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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------------- ---------------
Commission Registrant; State of Incorporation IRS Employer
file number Address; and Telephone Number Identification No.
- ----------- ---------------------------------- ------------------
1-11337 WPS RESOURCES CORPORATION 39-1775292
(A Wisconsin Corporation)
700 North Adams Street
P. O. Box 19001
Green Bay, WI 54307-9001
414-433-1466
1-3016 WISCONSIN PUBLIC SERVICE CORPORATION 39-0715160
(A Wisconsin Corporation)
700 North Adams Street
P. O. Box 19001
Green Bay, WI 54307-9001
414-433-1466
Securities registered pursuant to Section 12(b) of the Act:
- -----------------------------------------------------------
Title of Name of each exchange
each class on which registered
---------- ---------------------
WPS RESOURCES CORPORATION Common Stock, New York Stock Exchange and
$1 par value Chicago Stock Exchange
Rights to purchase New York Stock Exchange and
Common Stock pursuant Chicago Stock Exchange
to Rights Agreement
dated December 12, 1996
Securities registered pursuant to Section 12(g) of the Act:
- -----------------------------------------------------------
WISCONSIN PUBLIC SERVICE CORPORATION
Preferred Stock, Cumulative, $100 par value
5.00% Series 5.08% Series
5.04% Series 6.76% Series
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of Registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
State the aggregate market value of the voting stock held by
- ------------------------------------------------------------
nonaffiliates of the Registrant.
- --------------------------------
WPS RESOURCES CORPORATION
$651,192,214 as of March 5, 1997
WISCONSIN PUBLIC SERVICE CORPORATION
None
Number of shares outstanding of each class of common stock, as of
- -----------------------------------------------------------------
December 31, 1996:
- -----------------
WPS RESOURCES CORPORATION Common Stock, $1 par value,
23,896,962 shares
WISCONSIN PUBLIC SERVICE CORPORATION Common Stock, $4 par value,
23,896,962 shares
DOCUMENTS INCORPORATED BY REFERENCE
(1) Definitive proxy statement for the WPS Resources Corporation
Annual Meeting of Shareholders on May 1, 1997 is
incorporated into Parts I and III.
PAGE
WPS RESOURCES CORPORATION
and
WISCONSIN PUBLIC SERVICE CORPORATION
FORM 10-K
ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION
For the Year Ended December 31, 1996
TABLE OF CONTENTS
DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . v
PART I
1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . 1
A. GENERAL
WPS Resources Corporation. . . . . . . . . . . 1
Wisconsin Public Service Corporation . . . . . 1
B. ELECTRIC MATTERS
Industry Restructuring . . . . . . . . . . . . 2
Electric Operations. . . . . . . . . . . . . . 5
Generating Capacity. . . . . . . . . . . . . . 5
Advance Plan . . . . . . . . . . . . . . . . . 6
Kewaunee Nuclear Power Plant . . . . . . . . . 6
Fuel Supply. . . . . . . . . . . . . . . . . . 10
Other Matters. . . . . . . . . . . . . . . . . 14
Electric Financial Summary . . . . . . . . . . 15
Electric Operating Statistics
WPS Resources Corporation . . . . . . . . 16
Wisconsin Public Service Corporation . . 17
C. GAS MATTERS
Industry Restructuring . . . . . . . . . . . . 18
Other Matters. . . . . . . . . . . . . . . . . 18
Gas Financial Summary. . . . . . . . . . . . . 22
Gas Operating Statistics
WPS Resources Corporation . . . . . . . . 23
Wisconsin Public Service Corporation . . 24
D. NON-REGULATED BUSINESS ACTIVITIES . . . . . . . . . 25
E. ENVIRONMENTAL MATTERS
General. . . . . . . . . . . . . . . . . . . . 26
Air Quality. . . . . . . . . . . . . . . . . . 26
Water Quality. . . . . . . . . . . . . . . . . 27
i
Gas Plant Cleanup. . . . . . . . . . . . . . . 27
Other Solid Waste Disposal . . . . . . . . . . 29
F. REGULATORY MATTERS
General. . . . . . . . . . . . . . . . . . . . 30
Customer Rate Matters. . . . . . . . . . . . . 30
Industry Restructuring . . . . . . . . . . . . 30
Accounting Developments. . . . . . . . . . . . 31
Dividend Restrictions. . . . . . . . . . . . . 31
G. CAPITAL REQUIREMENTS. . . . . . . . . . . . . . . . 32
H. EMPLOYEES . . . . . . . . . . . . . . . . . . . . . 33
2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . 34
A. UTILITY . . . . . . . . . . . . . . . . . . . . . . 34
B. NON-REGULATED . . . . . . . . . . . . . . . . . . . 35
3. LEGAL PROCEEDINGS .. . . . . . . . . . . . . . . . . . . 35
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . 35
4A. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . . 36
A. EXECUTIVE OFFICERS OF WPS RESOURCES CORPORATION . . 36
B. EXECUTIVE OFFICERS OF WISCONSIN PUBLIC SERVICE
CORPORATION . . . . . . . . . . . . . . . . . . . . 37
PART II
5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS. . . . . . . . . . . . . . . 39
6. SELECTED FINANCIAL DATA
WPS RESOURCES CORPORATION
COMPARATIVE FINANCIAL STATEMENTS AND
FINANCIAL STATISTICS (1992 TO 1996)
A. CONSOLIDATED STATEMENTS OF INCOME . . . . . . . . . 41
B. CONSOLIDATED BALANCE SHEETS . . . . . . . . . . . . 42
C. FINANCIAL STATISTICS. . . . . . . . . . . . . . . . 43
ii
WISCONSIN PUBLIC SERVICE CORPORATION
COMPARATIVE FINANCIAL DATA AND FINANCIAL
STATISTICS (1992 TO 1996)
D. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . 44
E. FINANCIAL STATISTICS. . . . . . . . . . . . . . . . 45
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION OF
WPS RESOURCES CORPORATION AND
WISCONSIN PUBLIC SERVICE CORPORATION . . . . . . . . . . 46
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WPS RESOURCES CORPORATION
A. CONSOLIDATED STATEMENTS OF INCOME
AND RETAINED EARNINGS . . . . . . . . . . . . . . . 60
B. CONSOLIDATED BALANCE SHEETS . . . . . . . . . . . . 61
C. CONSOLIDATED STATEMENTS OF CAPITALIZATION . . . . . 63
D. CONSOLIDATED STATEMENTS OF CASH FLOWS . . . . . . . 64
E. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. . . . . 65
F. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS. . . . . . 88
WISCONSIN PUBLIC SERVICE CORPORATION
G. CONSOLIDATED STATEMENTS OF INCOME . . . . . . . . . 89
H. CONSOLIDATED BALANCE SHEETS . . . . . . . . . . . . 90
I. CONSOLIDATED STATEMENTS OF CAPITALIZATION . . . . . 92
J. CONSOLIDATED STATEMENTS OF CASH FLOWS . . . . . . . 93
K. CONSOLIDATED STATEMENTS OF RETAINED EARNINGS . . . 94
L. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. . . . . 95
M. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS. . . . . . 96
9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE. . . . . . . . . . . 97
PART III. . . . . . . . . . . . . . . . . . . . . . . . . . . 97
PART IV
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . 97
DESCRIPTION OF DOCUMENTS . . . . . . . . . . . . . . . . 100
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . 106
iii
WPS RESOURCES CORPORATION FINANCIAL STATEMENT SCHEDULES
A. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON
SCHEDULE III - CONDENSED PARENT
COMPANY ONLY FINANCIAL STATEMENTS . . . . . . . . . 107
B. STATEMENTS OF INCOME AND RETAINED EARNINGS. . . . . 108
C. BALANCE SHEETS . . . . . . . . . . . . . . . . . . 109
D. STATEMENTS OF CASH FLOWS . . . . . . . . . . . . . 110
E. NOTES TO PARENT COMPANY FINANCIAL STATEMENTS . . . 111
iv
DEFINITIONS
The following abbreviations and acronyms are used in the text of
this Form 10-K:
Act . . . . . . . . . . . . Federal Clean Air Act Amendments
of 1990
AFUDC . . . . . . . . . . . Allowance for funds used during
construction
ANR . . . . . . . . . . . . ANR Pipeline Company
APBO. . . . . . . . . . . . Accrued post-retirement benefit
obligation
Btu . . . . . . . . . . . . British thermal unit
Columbia* . . . . . . . . . The Columbia Energy Center
Company . . . . . . . . . . WPS Resources Corporation
CPCN. . . . . . . . . . . . Certificate of Public
Convenience and Necessity
CWIP* . . . . . . . . . . . Construction work in progress
Dakota. . . . . . . . . . . Dakota Gasification Plant
DNR . . . . . . . . . . . . Wisconsin Department of Natural
Resources
DOE . . . . . . . . . . . . U. S. Department of Energy
DRP*. . . . . . . . . . . . Dividend Reinvestment and Stock
Purchase Plan of the Company
(subsequently replaced by the
Stock Investment Plan)
DSM . . . . . . . . . . . . Demand-side management of energy
use
Edgewater*. . . . . . . . . The Edgewater Unit 4 power plant
EPA . . . . . . . . . . . . U. S. Environmental Protection
Agency
ESOP. . . . . . . . . . . . Employee Stock Ownership Plan
and Trust of Wisconsin Public
Service Corporation
v
ESI . . . . . . . . . . . . WPS Energy Services, Inc., a
subsidiary of the Company
FERC. . . . . . . . . . . . Federal Energy Regulatory
Commission
GIC . . . . . . . . . . . . Gas Inventory Charge filed by
ANR Pipeline Company
ISO . . . . . . . . . . . . Independent system operator
Kewaunee. . . . . . . . . . Kewaunee Nuclear Power Plant
kVa . . . . . . . . . . . . Kilovolt-ampere
kw. . . . . . . . . . . . . Kilowatts
kWh . . . . . . . . . . . . Kilowatt-hour
Leasing . . . . . . . . . . WPS Leasing, Inc., a subsidiary
of Wisconsin Public Service
Corporation
MAIN. . . . . . . . . . . . Mid America Interconnected
Network
MG&E. . . . . . . . . . . . Madison Gas and Electric Company
MPSC. . . . . . . . . . . . Michigan Public Service
Commission
NERCO . . . . . . . . . . . NERCO Coal Company
NOI . . . . . . . . . . . . Notice of Inquiry
NOPR. . . . . . . . . . . . Notice of Proposed Rulemaking
NRC . . . . . . . . . . . . Nuclear Regulatory Commission
Nuclear Policy Act. . . . . Nuclear Waste Policy Act of 1982
OASIS . . . . . . . . . . . Open Access Same Time
Information System
Oconto. . . . . . . . . . . Oconto Electric Cooperative
Order . . . . . . . . . . . Order No. 636 issued by FERC in
April 1992
PDI . . . . . . . . . . . . WPS Power Development, Inc., a
subsidiary of the Company
vi
PGAC. . . . . . . . . . . . Purchased-gas-adjustment clause
Polsky. . . . . . . . . . . Polsky Energy Corporation
PRB . . . . . . . . . . . . Powder River Basin in Wyoming
PRP . . . . . . . . . . . . Potentially responsible party
PSCW. . . . . . . . . . . . Public Service Commission of
Wisconsin
Pulliam*. . . . . . . . . . The Pulliam generating facility
Railroads . . . . . . . . . Soo Line and Wisconsin Central
railroads
River Power . . . . . . . . Wisconsin River Power Company
SFAS. . . . . . . . . . . . Statement of Financial
Accounting Standards
Sheboygan II Gas Plant. . . Property adjacent to the
Sheboygan River previously used
by Wisconsin Public Service
Corporation for the gasification
of coal
SIP . . . . . . . . . . . . Stock Investment Plan of the
Company
Stoneman. . . . . . . . . . Stoneman Power Plant
Superfund . . . . . . . . . Comprehensive Environmental
Response, Compensation, and
Liability Act
Union . . . . . . . . . . . Local 310 of the International
Union of Operating Engineers
which represents certain
Wisconsin Public Service
Corporation employees
USEC. . . . . . . . . . . . United States Enrichment
Corporation
Viking. . . . . . . . . . . Viking Gas Transmission Company
WCC . . . . . . . . . . . . Wisconsin Capacity Coalition
WDG . . . . . . . . . . . . Wisconsin Distributors Group
WEPCO . . . . . . . . . . . Wisconsin Electric Power Company
Weston* . . . . . . . . . . The Weston generating facility
vii
Wisconsin*. . . . . . . . . State of Wisconsin
WP&L. . . . . . . . . . . . Wisconsin Power and Light
Company
WPPI. . . . . . . . . . . . Wisconsin Public Power, Inc.
