFAS No. 87. Only the administrative
plan is subject to
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federal income taxes which are reflected in the
expense and funding status. The assumed health
care cost trend rates for 1997 are 8.0% for medical
and 7.5% for dental, both decreasing to 5.0% by the
year 2006. Increasing each of the medical and dental
cost trend rates by 1.0% in each year would increase
the total APBO as of December 31, 1996 by $17.1 million
and the total net periodic post-retirement benefit cost
for the year then ended by $2.1 million.
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 2,165,916 shares of Company
common stock (market value of approximately $61.7
million) at December 31, 1996. At that date, the ESOP
also had one loan guaranteed by WPSC and secured by
common stock.
Principal and interest on the loan are to be paid
through WPSC contributions and through dividends on
Company common stock held by the ESOP. Shares in the
ESOP are allocated to participants as the loan is
repaid. Tax benefits from dividends paid to the ESOP
are recognized as a reduction in WPSC's cost of
providing service to customers. The PSCW has allowed
WPSC to include in cost of service an additional
employer contribution to the plan. The net effect of
the tax benefits and of the employee contribution is an
approximately equal sharing of benefits of the program
between customers and employees.
(q) Income Taxes--The Company accounts for income taxes
using the liability method as prescribed by SFAS No.
109, "Accounting for Income Taxes." Under the
liability method, deferred income tax liabilities are
established for all temporary differences in the book
and tax bases of assets and liabilities based upon
enacted tax laws and rates applicable to the periods in
which the taxes become payable. Excess deferred income
taxes resulted from taxes provided in prior years at
rates greater than current rates, and are being
refunded to customers prospectively. The net
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regulatory liability totaled $30.0 million as of
December 31, 1996.
Previously deferred investment tax credits are being
amortized as a reduction of income tax expense over the
life of the related utility plant. The components of
income tax expense are set forth in the tables below.
As of December 31, 1996 and 1995, the Company had the
following significant temporary differences that
created deferred tax assets and liabilities:
==========================================================
(Thousands) 1996 1995
----------------------------------------------------------
Deferred tax assets
Plant related $ 55,040 $ 51,362
Customer advances 8,232 7,216
Post-retirement medical and dental 10,844 7,974
Other 14,752 16,086
----------------------------------------------------------
Total 88,868 82,638
==========================================================
Deferred tax liabilities
Plant related 179,573 172,304
Demand-side management expenditures 15,540 17,415
Pension 13,676 11,719
Other 10,287 17,158
----------------------------------------------------------
Total 219,076 218,596
==========================================================
Net deferred tax liabilities $130,208 $135,958
==========================================================
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=================================================================================================
(Thousands,
except for percentages) 1996 1995 1994
-------------------------------------------------------------------------------------------------
Rate Amount Rate Amount Rate Amount
-------------------------------------------------------------------------------------------------
Statutory federal income tax 35.0% $26,329 35.0% $31,242 35.0% $29,865
State income taxes, net 5.7 4,275 5.4 4,850 6.2 5,232
Investment tax credit restored (2.4) (1,778) (1.9) (1,725) (2.4) (2,038)
Rate difference on reversal
of income tax temporary
differences (2.1) (1,579) (1.9) (1,656) (1.6) (1,344)
Dividends paid to ESOP (1.9) (1,424) (1.6) (1,444) (1.7) (1,445)
Other differences, net (2.0) (1,465) (0.5) (459) (0.9) (744)
-------------------------------------------------------------------------------------------------
Effective income tax 32.3% $24,358 34.5% $30,808 34.6% $29,526
=================================================================================================
Current provision
Federal $26,122 $25,628 $28,681
State 7,729 6,586 7,445
-------------------------------------------------------------------------------------------------
Total current provision 33,851 32,214 36,126
Deferred provision
(benefit) (7,715) 319 (4,562)
Investment tax credit
restored, net (1,778) (1,725) (2,038)
-------------------------------------------------------------------------------------------------
Total income tax expense $24,358 $30,808 $29,526
=================================================================================================
(r) Reclassifications--Certain prior year financial
statement amounts have been reclassified to conform to
their current year presentation.
(s) Retirement of Debt--Historically, gains or losses
resulting from the settlement of long-term debt
obligations have been deferred and amortized concurrent
with rate recovery as required by regulators.
NOTE 2--SHORT-TERM DEBT AND LINES OF CREDIT
To provide short-term borrowing flexibility and security for
commercial paper outstanding, the Company and its
subsidiaries maintain bank lines of credit. Most of these
lines of credit require a fee.
The information in the table below relates to short-term
debt and lines of credit for the years indicated:
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===============================================================================================
(Thousands, except for percentages) 1996 1995 1994
-----------------------------------------------------------------------------------------------
As of end of year
Commercial paper outstanding $31,350 $11,500 $12,500
Discount rate on outstanding commercial paper 5.73% 5.65% 5.95%
Notes payable outstanding $26,600 $15,000 $10,000
Interest rate on notes payable 5.81% 5.77%-6.18% 5.97%
Available lines of credit $41,300 $28,050 $22,870
===============================================================================================
For the year
Maximum amount of short-term debt $70,250 $32,500 $26,000
Average amount of short-term debt $28,424 $14,305 $10,844
Average interest rate on short-term debt 4.89% 5.97% 4.3%
===============================================================================================
NOTE 3--JOINTLY-OWNED FACILITIES
Information regarding WPSC's share of major jointly-owned
electric generating facilities in service at December 31,
1996 is set forth below.
============================================================================
(Thousands, Columbia Edgewater
except for percentages) Energy Center Unit No. 4 Kewaunee
----------------------------------------------------------------------------
Ownership 31.8% 31.8% 41.2%
Plant capacity (Megawatts) 335.2 104.9 221.0
Utility plant in service $110,886 $22,064 $132,635
Accumulated depreciation $ 62,497 $12,602 $ 83,131
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. WPSC has supplied its own financing
for all jointly-owned projects.
NOTE 4--LONG-TERM DEBT
Substantially all utility plant assets are secured by first
mortgage bonds.
In June 1996, WPSC repurchased $6.9 million of the First
Mortgage Bonds, 8.80% Series, due in 2021. The repurchase
was funded through short-term borrowings. The repurchase
premium and the unamortized discount from the original issue
have been deferred and will be amortized over approximately
a two-year period to correspond with ratemaking treatment.
In 1998, $50.0 million of 5-1/4% bonds will mature.
