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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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------- ---------------
Commission Registrant; State of Incorporation IRS Employer
file number Address; and Telephone Number Identification No.
- ----------- ---------------------------------- ------------------
1-11337 WPS RESOURCES CORPORATION 39-1775292
(A Wisconsin Corporation)
700 North Adams Street
P. O. Box 19001
Green Bay, WI 54307-9001
920-433-4901
1-3016 WISCONSIN PUBLIC SERVICE CORPORATION 39-0715160
(A Wisconsin Corporation)
700 North Adams Street
P. O. Box 19001
Green Bay, WI 54307-9001
800-450-7260
Securities registered pursuant to Section 12(b) of the Act:
- -----------------------------------------------------------
Title of Name of each exchange
each class on which registered
---------- ---------------------
WPS RESOURCES CORPORATION Common Stock, New York Stock Exchange
$1 par value
Rights to purchase New York Stock Exchange
Common Stock pursuant
to Rights Agreement
dated December 12, 1996
Securities registered pursuant to Section 12(g) of the Act:
- -----------------------------------------------------------
WISCONSIN PUBLIC SERVICE CORPORATION
Preferred Stock, Cumulative, $100 par value
5.00% Series 6.76% Series
5.04% Series 6.88% Series
5.08% 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
$621,719,414 as of March 10, 2000
WISCONSIN PUBLIC SERVICE CORPORATION
None
Number of shares outstanding of each class of common stock, as of
December 31, 1999
- -----------------------------------------------------------------
WPS RESOURCES CORPORATION Common Stock, $1 par value,
26,851,045 shares
WISCONSIN PUBLIC SERVICE CORPORATION Common Stock, $4 par value,
23,896,962 shares.
WPS Resources Corporation is
the sole holder of Wisconsin
Public Service Corporation
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Definitive proxy statement for the WPS Resources Corporation
Annual Meeting of Shareholders on May 11, 2000 is incorporated
into Parts I and III.
WPS RESOURCES CORPORATION
and
WISCONSIN PUBLIC SERVICE CORPORATION
FORM 10-K
ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION
For the Year Ended December 31, 1999
TABLE OF CONTENTS
PART I
1. BUSINESS............................................................1
A. GENERAL
WPS Resources Corporation...................................1
Wisconsin Public Service Corporation........................1
Upper Peninsula Power Company...............................2
WPS Resources Capital Corporation...........................2
WPS Energy Services, Inc....................................2
WPS Power Development, Inc..................................2
Regulatory Oversight........................................2
An Overview of Industry Restructuring.......................3
General..................................................3
Effect on Operations.....................................3
Regional Merger Activities..................................3
Y2K Compliance..............................................4
Forward-Looking Statements..................................4
B. ELECTRIC UTILITY MATTERS
Electric Operations.........................................4
Generating Capacity.........................................5
Kewaunee Nuclear Power Plant................................5
General..................................................5
Ownership................................................6
Steam Generator Replacement..............................6
Formation of a Nuclear Management Company................7
Low-Level Radioactive Waste Storage......................7
Depreciation and Decommissioning.........................7
Fuel Supply.................................................8
Electric Generation Mix..................................8
Fuel Costs...............................................8
Coal.....................................................8
Nuclear Fuel Cycle.......................................9
Spent Nuclear Fuel Disposal.............................10
Funding Decontamination and Decommissioning of
Federal Facilities....................................10
Regulatory Matters in the Wisconsin Jurisdiction ..........11
Industry Restructuring..................................11
Independent System Operator.............................12
Utility Businesses and Affiliate Interest Standards.....12
Electric Supply Issues..................................12
Customer Rate Matters...................................13
Regulatory Matters in the Michigan Jurisdiction............13
Industry Restructuring..................................13
Customer Rate Matters...................................14
i
Regulatory Matters in the FERC Jurisdiction................14
Customer Rate Matters...................................14
Wholesale Status........................................14
Regulatory Compliance...................................14
Regional Transmission Organizations.....................15
Hydroelectric Licenses..................................15
Other Matters..............................................16
Research and Development................................16
Technology..............................................16
Customer Segmentation...................................16
Contracted Construction Project.........................16
Electric Financial Summary.................................17
Electric Operating Statistics..............................18
Wisconsin Public Service Corporation....................18
Upper Peninsula Power Company...........................19
C. GAS UTILITY MATTERS
Wisconsin Public Service Corporation's Gas Market..........20
Gas Supply.................................................21
General.................................................21
Pipeline Capacity and Storage...........................21
Supply Contracts........................................22
Regulatory Matters in the Wisconsin Jurisdiction...........22
Industry Restructuring..................................22
Cost Recovery Mechanism.................................22
Gas Supply Plan.........................................23
Customer Rates..........................................23
Regulatory Matters in the Michigan Jurisdiction ...........23
Industry Restructuring..................................23
Gas Cost Recovery Plan..................................23
Customer Rates..........................................23
Regulatory Matters in the Federal Energy Regulatory........23
Commission Jurisdiction....................................23
Gas Financial Summary......................................25
Gas Operating Statistics...................................25
Wisconsin Public Service Corporation....................25
D. NONREGULATED BUSINESS ACTIVITIES
General....................................................26
WPS Energy Services, Inc...................................26
WPS Power Development, Inc.................................27
Technology..............................................28
E. ENVIRONMENTAL MATTERS
General....................................................28
Air Quality................................................29
Water Quality..............................................30
Gas Plant Cleanup..........................................31
Ash Disposal...............................................31
F. CAPITAL REQUIREMENTS..........................................32
G. EMPLOYEES.....................................................32
2. PROPERTIES.........................................................34
A. UTILITY.......................................................34
Wisconsin Public Service Facilities........................34
Upper Peninsula Power Facilities...........................35
B. NONREGULATED..................................................36
ii
3. LEGAL PROCEEDINGS..................................................36
Spent Nuclear Fuel Disposal.....................................36
Funding Decontamination and Decommissioning of
Federal Facilities...........................................36
Environmental...................................................36
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................36
4A. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.................37
A. EXECUTIVE OFFICERS OF WPS RESOURCES CORPORATION...............37
B. EXECUTIVE OFFICERS OF WISCONSIN PUBLIC SERVICE CORPORATION....39
PART II
5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS........................................41
WPS Resources Corporation Common Stock Two-Year Comparison......41
Dividend Restrictions...........................................41
Common Stock....................................................42
6. SELECTED FINANCIAL DATA............................................43
WPS RESOURCES CORPORATION
COMPARATIVE FINANCIAL STATEMENTS AND
FINANCIAL STATISTICS (1995 TO 1999)
A. CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME....43
B. CONSOLIDATED BALANCE SHEETS...................................44
C. FINANCIAL STATISTICS..........................................45
WISCONSIN PUBLIC SERVICE CORPORATION
COMPARATIVE FINANCIAL STATEMENTS AND
FINANCIAL STATISTICS (1997 TO 1999)
D. SELECTED FINANCIAL DATA.......................................46
E. FINANCIAL STATISTICS..........................................47
UPPER PENINSULA POWER COMPANY
COMPARATIVE FINANCIAL STATEMENTS AND
FINANCIAL STATISTICS (1997 TO 1999)
F. SELECTED FINANCIAL DATA.......................................48
G. FINANCIAL STATISTICS..........................................49
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS .............................................50
WPS RESOURCES CORPORATION.......................................50
WISCONSIN PUBLIC SERVICE CORPORATION............................72
A. Quantitative And Qualitative Disclosures About Market Risk....76
iii
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................77
WPS RESOURCES CORPORATION
A. CONSOLIDATED STATEMENTS OF INCOME, COMPREHENSIVE INCOME,
AND RETAINED EARNINGS.........................................77
B. CONSOLIDATED BALANCE SHEETS...................................78
C. CONSOLIDATED STATEMENTS OF CAPITALIZATION.....................80
D. CONSOLIDATED STATEMENTS OF CASH FLOWS.........................81
E. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS....................82
F. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS.....................108
WISCONSIN PUBLIC SERVICE CORPORATION
G. CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME...109
H. CONSOLIDATED BALANCE SHEETS..................................110
I. CONSOLIDATED STATEMENTS OF CAPITALIZATION....................112
J. CONSOLIDATED STATEMENTS OF CASH FLOWS........................113
K. CONSOLIDATED STATEMENTS OF RETAINED EARNINGS.................114
L. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS...................115
M. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS.....................116
9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE...............................117
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................117
11. EXECUTIVE COMPENSATION............................................117
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....117
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................117
PART IV
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K...............................................118
DESCRIPTION OF DOCUMENTS..........................................120
SIGNATURES........................................................127
SCHEDULE I - CONDENSED PARENT COMPANY FINANCIAL STATEMENTS
WPS RESOURCES CORPORATION (PARENT COMPANY ONLY)
A. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS.....................128
B. STATEMENTS OF INCOME AND RETAINED EARNINGS...................129
C. BALANCE SHEETS...............................................130
D. STATEMENTS OF CASH FLOWS.....................................131
E. NOTES TO PARENT COMPANY FINANCIAL STATEMENTS.................132
iv
EXHIBITS
2A* Asset Purchase Agreement By and Among PP&L, Inc.,
PP&L Resources, Inc., Lady Jane Collieries, Inc.
and Sunbury Holdings, LLC, dated as of
May 1, 1999....................................................E-1
3B-1 By-Laws of WPS Resources Corporation as in Effect
February 10, 2000.............................................E-76
3B-2 By-Laws of Wisconsin Public Service Corporation as in
Effect February 10, 2000.....................................E-116
4H Term Loan Agreement, dated as of November 5, 1999 among
PDI New England, Inc., PDI Canada, Inc., and
Bayerische Landesbank Girozentrale...........................E-155
10H-1 WPS Resources Corporation Amended and Restated
Deferred Compensation Plan Effective March 1, 1999
WPS Resources Corporation.................................E-211
21 Subsidiaries of the Registrant...............................E-240
23 Consent of Independent Public Accountants....................E-241
24 Powers of Attorney...........................................E-242
27 Financial Data Schedule
WPS Resources Corporation.................................E-251
Wisconsin Public Service Corporation......................E-252
- --------------
* Schedules and exhibits to this document are not being filed herewith.
The registrant agrees to furnish supplementally a copy of any such schedule or
exhibit to the Securities and Exchange Commission upon request.
v
Part I
Item 1. BUSINESS
A. GENERAL
WPS RESOURCES CORPORATION
WPS Resources was incorporated in Wisconsin in 1993. WPS Resources is a
holding company for regulated utility and nonregulated business units.