WPSC. . . . . . . . . . . . Wisconsin Public Service
Corporation, the principal
subsidiary of the Company
Yankee Atomic . . . . . . . Yankee Atomic Electric Company
- -----
* Indicates items not defined elsewhere in this report.
viii
PART I
ITEM 1. BUSINESS
A. GENERAL
WPS RESOURCES CORPORATION
WPS Resources Corporation ("Company"), a Wisconsin
Corporation, was incorporated on December 3, 1993 as a subsidiary
of Wisconsin Public Service Corporation ("WPSC"). On September
1, 1994, the Company, in a share-for-share exchange of common
stock, acquired all of the common stock of WPSC, $4 par value,
and issued to the former shareholders of WPSC shares of the
Company's common stock, $1 par value. The Company operates as a
holding company with both regulated (utility) and non-regulated
business units. The Company's principal subsidiaries are: WPSC,
a regulated electric and gas utility; WPS Energy Services, Inc.
("ESI"), a non-regulated subsidiary, and WPS Power Development,
Inc. ("PDI"), a non-regulated subsidiary. WPSC, ESI, and PDI
represented approximately 82%, 18%, and .2% of the Company's
consolidated revenues and 95%, 4%, and 1% of the Company's
consolidated assets, respectively.
WISCONSIN PUBLIC SERVICE CORPORATION
At December 31, 1996, WPSC served 367,892 electric retail
customers and 212,094 gas retail customers in an 11,000 square
mile service territory in Northeastern Wisconsin and an adjacent
part of Upper Michigan. Additionally, WPSC provides wholesale
(full or partial requirements) electric service, either directly
or indirectly, to 12 municipal utilities, 3 Rural Electrification
Administration financed electric cooperatives, and a privately
held utility. Operating revenues in the year 1996 were derived
97% from Wisconsin customers and 3% from Michigan customers. Of
total revenues in 1996, 70% were from electric operations and 30%
were from gas operations. Of total electric revenues, 93% were
from retail sales and 7% were from wholesale sales.
WPSC's retail service areas are principally protected by
indeterminate permits secured by statute in Wisconsin, and
franchises granted by municipalities in Michigan.
-1-
B. ELECTRIC MATTERS
INDUSTRY RESTRUCTURING. The Federal Energy Regulatory
Commission ("FERC"), in March 1995, issued a notice of proposed
rulemaking ("NOPR") which: (1) required all utilities under the
FERC's jurisdiction, including WPSC, to file non-discriminatory,
open access transmission tariffs which would be available to all
wholesale buyers and sellers of electric energy, (2) required
utilities to take service under the tariffs for their own
wholesale sales and purchases of electric energy, and (3)
provided utilities with an opportunity to recover stranded costs
(i.e., unrecovered investment in facilities that are uneconomical
to operate).
In April 1996, FERC issued Orders 888 and 889 based on the
March 1995 NOPR and the comments of interested parties. These
orders covered: (1) open access transmission tariff rules,
pricing, and procedures, (2) the Open Access Same Time
Information System ("OASIS"), which requires utilities to publish
transmission tariff rules and pricing on a publicly available
electronic bulletin board for all potential buyers to see and
evaluate, (3) standards of conduct, which are rules a utility
must follow when dealing with its own unregulated subsidiaries,
and (4) general principles for Independent System Operators
("ISO"). An ISO is an independent third party which would
operate and regulate, on a real-time basis, the transmission
systems for a number of utility owners. An ISO would operate in
tight power pools, which are geographic areas where the regional
utilities have pooled their generation for centralized purchase
by all parties. The FERC order required utilities which own
transmission facilities, including WPSC, to file open access
transmission compliance tariffs by July 9, 1996. With a few
exceptions, all transmission owning investor-owned utilities have
open access transmission tariffs, all of which must yet be
approved by the FERC. These tariffs provide the terms and
conditions under which utilities will provide transmission
service and associated ancillary generation services to eligible
wholesale customers. Numerous parties have filed exceptions
requesting rehearing on a number of issues. It is anticipated
that FERC will address the rehearing issue requests in the first
quarter of 1997.
As part of implementing the FERC orders, WPSC has
accomplished separation of the transmission system operations
from wholesale purchasing and sales operations by physically
separating and isolating its transmission system operations
center from its generation, wholesale power sales, and purchased
power system operating center.
-2-
On January 3, 1997, WPSC implemented the final requirements
under these orders by developing and implementing formal
standards of conduct, which are rules governing transmission
department dealings with the generation, wholesale purchase, and
sales departments of the utility. WPSC also joined the regional
OASIS operated by Mid America Interconnected Network ("MAIN"),
which is an organization formed by utilities in Wisconsin, Upper
Michigan, Illinois, and Missouri that monitors and communicates
on the reliability of the generation and transmission systems.
The OASIS, which is being developed by MAIN utilities, will
calculate and post on a publicly available bulletin board, the
available regional transmission capacity, along with pricing and
rules for all potential buyers in an attempt to promote robust
generation competition in the region.
WPSC is part of a group of 23 Midwestern utilities designing
an independent system operator to operate and regulate on a
real-time basis the transmission systems in the region. If a
Midwest ISO becomes reality, it will operate, monitor, and
provide real-time regulation ensuring that utilities are
following tariff rules and pricing with respect to the
transmission systems of member owners, and providing transmission
service across the region. The Public Service Commission of
Wisconsin ("PSCW") has also promoted the ISO concept and has
issued a number of ISO principles it believes are important to
promote generation competition and limit generation owner market
power, which is the ability to control the market.
The import capability of Wisconsin's transmission system in
general, and WPSC's transmission system in particular, is
adequate based on historical levels to meet expected firm and
non-firm imports of power. Non-firm imports, usually made for
economic reasons, can be severely restrained during periods of
high transmission system use.
WPSC has completed negotiations with its major wholesale
customers and has a settlement agreement regarding the July open
access transmission rates and an associated request for
market-based rate authority. It is anticipated that FERC will
approve the settlement in the first quarter of 1997.
In December 1995, the PSCW outlined its plan for
restructuring the electric industry in Wisconsin. The plan
includes a 32-step, 5-year process concluding with retail
competition by the year 2001. In 1996, the PSCW opened dockets
in this process to address: (1) designing the organizational
separation of the generation, transmission, and distribution
portions of the vertically integrated utility, (2) determining
which government agency has siting authority for new generation
and transmission facilities, (3) adopting affiliate
-3-
interest standards, which are the rules for utility dealings with
subsidiaries and affiliates, (4) establishing public benefit
advisory boards to oversee the low income and conservation
efforts presently provided by the regulated utilities,
(5) determining generation market power and taking related
appropriate actions, (6) establishing quality of service
standards, and (7) reforming the advance plan process,which is
the planning process that prepares for transmission and
generation facility additions. Progress on these dockets has
been slow with final PSCW order being issued only on item (7).
The Wisconsin Legislature may consider electric
restructuring in 1997. In the meantime, the PSCW, utility
companies, various advocacy groups, and utility customers
continue to dialogue in an effort to reach consensus on how to
comply with the PSCW introduced plan for restructuring the
electric industry.
In Michigan, the governor asked a commission to study
industrial pressures for competitive electric utility rates,
since the rates in Michigan are higher than the national average
and higher than some neighboring states. Based on the
commission's report, utilities have identified the following
issues: (1) generation access for new loads,(2) Michigan Public
Service Commission ("MPSC") approved tariffs, (3) separating the
tariff rules and pricing into generation, transmission, and
distribution components, (4) determining the maximum and minimum
levels of customer load that can be included in the program, (5)
requiring reciprocity from utilities in neighboring states, (6)
determining levels of stranded cost with respect to generation
assets and/or purchase power contracts with costs in excess of
market recovery levels, (7) replacing cost-based rate regulation
with performance-based regulation, which allows utilities to gain
or lose earnings based on performance, (8) special contracts
between utilities and individual customers based on market
pricing rather than cost, and (9) elimination of utility
subsidized or customer subsidized conservation programs.
The MPSC staff has proposed, and the MPSC is considering a move
to industry restrucuring with retail customer open access to
generation for all customers classes at a rate of 2.5% of each
utility's load per year starting in 1998.
Two merger proposals involving utilities in the region were
moving through the approval process during 1996. In May 1995,
Wisconsin Energy Corporation and Northern States Power Company
filed with the FERC for approval to form Primergy. In March
1996, WPL Holdings, Inc., IES Industries, Inc., and Interstate
Power Company filed with the FERC to form Interstate Energy
Corporation. The FERC issued a Notice of Inquiry ("NOI") in the
Primergy Case in late 1995. Comments on this NOI were due in May
1996. WPSC participated in the
-4-
NOI and was a limited intervenor in the Primergy merger case at
the FERC and at the PSCW. WPSC is also a participant in the IES
merger case at the FERC and the PSCW.
ELECTRIC OPERATIONS. The largest communities served at
retail with electricity are the cities of Green Bay, Oshkosh,
Wausau, and Stevens Point.
WPSC owns 33.1% of the outstanding capital stock of
Wisconsin River Power Company ("River Power"). The business of
River Power consists of the ownership and operation of two dams
and related hydroelectric plants on the Wisconsin River having an
aggregate installed capacity of about 38,700 kilowatts ("kw").
The output of the hydroelectric plants is sold, at the sites of
the plants, to the three companies substantially in proportion to
their stock ownership interests.