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PDI has a revolving credit note of $11.5 million which is
secured by Stoneman. As of December 31, 1996, $7.3 million
had been drawn against this credit note. PDI also has a
note payable of $3.3 million secured by a letter of credit
which reduces the availability of the above revolving credit
note. Both of these notes are due in the year 2000 when the
plant may be converted to a 300-megawatt gas-fired combined
cycle facility.
NOTE 5--COMMON EQUITY
Under the Company's Stock Investment Plan ("SIP"), the
Company's common stock is purchased in the open market to
satisfy shareholder and employee purchase requirements.
In December 1996, the Company adopted a Shareholder Rights
Plan designed to enhance the ability of the Board of
Directors to protect shareholders and the Company if efforts
are made to gain control of the Company in a manner that is
not in the best interests of the Company and its
shareholders. The plan gives existing shareholders, under
certain circumstances, the right to purchase stock at a
discounted price. The rights expire on December 11, 2006.
At December 31, 1996, the Company had $310.8 million of
retained earnings available for dividends; however, WPSC is
restricted by a PSCW order to paying normal common stock
dividends of no more than 109% of the previous year's common
stock dividend without PSCW approval. Also, Wisconsin law
prohibits WPSC from making loans to the Company and its
subsidiaries and from guaranteeing their obligations. In
January 1997 and January 1996, WPSC paid special common
dividends of $10 million and $11 million, respectively, to
the Company. The special dividends allow WPSC's average
common equity capitalization ratio to remain at
approximately 54%, the level approved by the PSCW for
ratemaking.
NOTE 6--FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate
the fair value of each class of financial instruments for
which it is practicable to estimate such value:
Cash, Short-Term Investments, Energy Conservation Loans,
Notes Payable, and Outstanding Commercial Paper: The
carrying amount approximates fair value due to the short
maturity of those investments and obligations.
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Nuclear Decommissioning Trusts: The value of WPSC's nuclear
decommissioning trust investments is recorded at market
value.
Long-Term Debt, Preferred Stock, and ESOP Loan Guarantees:
The fair value of WPSC's long-term debt, preferred stock,
and ESOP loan guarantees is estimated based on the quoted
market price for the same or similar issues or on the
current rates offered to WPSC for debt of the same remaining
maturity.
The estimated fair values of the Company's financial
instruments as of December 31 were:
=================================================================================================
1996 1995
-------------------------------------------------------------------------------------------------
(Thousands) Carrying Amount Fair Value Carrying Amount Fair Value
-------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 5,978 $ 5,978 $ 6,533 $ 6,533
Energy conservation loans 5,388 5,388 3,241 3,241
Nuclear decommissioning trusts 100,570 100,570 82,109 82,109
Notes payable 26,600 26,600 15,000 15,000
Commercial paper 31,350 31,350 11,500 11,500
ESOP loan guarantees 12,745 13,412 16,346 17,700
Long-term debt 293,756 300,906 291,075 314,297
Preferred stock 51,200 45,314 51,200 44,886
Gas commodity instruments (61) 650 - 2,032
=================================================================================================
NOTE 7--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 $230.6 million from 1997 through 2016.
The obligations are subject to force majeure provisions
which provide WPSC other options if the specified coal does
not meet emission limits which may be mandated in future
legislation. In the opinion of management, any amounts paid
under the take-or-pay obligations described above would be
legitimate costs of service subject to recovery in customer
rates.
Purchased Power
WPSC has several take-or-pay contracts related to purchased
power, for either capacity or energy. These contracts total
$29.2 million through 1998. Management expects to recover
these costs in future customer rates.
-80-
Long-Term Power Supply
In November 1995, WPSC signed a 25-year agreement to
purchase power from Polsky Energy Corporation ("Polsky"), an
independent power producer proposing to build a cogeneration
facility and sell the electrical power to WPSC. Polsky is
in the second stage of a two-stage Certificate of Public
Convenience and Necessity ("CPCN") permitting process
prescribed by the PSCW. Construction of the Polsky project
is contingent upon a PSCW determination in stage two of the
CPCN process that WPSC will need the electric capacity which
would be provided by the proposed plant. A recent WPSC load
forecast suggests the capacity may not be needed. A final
decision is expected in 1997. If the PSCW approves the
Polsky project, it will be accounted for as a capitalized
lease. This would result in the Company recording a plant
asset of approximately $110 million, with an offsetting
amount of long-term debt.
Gas Costs
WPSC has natural gas supply and transportation contracts
that require total demand payments of $309.7 million through
October 2003. Management believes that these costs will be
recoverable in future customer rates.
The FERC has allowed ANR Pipeline Company ("ANR"), WPSC's
primary pipeline supplier, to recover from its customers,
including WPSC, a portion of certain take-or-pay costs it
incurred from renegotiating its long-term gas contracts. To
date, the PSCW has granted WPSC recovery of all ANR
take-or-pay costs.
In April 1992, the FERC issued Order No. 636 ("Order") which
required natural gas pipelines to restructure their sales
and transportation services. As a result of this Order,
WPSC was obligated to pay for a portion of ANR's transition
costs incurred to comply with the Order. At December 31,
1995, WPSC had paid in full the liability for 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.
In December 1996, FERC approved a settlement agreement which
establishes the price for ANR's gas purchases and demand
charge from the Dakota Gasification Plant. While the amount
has not yet been determined, WPSC estimates that it will be
billed
-81-
approximately half of the current amount, or $.6 million in
1997. Charges through 2003 are estimated to be $4.2 million.
Nuclear Liability
The Price-Anderson Act provides for the payment of funds for
public liability claims arising out of a nuclear incident.
In the event of a nuclear incident involving any of the
nation's licensed reactors, WPSC is subject to a
proportional assessment which is approximately $32.7 million
per incident, not to exceed $4.1 million per incident, per
calendar year. These amounts represent WPSC's 41.2%
ownership share in Kewaunee.
Nuclear Plant Operation
As a result of more extensive tube degradation discovered in
the steam generators at Kewaunee during the fall 1996
scheduled refueling and maintenance outage, WPSC has
concluded that Kewaunee will need to be retired from service
unless the steam generators are replaced within the next few
years. WPSC is currently repairing steam generators, but
this repair is only expected to last a few years. WPSC is
pursuing replacement of steam generators at a cost of
approximately $89.0 million (WPSC's share is approximately
$36.7 million). Approval is needed from both the joint
owners and the PSCW in order to proceed with replacement.