Principal operating subsidiaries and their approximate percentages of revenues
and assets are:
Percent of Percent of
Revenues Assets
---------- ----------
Wisconsin Public Service Corporation 65% 77%
Upper Peninsula Power Company 6% 7%
WPS Energy Services, Inc. 27% 4%
WPS Power Development, Inc. 3% 10%
Upper Peninsula Power is a Michigan corporation. The other listed
subsidiaries are Wisconsin corporations. Wisconsin Public Service and
Upper Peninsula Power are both regulated utilities.
WISCONSIN PUBLIC SERVICE CORPORATION
Wisconsin Public Service is a regulated electric and gas utility serving
an 11,000 square-mile service territory in northeastern Wisconsin and a
portion of the Upper Peninsula of Michigan. In 1999 Wisconsin Public Service
served 388,390 electric retail customers and 229,905 gas retail customers.
Wholesale electric service is provided to various customers including
municipal utilities, electric cooperatives, energy marketers, other
investor-owned utilities, and a municipal joint action agency.
1999 Operating Revenues were:
State Wisconsin 96% Michigan 4%
Customers Electric 73% Gas 27%
Electric
Jurisdiction Retail 89% Wholesale 11%
Gas
Jurisdiction Retail 100% Wholesale 0%
-1-
UPPER PENINSULA POWER COMPANY
In 1999, Upper Peninsula Power, a regulated utility, provided electric
service to a 4,500 square-mile area of Michigan's Upper Peninsula. Electric
service was provided to 48,636 retail customers. Wholesale electric service
was provided to various municipal utilities, electric cooperatives, and other
investor-owned utilities. Total revenues consisted of 92% retail sales and 8%
wholesale sales.
WPS RESOURCES CAPITAL CORPORATION
WPS Resources Capital Corporation was created in 1999 as an intermediate
holding company for the nonregulated subsidiaries of WPS Resources. Financing
for most nonregulated projects is expected to be obtained through nonrecourse
project financing. WPS Resources Capital Corporation will provide the equity
for these projects. At the end of 1999, WPS Resources Capital Corporation had
total assets of $59.1 million, consisting mainly of its investments in
WPS Energy Services and WPS Power Development.
WPS ENERGY SERVICES, INC.
WPS Energy Services is a nonregulated subsidiary of WPS Resources.
WPS Energy Services provides energy and related products and services in the
nonregulated energy market throughout the Midwest and eastern United States.
WPS Energy Services had revenues of $292 million in 1999.
WPS POWER DEVELOPMENT, INC.
WPS Power Development is also a nonregulated subsidiary of
WPS Resources. WPS Power Development currently owns through subsidiaries,
electric generation facilities in Wisconsin, Maine, Pennsylvania, and
New Brunswick, Canada. Synthetic fuel processing and steam production
facilities are located in Alabama, Arkansas and Oregon. Energy-related
services provided by WPS Power Development, include acquisition and investment
analysis of generation facilities, engineering and management services, and
operations and maintenance services. WPS Power Development had revenues of
$35 million in 1999.
REGULATORY OVERSIGHT
WPS Resources is exempt from registration under the Public Utility
Holding Company Act of 1935. We are subject to various requirements and
prohibitions of the Wisconsin Public Utility Holding Company Act.
The Public Service Commission of Wisconsin regulates the Wisconsin
retail utility operations of Wisconsin Public Service. The Michigan Public
Service Commission regulates Michigan retail utility operations of
Upper Peninsula Power and Wisconsin Public Service. Both utility companies
are subject to regulation of their wholesale electric rates, hydroelectric
projects, and certain other matters by the Federal Energy Regulatory
Commission. In addition, both are subject to limited regulation by local
authorities. Each utility follows Statement of Financial Accounting Standards
No. 71, "Accounting for the Effects of Certain Types of Regulation." Their
financial statements and the consolidated financial statements of
WPS Resources reflect the different ratemaking principles of various
jurisdictions. The operation of the Kewaunee Nuclear Power Plant is subject
to the jurisdiction of the Nuclear Regulatory Commission.
Hydroelectric projects operated by WPS Power Development, in the State
of Maine are also regulated by the Federal Energy Regulatory Commission.
-2-
There is no comparable Canadian regulation on the hydroelectric facilities
operated in Canada.
AN OVERVIEW OF INDUSTRY RESTRUCTURING
GENERAL
In April 1994, the Federal Energy Regulatory Commission issued Order 888
on open access electric transmission and stranded cost recovery due to
wholesale competition. Order 888 directs the creation of power pools and
independent system operators to meet the open access requirements and
principles.
An independent system operator is an independent third party that would
regulate the operation of the transmission systems in a defined geographic
area. Independent system operators would monitor the generation, transmission
and distribution systems, direct the operations of transmission facilities,
administer open access transmission tariffs, and direct generation. In an
independent operator system, the transmission system assets may be retained by
the electric utilities.
In 1999 Wisconsin enacted the Reliability 2000 Act. This law requires a
utility holding company to have its Wisconsin utility subsidiary contribute
its transmission assets to the Wisconsin Transmission Company in exchange for
relief from the asset cap limitation on non-utility investments by its parent
holding company. The Wisconsin Transmission Company would be a member of the
Midwest Independent System Operator. The Wisconsin Transmission Company would
own the transmission assets contributed. The Federal Energy Regulatory
Commission has jurisdiction in setting rates for both independent system
operators and independent transmission companies.
In April 1994, the Federal Energy Regulatory Commission also issued
Order 889 which requires public utilities to develop a system to communicate
information about their transmission systems and services electronically to
all potential customers at the same time. Wisconsin Public Service is
included in the system created by the Mid-America Interconnected Network, one
of the existing electric reliability regions in the United States.
EFFECT ON OPERATIONS
Industry restructuring will create competitive markets which could make
the recovery of investment dollars in customer rates less certain. We believe
that the cost of our utility assets will continue to be recoverable in the new
competitive environment.
We expect that increased competition in a deregulated environment will
put greater emphasis on managing costs and put pressure on operating margins
at the utility companies.
REGIONAL MERGER ACTIVITIES
Industry restructuring has been accompanied by merger activity in the
region, impacting the competitive environment. We anticipate that mergers and
acquisitions will continue to be one means to gain an advantage in a
competitive environment.
-3-
Y2K COMPLIANCE
The beginning of the new year proved to be uneventful for WPS Resources
and its subsidiaries. No significant problems were experienced with our
operational or management systems entering the year 2000.
FORWARDING-LOOKING STATEMENTS
Except for historical data and statements of current fact, the
information contained in this Annual Report constitutes forward-looking
statements. Any references made to plans, goals, beliefs, or expectations in
respect to future events and conditions or to estimates are forward-looking
statements. We believe our expectations are based on reasonable assumptions.
Forward-looking statements are inherently uncertain and subject to risks.
Such statements should be viewed with caution. Actual results or experience
could differ materially from the forward-looking statements as a result of
many factors. Forward-looking statements in this report include, but are not
limited to statements regarding:
1) expectations regarding future revenues,
2) estimated future capital expenditures,
3) the expected costs of purchased power in the future,
4) the costs of decommissioning nuclear generating plants,
5) future cleanup costs associated with gas plant sites, and
6) statements in the Management Discussion and Analysis of
Financial Condition and Results of Operations regarding
trends or estimates.
We cannot predict the course of future events or anticipate the
interaction of multiple factors beyond our control and their effect on
revenues, project timing and costs. Some risk factors that could cause
results different from any forward-looking statement include:
1) the speed and degree to which competition enters the
electric and natural gas industries,
2) state and Federal legislation, regulation, interpretation,
or enforcement,
3) regulatory initiatives,
4) economic climate,
5) industrial, commercial, and residential growth,
6) environmental regulation,
7) weather,
8) timing and extent of changes in commodity prices,
9) interest rates,
10) capital markets, and
11) opportunities for expansion in nonregulated energy markets.
We make no commitment to disclose any revisions to the forward-looking
statements, facts, events, or circumstances after the date of this report.
B. ELECTRIC UTILITY MATTERS
ELECTRIC OPERATIONS
In Wisconsin, the largest communities served by Wisconsin Public Service
at the electric retail level are the cities of Green Bay, Oshkosh, Wausau, and
Stevens Point. In Michigan, the largest community served at the electric
retail level is the area of Houghton/Hancock, which is served by
Upper Peninsula Power.
-4-
GENERATING CAPACITY
In 1999, Wisconsin Public Service reached a firm net design peak of
1,751 megawatts on July 30 between 10 a.m. and 3 p.m. The summer time period
is the most relevant for capacity planning purposes. During the actual peak,
there were firm purchases of 15 megawatts and firm sales of 110 megawatts.
Planned generator capability for the 1999 summer period was 1,979 megawatts.
Future supply reserves are estimated to be above the minimum 18% planning
criteria for 2000 and 2001.
For additional information regarding our generation facilities, see
"UTILITY" in Part I, Item 2, PROPERTIES.
In 1997, the Public Service Commission of Wisconsin authorized the
construction of a 179-megawatt combustion turbine generating facility by
De Pere Energy LLC, an affiliate of SkyGen LLC, an independent power producer.
The facility was completed and placed in service in early June 1999.
Effective June 1, 1999, Wisconsin Public Service entered into a 25-year
contract to purchase capacity and energy from the facility. This contract is
accounted for as a capital lease. Under the terms of the contract, the
De Pere Energy Center will be converted to a combined-cycle unit with a summer
rating of 233 megawatts sometime after the year 2003. A combined-cycle unit
recovers heat from hot exhaust gases to produce steam that drives a steam
turbine generator to produce approximately one-third of the power generated.
Wisconsin Public Service will furnish natural gas for the facility under
existing gas tariffs. The energy center will be operated by
De Pere Energy LLC. See NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,
Note 13, Commitments and Contingencies regarding "Long-Term Power Supply."
In 1999, Upper Peninsula Power purchased 86% of its total energy
requirements. Remaining energy requirements were supplied by hydroelectric
and combustion turbine facilities owned by Upper Peninsula Power. During
1999, 50 megawatts of firm power were purchased from Commonwealth Edison and
15 megawatts were purchased from Wisconsin Public Service. Upper Peninsula
Power also purchased non-firm power from Wisconsin Public Service and
Wisconsin Power and Light Company among others. The purchase from
Commonwealth Edison represented 45% of Upper Peninsula Power's total energy
requirements in 1999. These purchase contracts were effective through
December 31, 1999. Upper Peninsula Power has contracted for 65 megawatts of
capacity and energy from Wisconsin Public Service for the years 2000, 2001,
and 2002.
Wisconsin Public Service completed construction of a 9-megawatt wind
facility in 1999. The facility includes 14 wind turbines installed on private
farmlands located in the Town of Lincoln in Kewaunee County, Wisconsin. The
plant became operational in June 1999 at a cost of $10.3 million.
