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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------- ---------------
Commission Registrant; State of Incorporation IRS Employer
file number Address; and Telephone Number Identification No.
- ----------- ---------------------------------- ------------------
1-11337 WPS RESOURCES CORPORATION 39-1775292
(A Wisconsin Corporation)
700 North Adams Street
P. O. Box 19001
Green Bay, WI 54307-9001
920-433-1466
1-3016 WISCONSIN PUBLIC SERVICE CORPORATION 39-0715160
(A Wisconsin Corporation)
700 North Adams Street
P. O. Box 19001
Green Bay, WI 54307-9001
920-433-1466
Securities registered pursuant to Section 12(b) of the Act:
- -----------------------------------------------------------
Title of Name of each exchange
each class on which registered
---------- ---------------------
WPS RESOURCES CORPORATION Common Stock, New York Stock Exchange
$1 par value and Chicago Stock
Exchange
Rights to purchase New York Stock Exchange
Common Stock pursuant and Chicago Stock
to Rights Agreement Exchange
dated December 12, 1996
PAGE
Securities registered pursuant to Section 12(g) of the Act:
- -----------------------------------------------------------
WISCONSIN PUBLIC SERVICE CORPORATION
Preferred Stock, Cumulative, $100 par value
5.00% Series 5.08% Series
5.04% Series 6.76% Series
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
State the aggregate market value of the voting stock held by nonaffiliates of
- -----------------------------------------------------------------------------
the Registrant.
- ---------------
WPS RESOURCES CORPORATION
$781,131,945 as of March 4, 1998
WISCONSIN PUBLIC SERVICE CORPORATION
None
Number of shares outstanding of each class of common stock, as of December 31,
- ------------------------------------------------------------------------------
1997
- ----
WPS RESOURCES CORPORATION Common Stock, $1 par value,
23,896,962 shares
WISCONSIN PUBLIC SERVICE CORPORATION Common Stock, $4 par value,
23,896,962 shares
DOCUMENTS INCORPORATED BY REFERENCE
(1) Definitive proxy statement for the WPS Resources Corporation Annual
Meeting of Shareholders on May 7, 1998 is incorporated into Parts I and
III.
PAGE
WPS RESOURCES CORPORATION
and
WISCONSIN PUBLIC SERVICE CORPORATION
FORM 10-K
ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION
For the Year Ended December 31, 1997
TABLE OF CONTENTS
DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .v
PART I
1. BUSINESS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
A. GENERAL
WPS Resources Corporation . . . . . . . . . . . . . . . . . . .1
Wisconsin Public Service Corporation. . . . . . . . . . . . . .1
Regulatory Oversight. . . . . . . . . . . . . . . . . . . . . .2
Year 2000 Compliance. . . . . . . . . . . . . . . . . . . . . .2
Forward-Looking Statements. . . . . . . . . . . . . . . . . . .2
B. ELECTRIC MATTERS
Electric Operations . . . . . . . . . . . . . . . . . . . . . .3
Generating Capacity . . . . . . . . . . . . . . . . . . . . . .3
Kewaunee Nuclear Power Plant. . . . . . . . . . . . . . . . . .4
Fuel Supply . . . . . . . . . . . . . . . . . . . . . . . . . .6
Electric Generation Mix. . . . . . . . . . . . . . . . . . .6
Fuel Costs . . . . . . . . . . . . . . . . . . . . . . . . .6
Coal . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
Nuclear. . . . . . . . . . . . . . . . . . . . . . . . . . .6
Regulatory Matters in the Wisconsin Jurisdiction. . . . . . . .7
Industry Restructuring . . . . . . . . . . . . . . . . . . .7
Independent System Operator. . . . . . . . . . . . . . . . .8
Merger Activity. . . . . . . . . . . . . . . . . . . . . . .9
Electric Supply Issues . . . . . . . . . . . . . . . . . . .9
Customer Rate Matters. . . . . . . . . . . . . . . . . . . 10
Regulatory Matters in the Michigan Jurisdiction . . . . . . . 10
Industry Restructuring . . . . . . . . . . . . . . . . . . 10
Customer Rate Matters. . . . . . . . . . . . . . . . . . . 11
Regulatory Matters in the FERC Jurisdiction . . . . . . . . . 11
Customer Rate Matters. . . . . . . . . . . . . . . . . . . 11
Open Access Transmission Tariff. . . . . . . . . . . . . . 11
Marketer Status. . . . . . . . . . . . . . . . . . . . . . 11
Wholesale Status . . . . . . . . . . . . . . . . . . . . . 11
Regulatory Compliance. . . . . . . . . . . . . . . . . . . 12
Hydroelectric Licenses . . . . . . . . . . . . . . . . . . 12
Other Matters . . . . . . . . . . . . . . . . . . . . . . . . 12
Research and Development . . . . . . . . . . . . . . . . . 12
Customer Segmentation. . . . . . . . . . . . . . . . . . . 12
Electric Financial Summary. . . . . . . . . . . . . . . . . . 13
Electric Operating Statistics . . . . . . . . . . . . . . . . 14
WPS Resources Corporation. . . . . . . . . . . . . . . . . 14
Wisconsin Public Service Corporation . . . . . . . . . . . 15
i
C. GAS MATTERS
Wisconsin Public Service Corporation's Gas Market . . . . . . 16
Gas Supply. . . . . . . . . . . . . . . . . . . . . . . . . . 16
General. . . . . . . . . . . . . . . . . . . . . . . . . . 16
Pipeline Capacity and Storage. . . . . . . . . . . . . . . 17
Gas Supply Contracts . . . . . . . . . . . . . . . . . . . 18
New Pipeline Supply Source . . . . . . . . . . . . . . . . 18
Federal Regulatory Activities . . . . . . . . . . . . . . . . 19
Dakota . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Viking Costs on ANR Pipeline . . . . . . . . . . . . . . . 19
ANR Rate Case Settlement . . . . . . . . . . . . . . . . . 19
Wisconsin Regulatory Activities . . . . . . . . . . . . . . . 20
General. . . . . . . . . . . . . . . . . . . . . . . . . . 20
Gas Cost Recovery Mechanism. . . . . . . . . . . . . . . . 20
Gas Distribution Restructuring . . . . . . . . . . . . . . 20
Customer Rate Matters. . . . . . . . . . . . . . . . . . . 21
Michigan Regulatory Activities. . . . . . . . . . . . . . . . 21
Gas Cost Recovery. . . . . . . . . . . . . . . . . . . . . 21
Gas Distribution Restructuring . . . . . . . . . . . . . . 21
Customer Rate Matters. . . . . . . . . . . . . . . . . . . 21
Gas Financial Summary . . . . . . . . . . . . . . . . . . . . 22
Gas Operating Statistics. . . . . . . . . . . . . . . . . . . 23
WPS Resources Corporation. . . . . . . . . . . . . . . . . 23
Wisconsin Public Service Corporation . . . . . . . . . . . 24
D. NONREGULATED BUSINESS ACTIVITIES
General . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
WPS Energy Services, Inc. . . . . . . . . . . . . . . . . . . 25
WPS Power Development, Inc. . . . . . . . . . . . . . . . . . 25
Earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . 26
E. ENVIRONMENTAL MATTERS
General . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Air Quality . . . . . . . . . . . . . . . . . . . . . . . . . 26
Water Quality . . . . . . . . . . . . . . . . . . . . . . . . 27
Gas Plant Cleanup . . . . . . . . . . . . . . . . . . . . . . 27
F. CAPITAL REQUIREMENTS . . . . . . . . . . . . . . . . . . . . . . 28
G. EMPLOYEES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
2. PROPERTIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
A. UTILITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
B. NONREGULATED . . . . . . . . . . . . . . . . . . . . . . . . . . 31
3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . 31
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . . 31
4A. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. . . . . . . . . 32
A. EXECUTIVE OFFICERS OF WPS RESOURCES CORPORATION. . . . . . . . . 32
B. EXECUTIVE OFFICERS OF WISCONSIN PUBLIC SERVICE CORPORATION . . . 33
ii
PART II
5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . 34
WPS Resources Corporation Common Stock Two-Year Comparison . . . 34
Dividend Restrictions. . . . . . . . . . . . . . . . . . . . . . 34
Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . 34
6. SELECTED FINANCIAL DATA
WPS RESOURCES CORPORATION
COMPARATIVE FINANCIAL STATEMENTS AND
FINANCIAL STATISTICS (1993 TO 1997)
A. CONSOLIDATED STATEMENTS OF INCOME. . . . . . . . . . . . . . . . 35
B. CONSOLIDATED BALANCE SHEETS. . . . . . . . . . . . . . . . . . . 36
C. FINANCIAL STATISTICS . . . . . . . . . . . . . . . . . . . . . . 37
WISCONSIN PUBLIC SERVICE CORPORATION
COMPARATIVE FINANCIAL DATA AND FINANCIAL
STATISTICS (1993 TO 1997)
D. SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . . . . . . 38
E. FINANCIAL STATISTICS . . . . . . . . . . . . . . . . . . . . . . 39
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION FOR WPS RESOURCES CORPORATION AND
WISCONSIN PUBLIC SERVICE CORPORATION. . . . . . . . . . . . . . . . 40
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WPS RESOURCES CORPORATION
A. CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS. . . . . 52
B. CONSOLIDATED BALANCE SHEETS. . . . . . . . . . . . . . . . . . . 53
C. CONSOLIDATED STATEMENTS OF CAPITALIZATION. . . . . . . . . . . . 55
D. CONSOLIDATED STATEMENTS OF CASH FLOWS. . . . . . . . . . . . . . 56
E. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . 57
F. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS . . . . . . . . . . . . 76
WISCONSIN PUBLIC SERVICE CORPORATION
G. CONSOLIDATED STATEMENTS OF INCOME. . . . . . . . . . . . . . . . 77
H. CONSOLIDATED BALANCE SHEETS. . . . . . . . . . . . . . . . . . . 78
I. CONSOLIDATED STATEMENTS OF CAPITALIZATION. . . . . . . . . . . . 80
J. CONSOLIDATED STATEMENTS OF CASH FLOWS. . . . . . . . . . . . . . 81
K. CONSOLIDATED STATEMENTS OF RETAINED EARNINGS . . . . . . . . . . 82
L. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . 83
M. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS . . . . . . . . . . . . 84
9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . 85
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. . . . . . . . . 85
11. EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . . . . . . . . . 85
iii
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. . . 85
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. . . . . . . . . . . 85
PART IV
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . . . . 86
DESCRIPTION OF DOCUMENTS. . . . . . . . . . . . . . . . . . . . . . 88
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
SCHEDULE III - CONDENSED PARENT COMPANY FINANCIAL STATEMENTS
WPS RESOURCES CORPORATION (PARENT COMPANY ONLY)
A. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS . . . . . . . . . . . . 95
B. STATEMENTS OF INCOME AND RETAINED EARNINGS . . . . . . . . . . . 96
C. BALANCE SHEETS . . . . . . . . . . . . . . . . . . . . . . . . . 97
D. STATEMENTS OF CASH FLOWS . . . . . . . . . . . . . . . . . . . . 98
E. NOTES TO PARENT COMPANY FINANCIAL STATEMENTS . . . . . . . . . . 99
EXHIBITS
10F-1 Power Purchase Agreement Between De Pere
Energy LLC and Wisconsin Public Service
Corporation dated November 8, 1995 and
amended by a Letter Agreement dated
February 18, 1997
Wisconsin Public Service Corporation. . . . . . . . . . . .100
10G-1 WPS Resources Corporation Amended and Restated
Deferred Compensation Plan Effective January 1,
1998
WPS Resources Corporation . . . . . . . . . . . . . . . . .213
10G-3 WPS Resources Corporation Short-Term Variable