The net carrying amount of WPSC's share of Kewaunee at
December 31, 1996 is $49.5 million. In addition, the
current cost of WPSC's share of the estimated costs to
decommission Kewaunee, assuming early retirement, exceeds
the trust assets at December 31, 1996 by $63.4 million. If
retired early, Kewaunee would be placed in a dormant state
following the transfer of spent fuel to temporary storage
facilities. Under this plan, Kewaunee remains intact with
minimal monitoring and maintenance until physical
decommissioning begins. Actual decommissioning would
probably not begin until approximately 2015. If the owners
of Kewaunee decide not to replace the steam generators,
management believes the carrying amount and any unfunded
decommissioning costs at the date of Kewaunee's retirement
would be recoverable from customers in rates, and that no
write-down for impairment would be necessary. On
January 3, 1997, the PSCW agreed with WPSC's recommendation
to accelerate recovery of the Wisconsin retail portion
(currently approximately 88.0%) of both the current
undepreciated plant balance and the unfunded decommissioning
costs over a six-year period, 1997 through 2002.
-82-
If the steam generators are replaced, the PSCW may reconsider
this decision based on information available at that time.
Clean Air Regulations
In 1990, the Federal Clean Air Act Amendments ("Act") became
law. The Act required WPSC to meet new emission limits for
sulfur dioxide and nitrogen oxide in 1995 (Phase I) and in
the year 2000 (Phase II). Wisconsin had already mandated
reduced sulfur dioxide emissions effective in 1993. WPSC
has been in compliance with the Wisconsin sulfur dioxide
limits and the federal Phase II limits since 1994.
Compliance was attained cost effectively through fuel
switching.
The final federal regulations regarding nitrogen oxide have
been published. WPSC may make additional capital
expenditures in the range of $3.0 million to $5.0 million
between 1998 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 is 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 seven sites at which
either a Phase I or Phase II site investigation had been
completed. The consultant has yet to perform a detailed
investigation of the eighth site, and comparable information
on this site is not available.
The range of future investigation and cleanup costs for all
eight sites is estimated to be from $34.7 million to $41.7
million. Minimal amounts have been spent to date.
Remediation expenditures would be made over the next
32 years. WPSC has recorded a liability with an offsetting
regulatory asset (deferred charge) of $41.7 million, which
represents WPSC's current estimate of cleanup costs for all
eight sites. Based on discussions with regulators and a
rate order in Wisconsin, management believes that these
costs (net of any insurance recoveries), but not the
carrying costs associated with the expenditures, will be
recoverable in future customer rates.
As remedial feasibility studies and initial remedial actions
are completed, these estimates may be adjusted, and these
adjustments could be significant. Other factors that can
affect these
-83-
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 has obtained or is pursuing.
Insurance recoveries are deferred as an offset to the
regulatory asset. Due to regulatory treatment, neither
adjustments to the estimated liability nor insurance
recoveries have an immediate impact on net income.
Currently, WPSC has insurance settlement agreements of
approximately $12.0 million which it expects to receive in
1997. The PSCW has authorized recovery of $225,000 per year
for gas site cleanup effective with the rate order which is
expected to become effective in February 1997.
Future Utility Expenditures
Management estimates 1997 utility plant construction
expenditures to be approximately $74.0 million. Demand-side
management ("DSM") expenditures are estimated to be
$7.3 million. No DSM expenditures will be deferred in 1997,
and the outstanding balance at December 31, 1996 of
$39.4 million will be amortized over the next five years
consistent with rate recovery.
NOTE 8--REGULATORY ENVIRONMENT
WPSC anticipates receipt of a rate order in the Wisconsin
jurisdiction effective in February 1997. The impact is
approximately a $35.5 million decrease in electric revenues
and a $5.7 million increase in gas revenues on an annual
basis. The new rates will be effective for 1997 and 1998.
A brief summary of the more significant rate case decisions
and their estimated impacts follows.
WPSC will be granted a $2.0 million per month surcharge on
customer bills to cover the additional costs to be incurred
by WPSC for acquiring power from other sources while
Kewaunee remains out of service.
The PSCW also reaffirmed its decision to allow WPSC to
accelerate the funding of decommissioning and the recovery
of investment for Kewaunee assuming a year 2002 shutdown.
The total dollar impact of this acceleration results in an
$11.1 million annual rate impact on WPSC.
WPSC will be granted an 11.8% return on equity for 1997 and
1998. The PSCW has also agreed to allow WPSC to file a 1998
rate case
-84-
should WPSC experience severe detrimental financial conditions
as a result of the constraints placed on it by the 1997 rate
order.
NOTE 9--SEGMENTS OF BUSINESS
The table below presents information for the respective
years pertaining to the Company's operations segmented by
lines of business.
===========================================================================================
(Thousands) 1996
-------------------------------------------------------------------------------------------
Electric Gas Non-Regulated Total
Utility Utility Operations
-------------------------------------------------------------------------------------------
Operating revenues $490,506 $211,357 $156,391 $ 858,254
Operating expenses
Operation and maintenance 309,212 190,331 168,323 667,866
Depreciation 56,708 7,127 1,343 65,178
Other taxes 23,161 3,708 (1) 26,868
-------------------------------------------------------------------------------------------
Total operating expenses 389,081 201,166 169,665 759,912
-------------------------------------------------------------------------------------------
Operating income $101,425 $ 10,191 $(13,274) $ 98,342
===========================================================================================
Identifiable assets(a) $905,325 $255,200 $ 71,716 $1,232,241
-----------------------------------------------------------------------
Assets not allocated(b) 98,423
-------------------------------------------------------------------------------------------
Total assets $1,330,664
===========================================================================================
Construction and nuclear fuel
expenditures including AFUDC $ 63,941 $ 17,773 $ - $ 81,714
===========================================================================================
(a) At December 31 and net of the respective accumulated depreciation.
(b) Primarily includes cash, investments, pension assets, non-utility property and other receivables.