Wisconsin Public Service owns 33.1% of the outstanding capital stock of
Wisconsin River Power Company, the owner and operator of two dams and related
hydroelectric plants on the Wisconsin River having an aggregate installed
capacity of approximately 39 megawatts.
KEWAUNEE NUCLEAR POWER PLANT
GENERAL
The Kewaunee plant is a pressurized water reactor plant with a nameplate
capacity of 562 megawatts. It is currently jointly owned by Wisconsin Public
Service (41.2%), Wisconsin Power and Light Company (41.0%), and Madison Gas
and Electric Company (17.8%). See the discussion on ownership below for
-5-
information on the future ownership of the Kewaunee plant. Wisconsin Public
Service is the plant operator. The plant's operating license expires in 2013.
OWNERSHIP
On September 29, 1998, Wisconsin Public Service and Madison Gas and
Electric Company entered into an agreement to transfer Madison Gas and
Electric's 17.8% share of the Kewaunee plant to Wisconsin Public Service. The
closing of this agreement is contingent upon regulatory approvals. After the
transfer, our ownership interest in the plant will be 59.0%. The remaining
co-owner, Wisconsin Power and Light Company, will retain its 41.0% ownership
interest in the plant.
Under terms of the agreement Wisconsin Public Service will pay
Madison Gas and Electric an amount equal to its depreciated book value for its
share of the Kewaunee plant at the ownership transfer date. Madison Gas and
Electric will provide to Wisconsin Public Service:
1) its qualified decommissioning trust at the date of the ownership
change,
2) access to its nonqualified trust, and
3) annual future decommissioning contributions of $8,091,000 through
the year 2002. These contributions are expected to fully fund
Madison Gas and Electric's share of total expected plant
decommissioning costs.
Wisconsin Public Service will then assume responsibility for 59.0% of
the costs of decommissioning the plant. Madison Gas and Electric will retain
its obligation for its share of the costs for final disposal of spent nuclear
fuel created up to the time of ownership transfer. Madison Gas and Electric
will be provided an option to purchase power from Wisconsin Public Service for
two years following the date of the ownership transfer. The amount of
potential power to be provided is approximately equal to Madison Gas and
Electric's current share of the power generated by the plant.
STEAM GENERATOR REPLACEMENT
On April 7, 1998, the Public Service Commission of Wisconsin approved
the Wisconsin Public Service application for replacement of the two steam
generators at the Kewaunee plant. The total cost of replacing the steam
generators is estimated to be approximately $113 million. After the
acquisition of Madison Gas & Electric's interest in the Kewaunee Plant our
share of the cost is estimated to be $66.7 million. Madison Gas and Electric
will not be responsible for any portion of the costs of the generator
replacement as a result of the change in ownership discussed above. Due to
delays in the manufacture of the new generators, the replacement is now
scheduled for the fall of 2001 and will take approximately 60 days.
On November 27, 1998, the plant returned to service from the 1998
planned maintenance and refueling outage. Inspection of the plant's two steam
generators showed that the repairs made to the tubes in 1997 were holding up
well and few additional repairs were needed. A major overhaul was also
performed on the main turbine generator. The next shutdown for refueling and
maintenance is scheduled for the spring of 2000. The Kewaunee plant completed
1999 with 100% availability.
-6-
FORMATION OF THE NUCLEAR MANAGEMENT COMPANY
On February 25, 1999, Northern States Power Company, Wisconsin Electric
Power Company, and Wisconsin Public Service announced the formation of Nuclear
Management Company. Subsequently, Alliant Energy Corporation also became a
participant in Nuclear Management Company. Combined, the four utilities
operate seven nuclear generating units at five locations for a combined
generating capacity of approximately 3,760 megawatts. This represents between
12% and 25% of the electricity generated by the individual utilities.
Nuclear Management Company was formed to sustain long-term safety,
optimize reliability, and improve the operational performance of the
individual nuclear generating plants. Overall plant operations will continue
to be staffed by the same plant personnel. Initially, the utilities will
continue to own their respective plants, be entitled to energy generated at
the plants, and retain the financial obligations for their safe operation,
maintenance, and decommissioning. Each utility will obtain required state and
Federal regulatory approvals prior to its participation in Nuclear Management
Company.
LOW-LEVEL RADIOACTIVE WASTE STORAGE
On June 26, 1997, the Midwest Compact Commission halted development of a
six-state regional disposal facility for low-level radioactive waste storage
in Ohio. The Midwest Compact Commission, established to implement the Federal
Low Level Radioactive Waste Policy Act of 1980, cited dwindling regional waste
volumes, continued access to existing disposal facilities, and potentially
high development costs as the primary reasons for the decision. The Midwest
Compact Commission continues to monitor the availability of disposal
facilities for the low-level radioactive waste created by all Midwest
generators. A site at Barnwell, South Carolina, has been available for the
storage of low-level radioactive waste from the Kewaunee plant in the past.
The availability of this site for future waste storage is uncertain. As a
result of technology advances, waste compaction, and the reduction of waste
generated, the Kewaunee plant has on-site low-level radioactive waste storage
capacity sufficient to store the amount of low-level waste expected over the
next 10-year period.
DEPRECIATION AND DECOMMISSIONING
In 1997, the Public Service Commission of Wisconsin directed the owners
of the Kewaunee plant to develop depreciation and decommissioning cost
projections based on full cost recovery, of the estimated obligation by the
end of 2002. Previous cost estimates were based on full collection of funds
required for decommissioning by 2013, the year in which the operating license
expires. The order was prompted by uncertainty regarding the expected useful
life of the plant without steam generator replacement. In 1998, after the
approval of the project to replace the steam generators, the Public Service
Commission of Wisconsin ruled that, until the replacement steam generators are
installed, we should continue to depreciate and collect decommissioning funds
at rates sufficient to fully recover costs by 2002. Once the replacement
steam generators are installed, the Public Service Commission of Wisconsin has
directed Wisconsin Public Service to depreciate and collect decommissioning
funds sufficient to recover remaining costs over a period of approximately 8.5
years. An accelerated depreciation method will be utilized for calculating
depreciation expense. The steam generators are scheduled for replacement in
the fall of 2001. A review of the depreciation and decommissioning costs and
their rate of recovery will be considered during the next rate case in 2000
for rates to be effective in 2001.
-7-
At December 31, 1999, the net carrying amount of our investment in
Kewaunee was approximately $28.2 million. The current cost for our share of
the estimated costs to decommission Kewaunee is $200.7 million.
Decommissioning trust assets at December 31, 1999 totaled $198.1 million.
Wisconsin and Michigan retail customers of Wisconsin Public Service are
responsible for approximately 91% of our share of the plant's costs.
During 1999, $8.3 million of depreciation expense related to unrecovered
plant investment was recognized compared with $8.2 million recognized in 1998.
The 1999 decommissioning funding level was $9.2 million compared with
$17.2 million in 1998, largely due to good investment return reflected in the
1998 decommissioning funding plan. Customer rates, which became effective in
the Wisconsin jurisdiction on January 15, 1999, are designed to recover the
accelerated plant depreciation and provide funds for decommissioning.
Additional discussion of Kewaunee plant matters is included in
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION and the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Notes 1(i),
1(k), 1(l), and 13.
FUEL SUPPLY
ELECTRIC GENERATION MIX
Wisconsin Public Service electric generation mix for 1999 and 1998 was:
1999 1998
---- ----
Energy Sources
Coal 64.0% 69.2%
Nuclear 14.5% 12.5%
Hydro 2.0% 1.7%
Natural gas/fuel oil 2.2% 1.8%
Purchased power 17.3% 14.8%
Purchased power represents short-term energy purchases.
FUEL COSTS
Wisconsin Public Service fuel costs for 1999 and 1998 were:
1999 1998
---- ----
Fuel Source
Coal $1.08 $1.04
Nuclear 0.45 0.42
Natural gas 3.05 2.59
Fuel oil 4.03 3.89
Propane 4.98 N/A
Costs presented above are measured in dollars per million Btus.
COAL
Coal is the primary fuel source for Wisconsin Public Service, most of
which is from the Powder River Basin mines located in Wyoming and Montana.
Powder River Basin coal is very low in sulfur and meets the standards of the
1990 Clean Air Act for the Year 2000 and beyond. This coal has been our
least-cost coal source from any of the subbituminous coal-producing regions in
the United States.
-8-
Wisconsin Public Service is testing alternative coal sources for its
Pulliam and Weston plants. Alternative sources could provide more competitive
market pricing and higher Btu content. Coal with higher Btu content will
increase generation output and provide flexibility in meeting peak electric
demands.
Wisconsin Public Service purchases most coal for its wholly owned plants
and the jointly-owned Edgewater and Columbia plants under relatively
short-term contracts of up to three years duration. One long-term contract
covers approximately 16% of total requirements and has take-or-pay obligations
totaling $94.2 million for the years 2000 through 2016.
Coal transportation for these plants is purchased under contracts of up
to five years duration. Over 90% of our coal transportation is under
competitive transportation agreements which are expected to continue to
contribute to competitive fuel costs. Union Pacific Railroad Company is the
exclusive provider of coal transportation for the Edgewater plant. The plant
operator, Wisconsin Power and Light Company, filed a complaint with the
Surface Transportation Board on December 30, 1999 claiming the tariff charged
by Union Pacific for unit train service between the Powder River Basin and the
Edgewater plant is unreasonably high.
See NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Note 13, COMMITMENTS AND
CONTINGENCIES regarding "Coal Contracts."
NUCLEAR FUEL CYCLE
Wisconsin Public Service purchases uranium concentrates, conversion
services, enrichment services, and fabrication services for nuclear fuel
assemblies at the Kewaunee plant. Approximately one-third of the 121 fuel
assemblies are removed from the reactor every 18 months and replaced with new
assemblies. Removed assemblies are placed in storage at the plant site
pending permanent disposal by the United States Department of Energy.
Uranium concentrates, conversion services, and enrichment services are
purchased either on the spot market, through a bidding process, or using
existing contracts.
The uranium inventory policy of Wisconsin Public Service requires that
sufficient inventory be maintained for two reactor refuelings. As of
December 31, 1999, approximately 983,000 pounds of yellowcake (a processed
form of uranium ore), or its equivalent, were held in inventory for the plant.
Inventory includes uranium under contract.
Conversion services are complete for nuclear fuel reloads in 2000, 2001,
and 2003.
A fixed quantity of enrichment services has been contracted through the
year 2004. Wisconsin Public Service has the option of purchasing future
enrichment services under an existing contract or by purchases from the spot
market.
Wisconsin Public Service has contracts in place for fuel fabrication
services for the next decade. These contracts contain force majeure and
termination for convenience provisions.