Pay Plan Effective January 1, 1998
WPS Resources Corporation . . . . . . . . . . . . . . . . .240
11 Statement Regarding Computation of Per Share
Earnings
WPS Resources Corporation . . . . . . . . . . . . . . . . .248
21 Subsidiaries of the Registrant . . . . . . . . . . . . . . . . .249
23 Consent of Independent Public Accountants. . . . . . . . . . . .250
24 Powers of Attorney . . . . . . . . . . . . . . . . . . . . . . .251
27 Financial Data Schedule
WPS Resources Corporation . . . . . . . . . . . . . . . . .259
Wisconsin Public Service Corporation. . . . . . . . . . . .260
iv
DEFINITIONS
The following abbreviations and acronyms are used in the text of this
Form 10-K:
Act . . . . . . . . . . . Federal Clean Air Act Amendments of 1990
AFUDC . . . . . . . . . . Allowance for funds used during construction
ANR . . . . . . . . . . . ANR Pipeline Company
APBO. . . . . . . . . . . Accrued postretirement benefit obligation
Btu . . . . . . . . . . . British thermal unit
Columbia *. . . . . . . . The Columbia Energy Center
CWIP. . . . . . . . . . . Construction work in progress
Dakota *. . . . . . . . . Dakota Gasification Plant
De Pere . . . . . . . . . De Pere Energy Center
DNR . . . . . . . . . . . Wisconsin Department of Natural Resources
DOE . . . . . . . . . . . United States Department of Energy
DSM . . . . . . . . . . . Demand-side management of energy use
Dth . . . . . . . . . . . Dekatherm
Edgewater * . . . . . . . The Edgewater Unit 4 power plant
EPA . . . . . . . . . . . United States Environmental Protection Agency
ESOP. . . . . . . . . . . Employee Stock Ownership Plan and Trust of
Wisconsin Public Service Corporation
ESI . . . . . . . . . . . WPS Energy Services, Inc., a nonregulated
subsidiary of WPS Resources Corporation
FASB. . . . . . . . . . . Financial Accounting Standards Board
FERC. . . . . . . . . . . Federal Energy Regulatory Commission
Great Lakes . . . . . . . Great Lakes Transmission Company
GSR . . . . . . . . . . . Gas supply realignment
Interface . . . . . . . . Constrained Minnesota to Eastern Wisconsin
transmission interface
ISO . . . . . . . . . . . Independent system operator
Kewaunee. . . . . . . . . Kewaunee Nuclear Power Plant
v
kVa . . . . . . . . . . . Kilovolt-ampere
kw. . . . . . . . . . . . Kilowatts
kWh . . . . . . . . . . . Kilowatt-hour
MG&E. . . . . . . . . . . Madison Gas and Electric Company
MPSC. . . . . . . . . . . Michigan Public Service Commission
NRC . . . . . . . . . . . Nuclear Regulatory Commission
Order . . . . . . . . . . Order No. 636 issued by the Federal Energy
Regulatory Commission in April 1992
PD. . . . . . . . . . . . Pricing differential
PDI . . . . . . . . . . . WPS Power Development, Inc., a nonregulated
subsidiary of WPS Resources Corporation
PGAC. . . . . . . . . . . Purchased gas adjustment clause
Polsky. . . . . . . . . . Polsky Energy Corporation
PBR . . . . . . . . . . . Performance based rates
PSCW. . . . . . . . . . . Public Service Commission of Wisconsin
Pulliam * . . . . . . . . The Pulliam generating facility
River Power . . . . . . . Wisconsin River Power Company
SEC . . . . . . . . . . . Securities and Exchange Commission
SFAS. . . . . . . . . . . Statement of Financial Accounting Standards
Sheboygan II. . . . . . . Property adjacent to the Sheboygan River
previously used by Wisconsin Public Service
Corporation for the gasification of coal
Stoneman. . . . . . . . . Stoneman Power Plant, a merchant steam plant
Superfund * . . . . . . . Comprehensive Environmental Response,
Compensation, and Liability Act
TransCanada . . . . . . . TransCanada Pipelines
Union . . . . . . . . . . Local 310 of the International Union of
Operating Engineers which represents certain
Wisconsin Public Service Corporation employees
UPEN. . . . . . . . . . . Upper Peninsula Energy Corporation
UPPCO . . . . . . . . . . Upper Peninsula Power Company
Viking. . . . . . . . . . Viking Gas Transmission Company
vi
WDG . . . . . . . . . . . Wisconsin Distributors Group
WEPCO . . . . . . . . . . Wisconsin Electric Power Company
Weston *. . . . . . . . . The Weston generating facility
WP&L. . . . . . . . . . . Wisconsin Power and Light Company
WPPI. . . . . . . . . . . Wisconsin Public Power, Inc.
WPSC. . . . . . . . . . . Wisconsin Public Service Corporation, a
regulated electric and gas utility and the
principal subsidiary of WPS Resources
Corporation
WPSR. . . . . . . . . . . WPS Resources Corporation, a holding company
- -----
* Indicates items not defined elsewhere in this report.
vii
PART I
ITEM 1. BUSINESS
A. GENERAL
WPS RESOURCES CORPORATION
WPS Resources Corporation ("WPSR"), a Wisconsin Corporation, was
incorporated on December 3, 1993 and operates as a holding company with both
regulated (utility) and nonregulated business units. WPSR's principal
wholly-owned subsidiaries, each of which is a Wisconsin corporation, are:
Wisconsin Public Service Corporation ("WPSC"), a regulated electric and gas
utility; and WPS Energy Services, Inc. ("ESI") and WPS Power Development, Inc.
("PDI"), both nonregulated subsidiaries. WPSC, ESI, and PDI represent
approximately 79%, 21%, and .2% of WPSR's consolidated revenues for 1997 and
95%, 4%, and 1% of WPSR's consolidated assets at December 31, 1997,
respectively. All of WPSR's net income for 1997 was derived from WPSC.
On July 10, 1997, WPSR announced an agreement to merge with Upper
Peninsula Energy Corporation ("UPEN"). The S-4 Registration Statement of WPSR
was declared effective by the Securities and Exchange Commission ("SEC") on
December 5, 1997. The shareholders of UPEN approved the merger on January 29,
1998. The merger is subject to (1) approval by the Federal Energy Regulatory
Commission ("FERC"); (2) approval by the SEC under the Public Utility Holding
Company Act of 1935; (3) the expiration or termination of the waiting period
applicable to the merger under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976; (4) receipt by the parties of an opinion of counsel that the
exchange of stock qualifies as a tax-free transaction; (5) receipt by the
parties of appropriate assurances that the transaction will be accounted for
as a pooling of interests; and (6) the satisfaction of various other
conditions. The merger is expected to be completed in the second half of
1998. UPEN will merge with and into WPSR, and Upper Peninsula Power Company
("UPPCO"), UPEN's utility subsidiary, will become a wholly-owned subsidiary of
WPSR. Each of the 2,950,001 outstanding shares of UPEN common stock (no par
value) will be converted into 0.90 shares of WPSR common stock ($1.00 par
value), subject to adjustment for fractional shares, as provided in the merger
agreement.
On a stand-alone basis, WPSR incurred a net loss in 1997 of $1.0 million,
compared with net income of $0.8 million in 1996. The 1997 WPSR stand-alone
loss was attributable primarily to costs related to the proposed merger with
UPEN.
WISCONSIN PUBLIC SERVICE CORPORATION
At December 31, 1997, WPSC served 374,516 electric retail customers and
218,299 gas retail customers in an 11,000 square mile service territory in
northeastern and central Wisconsin and an adjacent part of Upper Michigan.
Additionally, WPSC provides wholesale (full or partial requirements) electric
service, either directly or indirectly, to 12 municipal utilities, 3 Rural
Electrification Administration financed electric cooperatives, and a privately
held utility. Operating revenues in the year 1997 were derived 97% from
Wisconsin customers and 3% from Michigan customers. Of total revenues in
1997, 69% were from electric operations and 31% were from gas operations. Of
-1-
total electric revenues, 90% were from retail sales and 10% were from
wholesale sales.
WPSC's retail service areas are principally protected by indeterminate
permits secured by statute in Wisconsin and through franchises granted by
municipalities in Michigan.
REGULATORY OVERSIGHT
WPSR is exempt from registration under the Public Utility Holding
Company Act of 1935, as amended, but is subject to the various requirements
and prohibitions of the Wisconsin Public Utility Holding Company Act.
Utility rates, service, and securities issues of WPSC are subject to
regulation by the Public Service Commission of Wisconsin ("PSCW") and the
Michigan Public Service Commission ("MPSC"); and WPSC is subject to regulation
of its wholesale electric rates, hydroelectric projects, and certain other
matters by the FERC. WPSC is also subject to limited regulation by local
authorities. WPSC follows Statement of Financial Accounting Standards No. 71,
"Accounting for the Effects of Certain Types of Regulation," and its financial
statements reflect the effects of the different ratemaking principles of
various jurisdictions. These include the PSCW, 90% of revenues, the MPSC,
3% of revenues, and the FERC, 7% of revenues. The operation of the Kewaunee
Nuclear Power Plant ("Kewaunee") is subject to the jurisdiction of the Nuclear
Regulatory Commission ("NRC").
YEAR 2000 COMPLIANCE
WPSR has completed an initial assessment of the impact of year 2000
compliance on its computer systems. WPSR worked with a consultant beginning
in 1996 to analyze the year 2000 problem. Plans have been established to
analyze all in-house and third party software products and applications. A
preliminary plan indicates that all major in-house developed systems are
expected to be in compliance by the end of 1998. The plan is intended to
enable all systems to be in compliance by the year 2000. The most recent
estimated future internal labor and third party cost of year 2000 compliance
is approximately $13.4 million.
FORWARDING-LOOKING STATEMENTS
This report includes forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. Although WPSR
believes that its expectations are based on reasonable assumptions, no
assurance can be given that actual results may not differ materially from
those in the forward-looking statements included in this report for reasons
that include: the speed and degree to which competition enters the electric
and natural gas industries; state and federal legislative and regulatory
initiatives that increase competition, affect cost and investment recovery,
and have an impact on rate structures; the economic climate and industrial,
commercial, and residential growth in areas served by WPSC and ESI; the
weather and other natural phenomena; the timing and extent of changes in
commodity prices and interest rates; conditions in the capital markets; and
growth in opportunities for ESI and PDI.
A forward-looking statement speaks only as of the date on which such
statement is made, and WPSR does not undertake to update any forward-looking
-2-
statement to reflect events or circumstances after the date on which such
statement is made or to reflect the occurrence of unanticipated events. New
factors emerge from time to time, and it is not possible for WPSR to predict
all such factors, nor can it assess the impact of each such factor or the
extent to which any factor, or combination of factors, may cause results to
differ materially from those contained in any forward-looking statement.
