-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LHcwbGolEgd7q9XceILxLr6OhJ4ME+lc4SyYNOrTIZMsbeqChqh8E1+erR43yZ8y z6uIZkIcAmTB4x38xBr+cw== 0000916863-00-000024.txt : 20000510 0000916863-00-000024.hdr.sgml : 20000510 ACCESSION NUMBER: 0000916863-00-000024 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000509 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WPS RESOURCES CORP CENTRAL INDEX KEY: 0000916863 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 391775292 STATE OF INCORPORATION: WI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11337 FILM NUMBER: 623359 BUSINESS ADDRESS: STREET 1: 700 N ADAMS ST STREET 2: PO BOX 19001 CITY: GREEN BAY STATE: WI ZIP: 54307-9001 BUSINESS PHONE: 9204334901 MAIL ADDRESS: STREET 1: 700 NORTH ADAMS STREET STREET 2: PO BOX 19001 CITY: GREEN BAY STATE: WI ZIP: 54307-9001 10-Q 1 ______________________________________________________________________________ ______________________________________________________________________________ SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission Registrant; State of Incorporation; IRS Employer File Number Address; and Telephone Number Identification No. - ----------- ----------------------------------- ------------------ 1-11337 WPS RESOURCES CORPORATION 39-1775292 (A Wisconsin Corporation) 700 North Adams Street P. O. Box 19001 Green Bay, WI 54307-9001 920-433-4901 1-3016 WISCONSIN PUBLIC SERVICE CORPORATION 39-0715160 (A Wisconsin Corporation) 700 North Adams Street P. O. Box 19001 Green Bay, WI 54307-9001 800-450-7260 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. WPS Resources Corporation Yes [x] No [ ] Wisconsin Public Service Corporation Yes [x] No [ ] Indicate the number of shares outstanding of each of the issuers' classes of common stock, as of the latest practicable date: WPS RESOURCES CORPORATION Common stock, $1 par value, 26,488,992 shares outstanding at April 30, 2000 WISCONSIN PUBLIC SERVICE CORPORATION Common stock, $4 par value, 23,896,962 shares outstanding at April 30, 2000 ______________________________________________________________________________ ______________________________________________________________________________ WPS RESOURCES CORPORATION AND WISCONSIN PUBLIC SERVICE CORPORATION FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2000 CONTENTS Page FORWARD-LOOKING STATEMENTS 3 PART I. FINANCIAL INFORMATION Item 1. Financial Statements WPS RESOURCES CORPORATION Consolidated Statements of Income, Comprehensive Income, and Retained Earnings 4 Consolidated Balance Sheets 5 Consolidated Statements of Capitalization 6 Consolidated Statements of Cash Flows 7 WISCONSIN PUBLIC SERVICE CORPORATION Consolidated Statements of Income and Comprehensive Income 8 Consolidated Balance Sheets 9 Consolidated Statements of Capitalization 10 Consolidated Statements of Cash Flows 11 Consolidated Statements of Retained Earnings 12 CONDENSED NOTES TO FINANCIAL STATEMENTS OF WPS Resources Corporation and Wisconsin Public Service Corporation 13 - 15 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations for WPS Resources Corporation 16 - 23 Wisconsin Public Service Corporation 24 - 26 Item 3. Quantitative and Qualitative Disclosures About Market Risk 26 - 28 PART II. OTHER INFORMATION Item 5. Other Information 29 - 30 Item 6. Exhibits and Reports on Form 8-K 30 Signatures 31 - 32 EXHIBIT INDEX 33 Exhibit 27 Financial Data Schedule WPS Resources Corporation Wisconsin Public Service Corporation -2- FORWARD-LOOKING STATEMENTS This report contains statements which are forward-looking. You can identify these statements by the fact that they do not relate strictly to historical or current facts and often include words such as "anticipate," "believe," "estimate," "expect," "intend," "plan," "project," and other similar words. Although we believe we have been prudent in our plans and assumptions, there can be no assurance that indicated results will be realized. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could vary materially from those anticipated. Forward-looking statements speak only as of the date on which they are made, and we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events, or otherwise. We recommend that you consult any further disclosures we make on related subjects in our 10-Q, 8-K, and 10-K reports to the Securities and Exchange Commission. The following is a cautionary list of risks and uncertainties that may affect the assumptions which form the basis of forward-looking statements relevant to our business. These factors, and other factors not listed here, could cause actual results to differ materially from those contained in forward-looking statements. - General economic, business, and regulatory conditions - Legislative and regulatory initiatives regarding deregulation and restructuring of the utility industry which could affect costs and investment recovery - State and federal rate regulation - Growth and competition and the extent and timing of new business development in the markets of subsidiary companies - The performance of projects undertaken by subsidiary companies - Business combinations among our competitors and customers - Energy supply and demand - Financial market conditions, including availability, terms, and use of capital - Nuclear and environmental issues - Weather and other natural phenomena - Commodity price and interest rate risk. -3- Part I. FINANCIAL INFORMATION Item 1. Financial Statements WPS RESOURCES CORPORATION