If, for any reason, the Kewaunee plant was forced to suspend operations
permanently, the maximum exposure related to fuel contracts would not be
expected to exceed $274,000. No financial penalties associated with the
present uranium supply, conversion service, and enrichment agreements exist.
-9-
The fuel fabrication contract contains force majeure and termination for
convenience provisions. Uranium inventories could be sold on the spot market.
SPENT NUCLEAR FUEL DISPOSAL
The Federal government has the responsibility to dispose of or
permanently store spent nuclear fuel. Spent nuclear fuel is currently being
stored at the Kewaunee plant. With minor plant modifications planned for
2001, the Kewaunee plant should have sufficient fuel storage capacity until
the end of its licensed life in 2013. Legislation is being considered on the
Federal level to provide for the establishment of an interim storage facility.
On January 31, 1998, the United States Department of Energy failed to
comply with its obligation to begin removing spent nuclear fuel from plant
sites as required by the Nuclear Waste Policy Act of 1982. Wisconsin Public
Service joined other utilities in a motion to enforce the July 1996 mandate of
the United States Court of Appeals for the District of Columbia. The Court
had ruled that the Department of Energy had an unconditional obligation to
begin accepting, transporting, and disposing of spent nuclear fuel by
January 31, 1998.
On May 5, 1998, the United States Court of Appeals for the District of
Columbia issued a decision denying the motion to enforce the Court's 1996
mandate. The denial centered on the question of whether the Department of
Energy could properly use the Nuclear Waste Fund as a source to pay damages.
The Court also ruled that the question is not ready for review. The Court
indicated that compelling the Department of Energy to submit a detailed
program for disposing of spent fuel from utilities and declaring that the
utilities are relieved of their obligation to pay fees to the Nuclear Waste
Fund falls outside the scope of the Court's authority. The scope of the
Court's mandate was limited to defining the nature of the Department of
Energy's statutory obligations and did not extend to requiring the Department
of Energy to perform under its contracts with the utilities. Our current
recourse is to request reimbursement from the Department of Energy for
expansion of disposal facilities. Litigation on this issue continues in the
industry and we continue to monitor its progress.
FUNDING DECONTAMINATION AND DECOMMISSIONING OF FEDERAL FACILITIES
A surcharge imposed by the Energy Policy Act of 1992 requires nuclear
power companies to fund the decontamination and decommissioning of Department
of Energy facilities relating to the processing of nuclear fuel. As a result,
we are required to pay a surcharge on uranium enrichment services purchased
from the Federal government prior to October 23, 1992. On an inflation
adjusted basis, our portion of the obligation related to the Kewaunee plant is
approximately $600,000 per year through the year 2007. Madison Gas and
Electric has agreed to continue to pay its portion of this annual assessment
after the transfer of their ownership interest in the plant to Wisconsin
Public Service.
Wisconsin Public Service and a number of other nuclear power companies
sued the Department of Energy in the United States Court of Federal Claims
seeking a refund of the previously paid decontamination and decommissioning
surcharge payments. This claim continues in the Court of Federal Claims
pending the settlement of other litigation. On August 13, 1998, 22 utilities
filed a complaint in the U.S. District Court for the Southern District of
New York seeking a declaratory judgement that certain sections of the Energy
Policy Act are unconstitutional. As of December 1999, the Department of
Energy and the utilities continue legal proceedings in both the Court of
Federal Claims and the United States District Courts. No rulings have been
issued.
-10-
REGULATORY MATTERS IN THE WISCONSIN JURISDICTION
INDUSTRY RESTRUCTURING
Electric reliability continues to be the primary issue for the Public
Service Commission of Wisconsin and the state's legislature. Industry
restructuring and retail generation open access remain secondary issues in the
state. The Public Service Commission of Wisconsin's top priorities for the
past two years have been to develop the utility infrastructure necessary to
assure reliable electric service and remove the barriers to competition at the
wholesale level. Laws addressing reliability issues were passed in 1998 and
1999.
The State of Wisconsin 1999 Budget Act included a major package of
energy reforms affecting utilities and utility holding companies. The package
of energy reforms is generally referred to as "Reliability 2000." The law:
- Changes the asset cap for nonutility investments for
three investor-owned utility holding companies, including
WPS Resources, to allow investments in energy and
energy-related business which would be exempt from the
asset cap calculation,
- Requires the utility subsidiaries of these three utility
holding companies to place their transmission assets into
a statewide transmission company, in exchange for an
equity interest in the transmission company, as a
condition of applying the new asset cap provisions,
- Increases targets for retail electricity sales from
renewable resources. Targets would begin at 1/2% of
total energy sales by the end of 2001 and increase to
2.2% of total energy sales by the end of 2011, and
- Increases, by 50%, the amount of ratepayer funding for
public benefits spending used for low-income energy
assistance, conservation, and renewable energy research.
The statewide transmission company will be owned by those utilities
transferring transmission assets into the new company. Other Wisconsin public
utilities and electric cooperatives may acquire an equity interest in the
transmission company by transferring transmission assets to the transmission
company. The transferring utility is required to provide operation and
maintenance of these assets for a three-year period. The transmission company
is required to apply for membership in the Midwest Independent System
Operator. These legislative changes do not require any public utility to
contribute its transmission facilities to the transmission company. The bill
only requires such a transfer as a condition of granting relief to a public
utility holding company from the asset cap.
-11-
INDEPENDENT SYSTEM OPERATOR
A major regulatory concern in a restructured electric industry is the
establishment of independent system operators. An independent system operator
is an independent third party that would regulate, on a "real-time" basis, the
operation of the transmission systems in a defined geographic area. The
system operator would:
1) monitor the generation, transmission, and distribution systems,
2) direct the operations of transmission facilities,
3) administer open access transmission tariffs,
4) manage parallel path flows,
5) monitor generation and transmission maintenance schedules, and
6) manage congestion on the transmission system.
The Wisconsin 1998 Reliability Act requires all eastern Wisconsin
utilities with transmission systems to join the Midwest Independent System
Operator by June 30, 2000. The Reliability 2000 Act also provides utility
holding companies relief from the Wisconsin Holding Company Act asset cap
limitation on nonutility investments if their utility subsidiaries contribute
their transmission assets to this statewide transmission company. The
legislation requires one zone for pricing transmission services in eastern
Wisconsin. The result will be one transmission rate for all transmission
owners in eastern Wisconsin. The rate will be based on the average revenue
requirements of the member utilities.
The Midwest Independent System Operator is currently working with the
Federal Energy Regulatory Commission to determine transmission rates. The
Federal Energy Regulatory Commission has approved the Midwest Independent
System Operator rate methods, although several conditions are being contested.
The Federal Energy Regulatory Commission is still considering a uniform
authorized allowed return on equity for each member transmission owner.
UTILITY BUSINESSES AND AFFILIATE INTEREST STANDARDS
In 1998, the Wisconsin Commission opened a docket to review the types of
services that a regulated utility should be allowed to provide. Participants
in this docket include all Wisconsin utilities; a heating, ventilating and air
conditioning contractor trade association; several power marketers; and
various special interest groups. The trade association is recommending
regulated utilities be limited to the delivery of natural gas and electricity.
Any other services would need to be provided by the utility's unregulated
affiliates. The utilities are recommending that they be allowed to provide
services that are related to their core services, such as gas appliance
service. The record in this docket was closed in February 1999. The
Wisconsin Commission has taken no action on this docket and there are no
published plans to do so in the near future. The Wisconsin Commission will
open the second phase of this docket to determine the appropriate affiliate
interest requirements when a decision is reached in the first phase of the
docket regarding the types of services a regulated utility may offer.
ELECTRIC SUPPLY ISSUES
The summer of 1999 provided a number of challenges to maintaining the
reliability of the electric system in the region. In late July, Wisconsin
experienced some of the highest temperature and humidity conditions in the
-12-
last 105 years. These extreme conditions resulted in higher electric loads
than anticipated in the state and region, resulting in significant stress on
generation availability, transmission capacity, capacity prices and energy
prices. Price spikes reached $5,000 per megawatt hour in the region.
Wisconsin Public Service and the other state utilities met energy demands
through this period with no interruptions of firm customers and limited
financial consequences. A number of large interruptible customers on our
system experienced very high buy-through prices during this period. Due to
the high prices, many of these customers decided to temporarily shut down
operations during this period.
CUSTOMER RATE MATTERS
In 1999, the Edison Electric Institute reported Wisconsin Public Service
to be the low-cost electric provider in the State of Wisconsin, among
investor-owned utilities. 1999 rates were 89% of the state average for
residential rates, 77% for commercial rates, and 80% for large industrial
rates. Wisconsin Public Service also had some of the lowest natural gas rates
in Wisconsin in 1999. 1999 rates were 99% of the state average for
residential rates, 94% for commercial rates, and 72% for large industrial
rates.
The 1999 rate order for Wisconsin Public Service provided for a rate
case reopener to resolve several issues for the year 2000. A request for a
change in rates was filed under this reopener provision. The issues addressed
include:
1) construction of a combustion turbine for Madison Gas and
Electric Company,
2) deferral of 1998 costs related to tubing repairs at the
Kewaunee plant,
3) recovery of deferred Pulliam Unit 3 costs, and
4) changes in fuel transportation contracts and purchased power
costs.
Requests for approximately a $23.4 million increase in electric rates
were filed in 1999. No change in natural gas pricing was requested. The
resulting rate order maintained the current return on equity rate of 12.1% and
granted a $21.1 million, or 4.6%, increase in electric rates for 2000.
REGULATORY MATTERS IN THE MICHIGAN JURISDICTION
INDUSTRY RESTRUCTURING
On June 29, 1999, the Michigan Supreme Court found that the Michigan
Public Service Commission did not have the statutory authority to order retail
generation open access in Michigan. Following that decision, the Michigan
Commission determined that it had the authority to regulate open access
programs if the utilities volunteered to implement them. Detroit Edison and
Consumers Energy volunteered to implement open access programs previously
ordered by the Michigan Commission and retail open access is in progress in
the Lower Peninsula of Michigan. A number of parties have initiated
challenges in the Michigan Court of Appeals and Supreme Court questioning the
Michigan Commission's authority to approve voluntary open access programs.
The Michigan Supreme Court has refused to hear this case until the Court of
Appeals has made its determination.
-13-
In 1999, the Michigan Chamber of Commerce organized a coalition of
utilities, energy marketers, customers, and customer groups to develop
consensus legislation for generation open access. The effort produced several
versions of legislation over a 10-month period. The legislation was
negotiated with Consumers Energy and Detroit Edison and was introduced in
January 2000. This proposal is to be considered by the Michigan legislature
in early 2000.