B. ELECTRIC MATTERS
ELECTRIC OPERATIONS
The largest communities served at retail with electricity are the cities
of Green Bay, Oshkosh, Wausau, and Stevens Point.
GENERATING CAPACITY
Coordinated planning for generation and transmission is a function of
the Wisconsin Upper Michigan Systems of which WPSC is a member. Other members
include Madison Gas and Electric Company ("MG&E"), UPPCO, Wisconsin Electric
Power Company ("WEPCO"), Wisconsin Power and Light Company ("WP&L"), and
Wisconsin Public Power, Inc. ("WPPI"). Existing and planned interconnections
with other neighboring utilities provide a further means of sharing reserve
capacities and interchanging energy.
WPSC experienced a 1997 net firm load peak of 1,607,000 kilowatts
("kw") on July 17. Considering a firm purchase of 234,000 kw and a total
generating capability of 1,831,300 kw, the system reserve margin was 30.1%.
In addition, 13,300 kw of firm opportunity sales were served during the peak
hour. WPSC's future generating reserves, adjusted for firm purchases, firm
sales, and planned capacity additions, are estimated to be above the planning
criteria of a 18% minimum reserve in 1998 and 1999. See Part I, Item 2,
PROPERTIES, at page 30 for information concerning generating facilities.
During 1997, the PSCW authorized Polsky Energy Corporation ("Polsky"),
an independent power producer, to build the De Pere Energy Center ("De Pere"),
a 179-megawatt combustion turbine generating facility that is scheduled to be
operational in 1999. De Pere will be converted to a 232-megawatt combined
cycle operation on or after the fifth year of operation, per the requirements
of the contract. A combined-cycle unit is a type of combustion turbine in
which the hot exhaust gases pass through a heat recovery steam generator to
produce steam that drives a steam turbine generator which produces
approximately one-third of the power generated. WPSC has a 25-year contract
to purchase capacity and energy from De Pere. WPSC will furnish the natural
gas fuel for the facility and is working closely with Polsky to ensure that
there are adequate transmission lines serving De Pere.
WPSC owns 33.1% of the outstanding capital stock of Wisconsin River
Power Company ("River Power"). The business of River Power consists of the
ownership and operation of two dams and related hydroelectric plants on the
Wisconsin River having an aggregate installed capacity of approximately
38.7 megawatts. The output of the hydroelectric plants is sold, at the sites
of the plants, to the three joint owners (Consolidated Water Power Company of
Wisconsin Rapids, Wisconsin; Wisconsin Power and Light Company of Madison,
Wisconsin; and WPSC of Green Bay, Wisconsin) substantially in proportion to
their stock ownership interests.
-3-
KEWAUNEE NUCLEAR POWER PLANT
The Kewaunee Nuclear Power Plant ("Kewaunee"), a 562-megawatt
pressurized water reactor plant, is operated by WPSC and is jointly owned by
WPSC (41.2%), WP&L (41.0%), and MG&E (17.8%). The Kewaunee operating license
expires in 2013.
Kewaunee returned to service on June 12, 1997 after having been out of
service since September 21, 1996 for refueling, routine maintenance, and
repair of the two steam generators. The original Kewaunee steam generator
tubes are susceptible to corrosion and cracking. Tubes are repaired by
inserting sleeves (tubes within tubes) in the original steam generator tubes.
The most recent repair was undertaken when previously repaired tubes failed.
The repair consisted of removing old sleeves and inserting new slightly longer
sleeves which cover the areas of concern in the original steam generator
tubes. The new sleeves will be inspected during the next refueling and
maintenance outage which is scheduled for the fall of 1998. Kewaunee is
operating at 97% of rated capacity because certain steam generator tubes have
been removed from service rather than repaired.
Kewaunee operated for 238 consecutive days before being removed from
service on February 6, 1998 for repair of a reactor coolant pump seal. The
plant was returned to service on February 13, 1998.
Additional replacement power costs due to the extended Kewaunee outage
were recovered by a $2.0 million per month customer surcharge during the
period February 21, 1997 through July 1, 1997. Kewaunee steam generator
repair costs have been deferred as authorized by the PSCW. The WPSC portion
of these costs is approximately $3.6 million. The owners have requested the
PSCW to approve recovery of these costs through a customer surcharge which
for WPSC would be effective for April and May of 1998.
On March 15, 1996, WPSC filed an application with the PSCW for
permission to replace the Kewaunee steam generators. Public hearings were
held in January of 1998. A decision is expected in March of 1998. The total
cost of replacing the two steam generators would be approximately
$89.0 million. WPSC's share would be $36.7 million in year of occurrence
dollars. Because of work already completed, the elapsed time from placing a
firm order for steam generators to receiving delivery has been shortened to
approximately 22 months.
The owners of Kewaunee have differing views on the desirability of
proceeding with the steam generator replacement project. Although the new
resleeving repair technology may allow the plant to remain in service for an
extended period of time, WPSC favors replacement at the earliest possible date
because of reliability and cost concerns related to steam generator repairs.
To date, the other two owners have been unwilling to support replacement of
the steam generators. If the steam generator replacement project receives
PSCW approval, the issues related to the continued operation and future
ownership would still need to be resolved before steam generator replacement
could proceed.
The NRC's Systematic Assessment of Licensee Performance for Kewaunee for
the period February 19, 1995 through February 15, 1997 was received in 1997.
The report evaluated Kewaunee's performance in four categories: operations,
maintenance, engineering, and plant support. Maintenance was ranked
-4-
"superior," and the other areas were rated as "good." The NRC stated that
Kewaunee's overall performance was generally characterized by effective
management involvement and interdepartmental communication, and a clear
emphasis on quality by the staff. Areas for improvement that were identified
were: timely evaluation of errors of personnel, adequacy of procedures and
equipment for monitoring equipment performance, and the timely resolution of
plant identified deficiencies.
On July 14, 1997, the NRC assessed a $50,000 penalty against Kewaunee.
The penalty was the result of a NRC inspection in January of 1997 where the
NRC questioned the procedures and equipment used to conduct routine
operational tests on several pumps. In response, the procedures were updated
to improve the test methods, and more sensitive equipment was obtained. All
safety-related pumps in the plant were then retested and found to be operating
within standards.
The federal government has the responsibility to dispose of or
permanently store spent nuclear fuel. Spent nuclear fuel is currently being
stored at Kewaunee. With minor plant modifications, Kewaunee should have
sufficient fuel storage capacity until the end of its licensed life in 2013.
Legislation is being considered on the federal level to provide for the
establishment of an interim storage facility as early as 2002. Permanent
storage pursuant to the Nuclear Waste Policy Act of 1982 is discussed at
page 7.
The Midwest Compact Commission, on June 26, 1997, halted development in
Ohio of a six-state, regional disposal facility for low-level radioactive
waste. The Commission cited dwindling regional waste volumes, continued
access to existing disposal facilities, and potentially high development costs
as the primary reasons for the decision. A site at Barnwell, South Carolina,
continues to be available for the storage of low-level radioactive waste from
Kewaunee. In addition, because of technological advances, waste compaction,
and the reduction of waste generated, Kewaunee has on-site low-level
radioactive waste storage capacity sufficient to store low-level waste
expected to be generated over a 10-year period.
The PSCW has directed the owners of Kewaunee to develop depreciation and
decommissioning cost levels based on full recovery by the end of 2002 versus
recovery by license expiration in 2013. This was prompted by the uncertainty
regarding the expected useful life of the plant without steam generator
replacement. At December 31, 1997, the net carrying amount of WPSC's
investment in Kewaunee was approximately $43.0 million. The current cost of
WPSC's share of the estimated costs to decommission Kewaunee, assuming early
retirement ($182.2 million), exceeds the trust assets at December 31, 1997
($134.1 million) by $48.1 million. WPSC's customers in the Wisconsin
jurisdiction are responsible for approximately 89% of WPSC's share of Kewaunee
costs.
As a result of accelerating the recovery of WPSC's share of Kewaunee
related costs, depreciation expense and decommissioning funding have increased
approximately $3.3 million (from $4.7 million in 1996 to $8.0 million in 1997)
and $8.3 million (from $9.0 million in 1996 to $17.3 million in 1997),
respectively, on an annualized basis. During 1997, $7.5 million of
depreciation expense related to unrecovered plant investment was recognized
compared to $4.7 million which was recognized in 1996. During 1997, the
decommissioning funding level was $16.1 million compared to $9.0 million in
-5-
1996. Customer rates, which became effective in the Wisconsin jurisdiction on
February 21, 1997, are designed to recover the accelerated Kewaunee
depreciation and decommissioning costs.
Additional discussion of Kewaunee matters is included in MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION at
pages 46 and 48, and NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Notes 1(h),
1(j), 1(k), and 9 at pages 59, 60, 60, and 71, respectively.
FUEL SUPPLY
ELECTRIC GENERATION MIX
WPSC's electric generation mix in 1997 compared with 1996 was: steam
plants (coal), 68.9%, up from 67.9%; steam plant (nuclear), 8.2% down from
11.2%; hydro, 3.0% down from 3.1%; combined natural gas and fuel oil, 1.3% up
from .6%; and purchased power, 18.6% up from 17.3%. Purchased power
represents short-term energy purchases.
FUEL COSTS
Fuel costs in 1997 compared with 1996, expressed in dollars per million
British thermal unit ("Btu"), were: nuclear, $.43, down from $.47; coal,
$1.09, down from $1.14; natural gas, $2.96, up from $2.84; and No. 2 fuel oil,
$4.27, down from $4.36.
COAL
WPSC's primary fuel source is coal. In 1997, 99% of this coal came from
Powder River Basin mines located in Wyoming and Montana. This coal is very
low in sulfur and meets the standards of the 1990 Clean Air Act for the year
2000 and beyond. Further, this coal is the least cost coal for WPSC from any
of the subbituminous coal producing regions in the United States.
The majority of coal for WPSC's wholly-owned plants and the
jointly-owned Edgewater and Columbia plants is purchased under relatively
short-term contracts of up to three years duration. WPSC has one long-term
contract which covers approximately 16% of total requirements and has
take-or-pay obligations totaling $198.4 million from 1998 through 2016. Coal
transportation for these plants is purchased under contracts of up to five
years duration. Over 90% of the coal transported to these plants is moved
under competitive transportation market conditions which are expected to
continue to yield competitive fuel costs for WPSC for the long term.
NUCLEAR
WPSC purchases uranium concentrates, conversion services, enrichment
services, and fabrication services for nuclear fuel assemblies at Kewaunee.
New fuel assemblies replace used assemblies that are removed from the reactor
every 18 months and placed in storage at the plant site pending removal by the
United States Department of Energy ("DOE").
Uranium concentrates, conversion services, and enrichment services are
purchased at spot market prices, through a bid process, or using existing
contracts.
-6-
A uranium inventory policy requires that sufficient inventory exist for
up to two reactor reloads of fuel. As of December 31, 1997, 960,000 pounds of
yellowcake or its equivalent are held in inventory for Kewaunee.