========================================================================================== CONSOLIDATED STATEMENTS OF INCOME, COMPREHENSIVE INCOME, Three Months Ended AND RETAINED EARNINGS March 31 (Thousands, except share amounts) 2000 1999 ========================================================================================== Operating revenues Electric utility $153,431 $142,393 Gas utility 76,187 68,299 Nonregulated energy and other 169,231 119,142 - ------------------------------------------------------------------------------------------ Total operating revenues 398,849 329,834 ========================================================================================== Operating expenses Electric production fuels 28,220 26,533 Purchased power 15,673 17,872 Gas purchased for resale 47,406 40,284 Nonregulated energy cost of sales 149,505 116,023 Other operating expenses 62,142 44,380 Maintenance 16,732 14,616 Depreciation and decommissioning 27,170 20,219 Taxes other than income 9,268 8,461 - ------------------------------------------------------------------------------------------ Total operating expenses 356,116 288,388 ========================================================================================== Operating income 42,733 41,446 - ------------------------------------------------------------------------------------------ Other income Allowance for equity funds used during construction 368 196 Other, net 6,196 2,315 - ------------------------------------------------------------------------------------------ Total other income 6,564 2,511 ========================================================================================== Income before interest expense 49,297 43,957 - ------------------------------------------------------------------------------------------ Interest on long-term debt 8,842 6,402 Other interest 3,437 919 Allowance for borrowed funds used during construction (1,104) (177) - ------------------------------------------------------------------------------------------ Total interest expense 11,175 7,144 ========================================================================================== Distributions - preferred securities of subsidiary trust 875 875 ========================================================================================== Income before income taxes 37,247 35,938 Income taxes 7,237 12,623 Minority interest - (215) Preferred stock dividends of subsidiaries 778 778 - ------------------------------------------------------------------------------------------ Net income 29,232 22,752 - ------------------------------------------------------------------------------------------ Other comprehensive income - - - ------------------------------------------------------------------------------------------ Comprehensive income 29,232 22,752 ========================================================================================== Retained earnings at beginning of period 341,701 335,154 Cash dividends on common stock 13,521 13,157 - ------------------------------------------------------------------------------------------ Retained earnings at end of period $357,412 $344,749 ========================================================================================== Average shares of common stock 26,634 26,520 Basic and diluted earnings per average share of common stock $1.10 $0.86 Dividend per share of common stock $0.505 $0.495 ==========================================================================================
The accompanying notes are an integral part of these statements. -4- WPS RESOURCES CORPORATION
============================================================================= CONSOLIDATED BALANCE SHEETS March 31 December 31 (Thousands) 2000 1999 ============================================================================= ASSETS - ----------------------------------------------------------------------------- Utility plant Electric $1,815,294 $1,797,832 Gas 287,163 285,048 Property under capital lease 74,130 74,130 - ----------------------------------------------------------------------------- Net 2,176,587 2,157,010 Less - Accumulated depreciation and decommissioning 1,321,217 1,293,354 - ----------------------------------------------------------------------------- Total 855,370 863,656 Nuclear decommissioning trusts 207,791 198,052 Construction in progress 82,595 74,187 Nuclear fuel, less accumulated amortization 18,788 15,007 - ----------------------------------------------------------------------------- Net utility plant 1,164,544 1,150,902 ============================================================================= Current assets Cash and equivalents 16,767 10,547 Customer and other receivables, net of reserves 158,441 132,355 Accrued utility revenues 32,321 38,533 Fossil fuel, at average cost 20,847 24,657 Gas in storage, at average cost 11,482 29,344 Materials and supplies, at average cost 28,622 28,618 Assets from risk