CUSTOMER RATE MATTERS
In 1999, Wisconsin Public Service was the lowest cost provider of
electric service in Michigan for all customer classes. Our electric rates were
79% of the state average for residential rates, 81% for commercial rates, and
78% for large industrial rates. We also had some of the lowest natural gas
rates in Michigan in 1999. Our gas rates were 77% of the state average for
residential rates, 88% for commercial rates, and 61% for large industrial
rates.
Other than power supply and gas cost recovery adjustments, Wisconsin
Public Service has not had a Michigan electric rate increase since 1987 or a
gas rate increase since 1986. Wisconsin Public Service anticipates filing a
rate request in Michigan in early 2000.
REGULATORY MATTERS IN THE FERC JURISDICTION
CUSTOMER RATE MATTERS
Other than a transmission open access tariff case and an adjustment for
a fuel buyout, Wisconsin Public Service has not had a full Federal Energy
Regulatory Commission wholesale rate case since 1987.
WHOLESALE STATUS
Wisconsin Public Service continues to participate in the wholesale
electric market primarily with municipal electric utilities and electric
distribution cooperatives. In 1999, Wisconsin Public Service entered into a
three-year contract with Upper Peninsula Power to supply 65 megawatts of
baseload energy beginning January 1, 2000. Although the future of wholesale
electric sales within the regulated utility is uncertain, we continue to serve
customers under existing contracts.
In 1999, Wisconsin Public Service provided 31 wholesale electric
customers with either all or a portion of their power supply needs.
Wholesale customers in 1999 included 7 municipal customers, 3 electric
cooperatives, 9 investor-owned utilities, 11 marketers, and 1 municipal joint
action agency. Total wholesale sales for resale in 1999 were approximately
1.95 million megawatts of firm sales and various levels of interruptible and
non-firm service. Total wholesale sales for resale represented 16.4% of
Wisconsin Public Service's electric sales volume in 1999 compared with 17%
in 1998.
The wholesale electric market continues to be influenced by the
availability of transmission, reliable and economic capacity, and energy.
Changing markets, state and Federal regulatory and legislative agendas and
uncertainties regarding deregulation continue to impact the wholesale market
and how WPS Resources and its subsidiaries will participate in the future.
REGULATORY COMPLIANCE
An issue in a 1997 complaint on transmission use in Wisconsin was the
use of Capacity Benefit Margin by several Wisconsin utilities including
-14-
Wisconsin Public Service in determining available transmission capacity.
Capacity Benefit Margin is the use of the transmission system to provide
reserve generation capacity for reliability of the system. Wisconsin Public
Power, Inc. and Madison Gas and Electric maintain that this reservation of
transmission capacity is inappropriate and restricts available capacity for
their use. In 1998, the Federal Energy Regulatory Commission ordered
Wisconsin Public Service to provide additional information on the economics
and reliability of this provision. Additional data was supplied to support
the use of Capacity Benefit Margin to provide reliability to the
Wisconsin Public Service service territory.
The Federal Energy Regulatory Commission opened a generic docket on this
issue in 1999 and held hearings to collect additional information. The
Federal Energy Regulatory Commission issued a preliminary partial order on
Capacity Benefit Margin in this generic docket. The preliminary partial order
requires all utilities that use Capacity Benefit Margin to:
1) come to a regional agreement on how Capacity Benefit Margin
will be calculated,
2) determine how entities can access Capacity Benefit Margin,
3) document these methods, and
4) post the resulting values on their Open Access Sametime
Information System ("OASIS") or internet web pages.
Wisconsin Public Service, the Mid-America Interconnected Network, and
the Wisconsin Upper Michigan System utilities complied with this order by the
required date of August 27, 1999. The Federal Energy Regulatory Commission
has yet to rule regarding whether Capacity Benefit Margin is appropriate.
REGIONAL TRANSMISSION ORGANIZATIONS
The Federal Energy Regulatory Commission initiated a Notice of Proposed
Rule Making in 1999 regarding Regional Transmission Organizations, which
include independent system operators as well as independent transmission
companies. In this rule making process, the Commission took comments from
over 100 participants including utilities, customers, state regulatory
commissions, and marketers. After considering participant comments the
Federal Energy Regulatory Commission issued Order 2000 identifying the minimum
conditions a regional transmission organization must meet. This order will
not have a significant effect in Wisconsin. Wisconsin law requires Wisconsin
utilities to join the Midwest Independent System Operator by June 30, 2000.
The Midwest Independent System Operator is already approved by the Federal
Energy Regulatory Commission as a regional transmission organization in the
Midwest area including Wisconsin. The final Federal Energy Regulatory
Commission approval of rates for the regional transmission organization is
expected in 2000.
HYDROELECTRIC LICENSES
All Federal Energy Regulatory Commission hydroelectric facility licenses
held by Wisconsin Public Service are current. With the exception of the
licenses for Bond Falls and Dead River, all hydroelectric facility licenses
held by Upper Peninsula Power are also current.
In 1998, Upper Peninsula Power reached a settlement agreement with
Federal and state agencies and special interest groups regarding its Bond
Falls license. Signing of the agreement, by all parties, is expected early in
2000. The agreement will be the basis for a new license from the Federal
-15-
Energy Regulatory Commission. Issuance of the new license is expected early
in 2001. The license will have a term of 40 years from the date it is
granted.
Licensing of the Dead River project is also progressing. During 1999, a
long-term water power easement agreement was obtained from adjacent landowners
providing flowage rights required by the Federal Energy Regulatory Commission
and the Clean Water Act. Issuance of the license is expected in 2001. The
license will have a 40-year term beginning in August 1991, the date the
Federal Energy Regulatory Commission claimed jurisdiction over the Dead River
Project.
OTHER MATTERS
RESEARCH AND DEVELOPMENT
Electric research and development expenditures for Wisconsin Public
Service totaled $1.7 million for 1999, $1.5 million for 1998, and $1.3 million
for 1997. These expenditures were primarily charged to electric operations.
TECHNOLOGY
Wisconsin Public Service will be the first utility in the country to use
superconducting magnetic energy storage units to increase the stability of its
transmission grid during periods of transmission system disturbances. Six
portable units have been purchased and will be connected to key points on the
Wisconsin Public Service transmission grid. The units will boost local
voltages during the first critical moments of system disturbances. The
superconducting magnetic energy storage units will provide an immediate
temporary solution for Wisconsin Public Service while a long-term transmission
solution is pursued.
CUSTOMER SEGMENTATION
Twenty-eight paper mills account for 12% of Wisconsin Public Service
electric revenues. There is no single customer, or small group of customers,
the loss of which would have a materially adverse effect on the electric
business of Wisconsin Public Service in the current regulatory environment.
CONTRACTED CONSTRUCTION PROJECT
Wisconsin Public Service has agreed to construct and operate for Madison
Gas and Electric an 83-megawatt combustion turbine at the West Marinette site
of Wisconsin Public Service. The combustion turbine is scheduled for
completion in the second quarter of 2000. Wisconsin Public Service will
supply gas to this unit pursuant to existing gas tariffs.
-16-
ELECTRIC FINANCIAL SUMMARY
The following table sets forth the revenues, net income, and assets
attributable to electric utility operations:
ELECTRIC UTILITY OPERATIONS (WISCONSIN PUBLIC SERVICE AND UPPER PENINSULA
POWER)
==============================================================================
(Thousands) Year Ended December 31
- ------------------------------------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------
Consolidated Electric Operating Revenues $ 582,471 $ 543,260 $ 536,885
Net Income $ 56,083 $ 50,488 $ 53,294
Total Assets $1,247,859 $1,117,438 $1,089,875
==============================================================================
See Note 15 in Notes to Consolidated Financial Statements. The consolidated
electric operating revenues, above, reflect the elimination of intercompany
sales and do not agree with regulated electric operating revenues shown in
Note 15, Segments of Business, which do not reflect such elimination.
-17-
ELECTRIC OPERATING STATISTICS
WISCONSIN PUBLIC SERVICE CORPORATION
==============================================================================
1999 1998 1997
- ------------------------------------------------------------------------------
Operating revenues (Thousands)
Residential and farm $183,163 $164,961 $163,766
Small commercial and industrial 151,275 141,203 138,949
Large commercial and industrial 127,056 119,601 120,312
Resale and other 66,428 61,575 56,361
- ------------------------------------------------------------------------------
Total $527,922 $487,340 $479,388
==============================================================================
Kilowatt-hour sales (Thousands)
Residential and farm 2,747,659 2,627,496 2,565,432
Small commercial and industrial 3,135,669 3,004,134 2,876,832
Large commercial and industrial 4,053,153 3,977,829 3,943,275
Resale and other 1,983,667 1,990,705 1,873,788
- ------------------------------------------------------------------------------
Total 11,920,148 11,600,164 11,259,327
==============================================================================
Customers served (End of period)
Residential and farm 345,962 339,881 334,134
Small commercial and industrial 41,394 40,247 39,400
Large commercial and industrial 220 211 197
Resale and other 875 853 836
- ------------------------------------------------------------------------------
Total 388,451 381,192 374,567
==============================================================================
Annual average use (Kilowatt-hours)
Residential and farm 8,020 7,803 7,751
Small commercial and industrial 76,804 75,537 74,082
Large commercial and industrial 18,808,135 18,978,191 606,984
==============================================================================
Average kilowatt-hour price (Cents)
Residential and farm 6.67 6.28 6.38
Small commercial and industrial 4.82 4.70 4.83
Large commercial and industrial 3.13 3.01 3.05
==============================================================================
Production capacity (Summer - kilowatts)
Steam 1,326,100 1,307,800 1,326,000
Nuclear 208,000 205,200 212,200
Hydraulic 53,400 53,000 53,000
Combustion turbine 382,736 206,340 205,930
Other 8,600 7,800 7,800
Purchased capacity 14,900 14,750 14,750
- ------------------------------------------------------------------------------
Total system capacity 1,993,736 1,794,890 1,819,680
==============================================================================
Generation and purchases
(Thousands of kilowatt-hours)
Steam 8,055,350 8,513,537 8,213,518
Nuclear 1,823,147 1,526,702 973,485
Hydraulic 250,306 212,607 351,034
Purchases and other 2,435,409 1,994,826 2,327,334
- ------------------------------------------------------------------------------
Total 12,564,212 12,247,672 11,865,371
==============================================================================
Steam fuel costs
(Cents per million Btu)
Fossil 109.101 105.353 110.124
Nuclear 45.298 41.565 43.174
Total 97.378 95.735 103.093
- ------------------------------------------------------------------------------
System peak - firm (kilowatts) 1,751,000 1,685,000 1,607,000
==============================================================================
Annual load factor 77.71% 78.35% 79.42%
==============================================================================
-18-
ELECTRIC OPERATING STATISTICS
UPPER PENINSULA POWER COMPANY
==============================================================================
1999 1998 1997
- ------------------------------------------------------------------------------
Operating revenues (Thousands)
Residential and farm $25,109 $21,894 $22,626
Small commercial and industrial 19,035 16,688 16,611
Large commercial and industrial 10,809 9,773 9,271
Resale and other 7,483 14,310 11,694
- ------------------------------------------------------------------------------
Total $62,436 $62,665 $60,202
==============================================================================
Kilowatt-hour sales (Thousands)
Residential and farm 263,742 241,517 252,897
Small commercial and industrial 239,698 223,282 223,040
Large commercial and industrial 226,913 225,565 222,143
Resale and other 147,281 148,153 147,297
- ------------------------------------------------------------------------------
Total 877,634 838,517 845,377
==============================================================================
Customers served (End of period)
Residential and farm 43,309 42,783 42,551
Small commercial and industrial 5,304 5,286 5,254
Large commercial and industrial 9 9 8
Resale and other 183 194 190
- ------------------------------------------------------------------------------
Total 48,805 48,272 48,003
==============================================================================
Annual average use (Kilowatt-hours)
Residential and farm 6,113 5,646 5,945
Small commercial and industrial 45,296 42,239 42,454
Large commercial and industrial 25,212,556 25,062,778 26,708,834
==============================================================================
Average kilowatt-hour price (Cents)
Residential and farm 9.57 9.07 8.95
Small commercial and industrial 7.95 7.48 7.45
Large commercial and industrial 4.78 4.34 4.17
==============================================================================
Production capacity (Summer - kilowatts)
Steam 17,700 17,700 17,700
Hydraulic 30,000 30,000 30,000
Combustion turbine 55,000 55,000 55,000
Purchased capacity 65,000 55,000 65,000
- ------------------------------------------------------------------------------
Total system capacity 167,700 157,700 167,700
==============================================================================
Generation and purchases
(Thousands of kilowatt-hours)
Steam (451) 4,029 (298)
Hydraulic 126,146 97,988 138,923
Purchases and other 846,088 845,426 795,599
- ------------------------------------------------------------------------------
Total 971,783 947,443 934,224
==============================================================================
Steam fuel costs
(Cents per million Btu)
Fossil - 2.67943 -
- ------------------------------------------------------------------------------
System peak - firm (kilowatts) 149,300 137,000 138,600
==============================================================================
Annual load factor 68.65% 74.44% 73.23%
==============================================================================
-19-
C. GAS UTILITY MATTERS
WISCONSIN PUBLIC SERVICE CORPORATION'S GAS MARKET
As of December 31, 1999, Wisconsin Public Service provided natural gas
distribution service to 224,674 customers in 225 cities, villages, and towns
in northeastern and central Wisconsin, and 5,231 customers in and around the
city of Menominee, Michigan, for a total of 229,905 gas distribution
customers. This represents an increase of 5,847 customers, or 2.6%, compared
to December 31, 1998. The principal cities served include Green Bay, Oshkosh,
Sheboygan, Two Rivers, Marinette, Stevens Point, and Rhinelander, in
Wisconsin, and the city of Menominee in Michigan.