Two contracts are in place to provide conversion services for Kewaunee
nuclear fuel for reloads in 1998 and 2000.
A contract with Cogema, Inc. provides a fixed quantity of enrichment
services through the year 2001. Additional enrichment services will be
acquired under a contract with the United States Enrichment Corporation which
is in effect for the life of Kewaunee or by purchases on the spot market.
A contract with Siemens Power Corporation provides fuel fabrication
services through March 15, 2001, for Kewaunee. This contract contains force
majeure and termination provisions.
If, for any reason, Kewaunee were forced to suspend operations
permanently, fuel-related obligations are as follows: (1) there are no
financial penalties associated with the present uranium supply, conversion
service, and enrichment agreements, and (2) the fuel fabrication contract
contains force majeure and termination for convenience provisions. As of the
end of 1997, the maximum exposure would not be expected to exceed $550,000.
Uranium inventories could be sold on the spot market.
The Nuclear Waste Policy Act of 1982 requires that the DOE accept,
transport, and dispose of spent nuclear fuel beginning no later than
January 31, 1998. The DOE has announced that it will delay the acceptance of
spent nuclear fuel beyond 1998. The nuclear utilities have been supported by
a decision of the United States Court of Appeals for the District of Columbia
Circuit in their claim that they may pursue the remedies provided in the DOE
standard contract in the event the DOE does not perform its duty to dispose of
spent nuclear fuel by the January 31, 1998 deadline.
The Energy Policy Act of 1992 requires that the federal government and
nuclear utilities fund the decontamination and decommissioning of the
government's three gaseous diffusion plants in the United States. WPSC is
required to pay approximately $600,000 per year (adjusted for inflation)
through the year 2007. WPSC, as well as other nuclear utilities, has filed
suit in the United States Court of Federal Claims disputing the
decontamination and decommissioning assessment. The suit has been stayed
pending the outcome of the Yankee Atomic Electric Company appeal. Yankee
Atomic Electric Company has received an adverse decision in the United States
Court of Appeals for the Federal Circuit and has filed a petition for
certiorari with the United States Supreme Court.
REGULATORY MATTERS IN THE WISCONSIN JURISDICTION
INDUSTRY RESTRUCTURING
In late 1995, the PSCW outlined a plan for restructuring the electric
industry in Wisconsin. The plan included a 32-step, 5-year process which
could conclude with retail competition by the year 2001. Progress on the plan
has been slow. During 1997, the PSCW chairperson developed a replacement
7-step plan for restructuring which is essentially a regrouping of the
original 32 steps with new priorities. To date, the revised plan has not been
adopted as the official PSCW restructuring plan. Restructuring and retail
-7-
competition, although still under consideration, have been replaced as a
priority by electric reliability issues. As a result of the electric
reliability problems during the summer of 1997 (see Electric Supply Issues, at
page 9), the PSCW announced that its first priority is to develop the utility
infrastructure necessary to assure reliable electric service and to remove the
barriers to competition at the wholesale level.
WPSC currently applies accounting standards that recognize the economic
effects of rate regulations and record regulatory assets and liabilities
related to its generation, transmission, and distribution operations. If rate
recovery of generation-related costs becomes unlikely or uncertain, whether
due to competition or regulatory action, these accounting standards may no
longer apply to WPSC's generation operations. This change could result in
either full recovery of generation-related regulatory assets (net of related
regulatory liabilities) and costs or an impairment charge, depending on
whether regulators adopt a transition mechanism for the recovery of all or a
portion of these net regulatory assets and costs. WPSC believes that the
magnitude of any possible impairment charge is lower than the stranded cost
exposure of many other companies in this industry. Based on a current
evaluation of the various factors and conditions that are expected to impact
future cost recovery, management believes that its regulatory assets,
including those related to generation, are probable of future recovery.
Management expects that increased competition in a deregulated
environment will put pressure on operating margins at WPSC. Management also
believes that no significant changes to depreciable lives of WPSC's capital
assets would be necessary in a competitive environment. However, at this
time, management cannot predict the ultimate results of deregulation.
During 1997, in an effort to mitigate the effects of market power, the
PSCW issued an order that prohibited ownership by electric utility affiliates
of merchant electric generating plants. A merchant electric generating plant
is defined as a plant not owned by or under long-term contract with a public
utility. Later, the PSCW decided that it did not have statutory authority to
order a flat prohibition of utility affiliate ownership of merchant plants and
would consider such ownership on a case-by-case basis. The major utilities in
Wisconsin, including WPSC, have made legislative proposals, as part of
reliability and restructuring efforts, advocating deregulation of merchant
plants. PDI has an ownership interest in a merchant generating facility as
discussed on page 25.
In late 1997, the PSCW initiated a docket on essential services and
customer protections the purpose of which is to create a utility customer
safety net for a restructured electric and gas industry.
INDEPENDENT SYSTEM OPERATOR
A major feature of a restructured electric industry is establishment of
independent system operators ("ISOs"). An ISO is an independent third party
that would regulate on a "real-time" basis the operation of the transmission
systems in a defined geographic area. The ISO would monitor the generation,
transmission, and distribution systems, direct the operations of transmission
facilities, administer open access transmission tariffs, and direct generation
redispatch.
-8-
WPSC has been working with a number of groups that are attempting to
form ISOs. The PSCW and the MPSC are considering the formation of statewide
ISOs. The Mid American Power Pool, one of ten National Electric Reliability
Council regions, is developing an ISO that would include utilities in portions
of Illinois, Minnesota, North Dakota, South Dakota, and Wisconsin.
Additionally, a group of 26 utilities in 10 Midwestern states is attempting to
form what is known as the Midwest ISO.
MERGER ACTIVITY
Industry restructuring has been accompanied by merger activity in the
region which could impact the competitive environment. The merger of WPSR and
UPEN, as previously described, is presently awaiting regulatory approval. The
proposed merger between Wisconsin Energy Corporation and Northern States Power
Company was terminated in May 1997 due to merger conditions imposed by the
FERC that were unacceptable to the applicants. The Interstate Energy
Corporation merger between WPL Holdings, Inc., IES Industries, Inc., and
Interstate Power Company has received FERC and state approvals. At
December 31, 1997, approval was pending from the Securities and Exchange
Commission. In May 1997, Wisconsin Energy Corporation announced the proposed
acquisition of ESELCO, Inc., the parent company of the Edison Sault Electric
Company. Regulatory approvals are pending.
ELECTRIC SUPPLY ISSUES
The summer of 1997 provided a serious challenge to the reliability of
the electric system in the region. Over 5,000 megawatts of generating
capacity were unavailable for most of the summer as various utility companies
experienced forced outages for a variety of reasons.
Kewaunee was returned to service after a longer than normal outage
before the greatest demands were placed on the WPSC electric system. WPSC's
Pulliam Unit 3, a 26.7-megawatt facility, was refurbished and returned to
service. WPSC's system operated at nearly full capacity during the warmest
portions of the summer months. WPSC's interruptible customers experienced
only limited interruptions as a result of WPSC being required to provide power
to other utilities in Wisconsin who were experiencing more severe energy
supply problems. See page 3 for a discussion of new generating capacity.
After the summer's reliability concerns, Governor Thompson requested
reports from the PSCW, electric utilities, and industrial customers assessing
the electric capacity problems experienced in eastern Wisconsin during this
past spring and summer. The reports provided analyses and recommendations on
how to assure the future reliability of the electrical supply and made
recommendations on how to improve the effectiveness of the state's utility
regulatory process. WPSC participated in the development of the utility
report.
WPSC is working closely with Governor Thompson, the PSCW, legislators,
and industry participants to ensure that Wisconsin has an adequate supply of
reliable power, an enhanced transmission system, and appropriate regulatory
changes.
-9-
CUSTOMER RATE MATTERS
In the Wisconsin jurisdiction, of the major investor-owned utilities,
WPSC is the low cost electric provider (based on the Edison Electric Institute
Summer 1997 Typical Bill Rate Report) with rates being 91% of the state
average for residential rates, 86% for commercial rates, and 88% for large
industrial rates. WPSC also has some of the lowest gas rates in Wisconsin
with rates being 95% of the state average for residential rates and 94% for
commercial rates.
Customer rates are based on forecasted expenses and capital costs. On
February 20, 1997, the PSCW authorized a $35.5 million, or 8.1%, decrease in
retail electric rates. These rates are effective through 1998.
WPSR's return on common equity was 11.3% and 10.2% for 1997 and 1996,
respectively. WPSR's return on common equity is determined in large part by
the return authorized for WPSC by the PSCW. The authorized return was 11.8%
and 11.5% for 1997 and 1996, respectively, before giving consideration to
earnings on deferred investment tax credits. The authorized return for 1998
remains at 11.8%.
The PSCW approved an electric surcharge to allow WPSC to recover costs
of acquiring replacement power during the extended outage at Kewaunee. The
surcharge, which amounted to approximately $2.0 million per month
(approximately $.23 per kilowatt-hour) was in place for the period
February 21, 1997 through July 1, 1997.
The PSCW authorized deferral of Kewaunee steam generator repair costs
which totaled $10.4 million, with WPSC's share being $3.6 million. The owners
have requested the PSCW to approve recovery of these costs through a customer
surcharge which would be effective for April and May of 1998.
WPSR anticipates filing on April 1, 1998 an application with the PSCW
for increased electric rates to be effective for the years 1999 and 2000.
REGULATORY MATTERS IN THE MICHIGAN JURISDICTION
INDUSTRY RESTRUCTURING
On June 5, 1997, the MPSC ordered utilities under its jurisdiction to
file electric open access plans and related tariffs. This action followed two
years of public hearings and a lack of consensus among the stakeholders. The
MPSC order called for generation open access in increments of 2.5% of retail
load each year starting in 1997 and ending in 2001. Generation open access is
the ability of customers to purchase electric generation from any supplier and
to use existing transmission and distribution lines to transport the energy to
the purchaser's facilities at the same price that the local supplier would
charge itself for such transportation services. There would be full
generation open access for retail load in 2002.
WPSC submitted a plan which provides retail open access starting in 2000
when the MPSC order requires open access for 10% of retail load. The WPSC
plan then continues on the MPSC schedule including full open access in 2002.
There is uncertainty whether the MPSC has authority to order open
access. In early 1998, the Michigan Circuit Court issued a decision holding
-10-
that the MPSC does not have the authority to order retail access, at least on
a pilot basis. It is expected that this court decision will be appealed. In
the meantime, the largest Michigan utilities are preparing for the start of
open access in 1998, and Michigan's small utilities are working with the MPSC
staff to determine when and how they should proceed toward open access.
CUSTOMER RATE MATTERS
WPSC is the lowest cost provider of electric service in Michigan for all
customer classes. WPSC's electric rates are 72% of the Michigan residential
customer average rate and 75% of the large industrial average rate.
Other than power supply cost recovery, WPSC has not had an electric rate
increase in Michigan since 1987.
REGULATORY MATTERS IN THE FERC JURISDICTION
CUSTOMER RATE MATTERS
WPSC has not had a FERC wholesale rate case since 1987.