-85-
===========================================================================================
(Thousands) 1995
-------------------------------------------------------------------------------------------
Electric Gas Non-Regulated Total
Utility Utility Operations
-------------------------------------------------------------------------------------------
Operating revenues $489,628 $174,065 $56,155 $ 719,848
Operating expenses
Operation and maintenance 310,293 152,062 57,538 519,893
Depreciation 58,608 6,766 253 65,627
Other taxes 22,171 3,749 1 25,921
-------------------------------------------------------------------------------------------
Total operating expenses 391,072 162,577 57,792 611,441
-------------------------------------------------------------------------------------------
Operating income $ 98,556 $ 11,488 $(1,637) $ 108,407
===========================================================================================
Identifiable assets(a) $906,029 $232,983 $33,332 $1,172,344
----------------------------------------------------------------------
Assets not allocated(b) 94,399
-------------------------------------------------------------------------------------------
Total assets $1,266,743
===========================================================================================
Construction and nuclear fuel
expenditures including AFUDC $ 56,916 $ 16,335 $ - $ 73,251
===========================================================================================
===========================================================================================
(Thousands) 1994
-------------------------------------------------------------------------------------------
Electric Gas Non-Regulated Total
Utility Utility Operations
-------------------------------------------------------------------------------------------
Operating revenues $480,816 $182,058 $10,921 $ 673,795
Operating expenses
Operation and maintenance 312,368 162,013 11,175 485,556
Depreciation 50,540 5,825 - 56,365
Other taxes 22,516 3,547 - 26,063
-------------------------------------------------------------------------------------------
Total operating expenses 385,424 171,385 11,175 567,984
-------------------------------------------------------------------------------------------
Operating income $ 95,392 $ 10,673 $ (254) $ 105,811
===========================================================================================
Identifiable assets(a) $937,525 $188,971 $12,043 $1,138,539
----------------------------------------------------------------------
Assets not allocated(b) 78,736
-------------------------------------------------------------------------------------------
Total assets $1,217,275
===========================================================================================
Construction and nuclear fuel
expenditures including AFUDC $ 58,674 $ 19,612 $ - $ 78,286
===========================================================================================
(a) At December 31 and net of the respective accumulated depreciation.
(b) Primarily includes cash, investments, pension assets, non-utility property and other receivables.
-86-
NOTE 10--QUARTERLY FINANCIAL INFORMATION
======================================================================================================================
(Thousands, except for share amounts) Three Months Ended
- ----------------------------------------------------------------------------------------------------------------------
1996
March June September December Total
- ----------------------------------------------------------------------------------------------------------------------
Operating revenues $251,337 $181,628 $178,980 $246,309 $858,254
Operating income $ 40,999 $ 20,606 $ 22,516 $ 14,221 $ 98,342
Net income $ 23,520 $ 10,120 $ 10,385 $ 3,730 $ 47,755
Average number of shares of common stock 23,896 23,893 23,893 23,885 23,891
Earnings per average share of common stock $ .98 $ .42 $ .43 $ .17 $ 2.00
======================================================================================================================
1995
March June September December Total
- ----------------------------------------------------------------------------------------------------------------------
Operating revenues $187,711 $162,153 $166,748 $203,236 $719,848
Operating income $ 34,272 $ 14,158 $ 32,693 $ 27,284 $108,407
Net income $ 20,238 $ 5,866 $ 15,732 $ 13,507 $ 55,343
Average number of shares of common stock 23,897 23,897 23,897 23,897 23,897
Earnings per average share of common stock $ .85 $ .24 $ .66 $ .57 $ 2.32
======================================================================================================================
Because of various factors which affect the utility business, the quarterly results of operations are not
necessarily comparable. Fourth quarter 1996 results include a loss of $.25 per share at the Company's
non-regulated subsidiaries.
-87-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WPS RESOURCES CORPORATION
F. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of WPS Resources Corporation:
We have audited the accompanying consolidated balance sheets and
consolidated statements of capitalization of WPS Resources
Corporation (a Wisconsin corporation) and subsidiaries as of
December 31, 1996 and 1995, 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, 1996.
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 opinions.
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, 1996 and 1995 and the results of its operations and
its cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin
January 28, 1997
-88-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WISCONSIN PUBLIC SERVICE CORPORATION
G. CONSOLIDATED STATEMENTS OF INCOME
====================================================================================================================
Year Ended December 31 (Thousands) 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
Operating revenues
Electric $490,506 $489,000 $480,816
Gas 211,357 174,693 182,058
- --------------------------------------------------------------------------------------------------------------------
Total operating revenues 701,863 663,693 662,874
====================================================================================================================
Operating expenses
Electric production fuels 105,418 104,858 111,011
Purchased power 37,737 39,593 38,631
Gas purchased for resale 149,388 116,253 126,351
Other operating expenses 158,167 150,880 148,382
Maintenance 48,734 50,761 49,983
Depreciation and decommissioning 63,835 65,374 56,365
Taxes
Federal income 25,267 25,645 24,082
Investment tax credit restored (1,778) (1,725) (2,038)
State income 7,732 7,378 7,768
Gross receipts and other 26,869 25,920 26,063
- --------------------------------------------------------------------------------------------------------------------
Total operating expense 621,369 584,937 586,598
====================================================================================================================
Operating income 80,494 78,756 76,276
- --------------------------------------------------------------------------------------------------------------------
Other income and (deductions)
Allowance for equity funds used during construction 139 170 108
Other, net 5,123 6,019 4,750
Income taxes (294) 160 (228)
- --------------------------------------------------------------------------------------------------------------------
Total other income and (deductions) 4,968 6,349 4,630
====================================================================================================================
Income before interest expense 85,462 85,105 80,906
- --------------------------------------------------------------------------------------------------------------------
Interest expense
Interest on long-term debt 22,512 23,409 23,410
Other interest 2,688 2,526 1,793
Allowance for borrowed funds used during construction (128) (68) (139)
- --------------------------------------------------------------------------------------------------------------------
Total interest expense 25,072 25,867 25,064
====================================================================================================================
Net income 60,390 59,238 55,842
====================================================================================================================
Preferred stock dividend requirements 3,111 3,111 3,111
Earnings on common stock $ 57,279 $ 56,127 $ 52,731
====================================================================================================================
The accompanying WPS Resources Corporation notes are an integral part of these statements.