management activities 98,462 - Prepayments and other 23,180 28,871 - ----------------------------------------------------------------------------- Total current assets 390,122 292,925 ============================================================================= Regulatory assets 67,701 70,490 Net nonutility and nonregulated plant 134,274 168,143 Pension assets 69,089 65,622 Investments and other assets 116,685 68,466 ============================================================================= Total $1,942,415 $1,816,548 ============================================================================= CAPITALIZATION AND LIABILITIES - ----------------------------------------------------------------------------- Capitalization Common stock equity $ 542,125 $ 536,300 Preferred stock of subsidiary with no mandatory redemption 51,190 51,193 Company-obligated mandatorily redeemable trust preferred securities of subsidiary trust holding solely WPS Resources 7.00% subordinated debentures 50,000 50,000 Long-term capital lease obligation 73,483 73,585 Long-term debt 510,891 510,917 - ----------------------------------------------------------------------------- Total capitalization 1,227,689 1,221,995 ============================================================================= Current liabilities Current portion of long-term debt and capital lease obligation 1,362 1,362 Notes payable 10,100 10,403 Commercial paper 45,950 79,855 Accounts payable 137,203 103,437 Accrued taxes 10,221 9,844 Accrued interest 11,126 7,561 Liabilities from risk management activities 98,272 - Other 36,364 21,099 - ----------------------------------------------------------------------------- Total current liabilities 350,598 233,561 ============================================================================= Long-term liabilities and deferred credits Accumulated deferred income taxes 112,782 111,092 Accumulated deferred investment tax credits 25,300 25,748 Regulatory liabilities 62,460 64,148 Environmental remediation liabilities 40,427 40,557 Postretirement health care liability 48,419 47,115 Other long-term liabilities 74,740 72,332 - ----------------------------------------------------------------------------- Total long-term liabilities and deferred credits 364,128 360,992 ============================================================================= Total $1,942,415 $1,816,548 =============================================================================
The accompanying notes are an integral part of these statements. -5- WPS RESOURCES CORPORATION
=============================================================================================== CONSOLIDATED STATEMENTS OF CAPITALIZATION March 31 December 31 (Thousands, except share amounts) 2000 1999 =============================================================================================== Common stock equity Common stock, $1 par value, 100,000,000 shares authorized; 26,851,045 shares outstanding $ 26,851 $ 26,851 Premium on capital stock 172,108 172,108 Retained earnings 357,412 341,701 Treasury stock, 376,500 shares at average cost of $25.08 at March 31, 2000 (9,442) - Shares in deferred compensation trust, 86,756 and 71,097 shares at average cost of $29.14 and $30.04 per share at March 31, 2000 and December 31, 1999, respectively (2,528) (2,136) Employee Stock Ownership Plan loan guarantees (2,276) (2,224) - ----------------------------------------------------------------------------------------------- Total common stock equity 542,125 536,300 =============================================================================================== Preferred stock - Wisconsin Public Service Corporation Cumulative, $100 par value, 1,000,000 shares authorized; with no mandatory redemption Shares Outstanding ----------------------- March 31 December 31 Series 2000 1999 ------ -------- ----------- 5.00% 131,930 131,950 13,193 13,195 5.04% 29,980 29,980 2,998 2,998 5.08% 49,990 50,000 4,999 5,000 6.76% 150,000 150,000 15,000 15,000 6.88% 150,000 150,000 15,000 15,000 - ----------------------------------------------------------------------------------------------- Total preferred stock with no mandatory redemption 51,190 51,193 =============================================================================================== Company-obligated mandatorily redeemable trust preferred securities of subsidiary trust holding solely WPSR 7.00% subordinated debentures 50,000 50,000 =============================================================================================== Capital lease obligation - Wisconsin Public Service Corporation 73,902 74,004 Less current portion (419) (419) - ----------------------------------------------------------------------------------------------- Net capital lease obligation 73,483 73,585 =============================================================================================== Long-term debt First mortgage bonds - Wisconsin Public Service Corporation Series Year Due ------ -------- 7.30% 2002 50,000 50,000 6.80% 2003 50,000 50,000 6-1/8% 2005 9,075 9,075 6.90% 2013 22,000 22,000 8.80% 2021 53,100 53,100 7-1/8% 2023 50,000 50,000 6.08% 2028 50,000 50,000 First mortgage bonds - Upper Peninsula Power Company