GENERATING CAPACITY. Coordinated planning for generation
and transmission is a function of the Wisconsin Upper Michigan
Systems of which WPSC is a member. Other members include Madison
Gas and Electric Company ("MG&E"), Upper Peninsula Power Company,
Wisconsin Electric Power Company ("WEPCO"), Wisconsin Power and
Light Company ("WP&L"), and Wisconsin Public Power, Inc.
("WPPI"). Existing and planned interconnections with other
neighboring utilities provide a further means of sharing reserve
capacities and interchanging energy.
WPSC experienced a 1996 net firm load peak of 1,591,000 Kw
on August 6. Considering a firm purchase of 74,800 Kw and a
total generating capability of 1,799,300 Kw, the system reserve
margin was 18.7%. In addition, 92,000 Kw of opportunity sales
were served during the peak hour. WPSC's future generating
reserves, adjusted for firm purchases, firm sales, and planned
capacity additions, are estimated to be above the planning
criteria of a 15% minimum reserve in 1997 and 1998. See Part I,
Item 2, PROPERTIES, at page 34 for information concerning
generating facilities.
In November 1995, WPSC signed a 25-year agreement to
purchase power from Polsky Energy Corporation ("Polsky"), an
independent power producer proposing to build a plant adjacent to
the Nicolet Paper Company mill in DePere, Wisconsin. The first
phase of the project calls for completion of a 179-megawatt
combustion turbine facility in 1999. The second phase, scheduled
to be in service in 2004, converts the facility to a combined
cycle unit and increases the total capacity to 232 megawatts. A
combined-cycle unit is a type of combustion turbine in which the
hot exhaust gases pass through a heat recovery
-5-
steam generator to produce steam. The steam drives a steam
turbine generator which usually produces one-third of the power
generated.
Construction of the Polsky project is contingent upon PSCW
approval in stage two of the Certificate of Public Convenience
and Necessity ("CPCN") process. The PSCW has stated that during
stage two of the CPCN proceedings, evidence of the need for the
facility will be considered. A recent WPSC load forecast
suggests the capacity may not be needed. A final decision on
stage two of the CPCN process is expected in 1997.
ADVANCE PLAN. In December 1995, the PSCW approved the
Advance Plan 7 order. The transmission and generation plans
submitted by WPSC in Advance Plan 7 were approved. The Advance
Plan order requires that WPSC provide cost effective demand-side
energy management programs. The order stresses use of renewable
resources such as wind, wood residues, leafy residues, and other
similar materials and the state-wide development plans for the
design and feasibility of increased use of solar water heating
and the use of natural light in new building design.
KEWAUNEE NUCLEAR POWER PLANT. WPSC operates and has a 41.2%
ownership interest in the Kewaunee Nuclear Power Plant
("Kewaunee"). Kewaunee operates with a Nuclear Regulatory
Commission ("NRC") license which expires in 2013.
Kewaunee was taken out of service on September 21, 1996 for
a scheduled refueling and maintenance outage which was projected
to be five weeks in duration. During the outage, however,
inspection of previously repaired steam generator tubes disclosed
continued degradation of the tubes at the sleeve/parent tube
joints. The severity of tube degradation prevents further
operation of Kewaunee until the tubes are repaired or the two
steam generators are replaced.
Repair of the tubes using laser welding was undertaken. At
December 31, 1996, it was anticipated that Kewaunee would return
to service with repaired steam generators during the first
quarter of 1997. Welding was completed late in January 1997.
Subsequent testing indicated that repair of a number of the tubes
was not effective. The return of Kewaunee to service will be
delayed while additional repair efforts are undertaken. NRC
approval of the repair process is needed to restart the plant.
It is unknown how long steam generator repairs and NRC approval
of the steam generator repair process will take. It is uncertain
when Kewaunee will return to service with repaired steam
generators. If for any reason the steam generators cannot be
repaired, the ability of the Kewaunee owners to reach consensus
on
-6-
steam generator replacement and to secure the approval of the
PSCW for such replacement would become critical factors affecting
the duration of the current outage because, in that case,
replacement of the steam generators would be essential for the
continued operation of Kewaunee.
Even if the repairs are successful and the plant restarts,
the tube repairs are expected to last only a few years because
corrosion will continue at a rate which cannot be accurately
forecasted. Therefore, Kewaunee would be retired significantly
prior to the expiration of the operating license in 2013 unless
the steam generators are replaced.
If Kewaunee returns to service, it would be shut down at
mid-cycle (within one year after being returned to service)
for tube inspection. If significant further tube degradation
would be discovered during the mid-cycle shutdown, Kewaunee may
not be able to continue to operate without replacement of the
steam generators. Since the earliest date by which the steam
generators could be replaced is 1999, a mid-cycle shutdown and
subsequent requirement that the steam generators be replaced
before startup could result in an extended outage.
WPSC could incur up to $1.8 million in the first quarter of
1997 for its share of Kewaunee steam generator tube repair costs.
In addition, the cost to use other generating units or to
purchase replacement power is expected to exceed the cost of
Kewaunee generated power by approximately $67,000 per day. The
cost of repairs and replacement power are contingent upon a
number of factors including the repair method employed, the
effectiveness of the repairs, and the duration of the outage.
On February 20, 1997, WPSC received a rate order in the
Wisconsin jurisdiction providing a $2.0 million per month
surcharge on customer bills to cover the additional costs to be
incurred by WPSC for acquiring power from other sources while
Kewaunee remains out of service. The order was effective
February 21, 1997.
Continued long-term operation of Kewaunee will require
replacement of both of the Kewaunee steam generators. On March
15, 1996, WPSC filed an application with the PSCW for permission
to replace the Kewaunee steam generators in 1999. Review of this
application is pending and a PSCW decision is expected late in
1997.
The total capital cost of replacing the two generators would
be approximately $89.0 million (WPSC's share being $36.7 million
in year of occurrence dollars). Because of the work already
undertaken, the
-7-
elapsed time from placing a firm steam generator order to
receiving delivery has been shortened to 22 months.
In addition, the owners of Kewaunee have differing views on
the desirability of proceeding with the steam generator
replacement project. WPSC favors replacement of the steam
generators at the earliest possible date, while the other two
joint owners have been unwilling to support replacement. The
joint owners continue to discuss the issues and the related
alternatives. If the steam generator replacement project
receives PSCW approval, the issues relating to the continued
operation and future ownership would still need to be resolved
before the steam generator replacement could proceed. If the
steam generators are replaced, WPSC believes Kewaunee costs would
be recoverable in a competitive generation market.
On January 3, 1997, the PSCW approved acceleration of cost
recovery relative to that portion of the depreciation and
decommissioning costs associated with Kewaunee applicable to the
Wisconsin retail jurisdiction (currently approximately 88.0%).
The PSCW decision directs the owners of Kewaunee to develop
depreciation and decommissioning cost levels in connection with
revised customer rates based on an expected end-of-life of 2002
versus the currently licensed end-of-life of 2013. At December
31, 1996, the net carrying amount of WPSC's Kewaunee investment
was approximately $49.5 million. The current cost of WPSC's share
of the estimated costs to decommission Kewaunee, assuming early
retirement, exceeds the trust assets at December 31, 1996 by
$63.4 million. This decision will result in a significant
acceleration of WPSC's depreciation and decommissioning
collections relative to Kewaunee for 1997 and the succeeding five
years. The total dollar impact of this acceleration results in
an $11.1 million annual increase in WPSC's customer rates. The
decision was based on the substantial uncertainty regarding the
expected useful life of the facility without steam generator
replacement. The PSCW, in reaching its conclusion on this issue,
clearly indicated that this decision was not to be interpreted as
setting precedent with respect to the pending decision it faces
regarding the approval of the steam generator replacement
project. The PSCW indicated that the acceleration of
depreciation and decommissioning at this time in conjunction with
pending rate cases for each of the owners provided it with an
opportunity to hedge against the potential that the decision will
be to not proceed with replacement. Financial assurance of
adequate funds to accomplish decommissioning was a significant
consideration in reaching the decision. In the event the steam
generator project is approved and proceeds, the PSCW indicated an
interest in revisiting the depreciation and decommissioning
decision based on the information available at that time. If the
Kewaunee owners would decide not to
-8-
replace the steam generators, management believes that the
carrying amount of any unfunded decommissioning costs at the date
of Kewaunee's retirement would be recoverable from customers in
rates and that no write-down for impairment would be necessary.
The PSCW decision, which became effective February 21, 1997,
increases depreciation expense, exclusive of decommissioning
expense recorded as depreciation expense, by approximately $3.3
million on an annualized basis. The depreciation of new steam
generators, if approved, would be expected to be over their
remaining useful life.
The funding plan for decommissioning in effect through 1996
was based on physical decommissioning of the facility during the
period 2014 to 2021 with additional expenditures being incurred
during the period 2022 to 2050 related to the storage of spent
nuclear fuel at the site. The revised funding plan for
decommissioning, which became effective February 21, 1997, is
based on an assumption that the plant will be shut down at the
end of 2002 and placed in a dormant state following the transfer
of spent fuel from the spent fuel pool to temporary alternative
storage facilities. The dormancy period is assumed to last until
physical decommissioning begins. Physical decommissioning would
be accomplished during the period 2015 to 2021 with additional
expenditures being incurred during the period 2022 to 2039
related to the storage of spent nuclear fuel at the site. Based
on the standard cost escalation assumptions required by a July
1994 PSCW order, Kewaunee decommissioning costs are estimated to
be $398.0 million in current dollars under the current funding
plan and $419.0 million in current dollars under the revised
funding plan. In year of expenditure dollars, these amounts are
$1.9 billion and $1.5 billion for the current funding plan and
the revised funding plan, respectively. WPSC's share of Kewaunee
decommissioning costs are estimated to be $164.0 million in
current dollars and $785.0 million in year-of-expenditure dollars
for the current funding plan and $172.0 million in current
dollars and $614.0 million in year-of-expenditure dollars for the
revised funding plan. These costs are recovered currently in
customer rates and deposited in external trusts. Such costs
totaled $9.0 million, $9.0 million, and $4.0 million for 1996,
1995, and 1994, respectively. The January 3, 1997 PSCW decision
will increase these costs by approximately $8.3 million on an
annualized basis. In developing these funding plans, long-term
after-tax earnings of approximately 5.5% are assumed. As of
December 31, 1996, the external trusts totaled $101.0 million, or
58.7% of revised estimated decommissioning costs of $172.0
million.
WPSC anticipates that it will have sufficient capacity to
supply electric energy to its firm customers during the present
Kewaunee
-9-
outage. In addition, energy supplies can be purchased
from neighboring utilities and power marketers in order to
supplement sources owned by WPSC.
If Kewaunee were to be retired early for any reason,
management believes it will be able to meet its commitments to
supply power to its customers through one or more of the
following alternatives: (1) contracting for additional purchased
power, (2) investment in new generating facilities, or
(3) changes in commitments to serve customers if the generating
business is deregulated.
Spent fuel is currently stored at Kewaunee. The existing
capacity of the spent fuel storage facility will enable storage
of the projected quantities of spent fuel through April 2001.