OPEN ACCESS TRANSMISSION TARIFF
WPSC has reached agreement with a group of Wisconsin municipal
intervenors, the FERC staff, and two administrative law judges regarding the
proposed open access transmission tariff rates and conditions and WPSC's
request for market-based rates. FERC approval is expected early in 1998. The
settlement rate will be in effect for two years.
MARKETER STATUS
ESI has received FERC power "marketer" status. WPSC, ESI, and PDI have
also been authorized to sell electric energy and capacity at market rates.
WHOLESALE STATUS
In recent years, WPSC has experienced increased competition and reduced
margins in the wholesale power market. Transmission availability, pricing and
policy, the availability of reliable and economically priced energy and
capacity in the region, changing market participants (both suppliers and
consumers), the development and increasing use of risk management tools, and
regulatory and legislative developments at both the state and federal levels
are forces that will continue to influence the wholesale electric market.
WPSC aggressively and competitively procures, packages, markets, and
sells electric energy, capacity, ancillary services, and other associated
energy-related products and services to primarily municipal electric utilities
and electric distribution cooperatives. The objectives are to retain existing
wholesale customer load, obtain new customers, maintain margins, and optimize
the use of WPSC's generating assets. WPSC currently provides 12 wholesale
electric customers with approximately 300 megawatts of firm and various levels
of interruptible service. Wholesale sales represented 16% of WPSC's electric
sales volume in 1997 compared to 17% in 1996.
Effective in October 1997, WPPI discontinued purchasing power under a
full-requirements supply contract. WPPI had been purchasing 66 megawatts of
-11-
electricity from WPSC for resale to municipal utilities. WPSC has been
successful in partially offsetting the loss of this load by securing new
customers and by other sales to WPPI.
During 1996, WPSC entered into agreements with UPPCO covering the
handling of after-hours calls, system operating services, and a multi-year
power supply agreement beginning in 1998. Subsequently, as described at
page 1 of this report, WPSR and UPEN, the parent of UPPCO, announced an
agreement to merge.
REGULATORY COMPLIANCE
WPPI requested transmission service across the WPSC portion of the
constrained Minnesota to eastern Wisconsin interface ("Interface") to serve
five of WPPI's municipal customers (Sturgeon Bay, Algoma, Eagle River,
New Holstein, and Washington Island) located in the WPSC service territory.
The Interface is owned by WEPCO, (52%), WP&L (28%), and WPSC (20%). WPPI has
a 1993 contract with WP&L that provides transmission service for these loads
through the WP&L portion of the Interface.
WPSC filed a complaint with the FERC contending that WPPI and WP&L were
conspiring to use the WPSC portion of the interface capacity for a service
that should use the WP&L portion of the Interface. WPPI responded with a FERC
complaint against both WPSC and WP&L indicating that neither has provided the
necessary transmission services across the constrained Interface. WPSC and
WP&L both maintain that they have previous claims to the interface capacity
consistent with the FERC first-come-first-served transmission scheduling
process.
HYDROELECTRIC LICENSES
New licenses were received in 1997 from the FERC for WPSC's
Caldron Falls, High Falls, Johnson Falls, Sandstone Rapids, Potato Rapids,
Peshtigo, and Grand Rapids hydroelectric projects. These licenses represent
29.7 megawatts of hydroelectric generating capacity.
OTHER MATTERS
RESEARCH AND DEVELOPMENT
Electric research and development expenditures totaled $1.3 million for
1997, $1.9 million for 1996, and $2.6 million for 1995. These expenditures
were made for WPSC sponsored projects and were primarily charged to electric
operations.
CUSTOMER SEGMENTATION
Although 13% of electric revenues come from sales to 26 paper mills,
resulting in a relatively high and favorable load factor, there is no single
customer or small group of customers, the loss of which would have a
materially adverse effect on the electric business of WPSC under the current
regulatory environment.
-12-
ELECTRIC FINANCIAL SUMMARY
The following table sets forth the revenues, operating income, and
identifiable assets attributable to electric utility operations:
WISCONSIN PUBLIC SERVICE CORPORATION
==============================================================================
(Thousands) Year Ended December 31
- ------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------
Electric Operating Revenues $479,388 $490,506 $489,000
Operating Income, Including Allowance
For Funds Used During Construction $ 92,998 $101,425 $ 97,928
Identifiable Assets $906,198 $905,325 $906,029
==============================================================================
See Note 12 in Notes to Consolidated Financial Statements.
-13-
ELECTRIC OPERATING STATISTICS
WPS Resources Corporation
=====================================================================================================================
1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
Operating revenues (Thousands)
Residential and farm $163,766 $169,587 $168,391 $163,381
Small commercial and industrial 138,949 144,055 140,280 137,323
Large commercial and industrial 120,312 118,997 117,978 118,121
Resale and other 62,734 58,648 62,351 61,991
- ---------------------------------------------------------------------------------------------------------------------
Total $485,761 $491,287 $489,000 $480,816
=====================================================================================================================
Kilowatt-hour sales (Thousands)
Residential and farm 2,565,432 2,570,397 2,548,373 2,406,479
Small commercial and industrial 2,876,832 2,761,278 2,672,359 2,555,488
Large commercial and industrial 3,943,275 3,744,153 3,644,764 3,468,390
Resale and other 2,126,805 1,970,083 2,112,635 2,121,660
- ---------------------------------------------------------------------------------------------------------------------
Total 11,512,344 11,045,911 10,978,131 10,552,017
=====================================================================================================================
-14-
ELECTRIC OPERATING STATISTICS
Wisconsin Public Service Corporation
================================================================================================================================
1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------------
Operating revenues (Thousands)
Residential and farm $163,766 $169,587 $168,391 $163,381 $165,568
Small commercial and industrial 138,949 144,055 140,280 137,323 140,678
Large commercial and industrial 120,312 118,997 117,978 118,121 123,920
Resale and other 56,361 57,867 62,351 61,991 63,090
- --------------------------------------------------------------------------------------------------------------------------------
Total $479,388 $490,506 $489,000 $480,816 $493,256
================================================================================================================================
Kilowatt-hour sales (Thousands)
Residential and farm 2,565,432 2,570,397 2,548,373 2,406,479 2,349,307
Small commercial and industrial 2,876,832 2,761,278 2,672,359 2,555,488 2,444,548
Large commercial and industrial 3,943,275 3,744,153 3,644,764 3,468,390 3,296,254
Resale and other 1,873,788 1,936,014 2,112,635 2,121,660 2,060,804
- --------------------------------------------------------------------------------------------------------------------------------
Total 11,259,327 11,011,842 10,978,131 10,552,017 10,150,913
================================================================================================================================
Customers served (End of period)
Residential and farm 334,134 328,522 322,550 316,442 310,336
Small commercial and industrial 39,400 38,376 37,455 36,491 35,683
Large commercial and industrial 197 168 170 164 137
Resale and other 836 826 802 796 794
- --------------------------------------------------------------------------------------------------------------------------------
Total 374,567 367,892 360,977 353,893 346,950
================================================================================================================================
Annual average use (Kilowatt-hours)
Residential and farm 7,751 7,905 7,982 7,688 7,649
Small commercial and industrial 74,082 72,995 72,326 70,931 69,532
Large commercial and industrial 21,606,984 22,115,491 21,824,937 22,091,659 24,416,697
================================================================================================================================
Average kilowatt-hour price (Cents)
Residential and farm 6.38 6.60 6.61 6.79 7.05
Small commercial and industrial 4.83 5.22 5.25 5.37 5.75
Large commercial and industrial 3.05 3.18 3.24 3.41 3.76
================================================================================================================================
Production capacity (Summer - kilowatts)
Steam 1,326,000 1,325,400 1,325,400 1,318,300 1,315,300
Nuclear 212,200 213,800 216,700 215,100 215,100
Hydraulic 53,000 53,100 52,900 53,400 53,100
Combustion turbine 205,930 208,600 207,480 201,200 177,200
Other 7,800 4,200 4,240 4,240 4,240
Purchased capacity 14,750 27,250 26,400 26,400 27,700
- --------------------------------------------------------------------------------------------------------------------------------
Total system capacity 1,819,680 1,832,350 1,833,120 1,818,640 1,792,640
================================================================================================================================
Generation and purchases
(Thousands of kilowatt-hours)
Steam 8,213,518 7,956,378 7,428,612 7,047,511 7,004,634
Nuclear 973,485 1,305,751 1,564,268 1,631,003 1,572,696
Hydraulic 351,034 359,750 306,101 292,617 346,386
Purchases and other 2,327,334 2,050,762 2,310,399 2,243,021 1,849,047
- --------------------------------------------------------------------------------------------------------------------------------
Total 11,865,371 11,672,641 11,609,380 11,214,152 10,772,763
================================================================================================================================
Steam fuel costs
(Cents per million Btu)
Fossil 110.124 115.132 118.365 132.360 139.038
Nuclear 43.174 46.674 49.539 49.168 44.888
Total 103.093 105.439 106.320 116.782 121.949
- --------------------------------------------------------------------------------------------------------------------------------
System peak - firm (kilowatts) 1,607,000 1,591,000 1,670,000 1,543,000 1,569,000
================================================================================================================================
Annual load factor 79.42% 77.56% 73.32% 76.96% 73.29%
================================================================================================================================
-15-
C. GAS MATTERS
WPSC'S GAS MARKET
As of December 31, 1997, WPSC provided natural gas distribution service
to 213,195 customers in 210 cities, villages, and towns in northeastern and
central Wisconsin, and 5,104 customers in and around the city of Menominee,
Michigan, for a total of 218,299 gas distribution customers. This represents
an increase of 6,205 customers, or 2.9%, compared to December 31, 1996. The
principal cities served by WPSC include Green Bay, Oshkosh, Sheboygan,
Two Rivers, Marinette, Stevens Point, and Rhinelander all in Wisconsin, and
the city of Menominee in Michigan.
WPSC's gas distribution business has a significant seasonal component
and is impacted by varying weather conditions from year-to-year.
Approximately 68% of WPSC's gas sales and 60% of WPSC's total gas system
throughput (i.e., total gas delivered by WPSC--includes gas sales and gas
delivered for transportation customers) occur during the 5 winter months of
November through March. Competition with other forms of energy exists in
varying degrees, particularly for large commercial and industrial customers
who have the ability to switch between natural gas and alternate fuels. WPSC
offers interruptible gas sales and gas transportation service for these
customers to enable them to reduce their energy costs and use natural gas
instead of other fuels. Transportation customers total 224. These customers
purchase their gas from other suppliers and contract with WPSC to transport
the gas from ANR Pipeline Company ("ANR") to the customer's facilities.
Another 133 customers still purchase their gas from WPSC but have elected to
do so on an interruptible basis. Additional customers are switching from firm
system supply to either interruptible system supply or transportation service
each year as the economics and service options become attractive for them.
WPSC's gas operations also provide gas to WPSC's electric operations for
power generation in combustion turbine peaking generators and for start-up,
flame stabilization, and peaking use at WPSC's Weston and Pulliam coal-fired
steam plants. Gas sales for power generation use are provided on an
interruptible basis, with the power plants maintaining alternate fuel
capability.