The gas distribution business of Wisconsin Public Service has a
significant seasonal component and is impacted by varying weather conditions
from year-to-year. In 1999, 65.5% of its gas sales and 58.5% of its total gas
system throughput occurred during the five winter months of November through
March. Total gas throughput includes gas sales and gas delivered for
transportation customers. Competition with other forms of energy exists in
varying degrees, particularly for large commercial and industrial customers
who have the ability to switch between natural gas and alternate fuels.
Wisconsin Public Service offers interruptible gas sales and gas transportation
service for these customers to enable them to reduce their energy costs
through the use of natural gas. There are currently 330 gas transportation
customers on our system. These customers purchase their gas from other
suppliers and contract with Wisconsin Public Service to transport the gas from
interstate natural gas pipelines to their facilities. Additionally,
121 customers still purchase their gas commodity directly from Wisconsin
Public Service, but have elected to do so on an interruptible basis. These
customers continue to switch from firm system supply to either interruptible
system supply or transportation service each year as the economics and service
options become attractive for them.
Gas operations also provide interruptible gas service to Wisconsin
Public Service electric operations for power generation in combustion turbine
peaking generators and for start-up, flame stabilization, and peaking use at
the Weston and Pulliam coal-fired plants.
Gas sales for customer-owned power generation use are provided on an
interruptible basis, with the power plants maintaining alternate fuel
capability. In 1999, Wisconsin Public Service began to provide interruptible
gas supplies to the De Pere Energy Center. Wisconsin Public Service will also
provide interruptible gas supplies to a combustion turbine owned by Madison
Gas and Electric Company upon its completion in 2000.
Total gas deliveries in 1999 for Wisconsin Public Service, including
customer-owned gas transported, were 66,397,064 dekatherms, an 8.9% increase
over 1998. A dekatherm is equivalent to 10 therms or 1 million Btu of energy.
Gas transported for end-user transport customers made up approximately, 43.7%
or 28,974,784 dekatherms of natural gas delivered. Winter weather in 1999 was
still warmer than the 20-year average benchmark generally used by Wisconsin
Public Service and the Public Service Commission of Wisconsin.
Peak day gas throughput in 1999 occurred on Tuesday, December 21 with
414,055 dekatherms total gas throughput at an average Green Bay temperature of
minus 1.2 degrees Fahrenheit. This compares with the previously reported 1998
record gas system throughput of 432,928 dekatherms set on February 2, 1996 at
an average Green Bay temperature of minus 23.8 degrees Fahrenheit.
-20-
GAS SUPPLY
GENERAL
Since the implementation of the Federal Energy Regulatory Commission
Order 636 in November 1993, Wisconsin Public Service has had full
responsibility for the design, acquisition, and management of gas supplies and
the pipeline transportation and storage services required to meet the varying
daily, seasonal, and annual load requirements of its customers. Wisconsin
Public Service manages a portfolio of gas supply contracts, pipeline
transportation, and storage services designed to meet its varying load pattern
at the lowest reasonable cost.
PIPELINE CAPACITY AND STORAGE
The service territory of Wisconsin Public Service is directly served by
a single interstate pipeline; ANR Pipeline Company. Through ANR's system,
Wisconsin Public Service directly or indirectly accesses three major gas-
producing areas of North America:
1) the Gulf of Mexico,
2) the mid-continent areas of Kansas, Texas, and Oklahoma, and
3) the Province of Alberta in western Canada.
Wisconsin Public Service holds firm long-term transportation capacity on
the pipeline in roughly equal proportions from each of these three supply
areas until November 2000. After November 2000, Wisconsin Public Service will
restructure its transportation services portfolio by eliminating
transportation capacity from the Gulf of Mexico and adding transportation
capacity from the developing Chicago Hub. The term for these restructured
services will extend through November 2010. Wisconsin Public Service holds
firm transportation capacity with Viking Gas Transmission Company, to deliver
gas on a firm basis from their interconnection with TransCanada Pipelines at
Emerson, in the Canadian Province of Manitoba, to the interconnection with
ANR at Marshfield, Wisconsin. These Canadian gas suppliers hold firm capacity
on TransCanada Pipelines from Emerson back into the production areas in
Alberta, Canada.
Because of the substantial daily and seasonal swings in gas usage in our
service territory, Wisconsin Public Service also has contracted with ANR for
firm underground storage capacity located in Michigan. There are no known
geological formations in Wisconsin capable of being developed into underground
storage facilities.
Besides providing the ability to manage significant changes in daily gas
demand, storage also provides the ability to purchase gas from the production
areas at high load factors, thus minimizing supply costs. During the summer,
gas purchased in excess of market demand is injected into storage. During the
winter, gas is withdrawn from storage and combined with gas purchased in the
production areas to meet the increased winter demand. Gas from storage
provides up to 65% of our supply on winter peak days, approximately 34% of our
winter sales volumes, and approximately 23% of our total annual sales volumes.
Our total firm storage capacity with ANR is 11.3 million dekatherms.
For peak day needs, Wisconsin Public Service also contracts with
third-party suppliers for high deliverability storage in production areas
during the winter. This storage capacity provides a back-up supply of gas for
transportation contracts when other supplies cannot be delivered due to
-21-
production supply losses caused by extremely cold weather in the production
areas.
SUPPLY CONTRACTS
Wisconsin Public Service contracts for fixed term firm supplies with
approximately 12 to 16 suppliers each year for gas produced in each of the
three production areas. Due to the current uncertainty regarding the future
role of gas utilities in continuing the gas supply function, Wisconsin Public
Service has continued the practice of contracting for domestic gas supplies
for terms of one-year or less. This will minimize potential stranded gas
supply contract costs if retail gas deregulation should proceed quickly in
Wisconsin. Our supply portfolio, as of December 31, 1999, contained contracts
with remaining terms ranging from three months to four years.
Additional supplies are purchased on the monthly spot market as required
to supplement supplies from fixed term firm contracts. Wisconsin Public
Service has been an active spot market purchaser since 1985 and has contracts
in place with a number of suppliers of spot market gas.
REGULATORY MATTERS IN THE WISCONSIN JURISDICTION
INDUSTRY RESTRUCTURING
The Public Service Commission of Wisconsin is continuing to implement
its plan to deregulate the gas market in Wisconsin. In June 1997, the
Wisconsin Commission decided to move incrementally on gas deregulation and
accommodate competition. Six working groups are to be formed to develop
policy recommendations regarding:
1) pipeline capacity,
2) market-based pricing for interruptible customers,
3) legislative changes,
4) marketer certification,
5) end user price reporting, and
6) consumer protection and essential services.
With the exception of the issuance of the work group's report on
consumer standards and essential services, little progress has been made on
gas deregulation in Wisconsin over the last year. The timing and details of
implementation could have an impact on Wisconsin Public Service because of
potential stranded costs associated with interstate pipeline capacity
contracts. It is expected that the Wisconsin Commission will allow for
stranded cost recovery from customers or direct assignment of stranded
contracts should deregulation progress. Wisconsin Public Service has taken
positive steps to reduce its exposure to stranded interstate pipeline capacity
costs.
COST RECOVERY MECHANISM
Wisconsin Public Service implemented a Modified One-for-One Gas Cost
Recovery Mechanism in January 1999, in response to Public Service Commission
of Wisconsin requirements. This method allows for the recovery of all gas
supply costs provided those costs meet index-based benchmarks and are not
deemed imprudent. Under this method, Wisconsin Public Service has been
authorized to recover all gas commodity costs incurred through November 1999.
-22-
GAS SUPPLY PLAN
As a requirement of the 05-GI-106 order, on July 1, 1999 Wisconsin
Public Service filed a Three-Year Gas Supply Plan with the Wisconsin
Commission detailing its plans to purchase and transport the necessary gas
supplies for the period November 1999 through October 2002. The Gas Supply
Plan was approved in October 1999.