WPSC is evaluating options for the storage of additional
quantities beyond 2001. Several technologies are available. An
investment of approximately $2.5 million in the early 2000s could
provide additional storage sufficient to meet spent fuel storage
needs until expiration of the current operating license in 2013.
The Low-Level Radioactive Waste Policy Act of 1980 specifies
that states may enter into compacts to provide for regional
low-level waste disposal facilities. Wisconsin is a member of
the Midwest Low Level Radioactive Waste Compact. The state of
Ohio has been selected as the host state for the Midwest Compact
and is proceeding with the preliminary phases of site selection.
In July 1995, the Barnwell, South Carolina, disposal facility
again began to accept low-level radioactive waste materials from
outside its region.
The Kewaunee capability factor was 71.3% in 1996, compared
to a projected industry average of 79.8%. The capability factor
is the percentage of maximum energy generation that a plant is
capable of supplying to the electrical grid limited only by
factors within the control of plant management. The comparable
amounts for 1995 were 83.1% and 84.5%, respectively. The lower
Kewaunee percentage for 1996 reflects the extended shutdown of
Kewaunee for the repair of the steam generator tubes.
FUEL SUPPLY. WPSC's electric generation mix in 1996
compared to 1995 was: steam plants (coal), 67.9%, up from 63.7%;
steam plant (nuclear), 11.2%, down from 13.5%; hydro, 3.1%, up
from 2.6%; combined natural gas and fuel oil, .6%, down from .9%;
and purchased power, 17.3%, down from 19.3%. Purchased power
represents short-term energy purchases.
-10-
Fuel costs in 1996 compared with 1995, expressed in dollars
per million British thermal unit ("Btu"), were: nuclear, $.47,
down from $.50; coal, $1.14, down from $1.18; natural gas, $2.84,
up from $2.29; and No. 2 fuel oil, $4.36, up from $4.35.
WPSC will purchase all of the coal for its solely-owned
plants from the Powder River Basin ("PRB") mines located in
Wyoming. Delivery of coal at the Pulliam plant is via railroad
or lake vessel and at the Weston plant via railroad.
WPSC has a long-term contract with one PRB coal supplier
that is expected to provide approximately two-thirds of the
projected coal requirements for Unit 3 at Weston over the long
term. The remainder of the coal for solely-owned generating
facilities is purchased under short-term agreements of three
years or less. Transportation contracts are in place with
railroads for delivery of PRB coal through 1999.
WPSC also has a 31.8% ownership share in Columbia and a
31.8% ownership share in Edgewater Unit 4, both of which are
operated by WP&L which has coal procurement responsibilities for
these units. Columbia, with two 527-megawatt units, uses coal
from the Wyoming-Montana coal fields. The entire low sulfur coal
supply for Units 1 and 2 is supplied from the Southern PRB under
short-term contracts of one to three years. Edgewater uses a
blend of bituminous and sub-bituminous PRB coal, both of which
are acquired under short-term contracts.
During 1991, WPSC bought out the coal supply agreement with
NERCO Coal Company ("NERCO") and the corresponding rail
transportation contracts with the Soo Line and the Wisconsin
Central Railroads ("Railroads"). WPSC paid approximately $34.0
million to NERCO and the Railroads as compensation for relief of
all contractual obligations. The PSCW ruled that the railroad
and coal contract buyout costs could be recovered in customer
rates subject to a benefits test. In the Wisconsin jurisdiction,
the remaining unamortized buyout costs of $7.7 million were
recovered during 1996. FERC issued a conditional order on
November 15, 1994 allowing recovery of all but approximately $3.6
million of NERCO buyout costs through a monthly surcharge rate
over the period January 1993 through December 2005. The portion
of the $3.6 million disallowance allocable to the FERC
jurisdiction has not been determined. Management believes it is
likely that the disallowance allocable to the FERC jurisdiction
will not exceed the $625,000 write-off taken in 1993 in
anticipation of the disallowance. WPSC will accrue and recover
carrying charges on the unrecovered balance.
-11-
The supply of nuclear fuel for Kewaunee requires the
purchase of uranium concentrates, the conversion of uranium
concentrates to uranium hexafluoride, enrichment of the uranium
hexafluoride, and fabrication of the enriched uranium into usable
fuel assemblies. After a region of spent fuel (approximately
one-third of the nuclear fuel assemblies in the reactor) is
removed from the reactor, it is placed in temporary storage in a
spent fuel pool at the plant site. Permanent storage is
addressed below. There are presently no operating facilities in
the United States that are reprocessing commercial nuclear fuel.
A discussion of the nuclear fuel supply for Kewaunee follows:
(a) Requirements for uranium are met through spot or
contract purchases. WPSC's inventory policy, which
takes advantage of economical spot market purchases of
uranium, results in WPSC maintaining inventories
sufficient for up to two reactor reloads of fuel,
excluding in-process uranium.
(b) Uranium hexafluoride from inventory and from spot
market purchases was used to satisfy converted material
requirements in 1996. WPSC intends to purchase future
conversion services on the spot market, but it has
contracts with primary suppliers for services in 1997,
1998, and 1999.
(c) In 1996, enrichment services were procured from COGEMA,
Inc. pursuant to a contract executed in 1983 and last
amended in 1995. Enrichment services can be purchased
from the United States Enrichment Corporation ("USEC")
under the terms of the utility services contract which
is in effect for the life of Kewaunee. WPSC is
committed to take 70% of its annual enrichment
requirements in 1997 and, in alternate years
thereafter, from USEC.
(d) Fuel fabrication services through March 15, 2001 are
covered by contract with Siemens Power Corporation.
(e) Beyond the stated periods set forth above, additional
contracts for uranium concentrates, conversion to
uranium hexafluoride, enrichment, fabrication, and
spent fuel storage will have to be procured. WPSC
anticipates the prices for the foregoing will modestly
increase.
Pursuant to the Nuclear Waste Policy Act of 1982 ("Nuclear
Policy Act"), the U. S. Department of Energy ("DOE") entered into
a contract with WPSC to accept, transport, and dispose of spent
nuclear fuel beginning no later than January 31, 1998. The DOE
has announced that
-12-
it will delay the acceptance of spent nuclear fuel beyond 1998.
A fee to offset the costs of the DOE's disposal for all spent
fuel used since April 7, 1983 has been assessed by the DOE at one
mill per net kilowatt-hour of electricity generated and sold by
Kewaunee. An additional one-time fee was paid to the DOE for
disposal of spent nuclear fuel used to generate electricity prior
to April 7, 1983.
The Nuclear Policy Act provides that both the federal
government and the nuclear utilities fund the decontamination and
decommissioning of the three gaseous diffusion plants in the
United States. Utility contributions will be collected through a
special assessment based on a utility's percentage of uranium
enrichment services purchased through the date of enactment
compared to total enrichment sales by the DOE. The owners of
Kewaunee are required to pay approximately $19.2 million in
current dollars over a period of 15 years. At December 31, 1996,
the remaining liability was $14.9 million of which WPSC's share
was $6.0 million. The payments are subject to adjustment for
inflation.
In 1995, Yankee Atomic Electric Company ("Yankee Atomic")
received a U. S. Court of Federal Claims decision holding that
Yankee Atomic was entitled to a refund from the DOE of $3.0
million paid to the Decontamination and Decommissioning Fund.
The court ruled that by entering into contracts with utilities,
the government agreed to charge certain prices for uranium
enrichment services that could not be legislatively changed after
performance and payment were completed. The Yankee Atomic
decision only addresses a refund to Yankee Atomic. Based on the
Yankee Atomic decision, WPSC has filed a claim against the DOE
for a refund of its payments to the Decontamination and
Decommissioning Fund.
Utility customers of the USEC have challenged the pricing of
enrichment services, subsequent to the Energy Policy Act of 1992.
The position of the utilities is that the charges by the USEC are
higher than the terms of the contracts originally entered into
with the DOE. WPSC has filed a claim that has been denied by the
USEC. Subsequently, a complaint was filed in the U. S. Court of
Federal Claims. Action on this complaint by the Claims Court is
expected after the Court of Appeals rules in the Yankee Atomic
case.
If for any reason the Kewaunee Nuclear Power Plant were
forced to suspend operations permanently, fuel related
obligations are as follows: (1) there are no financial penalties
associated with the present uranium supply, conversion service,
and enrichment agreements, and (2) the fuel fabrication contract
contains force majeure and termination for convenience
provisions. The maximum exposure could be
-13-
as much as $550,000 as of the end of 1996. Uranium inventories
could be sold on the spot market.
OTHER MATTERS. The Company has received FERC power
"marketer" status. This status gives WPSC, ESI, and PDI the
flexibility to sell electric energy and capacity at market rates.
In recent years, WPSC has experienced increased competition
and reduced margins in the wholesale power market. WPSC's
objective is to compete aggressively to retain existing wholesale
customer load, obtain new customers, maintain margins, and
optimize the use of generating assets by developing innovative
supply contracts. Transmission availability, pricing and policy,
the availability of economically priced energy and capacity in
the region, new competitors entering the market, the development
of risk management tools, and regulatory and legislative
developments are forces that will influence the wholesale market
in the future. In 1996, wholesale sales represented 16% of
WPSC's electric sales volume.
During 1996, WPSC, the Oconto Electric Cooperative
("Oconto"), and a third party entered into an agreement to serve
the power needs of Oconto for the period May 1996 through April
2005. The peak demand for Oconto is 17 megawatts.
Also during 1996, WPSC entered into agreements with Upper
Peninsula Power Company covering the handling of after-hours
calls, system operating services, and a multi-year power supply
agreement beginning in 1998.
In October 1992, Wisconsin Public Power, Inc. ("WPPI")
notified WPSC that it was ending its agreement to purchase power
effective in October 1997. WPPI is a wholesale customer which
buys 66 megawatts of electricity from WPSC for resale to
municipal utilities.
Although 11% of electric revenues come from sales to 24
paper mills, resulting in a relatively high and favorable load
factor, there is no single customer or small group of customers,
the loss of which would have a materially adverse effect on the
electric business of WPSC under the current regulatory
environment.
Applications for relicensing of WPSC's Caldron Falls, High
Falls, Johnson Falls, Sandstone Rapids, Potato Rapids, Peshtigo,
Grand Rapids, and Jersey hydroelectric projects were submitted to
the FERC in December 1991. These licenses, representing 30
megawatts of hydroelectric generating capacity, expired in
December 1993. Application to the FERC for relicensing of WPSC's
Wausau Project was
-14-
submitted in June 1993. The license for this project expired in
June 1995 and represents 5,400 kw of capacity. New licenses
have been received from the FERC for only the Jersey and Wausau
projects. The remaining hydroelectric projects' license
applications are still pending at the FERC. These licenses are
being extended on an annual basis until FERC acts on the
applications.
Electric research and development expenditures totaled
$1.9 million for 1996, $2.6 million for 1995, and $2.3 million
for 1994. These expenditures were made for WPSC sponsored
projects and were primarily charged to electric operations.