Total gas deliveries by WPSC in 1997, including customer-owned gas
transported by WPSC, were 67,289,030 Dth, a 0.4% decrease over 1996. A
dekatherm ("Dth") is equivalent to 10 therms or 1 million Btu of energy. Gas
transported for end-user transport customers included in the above total was
28,077,338 Dth in 1997, or approximately 42% of WPSC's total deliveries.
WPSC's peak day gas throughput in 1997 occurred on January 16 with
422,859 Dth total gas throughput at an average Green Bay temperature of minus
7.7 degrees Fahrenheit. This compares with WPSC's record gas system
throughput of 432,928 Dth set on February 2, 1996 at an average Green Bay
temperature of minus 23.8 degrees Fahrenheit.
GAS SUPPLY
GENERAL
Since the implementation of FERC Order 636 in November 1993, WPSC has
had full responsibility for the design, acquisition, and operation of gas
-16-
supplies and the pipeline transportation and storage services required to meet
the varying daily, seasonal, and annual load requirements of its customers.
WPSC operates a portfolio of gas supply contracts and pipeline transportation
and storage services designed to meet reliably WPSC's varying load pattern at
the lowest reasonable cost.
WPSC is presently served by a single interstate pipeline, ANR Pipeline
Company. Because ANR's pipeline system in Wisconsin has reached its maximum
capacity, and because lower prices are generally available in other areas
where there is competition for pipeline services, WPSC is investigating
potential suppliers of pipeline services in addition to those offered by ANR.
Prominent among possible alternatives is the Viking Voyageur project proposed
by TransCanada Pipelines, Northern States Power Company, and NICOR. WPSC, as
part of the Wisconsin Capacity Coalition (a group of Wisconsin gas utilities
consisting of MG&E, Wisconsin Gas Company, Wisconsin Fuel and Light Company,
Northern States Power Company-Wisconsin, and WPSC who are working together to
encourage development of alternate pipeline capacity to serve Wisconsin), is
presently evaluating construction of lateral lines to interconnect WPSC's
distribution system with Viking Voyageur and thereby provide access to WPSC's
markets. Other pipeline service alternatives are also being evaluated.
PIPELINE CAPACITY AND STORAGE
ANR's system serving WPSC accesses three major gas producing areas of
North America: (1) the Gulf of Mexico, (2) the mid-continent areas of
Oklahoma, Texas, and Kansas, and (3) the Province of Alberta in western
Canada. WPSC holds firm long-term transportation capacity on ANR in roughly
equal proportions from each of these three supply areas. The term of these
long-line ANR firm transportation contracts from the Gulf Coast and
mid-continent areas extend through October 2003. The term of the ANR contract
for 83% of the supplies from Canada extends through October 1998. WPSC
intends to renew this ANR contract for supply from Canada in 1998 for another
five-year term through October 2003 at a reduced capacity to coincide with the
expiration of an upstream transportation contract with Viking Gas
Transmission. The remaining 17% of the Canadian contracts extend through
October 2003.
Because of the substantial daily and seasonal swings in gas usage in
WPSC's service territory, WPSC also has contracted with ANR for firm
underground storage capacity located in Michigan. There are no known
geological formations in Wisconsin capable of being developed into underground
storage facilities.
Besides providing WPSC the ability to manage significant changes in
daily gas demand, storage also provides WPSC the ability to purchase gas from
the production areas at high load factors, thus minimizing supply costs.
During the summer, gas purchased in excess of market demand is injected into
storage. During the winter, gas is withdrawn from storage and combined with
gas purchased in the production areas to meet the increased winter demand.
Gas from storage provides up to 63% of WPSC's supply on winter peak days,
approximately 32% of WPSC's winter sales volumes, and approximately 22% of
WPSC's total annual sales volumes. WPSC's total firm storage capacity with
ANR is 11.3 million Dth.
WPSC also contracts for high deliverability storage in the Gulf Coast
and mid-continent production areas during the winter from third-party
-17-
suppliers. This storage capacity provides a back-up supply of gas into WPSC's
long-line transportation contracts when other supplies cannot be delivered due
to production supply losses caused by extremely cold weather in the production
areas.
As of December 31, 1997, WPSC's total firm winter long-line
transportation capacity from ANR was 128,952 Dth per day, and firm capacity
from ANR storage was 223,120 Dth per day, for a total winter peak day capacity
of 352,072 Dth per day. WPSC's forecasted peak day firm load requirement for
the 1997-1998 winter is 337,453 Dth per day, providing WPSC a 14,619 Dth per
day or 4.3% reserve margin of capacity for load growth and unforeseen needs.
On November 1, 1998, WPSC's total firm winter long-line transportation
capacity from ANR will be 121,254 Dth per day, and firm capacity from ANR
storage will be 223,120 Dth per day, for a total winter peak day capacity of
344,374 Dth per day. WPSC's forecasted peak day firm load requirement for the
1998-1999 winter is 323,885 Dth per day, providing WPSC a 20,489 Dth per day
or 6.3% reserve margin of capacity for load growth and unforeseen needs.
WPSC also holds firm transportation capacity with Viking Gas
Transmission Company, ("Viking") to deliver gas on a firm basis from Viking's
interconnection with TransCanada Pipelines ("TransCanada") at Emerson,
Manitoba, Canada to the interconnection with ANR at Marshfield, Wisconsin.
The Canadian suppliers, from whom WPSC purchases gas, hold firm capacity on
TransCanada and NOVA from Emerson back into the production areas in Alberta,
Canada.
GAS SUPPLY CONTRACTS
WPSC contracts for firm term supplies with approximately 12 to 16
suppliers each year for gas produced in each of the three production areas.
WPSC initially designed its supply portfolio with terms ranging from one to
ten years so that only a portion of WPSC's supply contracts expired in any
given year. With the current uncertainty surrounding the future of WPSC's gas
merchant function, however, as long-term contracts expire, WPSC has been
replacing them with contracts of a one-year term or less. This will minimize
potential stranded gas supply contract costs if retail gas deregulation should
proceed quickly in Wisconsin. WPSC's supply portfolio as of December 31, 1997
contained contracts with remaining terms ranging from two months to six years.
An exception to this short-term supply contracting practice will occur
if the proposed Viking Voyageur gas pipeline project is constructed. In which
case, WPSC plans to enter into five-year gas supply contracts with suppliers
to help support construction of the pipeline. Viking Voyageur supply
contracts will be assignable to third parties should WPSC's merchant function
be substantially reduced during the term of the supply agreements.
Additional supplies are purchased on the monthly spot market as required
to supplement supplies from long-term firm contracts. WPSC has been an active
spot market purchaser since 1985 and has contracts in place with a number of
suppliers of spot market gas.
NEW PIPELINE SUPPLY SOURCE
WPSC is planning a joint project with Wisconsin Electric Power Company-
Gas Operations to construct a new eight-inch pipeline from an interconnection
-18-
with Great Lakes Gas Transmission Company ("Great Lakes") in the Upper
Peninsula of Michigan near Watersmeet into northern Wisconsin. WPSC plans to
build additional pipeline facilities to connect the new pipeline to WPSC's
existing northern area distribution system to reinforce pressures and increase
system reliability. WPSC plans to modify and extend the term of portions of
its existing pipeline capacity and storage contracts with ANR and add a new
transportation service on Great Lakes to deliver up to 7,000 Dth per day into
the new pipeline system during the winter. The new pipeline project is
expected to be in service by November 1998.
FEDERAL REGULATORY ACTIVITIES
WPSC's involvement in federal regulatory activities has been through the
Wisconsin Distributor Group ("WDG") which is made up of several Wisconsin gas
utilities. Over the past several years, the WDG has participated in numerous
dockets filed by ANR at the FERC.
Successes in three key issues this year are summarized below.
DAKOTA
In December 1996, ANR's Dakota Gasification Plant settlement was
approved by FERC. The settlement results in cost savings for WPSC's customers
compared to the original gas purchase contracts ANR had with Dakota, and
brings to an end the extensive litigation that surrounded this issue. As part
of the settlement, in July 1997, WPSC received a refund of previously paid
above-market Dakota costs in the amount of $1,912,225 which WPSC refunded to
customers in September 1997.
VIKING COSTS ON ANR PIPELINE
The WDG was also successful in obtaining refunds of overcollections by
ANR for Viking-related expenses. In July 1997, WPSC received a refund of
$890,325 which was refunded to its customers in September.
ANR RATE CASE SETTLEMENT
After nearly three years of effort, a settlement was achieved in the
rate case ANR filed on November 1, 1993 and put into effect on May 1, 1994.
The settlement will result in refunds to WPSC of $6.8 million, an annual
reduction in WPSC's rates paid to ANR of approximately $7.5 million, or 19%, a
moratorium period against rate increases, and an opportunity for additional
cost reduction through contract portfolio reshaping. The new, lower rates
went into effect November 1, 1997, subject to future FERC approval. On
February 13, 1998, FERC issued an order approving ANR's settlement agreement
as filed. ANR now has until March 15, 1998 to notify the FERC if any party
objects to any conditions imposed by the FERC in its order. Since the FERC
approved ANR's settlement without modification, WPSC expects ANR will notify
the FERC that no party objects, and the settlement will become effective by
April 15, 1998.
-19-
WISCONSIN REGULATORY ACTIVITIES
GENERAL
The PSCW is considering gas restructuring issues including unbundling of
rates, pricing of contracted services in potential utility bypass situations
(i.e., situations in which a major industrial gas customer may construct a
pipeline connecting them directly to an interstate pipeline, thus avoiding
purchasing any delivery service from the local gas utility), and the
separation of gas utilities from their unregulated gas marketing affiliates.
GAS COST RECOVERY MECHANISM
Historically, Wisconsin gas utilities, including WPSC, have recovered
their costs for gas supply and pipeline services on a one-for-one basis
through a mechanism called the Purchased Gas Adjustment Clause. The PSCW
conducted an investigation in Docket 05-GI-106 to determine whether alternate
gas cost recovery mechanisms may be more appropriate in the evolving gas
market. In particular, Performance Based Rates ("PBR") were evaluated as
alternatives to the traditional one-for-one recovery mechanism. Under PBRs,
gas utilities are given an incentive to reduce gas costs by being allowed to
keep a portion of any cost savings they are able to obtain relative to a gas
cost target value.
In November 1996, the PSCW issued an order which gave gas utilities a
choice between continuing under a modified one-for-one gas cost recovery
mechanism, or switching to a PBR mechanism. WPSC elected to continue under a
modified one-for-one mechanism, as WPSC believes it provides the greatest
value to customers through regulatory oversight and the return to customers of
all savings achieved. Development of WPSC's modified one-for-one mechanism is
in process, with implementation expected in November 1998.
GAS DISTRIBUTION RESTRUCTURING
The PSCW has an ongoing investigation into gas industry restructuring in
Docket 05-GI-108. Although the gas utility distribution function is expected
to continue as a regulated monopoly, sales of the natural gas commodity and
associated services, which were formerly also utility monopoly functions, are
expected to become increasingly open for competition among unregulated
third-party suppliers. WPSC's position is that utilities should be allowed to
continue to offer a regulated gas supply merchant function if they so choose,
thereby providing customers with a regulated supply choice.