-89-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WISCONSIN PUBLIC SERVICE CORPORATION
H. CONSOLIDATED BALANCE SHEETS
===========================================================================================================
Assets
- -----------------------------------------------------------------------------------------------------------
At December 31 (Thousands) 1996 1995
- -----------------------------------------------------------------------------------------------------------
Utility plant
Electric $1,474,104 $1,441,126
Gas 240,791 228,346
- -----------------------------------------------------------------------------------------------------------
Total 1,714,895 1,669,472
Less - Accumulated depreciation and decommissioning 952,296 905,427
- -----------------------------------------------------------------------------------------------------------
Total 762,599 764,045
Nuclear decommissioning trusts 100,570 82,109
Construction in progress 10,301 8,463
Nuclear fuel, less accumulated amortization 19,381 14,275
- -----------------------------------------------------------------------------------------------------------
Net utility plant 892,851 868,892
===========================================================================================================
Current assets
Cash and equivalents 4,165 4,471
Customer and other receivables, net of reserves 66,234 62,156
Accrued utility revenues 35,326 37,586
Fossil fuel, at average cost 8,224 8,701
Gas in storage, at average cost 16,440 9,903
Materials and supplies, at average cost 19,796 20,312
Prepayments and other 22,189 23,526
- -----------------------------------------------------------------------------------------------------------
Total current assets 172,374 166,655
===========================================================================================================
Regulatory assets 96,920 111,101
Net non-utility plant 4,191 2,141
Investments and other assets 92,612 84,622
===========================================================================================================
Total $1,258,948 $1,233,411
===========================================================================================================
-90-
PAGE
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WISCONSIN PUBLIC SERVICE CORPORATION
H. CONSOLIDATED BALANCE SHEETS (CONTINUED)
===========================================================================================================
Capitalization and Liabilities
- -----------------------------------------------------------------------------------------------------------
At December 31 (Thousands) 1996 1995
- -----------------------------------------------------------------------------------------------------------
Capitalization
Common stock equity $ 448,425 $ 445,375
Preferred stock with no mandatory redemption 51,200 51,200
Long-term debt to parent 14,612 6,101
Long-term debt 296,207 306,590
- -----------------------------------------------------------------------------------------------------------
Total capitalization 810,444 809,266
===========================================================================================================
Current liabilities
Notes payable 10,000 10,000
Commercial paper 29,000 11,500
Accounts payable 62,500 52,881
Accrued taxes 1,350 1,744
Accrued interest 8,134 8,378
Gas refunds 704 6,879
Other 11,620 12,635
- -----------------------------------------------------------------------------------------------------------
Total current liabilities 123,308 104,017
===========================================================================================================
Long-term liabilities and deferred credits
Accumulated deferred income taxes 131,549 136,226
Accumulated deferred investment credits 28,669 30,447
Regulatory liabilities 48,870 49,924
Environmental remediation liabilities 41,697 41,697
Other long-term liabilities 74,411 61,834
- -----------------------------------------------------------------------------------------------------------
Total long-term liabilities and deferred credits 325,196 320,128
===========================================================================================================
Commitments and contingencies (See Note 7)
===========================================================================================================
Total $1,258,948 $1,233,411
===========================================================================================================
The accompanying WPS Resources Corporation notes are an integral part of these balance sheets.
-91-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WISCONSIN PUBLIC SERVICE CORPORATION
I. CONSOLIDATED STATEMENTS OF CAPITALIZATION
=======================================================================================================================
At December 31 (Thousands, except share amounts) 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
Common stock equity
Common stock $ 95,588 $ 95,588
Premium on capital stock 73,842 73,842
Retained earnings 291,740 290,387
ESOP loan guarantees (12,745) (16,346)
Other - 1,904
- -----------------------------------------------------------------------------------------------------------------------
Total common stock equity 448,425 445,375
=======================================================================================================================
Preferred stock
Cumulative, $100 par value, 1,000,000 shares authorized:
with no mandatory redemption -
Series Shares Outstanding
------ ------------------
5.00% 132,000 13,200 13,200
5.04% 30,000 3,000 3,000
5.08% 50,000 5,000 5,000
6.76% 150,000 15,000 15,000
6.88% 150,000 15,000 15,000
- -----------------------------------------------------------------------------------------------------------------------
Total preferred stock 51,200 51,200
=======================================================================================================================
Long-term debt to parent
Series Year Due
------ --------
8.76% 2015 6,012 6,101
7.35% 2016 8,600 -
- -----------------------------------------------------------------------------------------------------------------------
Total long-term debt to parent 14,612 6,101
=======================================================================================================================
Long-term debt
First mortgage bonds
Series Year Due
------ --------
5-1/4% 1998 50,000 50,000
7.30% 2002 50,000 50,000
6.80% 2003 50,000 50,000
6-1/8% 2005 9,075 9,075
6.90% 2013 22,000 22,000
8.80% 2021 53,100 60,000
7-1/8% 2023 50,000 50,000
- -----------------------------------------------------------------------------------------------------------------------
Total 284,175 291,075
Unamortized discount and premium on bonds, net (978) (1,066)
- -----------------------------------------------------------------------------------------------------------------------
Total first mortgage bonds 283,197 290,009
- -----------------------------------------------------------------------------------------------------------------------
ESOP loan guarantees 12,745 16,346
Other long-term debt 265 235
- -----------------------------------------------------------------------------------------------------------------------
Total long-term debt 296,207 306,590
=======================================================================================================================
Total capitalization $810,444 $809,266
=======================================================================================================================
The accompanying WPS Resources Corporation notes are an integral part of these statements.
-92-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WISCONSIN PUBLIC SERVICE CORPORATION
J. CONSOLIDATED STATEMENTS OF CASH FLOWS
========================================================================================================================
Year Ended December 31 (Thousands) 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 60,390 $ 59,238 $ 55,842
Adjustments to reconcile net income to net cash from
operating activities -
Depreciation and decommissioning 63,835 65,374 56,365
Amortization of nuclear fuel and other 27,687 33,344 28,811
Deferred income taxes (6,623) 103 (4,476)
Investment credit restored (1,778) (1,725) (2,038)
Allowance for equity funds used during construction (139) (170) (108)
Pension income (12,413) (11,678) (10,808)
Post-retirement funding 7,150 6,917 7,036
Deferred demand-side management expenditures (6,250) (8,595) (9,659)
Other, net 7,261 6,640 (16,689)
Changes in -
Customer and other receivables (4,078) (4,120) 8,475
Accrued utility revenues 2,260 (8,766) 8,494
Fossil fuel inventory 477 1,804 (297)
Gas in storage (6,537) 5,880 4,102
Accounts payable 9,619 (12,455) 1,223
Accrued taxes (394) 545 (2,067)
Gas refunds (6,175) 4,926 138
- ------------------------------------------------------------------------------------------------------------------------
Net cash from operating activities 134,292 137,262 124,344
========================================================================================================================
Cash flows from (used for) investing activities:
Construction of utility plant and nuclear fuel expenditures (84,750) (80,226) (68,819)
Decommissioning funding (8,978) (8,181) (7,448)
Purchase of other property and equipment (2,050) 77 (97)
Other 949 171 2,526
- ------------------------------------------------------------------------------------------------------------------------
Net cash from (used for) investing activities (94,829) (88,159) (73,838)
========================================================================================================================
Cash flows from (used for) financing activities:
Proceeds from long term debt from parent 8,668 - 6,176
Redemption and maturities of first mortgage bonds (6,900) - (1,000)
Change in commercial paper 17,500 (1,000) 1,502
Preferred stock dividends (3,111) (3,111) (3,111)
Common stock dividends (55,926) (43,970) (56,015)
- ------------------------------------------------------------------------------------------------------------------------
Net cash from (used for) financing activities (39,769) (48,081) (52,448)
========================================================================================================================
Net increase (decrease) in cash and equivalents (306) 1,022 (1,942)
========================================================================================================================
Cash and equivalents at beginning of year 4,471 3,449 5,391
========================================================================================================================
Cash and equivalents at end of year $ 4,165 $ 4,471 $ 3,449
========================================================================================================================
Cash paid during year for:
Interest, less amount capitalized $ 22,100 $ 21,177 $ 20,693
Income taxes $ 35,662 $ 34,562 $ 40,333
Other information
Construction and nuclear fuel expenditures, including
accruals, allowance for funds used during
construction and customer contributions $ 81,714 $ 73,251 $ 78,286
========================================================================================================================
The accompanying WPS Resources Corporation notes are an integral part of these statements.