ELECTRIC FINANCIAL SUMMARY. The following table sets forth
the revenues, operating income, and identifiable assets
attributable to electric utility operations:
YEAR ENDED DECEMBER 31
----------------------------
1996 1995 1994
---- ---- ----
(THOUSANDS)
Electric Operating Revenues $490,506 $489,628 $480,816
Operating Income, Including
Allowance For Funds Used During
Construction $101,425 $ 98,556 $ 95,392
Identifiable Assets $905,325 $906,029 $937,525
See Note 9 in Notes to Consolidated Financial Statements.
-15-
ELECTRIC OPERATING STATISTICS
WPS RESOURCES CORPORATION
==========================================================================================================================
Electric 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------------
Operating revenues (Thousands)
Residential and farm $169,587 $168,391 $163,381 $165,568 $156,659
Small commercial and industrial 144,055 140,280 137,323 140,678 136,164
Large commercial and industrial 118,997 117,978 118,121 123,920 115,147
Resale and other 58,648 62,351 61,991 63,090 69,655
- --------------------------------------------------------------------------------------------------------------------------
Total $491,287 $489,000 $480,816 $493,256 $477,625
==========================================================================================================================
Kilowatt-hour sales (Thousands)
Residential and farm 2,570,397 2,548,373 2,406,479 2,349,307 2,268,685
Small commercial and industrial 2,761,278 2,672,359 2,555,488 2,444,548 2,384,098
Large commercial and industrial 3,744,153 3,644,764 3,468,390 3,296,254 3,016,329
Resale and other 1,970,083 2,112,635 2,121,660 2,060,804 2,078,057
- --------------------------------------------------------------------------------------------------------------------------
Total 11,045,911 10,978,131 10,552,017 10,150,913 9,747,169
==========================================================================================================================
-16-
ELECTRIC OPERATING STATISTICS
WISCONSIN PUBLIC SERVICE CORPORATION
==============================================================================================================================
Electric 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------
Operating revenues (Thousands)
Residential and farm $169,587 $168,391 $163,381 $165,568 $156,659
Small commercial and industrial 144,055 140,280 137,323 140,678 136,164
Large commercial and industrial 118,997 117,978 118,121 123,920 115,147
Resale and other 57,867 62,351 61,991 63,090 69,655
- ------------------------------------------------------------------------------------------------------------------------------
Total $490,506 $489,000 $480,816 $493,256 $477,625
==============================================================================================================================
Kilowatt-hour sales (Thousands)
Residential and farm 2,570,397 2,548,373 2,406,479 2,349,307 2,268,685
Small commercial and industrial 2,761,278 2,672,359 2,555,488 2,444,548 2,384,098
Large commercial and industrial 3,744,153 3,644,764 3,468,390 3,296,254 3,016,329
Resale and other 1,936,014 2,112,635 2,121,660 2,060,804 2,078,057
- ------------------------------------------------------------------------------------------------------------------------------
Total 11,011,842 10,978,131 10,552,017 10,150,913 9,747,169
==============================================================================================================================
Customers served (End of period)
Residential and farm 328,522 322,550 316,442 310,336 304,404
Small commercial and industrial 38,376 37,455 36,491 35,683 34,783
Large commercial and industrial 168 170 164 137 129
Resale and other 826 802 796 794 825
- ------------------------------------------------------------------------------------------------------------------------------
Total 367,892 360,977 353,893 346,950 340,141
==============================================================================================================================
Annual average use (kWh)
Residential and farm 7,905 7,982 7,688 7,649 7,538
Small commercial and industrial 72,995 72,326 70,931 69,532 69,394
Large commercial and industrial 22,115,491 21,824,937 22,091,659 24,416,697 23,750,625
- ------------------------------------------------------------------------------------------------------------------------------
Average kilowatt-hour price (Cents)
Residential and farm 6.60 6.61 6.79 7.05 6.91
Small commercial and industrial 5.22 5.25 5.37 5.75 5.71
Large commercial and industrial 3.18 3.24 3.41 3.76 3.82
- ------------------------------------------------------------------------------------------------------------------------------
Production capacity (Summer - kilowatts)
Steam 1,325,400 1,325,400 1,318,300 1,315,300 1,302,200
Nuclear 213,800 216,700 215,100 215,100 213,800
Hydraulic 53,100 52,900 53,400 53,100 52,000
Combustion turbine 208,600 207,480 201,200 177,200 148,900
Other 4,200 4,240 4,240 4,240 4,240
Purchased capacity 27,250 26,400 26,400 27,700 26,900
- ------------------------------------------------------------------------------------------------------------------------------
Total system capacity 1,832,350 1,833,120 1,818,640 1,792,640 1,748,040
==============================================================================================================================
Generation and purchases
(Thousands of kilowatt-hours)
Steam 7,956,378 7,428,612 7,047,511 7,004,634 6,796,975
Nuclear 1,305,751 1,564,268 1,631,003 1,572,696 1,622,279
Hydraulic 359,750 306,101 292,617 346,386 325,663
Purchases and other 2,050,762 2,310,399 2,243,021 1,849,047 1,628,326
- ------------------------------------------------------------------------------------------------------------------------------
Total 11,672,641 11,609,380 11,214,152 10,772,763 10,373,243
==============================================================================================================================
Steam fuel costs
(Cents per million Btu)
Fossil 115.132 118.365 132.360 139.038 160.144
Nuclear 46.674 49.539 49.168 44.888 40.528
Total 105.439 106.320 116.782 121.949 136.965
- ------------------------------------------------------------------------------------------------------------------------------
System peak - firm (kilowatts) 1,561,000 1,670,000 1,543,000 1,569,000 1,494,000
==============================================================================================================================
Annual load factor 79.05% 73.32% 76.96% 73.29% 74.03%
==============================================================================================================================
-17-
C. GAS MATTERS
INDUSTRY RESTRUCTURING. The re-regulation of the natural
gas business on the federal level prompted the PSCW to examine
the future regulation of the natural gas distribution business in
Wisconsin. In 1996, the PSCW issued orders: (1) defining the
level of interruption testing required of interruptible gas
customers, (2) modifying the presently required purchased gas
adjustment clause which allows recovery of gas supply and
capacity costs, (3) determining whether utilities and their
affiliated marketers should be required to have separate
resources for gas purchases and sales or if allocation of common
resources between these two markets is adequate, and (4) defining
a generic set of standards of conduct for the state's utilities
and their affiliates. The PSCW also opened a docket on the
definition of a competitive market and mitigation of barriers to
competition.
The MPSC initiated a similar process to look at gas industry
restructuring by forming a committee of interested parties which
considered changes in the gas cost recovery mechanism, service
unbundling, curtailment issues, and storage issues. The MPSC
opened a formal docket on this issue and began prehearings in
February 1996. The MPSC issued a final report which indicated
that there was consensus on the issues, but there was not
consensus on the remedies to resolve the issues.
The MPSC initiated a docket to investigate opening of
transport gas to all customers. Subsequently, the resulting
order suggested that the largest utilities should develop pilots
to test the move to open access transportation for all customer
classes.
OTHER MATTERS. At December 31, 1996, WPSC provided natural
gas distribution service to 206,867 customers in 157 cities,
villages, and towns in Northeastern Wisconsin, and 5,056
customers in and around Menominee, Michigan. The principal
Wisconsin cities served include Green Bay, Oshkosh, Sheboygan,
Marinette, Two Rivers, Stevens Point, and Rhinelander. The
principal Michigan city is Menominee.
WPSC transported 67,567,071 dekatherms of gas of which
41,579,031 dekatherms were for resale during the year ended
December 31, 1996. At the end of 1996, WPSC had 168 end-user
customers who purchased their gas directly from suppliers and
contracted with transporters, including WPSC, to transport the
gas to their points of use. A total of 25,988,040 dekatherms was
transported for these customers. Load loss due to fuel switching
has been minor
-18-
because customers have been able to purchase transportation gas
from suppliers at competitive prices.
Because WPSC has a purchased gas adjustment provision as
part of its customer rates, it recovers all of its purchased gas
costs from customers. Due to industry restructuring, the PSCW
has opened a docket to examine the appropriateness of continuing
to employ a purchased gas adjustment clause in today's industry.
In an order dated November 5, 1996, the PSCW concluded that the
majority of gas utilities in the state must use either an
incentive gas cost recovery mechanism or a modified
dollar-for-dollar gas cost recovery mechanism. WPSC will
evaluate the options provided in the PSCW order and will make
appropriate changes to its current gas cost recovery mechanism
or purchased gas adjustment clause.
WPSC has created a gas supply portfolio to match its gas
load profile at the lowest reasonable cost. The portfolio is
based on a 20-year gas peak day and annual sales forecasts and is
structured to place WPSC in an optimum gas purchasing position.
In 1996, WPSC had 17 gas supply contracts with 15 suppliers with
terms from 3 months to 3 years with domestic suppliers and 1 to 7
years with Canadian suppliers. The gas is competitively priced
based on a monthly spot price index. The gas supply contracts
contain a gas inventory charge as well as corporate warranties to
assure gas deliverability for the term of the contract.
Peak day design requirements of 338,992 dekatherms per day
are based on a 1996-1997 peak day forecast. An additional
13,080 dekatherms per day, or 3.9%, of reserve capacity allows
for growth and unforeseen needs. Peak day requirements will be
served by 115,872 dekatherms per day from transportation gas, and
223,120 dekatherms per day from storage gas. WPSC has access to
11.3 billion cubic feet of storage capacity in Michigan. Storage
gas is purchased and stored during the summer for redelivery
during the heating season. WPSC has purchased 0.22 billion cubic
feet of underground salt dome storage in the production area to
protect against a supply area gas shortage, (i.e., a shortage
caused by wellhead freeze-offs which occurs when moisture in the
gas freezes in low tempatures as it leaves the wellhead).
WPSC transports gas from Louisiana, the Gulf of Mexico, the
Texas-Oklahoma Panhandle area, and Canada under contracts with
ANR Pipeline Company ("ANR") for domestic gas, and Viking Gas
Transmission Company ("Viking") for Canadian supplies. On
November 1, 1993, FERC Order 636 became effective for ANR. Order
636 prohibits pipeline companies (such as ANR) from bundling gas
merchant services with
-19-
transportation services. Thus, Order 636 shifted gas supply
responsibilities to local distribution companies (such as WPSC)
while the pipeline companies continue to transport gas owned by
others. Pipeline transportation rates are governed by tariffs
subject to adjustment by the pipeline companies with the approval
of the FERC. As a result of restructuring under Order 636,
effective November 1, 1993, WPSC contracted for its pro rata
share of pipeline capacity from each of ANR's three supply areas:
Southeast, Southwest, and Canada. The initial term of each
contract was for ten years with the right to extend in five-year
increments. There are seven years remaining on these initial
capacity contracts. In addition, WPSC has pre-existing capacity
with Viking for delivery of Canadian gas for a remaining term of
one year with a right to extend.
Order 636 mandates a straight fixed-variable rate design for
interstate pipelines which loads all fixed costs into the
reservation charge and all variable costs into the commodity
charge. Based on rates effective May 1, 1994, pipeline company
reservation charges for 1996 totaled $41.3 million. WPSC also
utilizes ANR's no-notice service to accommodate load swings
caused by unexpected system requirements such as weather changes.