Series Year Due ------ -------- 7.94% 2003 15,000 15,000 10.0% 2008 4,800 4,800 9.32% 2021 18,000 18,000 Unsecured senior notes - WPS Resources Corporation Series Year Due ------ -------- 7.00% 2009 150,000 150,000 Term loan - nonrecourse, secured by nonregulated assets of PDI New England and PDI Canada Series Year Due ------ -------- 8.75% 2010 24,000 24,000 Employee Stock Ownership Plan loan guarantees 2,276 2,224 Notes payable to bank, secured by nonregulated plant 11,117 11,136 Senior secured note 3,634 3,722 Other long-term debt 142 142 - ----------------------------------------------------------------------------------------------- Total 513,144 513,199 Unamortized discount and premium on bonds and debt securities, net (1,310) (1,339) - ----------------------------------------------------------------------------------------------- Total long-term debt 511,834 511,860 Less current portion (943) (943) - ----------------------------------------------------------------------------------------------- Net long-term debt 510,891 510,917 =============================================================================================== Total capitalization $1,227,689 $1,221,995 ===============================================================================================
The accompanying notes are an integral part of these statements. -6- WPS RESOURCES CORPORATION
============================================================================================ CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended (Thousands) March 31 2000 1999 ============================================================================================ Cash flows from operating activities Net income $ 29,232 $ 22,752 Adjustments to reconcile net income to net cash from operating activities Depreciation and decommissioning 27,170 20,219 Amortization of nuclear fuel and other 3,891 3,717 Deferred income taxes 997 (617) Investment tax credit restored (448) (60) Allowance for equity funds used during construction (368) (196) Pension income (3,467) (1,542) Postretirement funding 1,304 1,117 Other, net 4,377 5,792 Changes in Customer and other receivables (26,086) 356 Accrued utility revenues 6,212 2,941 Fossil fuel inventory 3,810 (1,776) Gas in storage 17,862 17,209 Accounts payable 33,766 (21,814) Accrued taxes 377 10,449 Miscellaneous current and accrued liabilities 15,656 14,094 - -------------------------------------------------------------------------------------------- Net cash from operating activities 114,285 72,641 ============================================================================================ Cash flows from (used for) investing activities Construction of utility plant and nuclear fuel expenditures (34,276) (20,924) Purchase of other property and equipment (8,034) (620) Decommissioning funding (1,612) (2,273) Other (6,615) (260) - -------------------------------------------------------------------------------------------- Net cash used for investing activities (50,537) (24,077) ============================================================================================ Cash flows from (used for) financing activities Issuance of notes payable - 34,250 Redemptions of notes payable (303) (36,650) Issuance of other long-term debt 225 237 Redemptions of other long-term debt (107) - Issuance of commercial paper 259,508 687,595 Redemptions of commercial paper (293,413) (721,185) Cash dividends on common stock (13,521) (13,157) Issuance of common stock - 2,539 Purchase of treasury and deferred compensation shares (9,834) (133) Other (83) - - -------------------------------------------------------------------------------------------- Net cash used for financing activities (57,528) (46,504) ============================================================================================ Net increase in cash and equivalents 6,220 2,060 Cash and equivalents at beginning of period 10,547 7,134 ============================================================================================ Cash and equivalents at end of period $ 16,767 $ 9,194 ============================================================================================ Cash paid during period for Interest, less amount capitalized $ 10,129 $ 8,926 Income taxes 7,831 1,306 Preferred stock dividends of subsidiaries 778 778 ============================================================================================
The accompanying notes are an integral part of these statements. -7- WISCONSIN PUBLIC SERVICE CORPORATION