Phase I of this docket addressed issues of unbundling rates, pricing of
contracted service in potential utility bypass situations, and the separation
of gas utilities from their unregulated gas marketing affiliates. Phase II
established standards of conduct regarding how gas utilities can interact with
their marketing affiliates. Phase III explored the issue of how to determine
when a competitive market exists for various segments of customers, so the
utility could then be taken out of serving that market.
Because of the complexity of the many issues involved, industry work
groups were formed to study particular issues and bring recommendations back
to the PSCW. The six work groups are studying pipeline capacity, market-based
pricing for interruptible customers, end-user price reporting, marketer
certification, changes needed in the form of legislation or administrative
-20-
rules, and social issues and essential services. Although most of this work
has not yet started, completion of these work groups' assignments is projected
for November 1999.
CUSTOMER RATE MATTERS
Customer rates are based on forecasted expenses and capital costs. On
February 20, 1997, the PSCW authorized a $5.7 million, or 2.7%, increase in
WPSC's retail natural gas rates. The rates are effective through 1998.
WPSC anticipates filing on April 1, 1998 an application with the PSCW
for increased gas rates to be effective for the years 1999 and 2000.
MICHIGAN REGULATORY ACTIVITIES
GAS COST RECOVERY
In June 1997, WPSC filed with the MPSC the annual reconciliation of gas
costs and gas revenues for the period April 1, 1996 through March 31, 1997.
WPSC's gas cost recovery clause in Michigan allows WPSC to recover all
prudently incurred gas costs on a one-for-one basis. The MPSC staff contested
the prudency of certain summer-only gas sales WPSC made to a single
large-volume customer and recommended that WPSC not be allowed to recover
approximately $245,088 of gas costs associated with these sales. In January
1998, an administrative law judge issued a Proposal For Decision and
recommended that the MPSC issue an order allowing WPSC to recover the entire
amount in contention. A final order in this case is expected in March 1998.
GAS DISTRIBUTION RESTRUCTURING
The MPSC is also investigating the deregulation of retail gas markets
and expansion of gas transportation service in Michigan in Case No. U-11017.
The MPSC decided it would be appropriate to conduct a series of pilot projects
to test the development of competitive retail gas markets in Michigan.
Michigan's four largest gas utilities were approached by the MPSC regarding
development and implementation of pilot programs.
Because of the small size and limited number of customers in WPSC's
Michigan service territory and the service territories of two other utility
companies, the MPSC did not conduct pilot transportation programs for these
three utilities.
CUSTOMER RATE MATTERS
WPSC has not had a natural gas rate case in Michigan since 1986.
-21-
GAS FINANCIAL SUMMARY
The following table sets forth the amounts of revenues, operating
income, and identifiable assets attributable to gas utility operations:
WISCONSIN PUBLIC SERVICE CORPORATION
==============================================================================
(Thousands) Year Ended December 31
- ------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------
Gas Operating Revenues $211,090 $211,357 $174,693
Operating Income, Including Allowance
For Funds Used During Construction $ 18,584 $ 10,191 $ 12,116
Identifiable Assets $235,490 $255,200 $232,983
==============================================================================
See Note 12 in Notes to Consolidated Financial Statements.
-22-
GAS OPERATING STATISTICS
WPS Resources Corporation
=====================================================================================================================
1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
Operating revenues (Thousands)
Residential $122,782 $122,224 $109,998 $104,020
Small commercial and industrial 23,790 22,392 19,933 18,586
Large commercial and industrial 53,517 55,211 47,627 45,115
Other 190,310 164,673 52,367 25,258
- ---------------------------------------------------------------------------------------------------------------------
Total $390,399 $364,500 $229,925 $192,979
=====================================================================================================================
Therms delivered (Thousands)
Residential 202,558 216,963 202,152 187,355
Small commercial and industrial 43,056 46,614 42,600 38,568
Large commercial and industrial 127,132 142,033 129,494 115,939
Other 595,154 527,069 294,372 56,961
- ---------------------------------------------------------------------------------------------------------------------
Total therm sales 967,900 932,679 668,618 398,823
Transportation 268,114 251,279 241,531 234,149
- ---------------------------------------------------------------------------------------------------------------------
Total 1,236,014 1,183,958 910,149 632,972
=====================================================================================================================
-23-
GAS OPERATING STATISTICS
Wisconsin Public Service Corporation
========================================================================================================================
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
Operating revenues (Thousands)
Residential $122,782 $122,224 $109,998 $104,020 $110,541
Small commercial and industrial 23,790 22,392 19,933 18,586 20,254
Large commercial and industrial 53,517 55,211 47,627 45,115 47,091
Other 11,001 11,530 (2,865) 14,337 9,490
- ------------------------------------------------------------------------------------------------------------------------
Total $211,090 $211,357 $174,693 $182,058 $187,376
========================================================================================================================
Therms delivered (Thousands)
Residential 202,558 216,963 202,152 187,355 192,053
Small commercial and industrial 43,056 46,614 42,600 38,568 41,385
Large commercial and industrial 127,132 142,033 129,494 115,939 108,068
Other 21,148 9,709 15,415 9,810 6,337
- ------------------------------------------------------------------------------------------------------------------------
Total therm sales 393,894 415,319 389,661 351,672 347,843
Transportation 268,114 251,279 241,531 234,149 220,672
- ------------------------------------------------------------------------------------------------------------------------
Total 662,008 666,598 631,192 585,821 568,515
========================================================================================================================
Customers served (End of period)
Residential 198,524 192,947 186,267 178,992 172,902
Small commercial and industrial 16,770 16,133 15,905 14,689 14,571
Large commercial and industrial 2,780 2,846 2,432 2,867 2,508
Other 1 1 1 1 1
Transportation customers 224 167 121 117 127
- ------------------------------------------------------------------------------------------------------------------------
Total 218,299 212,094 204,726 196,666 190,109
========================================================================================================================
Average annual use (Therms)
Residential 1,037.3 1,146.6 1,112.3 1,068.8 1,128.4
Small commercial and industrial 2,619.4 2,937.2 2,770.8 2,673.9 2,888.8
Large commercial and industrial 32,423.5 37,163.7 39,707.6 34,651.2 41,354.4
========================================================================================================================
Average therm price (Cents)
Residential 60.62 56.33 54.41 55.52 57.56
Small commercial and industrial 55.25 48.04 46.79 48.19 48.94
Large commercial and industrial 45.92 42.84 40.63 41.84 44.97
========================================================================================================================
-24-
D. NONREGULATED BUSINESS ACTIVITIES
GENERAL
At the end of 1997, WPSR had two principal nonregulated subsidiaries:
WPS Energy Services, Inc. ("ESI") and WPS Power Development, Inc. ("PDI").
These subsidiaries were formed in 1994 and 1995, respectively, for the purpose
of positioning WPSR strategically for participation in the evolving
nonregulated energy marketplace.
WPS ENERGY SERVICES, INC.
ESI is a diversified energy company. ESI targets retail energy sales
and related services in Midwestern and Eastern states with an emphasis on
serving commercial, industrial, and wholesale customers. Principal operations
are located in Illinois, Michigan, Ohio, and Wisconsin. ESI also is
participating in retail pilot projects in each of these states. Wholesale
energy sales and related services are provided nationwide.
ESI provides electric, natural gas, and alternate fuel products; risk
management consulting services; real-time energy management services; and
project management. ESI also provides energy utilization consulting which
identifies opportunities for improving purchasing practices, equipment, and
systems necessary for the efficient use of energy.
The gas markets in which ESI participates are characterized by strong
competition, narrow margins, and volatile commodity and transportation prices.
ESI uses various financial instruments to minimize the risks present in the
natural gas marketplace (see Note 1(e), Price Risk Management Activities on
page 57 of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS).
Revenues were predominantly from the sale of natural gas. Revenues from
the sale of natural gas were $179.3 million in 1997 compared to $153.1 million
in 1996. Sales totaled 574.0 million therms in 1997 compared to 517.4 million
therms in 1996. Electric sales are not significant because electric retail
access has been slow to develop in ESI's target market areas. ESI continues
to pursue the electric wholsesale market, but to a lesser extent than in the
past.
WPS POWER DEVELOPMENT, INC.
PDI develops and owns electric generation projects and provides services
to the electric power generation industry nationwide. PDI's services include
acquisition and investment analysis, project development, engineering and
management services, and operations and maintenance services. PDI's areas of
expertise include cogeneration, distributed generation, generation from
renewables, generation plant repowering projects, and conversion of paper mill
sludge to lightweight aggregate.
PDI owns a two-thirds interest in the Stoneman Power Plant ("Stoneman"),
a 53-megawatt merchant steam plant located in Cassville, Wisconsin. The
redevelopment of Stoneman as a 300-megawatt to 500-megawatt gas-fired combined
cycle facility is planned for the 1999 to 2000 time period. PDI also owns
landfill gas generating facilities.
-25-
EARNINGS
Both ESI and PDI incurred losses for 1997 and 1996. The loss incurred
at ESI in 1997 was $4.9 million, compared with a loss of $6.3 million in 1996,
a decrease of 22.2%. The loss incurred by PDI in 1997 was $1.9 million,
compared with $4.0 million in 1996, a decrease of 52.5%. Operating losses at
the nonregulated subsidiaries were anticipated by management as the companies
develop infrastructure and finance additional working capital needed to
support growth.
See MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION at page 42 for additional information regarding
nonregulated operations.
E. ENVIRONMENTAL MATTERS
GENERAL
WPSC is subject to regulation with regard to the impact of its
operations on air and water quality and solid waste disposal, and may be
subject to regulation with regard to other environmental considerations by
various federal, state, and local authorities. The application of federal and
state restrictions to protect the environment involves or may involve review,
certification, or issuance of permits by various federal and state
authorities, including the United States Environmental Protection Agency
("EPA") and the Wisconsin Department of Natural Resources ("DNR"). Such
restrictions (particularly in regard to emissions into the air and water, and
solid waste disposal) may limit, prevent, or substantially increase the cost
of the operation of WPSC's generating facilities and may require substantial
investments in new equipment at existing installations. Such restrictions may
also require substantial additional investments for any new projects and may
delay or prevent authorization and completion of the projects. WPSC cannot
forecast effects of such regulation upon its generating, transmission, and
other facilities, or its operations, but believes that it is presently meeting
existing requirements.
AIR QUALITY
WPSC's generating plants are in compliance with all current sulfur
dioxide, nitrogen oxide, and particulate emission standards.
The Federal Clean Air Act Amendments of 1990 ("Act") required reductions
in sulfur dioxide in 1995 (Phase I) to meet limitations based on an emission
rate of 2.5 pounds per Btu multiplied by a historical generation baseline for
Pulliam Unit 8 and Edgewater Unit 4 generating units. The Act requires
further reductions beginning in the year 2000 (Phase II). The year 2000
limits are based on an emission rate of 1.2 pounds per million Btu multiplied
by a historical generation baseline for all generating units. WPSC's
generating facilities met the year 2000 standard in 1995. WPSC achieved
compliance with Wisconsin and federal sulfur dioxide emission limitations by
switching to low sulfur coal.