On December 31, 1996, in FERC Docket No. RP97-222-000, ANR
filed its eighth annual reconciliation of the take-or-pay
buyout/buydown costs recovered through monthly charges. These
costs, representing 75% of ANR's total take-or-pay buyout/buydown
costs paid to their gas suppliers, are being passed on to ANR's
customers, including WPSC. WPSC's fixed charge obligation for the
take-or-pay docket is paid off. Volumetric payments are
scheduled to be made through April 1998. All such costs are
expected to be recovered from WPSC's customers pursuant to
established policies of the PSCW and the MPSC.
ANR, as a result of its FERC Order 636 compliance filing,
will recover various transition costs from its customers,
including WPSC. WPSC expects to recover ANR transition costs in
future customer rates. These costs include purchased gas
adjustment costs of which WPSC's share is approximately $2.5
million. In addition, ANR has upstream pipeline capacity costs
of between $40.0 million and $230.0 million of which WPSC's share
is approximately 10%. The exact amount cannot be determined at
this time.
WPSC is currently being billed for ANR's above-market costs
of gas purchases from the Dakota Gasification Plant ("Dakota").
On December 18, 1996, FERC, in Opinion 410, approved a settlement
agreement between Dakota, the U. S. Department of Energy, and
ANR, for resolution of litigation between and among those
parties. The
-20-
settlement agreement establishes the price ANR is to pay Dakota
for Dakota gas as the Ventura, Iowa spot market price less $0.25
per dekatherm through the termination date of ANR's gas purchase
contract with Dakota in 2009. The settlement agreement approved
by FERC also establishes a fixed monthly demand charge payable by
ANR to Dakota for 84 months beginning January 1, 1997. It is
anticipated that ANR will bill WPSC a fixed monthly demand charge
based upon a share of an amount that has not yet been determined.
Based on available public information, WPSC anticipates that its
allocable share of the fixed monthly demand charge payable by ANR
to Dakota, as a result of the FERC approved settlement, will be
on the order of 50% of the average monthly surcharge for Dakota
costs billed by ANR to WPSC in 1996.
On April 29, 1994, ANR filed its Reconciliation Report of
activity under its previously effective Gas Inventory Charge
("GIC"). As a result, WPSC received a GIC refund of $4.7 million
of the $9.0 million WPSC had previously paid. WPSC and the
Wisconsin Distributors' Group ("WDG") intervened and protested
relative to the formula used to allocate the refunds. Hearings
in FERC Docket RP89-161-030 were held in May 1996. A decision is
expected soon. WPSC expects to recover additional refund dollars
which would be passed on to WPSC's customers.
On November 29, 1993, ANR filed for a general rate increase
in Docket RP94-43-000. WPSC, and other parties intervened and
protested the filing. Hearings have been completed and the
administrative law judge has issued an initial decision. The
initial decision reduces ANR's cost of service by up to $69.0
million per year, for WDG members which could result in a
significant rate decrease. Final settlement could take place in
1997.
Unbundling of gas service in Wisconsin has become an issue.
WPSC is studying the alternatives. At times, WPSC has gas supply
and unused pipeline capacity which is not needed to serve system
customers. This gas and capacity is then brokered on the market.
WPSC expects to recover $1.3 million in 1997 through such
activities. These amounts will be passed on to WPSC customers.
The Company has established a non-regulated subsidiary, ESI, to
market natural gas, other fuels, and related services to
transportation customers. See Part I, Item D, NON-REGULATED
BUSINESS ACTIVITIES, at page 25.
WPSC is a member of the WDG which utilizes a Washington,
D.C. legal counsel to monitor the FERC activities and advise the
group. The group files testimony and interventions in cases that
impact its members. WPSC is also advised by the same Washington,
D.C. legal
-21-
counsel. WPSC files interventions in cases to protect its
interests when appropriate.
All of WPSC's Wisconsin retail natural gas rates contain a
purchased gas adjustment clause which provides for the tracking
of wholesale costs and a true-up of such costs. WPSC's Michigan
retail rates include a gas cost recovery plan under procedures
authorized by the MPSC in 1983. Both the PSCW and the MPSC have
approved mechanisms to allow for full recovery of take-or-pay and
transition related costs which the FERC has authorized ANR to
pass on to its customers.
WPSC's aggressive program to connect new natural gas
customers resulted in the addition of about 7,300 new residential
customers in 1996. Growth in the number of natural gas customers
comes from the addition of new customers in existing service
areas and from the acquisition of new natural gas distribution
franchises. At December 31, 1996, 11 applications for new gas
distribution franchises were pending before the PSCW.
WPSC uses gas for power generation in peaking turbines and
for ignition and flame stabilization at its Weston Unit 3 and
Pulliam generating plants.
GAS FINANCIAL SUMMARY. The following table sets forth the
amounts of revenues, operating income, and identifiable assets
attributable to gas utility operations:
YEAR ENDED DECEMBER 31
------------------------
1996 1995 1994
---- ---- ----
(THOUSANDS)
Gas Operating Revenues $211,357 $174,065 $182,058
Operating Income, Including
Allowance For Funds Used During
Construction $ 10,191 $ 11,488 $ 10,673
Identifiable Assets $255,200 $232,983 $188,971
See Note 9 in Notes to Consolidated Financial Statements.
-22-
GAS OPERATING STATISTICS
WPS RESOURCES CORPORATION
=======================================================================================================================
1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------
Operating revenues (Thousands)
Residential $122,224 $109,998 $104,020 $110,541 $ 93,234
Small commercial and industrial 22,392 19,933 18,586 20,254 15,796
Large commercial and industrial 55,211 47,627 45,115 47,091 33,676
Other 164,673 52,367 25,258 9,490 14,471
- -----------------------------------------------------------------------------------------------------------------------
Total $364,500 $229,925 $192,979 $187,376 $157,177
=======================================================================================================================
Therms delivered (Thousands)
Residential 216,963 202,152 187,355 192,053 182,603
Small commercial and industrial 46,614 42,600 38,568 41,385 38,060
Large commercial and industrial 142,033 129,494 115,939 108,068 88,516
Other 527,069 294,372 56,961 6,337 3,718
- -----------------------------------------------------------------------------------------------------------------------
Total therm sales 932,679 668,618 398,823 347,843 312,897
Transportation 251,279 241,531 234,149 220,672 232,578
- -----------------------------------------------------------------------------------------------------------------------
Total 1,183,958 910,149 632,972 568,515 545,475
=======================================================================================================================
-23-
GAS OPERATING STATISTICS
WISCONSIN PUBLIC SERVICE CORPORATION
===============================================================================================================================
Gas 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------------------
Operating revenues (Thousands)
Residential $122,224 $109,998 $104,020 $110,541 $ 93,234
Small commercial and industrial 22,392 19,933 18,586 20,254 15,796
Large commercial and industrial 55,211 47,627 45,115 47,091 33,676
Other 11,530 (2,865) 14,337 9,490 14,471
- -------------------------------------------------------------------------------------------------------------------------------
Total $211,357 $174,693 $182,058 $187,376 $157,177
===============================================================================================================================
Therms delivered (Thousands)
Residential 216,963 202,152 187,355 192,053 182,603
Small commercial and industrial 46,614 42,600 38,568 41,385 38,060
Large commercial and industrial 142,033 129,494 115,939 108,068 88,516
Other 9,709 15,415 9,810 6,337 3,718
- -------------------------------------------------------------------------------------------------------------------------------
Total therm sales 415,319 389,661 351,672 347,843 312,897
Transportation 251,279 241,531 234,149 220,672 232,578
- -------------------------------------------------------------------------------------------------------------------------------
Total 666,598 631,192 585,821 568,515 545,475
===============================================================================================================================
Customers served (End of period)
Residential 192,947 186,267 178,992 172,902 168,349
Small commercial and industrial 16,133 15,905 14,689 14,571 14,248
Large commercial and industrial 2,846 2,432 2,867 2,508 2,178
Other 1 1 1 1 1
Transportation customers 167 121 117 127 161
- -------------------------------------------------------------------------------------------------------------------------------
Total 212,094 204,726 196,666 190,109 184,937
===============================================================================================================================
Average annual use (Therms)
Residential 1,146.6 1,112.3 1,068.8 1,128.4 1,099.4
Small commercial and industrial 2,937.2 2,770.8 2,673.9 2,888.8 2,737.4
Large commercial and industrial 37,163.7 39,707.6 34,651.2 41,354.4 38,680.8
===============================================================================================================================
Average therm price (cents)
Residential 56.33 54.41 55.52 57.56 51.06
Small commercial and industrial 48.04 46.79 48.19 48.94 41.50
Large commercial and industrial 42.84 40.63 41.84 44.97 38.30
===============================================================================================================================
-24-
D. NON-REGULATED BUSINESS ACTIVITIES
At the end of 1996, the Company had two principal
non-regulated subsidiaries: WPS Energy Services, Inc. ("ESI")
and WPS Power Development, Inc. ("PDI").
ESI is a diversified energy company organized to offer
electric and gas marketing services, energy management services,
project management, and energy consulting services to wholesale
and retail participants in the non-regulated energy marketplace.
Currently, ESI's principal activity is gas marketing. Today's
gas marketing activities are characterized by narrow margins and
volatile commodity and transportation prices. During 1996,
natural gas revenues totaled $159.9 million and sales totaled
517.4 million therms. For the year, ESI incurred a net loss as
the result of: (1) incurring substantial costs associated with
the expansion of the business and the development of
infrastructure necessary to operate effectively in the
non-regulated energy environment, (2) volatile gas commodity
markets in which ESI was not fully hedged for its customer
commitments, and (3) ESI's decision to honor customer contracts
despite defaults by certain gas suppliers during a period of
exceptionly high demand. ESI uses various financial instruments
to minimize the risks present in the gas marketplace. ESI
received an electric power marketers license from the FERC on
April 16, 1996. Limited electric power transactions began in
August. All power transactions for the period ending
December 31, have been at wholesale.
PDI is a company organized in the fourth quarter of 1995 to
participate in the development of electric generation and to
provide services to the power generation industry. Services
include acquisition and investment analysis; project development,
engineering, and management services; and operations and
maintenance services. Areas of expertise include cogeneration,
distributed generation, repowering projects, generation from
renewable resources, and paper mill waste disposal. During 1996,
PDI acquired a two-thirds interest in a 2-unit, 53-megawatt
merchant generating facility in Cassville, Wisconsin. For the
year, PDI incurred a net loss. A major factor was a loss on an
industrial processing facility investment made in anticipation of
energy sales opportunities.
The ESI and PDI combined losses for 1996 amounted to
$10.2 million or $.43 cents per share.