CUSTOMER RATES
On January 14, 1999, the Wisconsin Commission granted Wisconsin Public
Service a $10.3 million, or 5.1%, increase in its retail natural gas rates.
The rates were effective January 15, 1999. The 1999 gas rates were very
competitive in Wisconsin. Rates were 99% of the state average for residential
rates 94% for commercial rates, and 73% for large industrial rates.
Wisconsin Public Service anticipates filing an application with the
Wisconsin Commission on April 1, 2000 for new retail gas rates for the years
2001 and 2002.
REGULATORY MATTERS IN THE MICHIGAN JURISDICTION
INDUSTRY RESTRUCTURING
The Michigan Public Service Commission is investigating the deregulation
of retail gas markets and expansion of gas transportation service in Michigan.
The Michigan Commission decided it would be appropriate to conduct a series of
pilot projects to test the development of competitive retail gas markets in
Michigan. The Michigan Commission contacted Michigan's four largest gas
utilities regarding development and implementation of pilot programs.
Because of the small size and limited number of customers in its
Michigan service territory, a pilot transportation program was not conducted
by Wisconsin Public Service.
GAS COST RECOVERY PLAN
As required, on December 28, 1999 Wisconsin Public Service filed a
five-year Gas Cost Recovery Plan with the Michigan Commission detailing its
plan to purchase and transport the necessary gas supplies for the April 2000
through March 2005 period. This Gas Cost Recovery Plan is expected to be
approved by the Michigan Commission by May 2000.
CUSTOMER RATES
Wisconsin Public Service has not had a natural gas rate case in Michigan
since 1986.
REGULATORY MATTERS IN THE FEDERAL ENERGY REGULATORY COMMISSION JURISDICTION
Wisconsin Public Service involvement in Federal regulatory activities in
the natural gas area has been through the Wisconsin Distributor Group. This
group is made up of several Wisconsin gas utilities. Over the past several
years, the Wisconsin Distributor Group has participated in numerous dockets
filed by ANR Pipeline Company, Viking Gas Transmission Company, and the
Federal Energy Regulatory Commission. Although members may file individual
interventions, most interventions have been done through the Wisconsin
Distributor Group. Past successes in various Federal Energy Regulatory
Commission dockets have resulted in substantial refunds for natural gas
customers in Wisconsin as well as lower pipeline transportation rates charged
-23-
by ANR and Viking. Through its membership in the Wisconsin Distributor Group,
Wisconsin Public Service participated in a number of dockets at the Federal
Energy Regulatory Commission this past year.
Due to the volume of comments received, the Federal Energy Regulatory
Commission Notice of Proposed Rule Making on the Regulation of Short-term
Natural Gas Transportation Services and the Notice of Inquiry on the
Regulation of Interstate Natural Gas Transportation Services took the majority
of the group's efforts in 1999. The issue of greatest interest for
participants in the Notice of Proposed Rule Making was the Federal Energy
Regulatory Commission proposal to market unused pipeline capacity through an
auction process. The Wisconsin Distributor Group and Wisconsin Public Service
do not support the auction process and instead believe that increased
reporting and disclosure requirements may be enough to meet the goal of
stimulating competition. In the Notice of Inquiry, the Wisconsin Distributor
Group and Wisconsin Public Service support efforts to formulate pro-
competitive, long-term pricing policies to ensure that the Federal Energy
Regulatory Commission continues to fulfill its statutory obligation to protect
consumers while also encouraging the evolution of a competitive natural gas
industry. The Federal Energy Regulatory Commission has not yet issued a final
order on the Notice of Proposed Rule Making and Notice of Inquiry.
Another docket that drew the attention of the Wisconsin Distributor
Group was the Viking rate case. The Wisconsin Distributor Group was able to
reach a settlement with Viking and other shippers on Viking's system. An
agreement was also reached with other parties on a phase-in of recent
expansion costs on Viking's system. The phased-in approach greatly benefited
customers of Wisconsin Public Service as compared to an immediate roll-in of
all expansion costs. Also included in the Viking settlement was a refund of
approximately $48,000 to our customers, which appeared as a credit on Viking's
April 1999 invoice.
On-going activities in which Wisconsin Public Service will be
participating as a member of the Wisconsin Distributor Group include:
1) the continuation of the Federal Energy Regulatory Commission
Notice of Proposed Rule Making and the Notice of Inquiry and
2) continued monitoring of various dockets filed by ANR Pipeline
Company and Viking Gas Transmission Company at the Federal
Energy Regulatory Commission.
Along with our participation in the Wisconsin Distributor Group,
Wisconsin Public Service has begun to take a more active role in the American
Gas Association's Federal Energy Regulatory Commission Regulatory Committee.
Two of the issues being addressed through the Committee are the Federal Energy
Regulatory Commission's rule that shippers must have title to gas being
transported and their policy on the certification of natural gas pipeline
expansions.
The rule requiring a shipper to have title provides that anyone who
holds contracted capacity on an interstate pipeline must have title to the gas
that is moved on that capacity. In a deregulated natural gas industry, this
rule will bog down transactions between capacity holders and owners of natural
gas who wish to use the capacity, by requiring title transfer agreements or
capacity release agreements in order to transport gas for customers. The
elimination of this rule would greatly enhance the efficiency of a deregulated
natural gas market.
The new Federal Energy Regulatory Commission policy on pipeline
certification may make it more difficult for new pipelines to be built. This
-24-
is a concern to Wisconsin Public Service because its service territory is
currently served by only one pipeline. If the new policy permanently stops
the construction of new pipelines or the expansion of existing pipelines,
other than that of ANR, to its service territory, Wisconsin Public Service
customers may never see the benefits of true competition in pipeline services.
GAS FINANCIAL SUMMARY
The following table sets forth the amounts of revenues, net income, and
assets attributable to gas utility operations:
GAS UTILITY OPERATIONS (WISCONSIN PUBLIC SERVICE)
==============================================================================
(Thousands) Year Ended December 31
- ------------------------------------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------
Consolidated Gas Operating Revenues $191,521 $165,111 $211,090
Net Income $ 11,246 $ 5,912 $ 7,878
Total Assets $267,356 $246,365 $246,842
==============================================================================
See Note 15 in Notes to Consolidated Financial Statements.
GAS OPERATING STATISTICS
WISCONSIN PUBLIC SERVICE CORPORATION
==========================================================================================
1999 1998 1997
- ------------------------------------------------------------------------------------------
Operating revenues (Thousands)
Residential $114,610 $ 96,223 $122,782
Small commercial and industrial 21,922 19,333 23,790
Large commercial and industrial 43,980 37,482 53,517
Other 11,009 12,073 11,001
- ------------------------------------------------------------------------------------------
Total $191,521 $165,111 $211,090
==========================================================================================
Therms delivered (Thousands)
Residential 190,797 172,007 202,558
Small commercial and industrial 42,457 38,104 43,056
Large commercial and industrial 112,528 103,226 127,132
Other 27,085 29,182 21,148
- ------------------------------------------------------------------------------------------
Total therm sales 372,867 342,519 393,894
Transportation 289,748 265,573 268,114
- ------------------------------------------------------------------------------------------
Total 662,615 608,092 662,008
==========================================================================================
Customers served (End of period)
Residential 208,975 203,665 198,524
Small commercial and industrial 17,647 17,656 16,770
Large commercial and industrial 2,952 2,454 2,780
Other 1 1 1
Transportation customers 330 282 224
- ------------------------------------------------------------------------------------------
Total 229,905 224,058 218,299
==========================================================================================
Average annual use (Therms)
Residential 926.7 858.0 1,037.3
Small commercial and industrial 2,424.3 2,207.5 2,619.4
Large commercial and industrial 39,699.4 40,792.7 45,558.7
==========================================================================================
Average therm price (Cents)
Residential 60.07 55.94 60.62
Small commercial and industrial 51.63 50.74 55.25
Large commercial and industrial 39.08 36.31 42.10
==========================================================================================
-25-
D. NONREGULATED BUSINESS ACTIVITIES
GENERAL
The energy marketplace in the United States is moving toward
deregulation and a competitive, commodity-driven environment. We have two
primary nonregulated subsidiaries to implement our strategy to move from a
regulated vertically integrated utility to a vertically integrated
nonregulated energy company. Our nonregulated subsidiaries, WPS Energy
Services, Inc. and WPS Power Development, Inc. were formed in 1994 and 1995.
These subsidiaries are preparing for issues related to:
1) deregulation of generation assets,
2) providing competitive energy products and services in open
access energy markets
3) development of nonregulated merchant generating plants,
4) independent system operators,
5) open market energy trading and sales common in the national
deregulation environment,
6) managing and optimizing the risks and opportunities related to
nonregulated assets in the competitive energy marketplace, and
7) the interface with regulated transmission and distribution
companies of the future.
WPS Energy Services and WPS Power Development provide us flexibility to
adapt to the energy industry of the future.
In transitioning from a regulated environment to a competitive,
commodity-driven environment, significant investment in technical support
systems, human resources, and benefit and incentive-based compensation
packages are being made.
WPS ENERGY SERVICES, INC.
WPS Energy Services is a competitive energy company providing energy and
energy related products and services to the nonregulated energy market place.
It targets retail energy markets in the mid-western and eastern United States
serving commercial, industrial, and residential customers. Principal offices
are located in Illinois, Maine, Michigan, Ohio, and Wisconsin.
WPS Energy Services provides electric, natural gas, and alternate fuel
products, real-time energy management services, energy information management,
project management and energy utilization consulting.
WPS Energy Service's target wholesale market region encompasses that of
its retail customers, and includes the natural gas producing regions important
to those retail markets. Primary production regions include the United States
Gulf and mid-continent regions and Canada. WPS Energy Services opened an
office in Maine in 1999 to market the energy and capacity of the generation
assets acquired by WPS Power Development into the deregulated electric
marketplace, scheduled to open March 2000. The retail marketing efforts of
this office will generate electric revenue for WPS Energy Services while
securing a market for the output of the WPS Power Development generation
assets.
-26-
Nonregulated gas markets are highly volatile commodity markets.
WPS Energy Services has instituted various processes to manage its exposure in
these markets. Risk and credit guidelines, daily mark-to-market analysis, and
value-at-risk assessments have been instituted to continually evaluate
financial exposures in market commitments. Speculative trading in electric
energy markets has been minimized. See NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS, SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Note 1(e) and Note 10
regarding "Price Risk Management Activities."