-93-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WISCONSIN PUBLIC SERVICE CORPORATION
K. CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
==========================================================================================================================
Year Ended December 31 (Thousands) 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------
Balance at beginning of year $290,387 $280,730 $288,693
Add - Net income 60,390 59,238 55,842
- --------------------------------------------------------------------------------------------------------------------------
350,777 339,968 344,535
- --------------------------------------------------------------------------------------------------------------------------
Deduct -
Cash dividends declared on preferred stock
5.00% Series ($5.00 per share) 660 660 660
5.04% Series ($5.04 per share) 151 151 151
5.08% Series ($5.08 per share) 254 254 254
6.76% Series ($6.76 per share) 1,014 1,014 1,014
6.88% Series ($6.88 per share) 1,032 1,032 1,032
Dividends declared on common stock 55,926 46,470 59,915
Other - - 779
- --------------------------------------------------------------------------------------------------------------------------
59,037 49,581 63,805
- --------------------------------------------------------------------------------------------------------------------------
Balance at end of year $291,740 $290,387 $280,730
==========================================================================================================================
The accompanying WPS Resources Corporation notes are an integral part of these statements.
-94-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WISCONSIN PUBLIC SERVICE CORPORATION
L. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Notes to Consolidated Financial Statements for Wisconsin
Public Service Corporation are incorporated in the Notes to
Consolidated Financial Statements for WPS Resources Corporation
at page 65 of this report.
-95-
PAGE
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WISCONSIN PUBLIC SERVICE CORPORATION
M. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Wisconsin Public Service
Corporation:
We have audited the accompanying consolidated balance sheets and
consolidated statements of capitalization of Wisconsin Public
Service Corporation (a Wisconsin corporation) and subsidiary as
of December 31, 1996 and 1995, 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, 1996.
These financial statements are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of Wisconsin Public Service Corporation and subsidiary
as of December 31, 1996 and 1995, and the results of its
operations and its cash flows for each of the three years in the
period ended December 31, 1996 in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin
January 28, 1997
-96-
PAGE
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 for the Annual Meeting of Shareholders
scheduled to be held on May 1, 1997.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
(a) Documents filed as part of this report:
(1) The following financial consolidated statements
are included in Part II at Item 8 above:
DESCRIPTION PAGES IN 10-K
----------- -------------
WPS RESOURCES CORPORATION
Consolidated Statements of Income 60
and Retained Earnings for the
three years ended December 31,
1996, 1995, and 1994
Consolidated Balance Sheets as of 61
December 31, 1996 and 1995
Consolidated Statements of 63
Capitalization as of December 31,
1996 and 1995
-97-
DESCRIPTION PAGES IN 10-K
----------- -------------
Consolidated Statements of Cash 64
Flows for the three years ended
December 31, 1996, 1995, and 1994
Notes to Consolidated Financial 65
Statements
Report of Independent Public 88
Accountants
WISCONSIN PUBLIC SERVICE CORPORATION
Consolidated Statements of Income 89
for the three years ended
December 31, 1996, 1995, and 1994
Consolidated Balance Sheets as of 90
December 31, 1996 and 1995
Consolidated Statements of 92
Capitalization as of December 31,
1996 and 1995
Consolidated Statements of Cash 93
Flows for the three years ended
December 31, 1996, 1995, and 1994
Consolidated Statements of 94
Retained Earnings
Notes to Consolidated Financial 95
Statements
Report of Independent Public 96
Accountants
(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.
-98-
PAGE
DESCRIPTION PAGES IN 10-K
----------- -------------
Schedule III. Condensed Parent
Company Only Financial Statements
Report of Independent Public 107
Accountants
Statements of Income and 108
Retained Earnings
Balance Sheets 109
Statements of Cash Flows 110
Notes to Parent Company 111
Financial Statements
(3) All exhibits, including those incorporated by
reference.
-99-
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENTS
- ------- ------------------------
3A-1 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]).
3A-2 Articles of Incorporation of Wisconsin Public Service
Corporation as effective May 26, 1972 and amended
through May 31, 1988 (Incorporated by reference to
Exhibit 3A to Form 10-K for the year ended
December 31, 1991); Articles of Amendment to Articles of
Incorporation dated June 9, 1993 (Incorporated by
reference to Exhibit 3 to Form 8-K filed
June 10, 1993).
3B-1 By-Laws of the Company as in effect July 11, 1996.
(Incorporated by reference to Exhibit 3(ii) to Form 10-Q
for the quarter ended September 30, 1996). (File No.
1-11337)
3B-2 By-Laws of Wisconsin Public Service Corporation as in
effect July 11, 1996. (Incorporated by reference to
Exhibit 3(ii) to Form 10-Q for the quarter ended
September 30, 1996). (File No. 1-3016)
4A Copy of Rights Agreement, dated December 12, 1996
between WPS Resources Corporation and Firstar Trust
Company (Incorporated by reference to Exhibit 4.1 to
Form 8-A filed December 13, 1996 [File No.1-11337]).
4B Copy of First Mortgage and Deed of Trust, dated as of
January 1, 1941 from Wisconsin Public Service
Corporation to First Wisconsin Trust Company, Trustee
(Incorporated by reference to Exhibit 7.01 - File No.