================================================================================ CONSOLIDATED STATEMENTS OF INCOME Three Months Ended AND COMPREHENSIVE INCOME March 31 (Thousands) 2000 1999 ================================================================================ Operating revenues Electric $140,920 $127,537 Gas 76,187 68,299 - -------------------------------------------------------------------------------- Total operating revenues 217,107 195,836 ================================================================================ Operating expenses Electric production fuels 28,159 26,487 Purchased power 13,983 13,287 Gas purchased for resale 47,634 39,871 Other operating expenses 38,812 36,046 Maintenance 15,714 14,063 Depreciation and decommissioning 23,020 17,977 Federal income taxes 11,608 10,834 Investment tax credit restored (401) (402) State income taxes 2,783 2,646 Gross receipts tax and other 7,626 6,987 - -------------------------------------------------------------------------------- Total operating expenses 188,938 167,796 ================================================================================ Operating income 28,169 28,040 - -------------------------------------------------------------------------------- Other income and (deductions) Allowance for equity funds used during construction 368 196 Other, net 6,197 2,295 Income taxes (106) (381) - -------------------------------------------------------------------------------- Total other income 6,459 2,110 ================================================================================ Income before interest expense 34,628 30,150 - -------------------------------------------------------------------------------- Interest expense Interest on long-term debt 5,460 5,465 Other interest 2,209 707 Allowance for borrowed funds used during construction (1,104) (177) - -------------------------------------------------------------------------------- Total interest expense 6,565 5,995 ================================================================================ Net income 28,063 24,155 Preferred stock dividend requirements 778 778 - -------------------------------------------------------------------------------- Earnings on common stock 27,285 23,377 ================================================================================ Other comprehensive income - - Comprehensive income $ 27,285 $ 23,377 ================================================================================
The accompanying notes are an integral part of these statements. -8- WISCONSIN PUBLIC SERVICE CORPORATION
================================================================================================= CONSOLIDATED BALANCE SHEETS March 31 December 31 (Thousands) 2000 1999 ================================================================================================= ASSETS - ------------------------------------------------------------------------------------------------- Utility plant Electric $1,627,747 $1,611,543 Gas 287,163 285,048 Property under capital lease 74,130 74,130 - ------------------------------------------------------------------------------------------------- Total 1,989,040 1,970,721 Less - Accumulated depreciation and decommissioning 1,228,735 1,202,725 - ------------------------------------------------------------------------------------------------- Total 760,305 767,996 Nuclear decommissioning trusts 207,791 198,052 Construction in progress 76,584 67,831 Nuclear fuel, less accumulated amortization 18,788 15,007 - ------------------------------------------------------------------------------------------------- Net utility plant 1,063,468 1,048,886 ================================================================================================= Current assets Cash and equivalents 2,256 3,428 Customer and other receivables, net of reserves 66,713 70,940 Accrued utility revenues 29,485 36,132 Fossil fuel, at average cost 13,358 15,134 Gas in storage, at average cost 4,117 18,776 Materials and supplies, at average cost 23,342 21,302 Prepayments and other 16,204 20,734 - ------------------------------------------------------------------------------------------------- Total current assets 155,475 186,446 ================================================================================================= Regulatory assets 65,003 68,169 Net nonutility plant 1,317 1,294 Pension assets 69,089 65,622 Investments and other assets 40,589 39,468 ================================================================================================= Total $1,394,941 $1,409,885 ================================================================================================= CAPITALIZATION AND LIABILITIES - ------------------------------------------------------------------------------------------------- Capitalization Common stock equity $ 508,896 $ 525,128 Preferred stock with no mandatory redemption 51,190 51,193 Capital lease obligation 73,483 73,585 Long-term debt to parent 13,706 13,780 Long-term debt 285,849 285,783 - ------------------------------------------------------------------------------------------------- Total capitalization 933,124 949,469 ================================================================================================= Current liabilities Current portion of capital lease obligation 419 419 Note payable 10,000 10,000 Commercial paper 26,000 40,000 Accounts payable 57,366 52,654 Accrued interest and taxes 11,542 12,819 Other 22,149 13,118 - ------------------------------------------------------------------------------------------------- Total current liabilities 127,476 129,010 ================================================================================================= Long-term liabilities and deferred credits Accumulated deferred income taxes 109,140 107,516 Accumulated deferred investment tax credits 23,149 23,551 Regulatory liabilities 55,037 56,728 Environmental remediation liabilities 38,502 38,632 Postretirement health care liability 48,419 47,115 Other long-term liabilities 60,094 57,864 - ------------------------------------------------------------------------------------------------- Total long-term liabilities and deferred credits 334,341 331,406 ================================================================================================= Total $1,394,941 $1,409,885 =================================================================================================