-25-
E. ENVIRONMENTAL MATTERS
GENERAL. WPSC is subject to regulation with regard to the
impact of its operations on air and water quality and solid waste
disposal, and may be subject to regulation with regard to other
environmental considerations by various federal, state, and local
authorities. The application of federal and state restrictions
to protect the environment involves or may involve review,
certification or issuance of permits by various federal and state
authorities, including the U. S. Environmental Protection Agency
("EPA") and the Wisconsin Department of Natural Resources
("DNR"). Such restrictions, particularly in regard to emissions
into the air and water and solid waste disposal, may limit,
prevent, or substantially increase the cost of the operation of
WPSC's generating facilities and may require substantial
investments in new equipment at existing installations. They may
also require substantial investments for proposed new projects
and may delay or prevent authorization and completion of the
projects. WPSC cannot forecast other effects of all such
regulation upon its generating, transmission, and other
facilities, or its operations, but believes that it is presently
meeting existing requirements.
AIR QUALITY. The plants which WPSC operates are in
compliance with all current sulfur dioxide, nitrogen oxide, and
particulate emission standards.
The Federal Clean Air Act Amendments of 1990 ("Act") were
enacted in 1990. The Act required reductions in sulfur dioxide
in 1995 (Phase I) to meet limitations based on an emission rate
of 2.5 pounds per Btu multiplied by a historical generation
baseline for Pulliam Unit 8 and Edgewater Unit 4 generating
units. The Act requires further reductions beginning in the year
2000 (Phase II). The year 2000 limits are based on an emission
rate of 1.2 pounds per million Btu multiplied by a historical
generation baseline for all generating units. WPSC's generating
facilities met the year 2000 standard in 1995. WPSC achieved
compliance with Wisconsin and federal sulfur dioxide emission
limitations by switching to low sulfur coal.
Because of the emission allowance system included in the
Act, operations during Phase I are expected to produce surplus
allowances which are expected to be available to aid in
compliance with the requirements of Phase II. To the extent WPSC
determines that it will have allowances available beyond its own
requirements in both Phase I and Phase II, it will consider the
sale of these excess allowances.
-26-
The PSCW has ordered that profits from the sale of allowances be
used to benefit utility customers.
The Act also requires the installation of low nitrogen oxide
burners on several units. Low nitrogen oxide burners were
installed at Pulliam Unit 8 early in 1994. Phase I of the Act
allows units smaller than 100 megawatts, such as Pulliam Unit 7,
to be designated Phase I units, thus building up sulfur dioxide
credits. Having made this election, low nitrogen oxide burners
were installed on Pulliam Unit 7 in 1994. Low nitrogen oxide
emissions from Pulliam Units 7 and 8 and Weston Unit 3 are
averaged with Weston Units 1 and 2. This averaging plan
generates additional emission allowances in Phase I and locks in
Phase I nitrogen oxide limits for these units. This should
reduce Phase II compliance costs.
Expenditures of $3.0 million to $5.0 million are projected
through 1999 to assure nitrogen oxide emission compliance under
all normal operating conditions at Pulliam and Weston. Based on
past experience, it is anticipated that expenditures related to
sulfur dioxide and nitrogen oxide emission compliance will be
recoverable in customer rates.
Air toxic provisions in the Act will not be applied until
the EPA conducts a three-year study to determine if those
standards need to be applied to utilities.
WATER QUALITY. WPSC is subject to regulation by the EPA and
the DNR with respect to thermal and other discharges into Lake
Michigan and other waters of Wisconsin from WPSC's power plants.
Permits were reissued to WPSC for its Pulliam and Weston power
plants in 1996. It is not anticipated that any permit conditions
will have a material cost associated with them. Revisions to
state water quality rules as a result of the Great Lakes
Initiative are expected in 1997. The incorporation of these
rules in the permits to be renewed in 2001 should not result in
any significant changes.
GAS PLANT CLEANUP. WPSC is currently investigating the need
for environmental cleanup of eight manufactured gas plant sites
which it previously operated. WPSC engaged an environmental
consultant to develop cleanup cost estimates for the seven sites
at which Phase I or Phase II site investigations have been
completed. The estimated cleanup cost range for each of the
seven sites are, Green Bay from $4.1 to $5.3 million, Two Rivers
from $3.9 to $4.0 million, Oshkosh from $3.3 to $4.5 million,
Marinette from $5.6 to $6.8 million, Sheboygan I from $2.7 to
$3.9 million, Sheboygan II from $12.2 to $13.4 million, and
Stevens Point from $1.4 to $1.9 million. The
-27-
estimates assume excavation of contaminated soils, thermal
treatment of soils, disposal of treatment residuals, on-site
groundwater extraction and treatment, and post-cleanup monitoring
for a minimum of 3 years and a maximum of 10 or 25 years,
depending on site conditions. The cost estimate for five of the
sites (Green Bay, Two Rivers, Oshkosh, Marinette, and
Sheboygan II) assumes, in addition to those items noted
previously, removal and disposal of contaminated river sediments.
The consultant has yet to perform a detailed investigation of the
Menominee site and comparable information on this site is not
available. WPSC used the estimate for the Stevens Point site as
a basis for making a projection of $1.5 million to $1.9 million
on cleanup costs at the Menominee site, if cleanup is required.
Both sites are relatively small and are not located adjacent to
rivers.
The range of future investigation and cleanup costs for all
eight sites is estimated to be from $34.7 million to $41.7
million. Remediation expenditures would be made over the next 32
years. WPSC has recorded as a liability with an offsetting
deferred charge (i.e., a regulatory asset) $41.7 million, which
represents WPSC's current estimate of cleanup costs for all eight
sites. Based on discussions with regulators and a rate order in
Wisconsin, management believes that these costs, but not the cost
of money associated with the deferred charges, will be
recoverable in future customer rates.
As remedial feasibility studies and initial remedial actions
are completed, these estimates may be adjusted and these
adjustments could be significant. Other factors that can affect
these estimates are changes in remedial technology and regulatory
requirements. The estimates presented above do not take into
consideration any recovery from insurance carriers or other third
parties which WPSC has obtained or is still pursuing. Insurance
recoveries are deferred as an offset to the regulatory asset.
Due to the regulatory treatment, neither adjustments to the
estimated liability nor insurance recoveries have an immediate
impact on net income. Currently, WPSC has insurance
settlement agreements of approximately $12.0 million which it
expects to receive in 1997. The PSCW has authorized recovery of
$225,000 per year for gas site cleanup effective with the rate
order which became effective in February 1997.
For two of the sites, agreements have been executed with the
DNR covering the conduct of the investigations and remediation
activities. In November 1990, WPSC was notified by the DNR that
it may be a potentially responsible party ("PRP") for
environmental contamination found on property next to the
Sheboygan River previously used by WPSC for the gasification of
coal in the City of Sheboygan, Wisconsin (the "Sheboygan II Gas
Plant"). WPSC last used the property for this
-28-
purpose in approximately 1930. In 1966, the property was sold
and is now owned by the City of Sheboygan. The DNR has offered
WPSC the opportunity to investigate and remediate the property
under an agreement with Wisconsin as opposed to having the site
handled by the EPA as part of the larger Sheboygan River and
Harbor Superfund site. WPSC, the City of Sheboygan, and
Wisconsin have negotiated an agreement for performing the work,
and therefore, Wisconsin, and not the EPA, will be handling this
matter.
An initial study was completed on the site which confirmed
the presence of contaminants that appear to be related to the
Sheboygan II Gas Plant. A Phase II investigation was recommended
by the environmental consultant to determine more precisely the
scope of the contamination and to determine if any contamination
is migrating from off-site and whether sediments are impacted.
This Phase II investigation has been completed. WPSC and the
City of Sheboygan will negotiate an allocation of the costs
associated with cleanup of the site. Based on the Phase II
study, it is believed that the cost of cleanup for the
Sheboygan II Gas Plant site could be as much as $13.4 million.
The estimate presented above does not take into consideration any
recovery from insurance carriers or other third parties which
WPSC has obtained or is still pursuing.
In April 1992, WPSC received an order from the DNR directing
it to complete an investigation and implement remedial activities
on property owned by WPSC in the City of Oshkosh, Wisconsin.
Previously, WPSC had operated a manufactured gas plant on the
property from 1883 until 1946. A challenge to the order was
filed on May 8, 1992, and WPSC and the DNR have negotiated the
terms of a consent order. An environmental consultant conducted
an investigation in late 1993 and a more detailed investigation
in 1994, with sediment sampling conducted in 1995. Based on
these investigations, the cost of remediation is estimated to be
as much as $4.5 million. The City of Oshkosh has claimed that
contaminated groundwater from the former gas plant property has
migrated onto city-owned land. WPSC has agreed to stay the
statute of limitations that may be applicable to the City of
Oshkosh's claim in order to avoid the filing of a lawsuit by the
City of Oshkosh. WPSC is continuing to evaluate the validity of
the City of Oshkosh's claim as additional data is received. The
estimates presented above do not take into consideration any
recovery from insurance carriers or other third parties which
WPSC has obtained or is still pursuing.
OTHER SOLID WASTE DISPOSAL. On December 1, 1986, WPSC
received notice from the EPA - Region V that it was one of 832
PRP's for the cleanup of the Maxey Flats Waste Disposal Site.
Documents obtained to
-29-
date indicate that WPSC contributed 0.0162% of the waste disposed
of at the site. A remedial investigation and feasibility study
has been completed. At this time, the cost of the remedial
action and EPA oversight is estimated to be about $77.5 million.
The EPA offered a buyout agreement to de minimis PRPs. A final
agreement with payment has been executed. WPSC's total buyout
assessment was $27,791.
F. REGULATORY MATTERS
GENERAL. Utility rates, service, and securities issues of
WPSC are subject to regulation by the PSCW and the MPSC; and WPSC
is subject to regulation of its wholesale electric rates,
hydroelectric projects, and certain other matters by the FERC.
WPSC is also subject to limited regulation by local authorities.
WPSC follows Statement of Financial Accounting Standards No. 71,
"Accounting for the Effects of Certain Types of Regulation," and
its financial statements reflect the effects of the different
ratemaking principles of various jurisdictions. These include
the PSCW, 91% of revenues, the MPSC, 2% of revenues, and the
FERC, 7% of revenues. The operation of Kewaunee is subject to
the jurisdiction of the NRC.
CUSTOMER RATE MATTERS. Customer rates are based on
forecasted expenses and capital costs. On April 1, 1996, WPSC
filed a biennial rate case in the Wisconsin jurisdiction to be
effective for the years 1997 and 1998. Hearings were held in
October 1996. On February 20, 1997, the PSCW authorized a $35.5
million, or 8.1%, decrease in retail electric rates and a $5.7
million, or 2.7%, increase in retail natural gas rates.
The PSCW approved an electric surcharge effective
February 21, 1997 to allow WPSC to recover costs of acquiring
replacement power during the extended outage at Kewaunee. The
surcharge will be approximately $.23 per kWh, which amounts to
approximately $2.0 million per month.
The Company's return on common equity was 9.9% and 11.7% for
1996 and 1995, respectively. The Company's return on common
equity is determined in large part by the return authorized for
WPSC by the PSCW. The authorized return was 11.5% for 1996 and
1995, before giving consideration to earnings on deferred
investment tax credits. The authorized return on equity for 1997
and 1998 is 11.8%.