2-7229); Supplemental Indenture, dated as of
November 1, 1947 (Incorporated by reference to
Exhibit 7.02 - File No. 2-7602); Supplemental Indenture,
dated as of November 1, 1950 (Incorporated by reference
to Exhibit 4.04 - File No. 2-10174); Supplemental
Indenture, dated as of May 1, 1953 (Incorporated by
reference to Exhibit 4.03 - File No. 2-10716);
Supplemental Indenture, dated as of October 1, 1954
(Incorporated by reference to Exhibit 4.03 - File No.
2-13572); Supplemental Indenture, dated as of
December 1, 1957 (Incorporated by reference to
Exhibit 4.03 - File No. 2-14527); Supplemental Indenture,
dated as of October 1, 1963 (Incorporated by reference
to Exhibit 2.02B - File No. 2-65710); Supplemental
-100-
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENTS
- ------- ------------------------
Indenture, dated as of June 1, 1964 (Incorporated by
reference to Exhibit 2.02B - File No. 2-65710);
Supplemental Indenture, dated as of November 1, 1967
(Incorporated by reference to Exhibit 2.02B - File No.
2-65710); Supplemental Indenture, dated as of
April 1, 1969 (Incorporated by reference to Exhibit 2.02B
- File No. 2-65710); Fifteenth Supplemental Indenture,
dated as of May 1, 1971 (Incorporated by reference to
Exhibit 2.02B - File No. 2-65710); Sixteenth Supplemental
Indenture, dated as of August 1, 1973 (Incorporated by
reference to Exhibit 2.02B - File No. 2-65710);
Seventeenth Supplemental Indenture, dated as of
September 1, 1973 (Incorporated by reference to
Exhibit 2.02B - File No. 2-65710); Eighteenth
Supplemental Indenture, dated as of October 1, 1975
(Incorporated by reference to Exhibit 2.02B - File No.
2-65710); Nineteenth Supplemental Indenture, dated as
of February 1, 1977 (Incorporated by reference to
Exhibit 2.02B - File No. 2-65710); Twentieth Supplemental
Indenture, dated as of July 15, 1980 (Incorporated by
reference to Exhibit 4B to Form 10-K for the year ended
December 31, 1980); Twenty-First Supplemental Indenture,
dated as of December 1, 1980 (Incorporated by reference
to Exhibit 4B to Form 10-K for the year ended
December 31, 1980); Twenty-Second Supplemental Indenture
dated as of April 1, 1981 (Incorporated by reference to
Exhibit 4B to Form 10-K for the year ended
December 31, 1981); Twenty-Third Supplemental Indenture,
dated as of February 1, 1984 (Incorporated by reference
to Exhibit 4B to Form 10-K for the year ended
December 31, 1983); Twenty-Fourth Supplemental Indenture,
dated as of March 15, 1984 (Incorporated by reference to
Exhibit 1 to Form 10-Q for the quarter ended
June 30, 1984); Twenty-Fifth Supplemental Indenture,
dated as of October 1, 1985 (Incorporated by reference to
Exhibit 1 to Form 10-Q for the quarter ended
September 30, 1985); Twenty-Sixth Supplemental Indenture,
dated as of December 1, 1987 (Incorporated by reference
to Exhibit 4A-1 to Form 10-K for the year ended
December 31, 1987); Twenty-Seventh Supplemental
Indenture, dated as of September 1, 1991 (Incorporated by
reference to Exhibit 4 to Form 8-K filed
September 18, 1991); Twenty-Eighth Supplemental
Indenture, dated as of July 1, 1992 (Incorporated by
reference to Exhibit 4B - File No. 33-51428);
Twenty-Ninth Supplemental Indenture, dated as of
October 1, 1992 (Incorporated by
-101-
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENTS
- ------- ------------------------
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
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]).
-102-
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENTS
- ------- ------------------------
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]).
10F-4 Copy of Form of Director Deferred Compensation
Agreement (Plan 011) with certain non-employee
directors of Wisconsin Public
-103-
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENTS
- ------- ------------------------
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 Deferred
Compensation Agreement with executives and non-employee
directors effective January 1, 1996. (Incorporated by
reference to Exhibit 4 to a WPS Resources Corporation -
Wisconsin Public Service Corporation Registration
Statement on Form S-8 filed December 19, 1995 [Reg No.
33-65167]).
-104-
PAGE
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT PAGES IN 10-K
- ------- ----------------------- -------------
11 Statement regarding computation of per
share earnings
WPS Resources Corporation 112
21 Subsidiaries of the Registrant 113
23 Consent of Independent Public Accountants 114
24 Powers of Attorney 115
27 Financial Data Schedule
WPS Resources Corporation 123
Wisconsin Public Service Corporation 124
-105-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of
the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
WPS RESOURCES CORPORATION
and
WISCONSIN PUBLIC SERVICE CORPORATION
(Registrant)
By /s/ D. A. Bollom
--------------------------------
D. A. Bollom
Chairman 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 7, 1997
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 -----------------
James L. Kemerling Director D. A. Bollom
Larry L. Weyers Director Attorney-in-Fact
/s/ D. A. Bollom Principal Executive March 7, 1997
- ------------------------------Officer and Director
D. A. Bollom
/s/ D. P. Bittner Principal Financial March 7, 1997
- ------------------------------Officer
D. P. Bittner
/s/ D. L. Ford Principal Accounting March 7, 1997
- ------------------------------Officer
D. L. Ford
-106-
PAGE
A. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON
SCHEDULE III - CONDENSED PARENT
COMPANY ONLY FINANCIAL STATEMENTS
To the Board of Directors of WPS Resources Corporation:
We have audited in accordance with generally accepted auditing
standards, the consolidated financial statements of WPS Resources
Corporation included in this Form 10-K, and have issued our
report thereon dated January 28, 1997.
Our audit was made for the purpose of forming an opinion on the
basic consolidated financial statements taken as a whole.