Revenues at WPS Energy Services were $292.2 million in 1999 compared
with $351.3 million in 1998, a decrease of 16.8%. This decrease is the result
of lower overall gas prices experienced in 1999, and a deliberate change in
wholesale product mix focusing on the development of higher value, lower risk
wholesale products rather than high volume, low margin transactions common in
1998. Revenues in 1999, have not benefited from retail electric sales, as
electric retail access has been slow to develop in target market areas.
WPS Energy Services' strategy is to introduce electric products and services
to current gas customers, as the regulatory environment changes to allow
consumer choice. Beginning in March 2000, WPS Energy Services will serve as a
"standard offer" provider to electric customers in northern Maine. WPS Energy
Services works with WPS Power Development to establish control of physical
generation assets that will be able to serve the needs of the developing
nonregulated market.
WPS Energy Services experienced a loss of $3.5 million in 1999 compared
with a loss of $6.9 million in 1998, an improvement of 49.3%. The primary
reasons for the increased earnings at WPS Energy Services were the elimination
of speculative trading losses that occurred in 1998, and an increase in gas
margins. The improved trading performance on reduced trading volume is the
result of a deliberate shift in focus to emphasize capturing present
opportunities in the market rather than taking a position in anticipation of a
future market movement.
In the fourth quarter of 1999, WPS Energy Services opened an office in
Traverse City, Michigan. The office is focusing on wholesale gas
transactions, and is expected to make an immediate contribution to net income
in 2000.
WPS Energy Services is in the process of developing a natural gas
storage facility in Michigan. The facility is expected to be operational in
the second quarter of 2000, and have a capacity of 3 billion cubic feet of
gas. Additional storage capacity will allow increased supply reliability to
customers in Michigan, and greater flexibility in meeting peak day energy
requirements. This facility is not expected to have a material effect on
earnings in 2000.
WPS POWER DEVELOPMENT, INC.
WPS Power Development develops and owns electric generation projects and
provides services to the electric power generation industry nationwide.
Services include acquisition and investment analysis, project development,
engineering and management services, and operations and maintenance services.
An emerging trend in the restructuring of the electric utility industry is the
divestiture of generation facilities. WPS Power Development is continually
monitoring and assessing investment opportunities in this area. In addition,
WPS Power Development concentrates on cogeneration, distributed generation,
generation from renewable energy sources, new generation facilities and
generation plant repowering projects. WPS Power Development is currently
operating projects in six states and Canada.
-27-
ECO Coal Pelletization #12, LLC is a WPS Power Development investment that
produces synthetic fuel from coal fines. The project began operation in June
1998 and is eligible to receive Federal tax credits as the processed coal fines
qualify as a synthetic fuel. The project has addressed operational problems
throughout much of 1999. Project earnings improved in 1999. Management
expects further improvement in the year 2000.
WPS Power Development was the successful bidder for the purchase of
approximately 92 megawatts of hydroelectric and oil-fired facilities in Maine
and New Brunswick, Canada from Maine Public Service Company. The acquisition
was finalized in June of 1999.
WPS Power Development was the successful bidder for the purchase of the
Sunbury generation assets in Pennsylvania from PP&L Resources Inc. The
generation assets acquired have a total nameplate generating capacity of
472 megawatts. Final approvals were received and the transaction was
concluded in November 1999.
WPS Power Development experienced a loss of $3.8 million in 1999
compared with a $2.4 million loss in 1998, a change of 58.3%. The increased
loss was primarily due to additional expenses incurred in 1999 for the start
up and operation of newly acquired facilities and the pursuit of new projects.
TECHNOLOGY
WPS Resources has invested $1.5 million for a 40% interest in a fiber
optic communication network. The network is a competitive local exchange with
approximately 60 miles of fiber optic facilities in the City of Green Bay.
The project also has a communication link to approximately 50 miles of fiber
optic facilities in the City of Appleton.
WPS Energy Services has patented an energy management system called
DENet TM. DENet provides customers the capability to manage their energy
consumption on a real time basis and generate reports on historical energy use
through the Internet. The System's flexibility allows a customer to monitor
utility and process parameters related to gas, electricity, water, steam,
temperature, and production output. DENet allows WPS Power Development to
coordinate the operation of its plants through an integrated computer network.
Employees in numerous locations have access to plant operations through the
system.
See MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION at page 53 for additional information regarding
nonregulated operations.
E. ENVIRONMENTAL MATTERS
GENERAL
We are subject to Federal, state, and local regulations regarding
environmental impacts of our operations on air and water quality and solid
waste. The application of Federal and state restrictions to protect the
environment can involve review, certification, or issuance of permits by
various Federal and state authorities, including the United States
Environmental Protection Agency and the Wisconsin Department of Natural
Resources. These restrictions may limit, prevent, or substantially increase
the cost of the operation of generating facilities and may require substantial
investments in new equipment at existing installations. Such restrictions may
require substantial additional investments for new projects and may delay or
prevent completion of projects. We cannot forecast the effects of such
regulation on our generation, transmission, and other facilities, or
-28-
operations but we believe that Wisconsin Public Service, Upper Peninsula
Power, and WPS Power Development are presently meeting existing requirements.
AIR QUALITY
Wisconsin Public Service generation plants are in compliance with all
current sulfur dioxide, nitrogen oxide, and particulate emission standards.
The Federal Clean Air Act required reductions in sulfur dioxide in 1995
to meet limitations based on an emission rate of 2.5 pounds per million Btu
multiplied by a historical generation baseline for Pulliam Unit 8 and
Edgewater Unit 4 generation units. The Clean Air Act requires further
reductions beginning in the year 2000. The year 2000 limits are based on an
emission rate of 1.2 pounds per million Btu multiplied by a historical
generation baseline for all generation units. Our generation facilities met
the year 2000 standard in 1995. Compliance with Wisconsin and Federal sulfur
dioxide emission limitations were met by switching to low sulfur coal.
The Clean Air Act created an emission allowance system. Our early compliance
with the Clean Air Act requirements produced surplus allowances. The surplus
allowances aided in the compliance with the year 2000 requirements. We will
consider the sale of any allowances available in excess of our own needs. The
Wisconsin Commission has ordered that profits from the sale of allowances be
passed on to customers.
The Clean Air Act requires the installation of low nitrogen oxide
burners on several of our generating units. Low nitrogen oxide burners were
installed at Pulliam Unit 8 early in 1994. The Clean Air Act allows units
smaller than 100 megawatts, such as Pulliam Unit 7, to elect to comply with
the 1995 emission standards, thus building up sulfur dioxide credits. Having
made this election, low nitrogen oxide burners were installed on Pulliam
Unit 7 in 1994. Low nitrogen oxide burner equipment was installed on Weston
Unit 2 in 1999. Nitrogen oxide emissions from Pulliam Units 3 through 8 and
Weston Units 1 through 3 are averaged together to reach compliance
requirements under the Clean Air Act.
In September 1998, the United States Environmental Protection Agency
required certain states, including Wisconsin, to develop plans to reduce the
emissions of nitrogen oxides from sources within the state by May 2003. On a
preliminary basis, we project potential capital costs of between $61 million
and $112 million to comply with possible future regulations. Wisconsin Public
Service has committed $6.3 million to fund our share of initial costs for
Columbia Unit 2 selective catalytic nitrogen oxide reduction equipment to be
installed in the spring of 2000. The anticipated ozone season operation and
maintenance expenses are $3.6 million per year. The costs will depend on the
state-specific compliance method to be adopted in the future and the
effectiveness of the various technologies available for nitrogen oxide
emission control. Under our current practices, capital costs and the actual
operating costs are anticipated to be recovered through customer rates.
On December 24, 1998, Wisconsin Public Service and five other parties
filed a petition challenging the United States Environmental Protection
Agency's regulations that required Wisconsin to prepare and submit a Nitrogen
Oxide State Implementation Plan (Wisconsin Paper Council v. U.S. Environmental
Protection Agency, Case No. 98-4269 (7th Cir. 1998)). This petition was
consolidated with other similar challenges in the District of Columbia Circuit
Court. On January 22, 1999, the State of Wisconsin moved to intervene in the
litigation and challenged the geographic scope of the rule within Wisconsin
and the time required to implement nitrogen oxide controls in the state.
-29-
On March 3, 2000, the United States Court of Appeals for the District of
Columbia, held that the United States Environmental Protection Agency Nitrogen
Oxide State Implementation Plan call was not appropriately issued to the state
of Wisconsin. The decision is being reviewed by the Wisconsin Department of
Natural Resources, which indicated that reductions in nitrogen oxides may
still be necessary to show continued progress in achieving attainment with the
national ambient air quality standard for ozone. The affect of this ruling on
the company is uncertain at this time.
Toxic air provisions in the Clean Air Act will not be applied until the
United States Environmental Protection Agency determines if those standards
need to be applied to utilities.
Recent air quality modeling by the Wisconsin Department of Natural
Resources revealed that Weston Units 1 and 2 contribute to a modeled deviation
from the sulfur dioxide ambient air quality standard. Wisconsin Public
Service is evaluating options for increasing the stack height and reducing the
sulfur dioxide emission limit to eliminate the modeled deviation. These
options include extending the existing stacks, construction of new stacks, and
reducing the sulfur dioxide emission limit from 3.2 pounds per million Btu to
1.2 pounds per million Btu.
Due to degradation of the electrostatic precipitator at Weston Unit 3,
Wisconsin Public Service is evaluating the installation of a baghouse. A
baghouse is an alternative pollution control device to an electrostatic
precipitator. If the installation proceeds, it is estimated it will cost
approximately $25.7 million.
The Sunbury plant, acquired in November 1999 by WPS Power Development,
currently purchases emission allowances to comply with air regulations.
Additional nitrogen oxide control technology may be required by the year 2003
to comply with clean air regulations. Expenditures for this technology could
be significant.
On November 3, 1999, the United States Environmental Protection Agency
announced that it was pursuing an enforcement initiative against seven
utilities, or their subsidiaries, located in the Midwest and the South as well
as the Tennessee Valley Authority. The enforcement initiative alleges that
the utilities and the Tennessee Valley Authority undertook modifications at
their coal-fired power plants in violation of the Clean Air Act. The United
States Environmental Protection Agency is seeking penalties and the
installation of additional pollution control equipment.
No investigation has been undertaken of our Wisconsin or Pennsylvania
facilities in connection with this enforcement initiative. However, other
industries are being investigated, and we are aware that investigations of
certain operators of coal fired boilers in the pulp and paper industry are
occurring in the State of Wisconsin.
WATER QUALITY
Wisconsin Public Service is subject to regulation by the United States
Environmental Protection Agency and the Wisconsin Department of Natural
Resources with respect to thermal and other discharges from its power plants,
into Lake Michigan and other waters of Wisconsin. Wastewater discharge
permits, with a term of five years, were re-issued by the Wisconsin Department
of Natural Resources for our Kewaunee plant in 1995. Similar