Because of the emission allowance system included in the Act, operations
during Phase I are expected to produce surplus allowances which will be
available to aid in compliance with the requirements of Phase II. To the
-26-
extent WPSC determines that it will have allowances available beyond its own
requirements in both Phase I and Phase II, it will consider the sale of the
excess allowances. The PSCW has ordered that profits from the sale of
allowances be used to benefit utility customers.
The Act also requires the installation of low nitrogen oxide burners on
several units. Low nitrogen oxide burners were installed at Pulliam Unit 8
early in 1994. Phase I of the Act allows units smaller than 100 megawatts,
such as Pulliam Unit 7, to be designated Phase I units, thus building up
sulfur dioxide credits. Having made this election, low nitrogen oxide burners
were installed on Pulliam Unit 7 in 1994. Low nitrogen oxide emissions from
Pulliam Units 7 and 8 and Weston Unit 3 are averaged with Weston Units 1
and 2. This averaging plan generates additional emission allowances in
Phase I and locks in Phase I nitrogen oxide limits for these units. This
should reduce Phase II compliance costs.
Expenditures of $1.0 million to $2.0 million for Phase II of the Acid
Rain Program are projected through 1999 to assure nitrogen oxide emission
compliance at the Pulliam and Weston plants. The EPA recently proposed
additional nitrogen oxide emission reductions from facilities in 22 eastern
states, including those in Wisconsin. The reduction in nitrogen oxide
emissions that WPSC will need to achieve has yet to be determined. However,
it is likely that the reduction will be significant and beyond that required
by the existing rules. The proposed rules will probably take effect in 2002
to 2004 and result in significant emission control costs.
Air toxic provisions in the Act will not be applied until the EPA
determines if those standards need to be applied to utilities.
WATER QUALITY
WPSC is subject to regulation by the EPA and the DNR with respect to
thermal and other discharges into Lake Michigan and other waters of Wisconsin
from WPSC's power plants. Wastewater discharge permits with a term of five
years were reissued by the DNR to WPSC for Kewaunee in 1995 and the Pulliam
and Weston power plants in 1996. No new permit conditions or associated
material costs were imposed compared to permits issued during earlier
renewals. Revisions to state water quality rules as a result of the
Great Lakes Initiative should not result in any significant changes when
wastewater permits are reissued in 2000 for Kewaunee and in 2001 for the
Pulliam and Weston plants.
GAS PLANT CLEANUP
WPSC is investigating the cleanup of eight manufactured gas plant sites
which it previously operated in Green Bay, Two Rivers, Oshkosh, Marinette,
Sheboygan (two sites), Stevens Point, and Menominee (Michigan). In general,
WPSC is proceeding with these projects as the designated responsible party for
cleanup, although for two sites, Sheboygan II and Oshkosh, formal agreements
have been executed with the DNR covering the investigation and restoration
activities. The agreement for Sheboygan II allows WPSC to work with Wisconsin
on restoration. The site is not associated with the larger Sheboygan River
and Harbor Superfund site. The agreement for Oshkosh was entered into in
order to resolve a unilateral administrative order that was issued by the DNR.
-27-
Total costs of cleanup for all eight sites, as estimated by an
environmental consultant, should be in the range of $34.1 million to
$41.1 million. The estimates assume removal of significantly contaminated
soil and groundwater treatment/monitoring for up to 25 years, depending on
site conditions. The cost estimates for five of the sites include removal and
disposal of contaminated river sediments.
Expenditures for the gas plant sites are estimated to be made over the
next 32 years. WPSC has recorded on its books a liability with an offsetting
deferred charge (i.e., a regulatory asset) in the amount of $41.7 million.
Insurance recoveries and collections in rates have reduced the regulatory
asset to $29.2 million at December 31, 1997. Expenditures have reduced the
liability to $40.2 million at December 31, 1997. Based on discussions with
regulators and a Wisconsin rate order, management believes that these costs,
but not the carrying costs associated with the deferred charges, will be
recoverable in future customer rates. In a rate order that became effective
in February 1997, the PSCW authorized current annualized recovery for gas site
cleanup of $225,000 for each of the years 1997 and 1998.
Work at the Stevens Point site is expected to commence in 1998. As
remedial feasibility studies and initial remedial activities are completed,
remediation cost estimates may be adjusted and these adjustments could be
significant. Other factors that can affect these estimates are changes in
remedial technology and regulatory requirements.
The cost estimates presented above do not take into consideration any
recovery from insurance carriers or other third parties which WPSC has
obtained or is pursuing. Insurance recoveries are deferred as a reduction to
the regulatory asset; therefore, neither adjustments to the estimated
liability nor insurance recoveries have an immediate impact on net income. To
date, WPSC has received insurance settlements of approximately $12.6 million.
F. CAPITAL REQUIREMENTS
WPSR's utility subsidiary, WPSC, makes large investments in capital
assets. Construction expenditures for WPSC are expected to continue in the
$75.0 million to $90.0 million range annually during the 1998 through 2000
period. This does not include any expenditures for the replacement of
Kewaunee steam generators. Steam generator replacement, WPSC's share of which
would be approximately $36.7 million in year of occurrence dollars, is
contingent upon receipt of approval from the PSCW to proceed with replacement
and agreement among the owners on a replacement plan. Potential expenditures
for gas pipeline laterals which would connect WPSC's distribution system with
the proposed Viking Voyageur pipeline from Canada are also not included.
In addition, other capital requirements for WPSC during the three-year
period include Kewaunee decommissioning trust fund contributions of
approximately $30.0 million and replacement financing for maturing
first-mortgage bonds of $50.0 million.
See note 9 of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Future Utility
Expenditures, at page 72 for additional information regarding forecasted
construction expenditures for WPSC.
-28-
WPSR expects that internally-generated funds and short-term borrowing
will satisfy most of its capital requirements. WPSR may periodically issue
additional long-term debt and common stock to reduce short-term debt and to
maintain desired capitalization ratios. The specific forms of financing,
amounts, and timing will depend on the availability of projects, market
conditions, and other factors. However, at this time, it is anticipated that
trust originated preferred stock could be issued on behalf of WPSR in 1998.
WPSR may also expand its leveraged employee stock ownership plan during the
three-year period.
Investment expenditures for nonregulated projects are uncertain since
there are no material firm commitments at this time. Debt financing for most
nonregulated projects is expected to be on a nonrecourse basis.
G. EMPLOYEES
At December 31, 1997, WPSR, including its subsidiaries, employed
2,486 persons. Of this number, 2,399 employees were employed by WPSC.
Of the employees of WPSC, 1,888 were considered electric utility
employees and 511 were considered gas utility employees. Approximately
1,200 WPSC employees are represented by Local 310 of the International Union
of Operating Engineers ("Union"). The Union has been operating without a
contract since October 29, 1997. Unresolved issues remain and contract
negotiations continue. There has never been a strike against WPSC by its
employees.
-29-
ITEM 2. PROPERTIES
A. UTILITY
The following table includes information about electric generation
facilities of WPSC (including those jointly-owned):
Rated
Capacity (a)
Type Name Location Fuel (Kilowatts)
- ------------- ---------------- ------------- ----------- -------------
Steam Pulliam Green Bay, WI Coal 400,900 (b)
Weston Wausau, WI Coal or Gas 480,100 (c)
Kewaunee Kewaunee, WI Nuclear 210,500 (d)
Columbia -
Units No. 1 & 2 Portage, WI Coal 325,100 (d)
Edgewater
Unit No. 4 Sheboygan Coal 106,200 (d)
---------
Total Steam 1,522,800
Hydro Various 68,400 (e)
(15 Plants)
Combustion Various Gas or Oil 269,410 (f)
Turbine (7 Plants)
& Diesel ---------
Total System 1,860,610
=========
(a) Based on winter-rated capacity.
(b) This plant has six units.
(c) This plant has three units. Two units burn only coal and the
other unit can burn coal or natural gas.
(d) These facilities are jointly-owned. Kewaunee is operated by
WPSC. WP&L is operator of the Columbia and Edgewater units.
The capacity indicated is WPSC's portion of total plant
capacity based on percent of ownership.
(e) Includes 12,900 kw purchased from Wisconsin River Power Company.
(f) WPSC and the Marshfield Electric and Water Department jointly
own 115,600 kilowatts of combustion turbine peaking capacity
which WPSC operates. The capacity indicated is WPSC's
portion of total plant capacity based on percent of
ownership.
WPSC owns 55 transmission substations with a transformer capacity of
5,616,110 kilovolt-ampere ("kVa"), 110 distribution substations with a
transformer capacity of 2,881,270 kVa, 1,549 miles of electric transmission
lines, and 19,358 miles of electric distribution lines.
-30-
Gas properties include approximately 4,623 miles of main, 68 gate and
city regulator stations, and 201,566 services. All gas facilities are located
in Wisconsin except for distribution facilities in and near the city of
Menominee, Michigan.
Substantially all of WPSC's utility plant is subject to a first mortgage
lien.
B. NONREGULATED
The following table includes information about jointly-owned electric
generation facilities of PDI:
Rated
Capacity
Type Name Location Fuel (Kilowatts)
- ----- -------------- ------------ ---- -----------
Steam Stoneman Cassville, WI Coal 53,000 (a)
(a) The Stoneman facility is owned by Mid-American Power, LLC.
PDI Stoneman, Inc. (a wholly-owned subsidiary of WPS Power
Development, Inc.) and B. M. Stoneman, Inc., (a wholly-owned
subsidiary of Burns and McDonnell) own 66-2/3% and 33-1/3%,
respectively, of Mid-American Power, LLC.
ITEM 3. LEGAL PROCEEDINGS
See Part I, Item 1E, ENVIRONMENTAL MATTERS, at page 26, for a
description of various proceedings relating to environmental matters.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year.
-31-
ITEM 4A. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information about outside directors is omitted for the reason that such
information will be included in a proxy statement for the Annual Meeting of
Shareholders of WPSR which is scheduled to be held on May 7, 1998.
A. EXECUTIVE OFFICERS OF WPS RESOURCES CORPORATION ("WPSR")
Current Position and Business Effective
Name and Age Experience During Past Five Years Date
- ----------------------------- ------------------------------------------- ---------
Larry L. Weyers 52 Chairman, President, and Chief Executive
Officer 02-12-98
President and Chief Executive Officer 05-01-97
President and Chief Operating Officer 01-01-96
Patrick D. Schrickel 53 Executive Vice President 12-29-96
Vice President 12-09-93
Phillip M. Mikulsky 49 Senior Vice President-Development 02-12-98
Vice President-Development 09-01-95
Manager-System Operations 10-01-91 *
Director-System Operations 09-28-91 *
Daniel P. Bittner 54 Vice President and Chief Financial Officer 05-01-97
Vice President 12-29-96
Richard E. James 44 Vice President-Corporate Planning 12-29-96
Vice President-Corporate Planning 08-01-95 *
Assistant Vice President-Corporate Planning 05-09-94 *
Assistant Vice President-Rates and Economic
Evaluation 03-01-92 *
Thomas P. Meinz 51 Vice President-Public Affairs 02-12-98
Bernard J. Treml 48 Vice President-Human Resources 02-12-98
Glen R. Schwalbach 52 Assistant Vice President-Corporate Planning 12-29-96
Assistant Vice President