INDUSTRY RESTRUCTURING. See Part I, Item 1B, ELECTRIC
MATTERS - Industry Restructuring, at page 2, and Part I, Item 1C,
GAS MATTERS - Industry Restructuring, at page 18, for discussions
of electric and gas utility restructuring.
-30-
ACCOUNTING DEVELOPMENTS. See Part II, Item 7, MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION, at page 46, for a discussion of accounting
developments.
The staff of the U. S. Securities and Exchange Commission
has questioned certain of the current accounting practices of the
electric utility industry regarding the recognition, measurement,
and classification of nuclear decommissioning costs for nuclear
generation facilities in the financial statements of electric
utilities. In response to these questions, the Financial
Accounting Standards Board has agreed to review the accounting
for nuclear decommissioning costs. If current electric utility
industry accounting practices for such decommissioning are
changed, the annual provisions for decommissioning could increase
and the estimated cost for decommissioning could be recorded as a
liability rather than as accumulated depreciation. WPSC does not
believe that such changes, if required, would have an adverse
effect on results of operations due to its current and future
ability to recover decommissioning costs through customer rates.
The PSCW certified new straight-line depreciation rates
which became effective January 1, 1994 and remain in effect. The
PSCW's February 1997 rate order also provided for the accelerated
funding of Kewaunee decommissioning costs and the accelerated
recovery of the remaining investment in the plant such that both
would be complete by the end of the year 2002. This treatment of
Kewaunee expenses recognizes the uncertain future of nuclear
generation. See Part I, Item 1B, ELECTRIC MATTERS - Kewaunee
Nuclear Power Plant, at page 6, for an extended discussion of
this development.
Regulatory assets represent probable future revenue
associated with certain costs which will be recovered from
customers through the ratemaking process. Regulatory liabilities
represent costs previously collected that are refundable in
future rates. At December 31, 1996, regulatory assets and
liabilities amounted to $96.9 million and $48.9 million,
respectively. Based on prior and current rate treatment of such
deferred charges, management believes it is probable that WPSC
will continue to recover these regulatory assets from ratepayers.
Pursuant to a PSCW rate order, effective February 21, 1997, WPSC
will recover approximately $39.4 million of deferred regulatory
costs over the next five years.
DIVIDEND RESTRICTIONS. WPSC is restricted by a PSCW order
to paying normal common stock dividends of no more than 109% of
the previous year's common stock dividend without prior notice to
the PSCW. Also, Wisconsin law prohibits WPSC from making loans
to the
-31-
Company and its non-regulated subsidiaries and from guaranteeing
their obligations.
On January 15, 1997 and January 15, 1996, special
common stock dividends of $10,000,000 and $11,000,000,
respectively, were declared by WPSC to be paid to the Company.
The special dividends allowed WPSC's equity capitalization ratio
to remain at approximately 54%, the level approved by the PSCW
for ratemaking. The dividends were paid in January 1997 and
January 1996.
G. CAPITAL REQUIREMENTS
The Company's subsidiary, WPSC, requires large investments
in capital assets. Most of the Company's significant capital
requirements relate to WPSC construction expenditures.
Anticipated construction expenditures for WPSC are $74.0
million, $110.0 million, and $74.7 million for 1997, 1998, and
1999, respectively. The 1997 expenditures includes $43.0 million
for electric construction, $8.0 million for nuclear fuel, $16.0
million for gas construction, and $7.0 million for other
construction expenditures. Included in these expenditures is
$36.7 million for WPSC's share of the Kewaunee steam generator
replacement. Anticipated investment expenditures for non-utility
subsidiaries could be as high as $7.0 million, $68.0 million, and
$64.0 million for 1997, 1998, and 1999, respectively.
Although the Company has no plans for permanent financings
during 1997, issuance of up to $150.0 million of bonds and
debentures and $100.0 million of common stock sales may be
necessary in 1998 and 1999 to cover WPSC's expenditures, maturing
bonds, and currently forecasted non-regulated projects.
-32-
H. EMPLOYEES
At December 31, 1996, the Company, including its
subsidiaries, employed 2,606 persons. Of this number,
2,518 employees were employed by WPSC.
Of the employees of WPSC, 1,970 were considered electric
utility employees and 548 were considered gas utility employees.
Approximately 1,277 WPSC employees are represented by Local 310
of the International Union of Operating Engineers ("Union"). The
current agreement between the Union and WPSC runs through October
1997. There has never been a strike against WPSC by its
employees.
-33-
ITEM 2. PROPERTIES
A. UTILITY
The following table includes information about electric
generation facilities of WPSC (including those jointly-owned):
RATED
CAPACITY (a)
TYPE NAME LOCATION FUEL (KILOWATTS)
----- ---------------- ------------- ----------- ------------
Steam Pulliam Green Bay, WI Coal 370,100 (b)
Weston Wausau, WI Coal or Gas 491,300 (c)
Kewaunee Kewaunee, WI Nuclear 213,800 (d)
Columbia -
Units No. 1 & 2 Portage, WI Coal 324,700 (d)
Edgewater
Unit No. 4 Sheboygan Coal 102,500 (d)
---------
Total Steam 1,502,400
Hydro Various 68,000 (e)
(15 Plants)
Combustion Various Gas or Oil 265,340 (f)
Turbine (7 Plants)
& Diesel ---------
Total System 1,835,740
=========
(a) Based on 1996 winter capacity (through February 1997).
(b) This plant has six units. Pulliam Unit 3 (28.2 megawatts) is out of
service for maintenance, but is expected to be available for the
1997 summer season.
(c) This plant has three units. Two units burn only coal and the other
unit can burn coal or natural gas.
(d) These facilities are jointly-owned. Kewaunee is operated by WPSC.
WP&L is operator of the Columbia and Edgewater units. The capacity
indicated is WPSC's portion of total plant capacity based on percent
of ownership.
(e) Includes 12,900 kv purchased from Wisconsin River Power Company.
(f) WPSC and the Marshfield Electric and Water Department jointly own
115,500 kilowatts of combustion turbine peaking capacity which WPSC
operates. The capacity included is WPSC's portion of total plant
capacity based on percent of ownership.
WPSC owns 55 transmission substations with a
transformer capacity of 5,459,640 kilovolt-ampere ("Kva");
110 distribution substations with a transformer capacity of
2,807,770 Kva; and 20,751 route miles of electric transmission
and distribution lines. Gas properties include approximately
4,187 miles of main, 71 gate and city regulator stations, and
195,945 services. All gas facilities are
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located in Wisconsin except for distribution facilities in and
near the city of Menominee, Michigan.
Substantially all of WPSC's utility plant is subject to a
first mortgage lien.
B. NON-REGULATED
RATED
CAPACITY
TYPE NAME LOCATION FUEL (KILOWATTS)
- ----- -------------- ------------ ---- ----------
Steam E.J. Stoneman Cassville, WI Coal 53,000 (a)
(a) The E. J. Stoneman generation facility is owned by
Mid-American Power, LLC. Mid-American Power, LLC is
owned jointly and equally by PDI Stoneman, Inc. (a
wholly-owned subsidiary of WPS Power Development,
Inc.), LB Mid-American, Inc. (a wholly-owned subsidiary
of PDI Stoneman Inc.), and B. M. Stoneman, Inc., (a
wholly-owned subsidiary of Burns and McDonnell).
ITEM 3. LEGAL PROCEEDINGS
See Part I, Item 1E, ENVIRONMENTAL MATTERS, at page 26, for
a description of various proceedings relating to environmental
matters.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders
during the fourth quarter of the fiscal year.
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ITEM 4A. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information about outside directors is omitted for the
reason that such information will be included in a proxy
statement for the Annual Meeting of Shareholders of the Company
which is scheduled to be held on May 1, 1997.
A. EXECUTIVE OFFICERS OF WPS RESOURCES CORPORATION ("Company")
Current Position and Business Effective
Name and Age Experience During Past Five Years Date
- --------------------------- ------------------------------------ ---------
DANIEL A. BOLLOM ** 60 Chairman and Chief Executive Officer 01-01-96
President and Chief Executive Officer 12-09-93
LARRY L. WEYERS 51 President and Chief Operating Officer 01-01-96
PATRICK D. SCHRICKEL 52 Executive Vice President 12-29-96
Vice President 12-09-93
DANIEL P. BITTNER 53 Vice President 12-29-96
RICHARD E. JAMES 43 Vice President-Corporate Planning 12-29-96
Vice President-Corporate Planning 08-01-95 *
Assistant Vice President-Corporate
Planning 05-09-94 *
Assistant Vice President-Rates and
Economic Evaluation 03-01-92 *
RICHARD A. KRUEGER ** 59 Vice President 05-02-96
PHILLIP M. MIKULSKY 48 Vice President-Development 09-01-95
Manager-System Operations 10-01-91 *
Director-System Operations 09-28-91 *
GLEN R. SCHWALBACH 51 Assistant Vice President-Corporate
Planning 12-29-96
Assistant Vice President Corporate
Planning 07-28-96 *
Assistant Vice President-Gas
Engineering and Supply 06-01-90 *
FRANCIS J. KICSAR 57 Secretary 01-01-96
RALPH G. BAETEN 53 Treasurer 12-09-93
DIANE L. FORD 43 Controller 12-15-93
GEORGE R. WIESNER 39 Assistant Controller 12-15-96
Director-Financial Accounting ESI/PDI 08-25-96 *
Financial Reporting Supervisor 05-01-87 *
* Identifies experience with Wisconsin Public Service Corporation
("WPSC") for Richard E. James, Phillip M. Mikulsky, Glen R. Schwalbach,
and George R. Wiesner. The other listed officers of the Company are
also officers of WPSC and their experience with WPSC is indicated below.
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** Daniel A. Bollom and Richard A. Krueger have announced their
intention to retire effective June 30, 1996. Daniel A. Bollom
will remain a Director after his retirement. He will be succeeded
as Chief Executive Officer by Larry L. Weyers.
B. EXECUTIVE OFFICERS OF WISCONSIN PUBLIC SERVICE CORPORATION ("WPSC")
Current Position and Business Effective
Name and Age Experience During Past Five Years Date
- --------------------------- ------------------------------------ ---------
DANIEL A. BOLLOM ** 60 Chairman and Chief Executive Officer 01-01-96
President and Chief Executive Officer 03-01-91
LARRY L. WEYERS 51 President and Chief Operating Officer 01-01-96
Senior Vice President-Power Supply
and Engineering 08-01-95
Vice President-Power Supply
and Engineering 05-09-94
Vice President-Energy Supply 01-01-92
PATRICK D. SCHRICKEL 52 Executive Vice President 12-29-96
Senior Vice President-Finance and
Corporate Services 05-09-94
Senior Vice President-Operations 06-01-89
DANIEL P. BITTNER 53 Senior Vice President-Finance and
Corporate Services 12-29-96
Senior Vice President-Customer
Service 05-09-94
Senior Vice President-Finance 03-01-92
Vice President-Treasurer 02-01-89
RICHARD A. KRUEGER ** 59 Senior Vice President-Sales
and Marketing 05-09-94
Senior Vice President-Power Supply
and Engineering 07-01-89
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