Supplemental Schedule III is the responsibility of the Company's
management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the
basic consolidated financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the
basic consolidated financial statements and, in our opinion,
fairly states in all material respects, the financial data
required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin
January 28, 1997
-107-
SCHEDULE III - CONDENSED
PARENT COMPANY FINANCIAL STATEMENTS
WPS RESOURCES CORPORATION (PARENT COMPANY ONLY)
B. STATEMENTS OF INCOME AND RETAINED EARNINGS
===========================================================================================================================
Year Ended December 31 (Thousands) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
Income
Equity in earnings of subsidiaries after dividends $ (8,941) $ 11,236 $ (9,353)
Cash dividends from subsidiaries 55,926 43,970 23,873
- ---------------------------------------------------------------------------------------------------------------------------
Income from subsidiaries 46,985 55,206 14,520
- ---------------------------------------------------------------------------------------------------------------------------
Investment income and other 2,251 872 37
- ---------------------------------------------------------------------------------------------------------------------------
Total income 49,236 56,078 14,557
===========================================================================================================================
Operating expenses 585 589 19
- ---------------------------------------------------------------------------------------------------------------------------
Income before interest expense 48,651 55,489 14,538
Interest expense 454 68 -
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes 48,197 55,421 14,538
Income taxes 442 78 6
- ---------------------------------------------------------------------------------------------------------------------------
Net Income 47,755 55,343 14,532
===========================================================================================================================
Retained earnings, beginning of year 308,965 297,592 (451)
Common stock dividend (44,926) (43,970) (10,873)
Share exchange with WPSC (note 1) - - 294,384
- ---------------------------------------------------------------------------------------------------------------------------
Retained earnings at end of year $311,794 $308,965 $297,592
===========================================================================================================================
-108-
SCHEDULE III - CONDENSED
PARENT COMPANY FINANCIAL STATEMENTS
WPS RESOURCES CORPORATION (PARENT COMPANY ONLY)
C. BALANCE SHEETS
=========================================================================================================================
At December 31 (Thousands) 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
Assets
- -------------------------------------------------------------------------------------------------------------------------
Current assets
Cash and equivalents $ 3 $ 1,760
Accounts receivable - affiliates 614 84
Other receivables 12 79
Notes receivable - affiliates (note 2) 14,875 1,910
- -------------------------------------------------------------------------------------------------------------------------
Total current assets 15,504 3,833
=========================================================================================================================
Long-term notes - affiliates (note 3) 16,382 8,001
=========================================================================================================================
Investments in subsidiaries, at equity
Wisconsin Public Service Corporation 461,169 461,721
WPS Energy Services, Inc. 2,443 5,751
WPS Power Development, Inc. 2,238 3,952
- -------------------------------------------------------------------------------------------------------------------------
Total investments in subsidiaries, at equity 465,850 471,424
=========================================================================================================================
Net equipment 68 2
Other investments 3,025 2,624
Deferred income taxes 52 98
- -------------------------------------------------------------------------------------------------------------------------
Total assets $500,881 $485,982
=========================================================================================================================
=========================================================================================================================
Liabilities and Capitalization
- -------------------------------------------------------------------------------------------------------------------------
Current liabilities
Notes payable $ 18,950 $ 5,000
Accounts payable - affiliates 86 71
Accounts payable 519 13
Dividends payable 948 1,111
Accrued expenses 62 -
- -------------------------------------------------------------------------------------------------------------------------
Total current liabilities 20,565 6,195
=========================================================================================================================
Other liabilities 48 -
=========================================================================================================================
Capitalization
Common stock, $1 par value, 100,000,000
shares authorized; 23,896,962 shares outstanding 23,883 23,897
Premium on capital stock 144,591 145,021
Retained earnings 311,794 308,965
Other - 1,904
- -------------------------------------------------------------------------------------------------------------------------
Total capitalization 480,268 479,787
=========================================================================================================================
Total liabilities and capitalization $500,881 $485,982
=========================================================================================================================
-109-
SCHEDULE III - CONDENSED
PARENT COMPANY FINANCIAL STATEMENTS
WPS RESOURCES CORPORATION (PARENT COMPANY ONLY)
D. STATEMENTS OF CASH FLOWS
=======================================================================================================================
Year Ended December 31 (Thousands) 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
Operating
Net income $ 47,755 $ 55,343 $ 14,532
Add equity in earnings of subsidiaries after dividends 8,941 (11,236) 9,353
Deferred income taxes 46 139 64
Other - net 1,883 (30) 871
Changes in other items
Receivables (463) (1,740) (333)
Accounts payable 357 64 (85)
Other 110 285 179
- -----------------------------------------------------------------------------------------------------------------------
Net cash - operating 58,629 42,825 24,581
=======================================================================================================================
Investing
Long-term notes receivable - affiliates (21,346) (1,825) (6,176)
Capital contributions - affiliates (5,250) (5,400) -
Investments - other (2,371) (4,434) -
- -----------------------------------------------------------------------------------------------------------------------
Net cash - investing (28,967) (11,659) (6,176)
=======================================================================================================================
Financing
Change in notes payable 13,950 5,000 -
Capital contribution from WPSC (note 4) - - 2,031
Purchase of deferred compensation stock (443) - -
Common stock dividends (44,926) (43,970) (10,873)
- -----------------------------------------------------------------------------------------------------------------------
Net cash - financing (31,419) (38,970) (8,842)
=======================================================================================================================
Net change in cash (1,757) (7,804) 9,563
Cash, beginning of period 1,760 9,564 1
Cash, end of period $ 3 $ 1,760 $ 9,564
=======================================================================================================================
-110-
SCHEDULE III - CONDENSED
PARENT COMPANY FINANCIAL STATEMENTS
WPS RESOURCES CORPORATION (PARENT COMPANY ONLY)
E. NOTES TO PARENT COMPANY FINANCIAL STATEMENTS
The following are supplemental notes to the WPS Resources
Corporation (parent company only) financial statements and should
be read in conjunction with the WPS Resources Corporation
Consolidated Financial Statements and Notes thereto included
herein:
SUPPLEMENTAL NOTES
Note 1 WPS Resources Corporation (the "Company") was 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.
Note 2 The Company has short-term notes receivable from
WPS Energy Services, Inc. ("ESI") and WPS Power
Development, Inc. ("PDI") for $14.7 million and
$0.2 million, respectively. These notes bear interest
at between 6.90% and 8.25% depending upon the
operational use of the loaned funds.
Note 3 The Company has long-term notes receivable from WPSC
for $6.0 million and $8.6 million and bearing interest
at 8.76% and 7.35%, respectively. The notes are to be
repaid in monthly payments of $51,670 and $63,896
through January 2015 and May 2016, respectively. The
Company also has a long-term note receivable from ESI
totaling $1.8 million and bearing interest at 7-7/8%.
The note is to be repaid in quarterly payments of
$69,076 through October 2005.
Note 4 Prior to the one-for-one share exchange, WPSC
contributed $2.0 million in cash to WPSR to fund
operations.
-111-