The accompanying notes are an integral part of these statements. -9- WISCONSIN PUBLIC SERVICE CORPORATION
================================================================================== CONSOLIDATED STATEMENTS OF CAPITALIZATION March 31 December 31 (Thousands, except share amounts) 2000 1999 ================================================================================== Common stock equity Common stock $ 95,588 $ 95,588 Premium on capital stock 167,877 167,842 Retained earnings 247,707 263,922 Employee Stock Ownership Plan loan guarantees (2,276) (2,224) - ---------------------------------------------------------------------------------- Total common stock equity 508,896 525,128 ================================================================================== Preferred stock Cumulative, $100 par value, 1,000,000 shares authorized; with no mandatory redemption Shares Outstanding ----------------------- March 31 December 31 Series 2000 1999 ------ -------- ----------- 5.00% 131,930 131,950 13,193 13,195 5.04% 29,980 29,980 2,998 2,998 5.08% 49,990 50,000 4,999 5,000 6.76% 150,000 150,000 15,000 15,000 6.88% 150,000 150,000 15,000 15,000 - ---------------------------------------------------------------------------------- Total preferred stock 51,190 51,193 ================================================================================== Capital lease obligation 73,902 74,004 Less current portion 419 419 - ---------------------------------------------------------------------------------- Net capital lease obligation 73,483 73,585 ================================================================================== Long-term debt to parent Series Year Due ------ -------- 8.76% 2015 5,662 5,693 7.35% 2016 8,044 8,087 - ---------------------------------------------------------------------------------- Total long-term debt to parent 13,706 13,780 ================================================================================== Long-term debt First mortgage bonds Series Year Due ------ -------- 7.30% 2002 50,000 50,000 6.80% 2003 50,000 50,000 6-1/8% 2005 9,075 9,075 6.90% 2013 22,000 22,000 8.80% 2021 53,100 53,100 7-1/8% 2023 50,000 50,000 6.08% 2028 50,000 50,000 - ---------------------------------------------------------------------------------- Total 284,175 284,175 Unamortized discount and premium on bonds, net (744) (758) - ---------------------------------------------------------------------------------- Total first mortgage bonds 283,431 283,417 - ---------------------------------------------------------------------------------- Employee Stock Ownership Plan loan guarantees 2,276 2,224 Other long-term debt 142 142 - ---------------------------------------------------------------------------------- Total long-term debt 285,849 285,783 ================================================================================== Total capitalization $933,124 $949,469 ==================================================================================
The accompanying notes are an integral part of these statements. -10- WISCONSIN PUBLIC SERVICE CORPORATION
================================================================================== CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended (Thousands) March 31 2000 1999 ================================================================================== Cash flows from operating activities Net income $ 28,063 $ 24,155 Adjustments to reconcile net income to net cash from operating activities Depreciation and decommissioning 23,020 17,977 Amortization of nuclear fuel and other 3,484 3,558 Deferred income taxes 931 (803) Investment tax credit restored (402) (15) Allowance for equity funds used during construction (368) (196) Pension income (3,467) (1,542) Postretirement funding 1,304 1,117 Other, net (785) 1,016 Changes in Customer and other receivables 4,227 (4,976) Accrued utility revenues 6,647 2,371 Fossil fuel inventory 1,776 (1,772) Gas in storage 14,659 12,266 Accounts payable 4,712 (11,711) Miscellaneous current and accrued liabilities 7,202 12,133 Accrued taxes 200 11,754 - ---------------------------------------------------------------------------------- Net cash from operating activities 91,203 65,332 ================================================================================== Cash flows from (used for) investing activities Construction of utility plant and nuclear fuel expenditures (33,220) (19,899) Decommissioning funding (1,612) (2,273) Purchase of other property and equipment (24) (54) Other 881 (318) - ---------------------------------------------------------------------------------- Net cash used for investing activities (33,975) (22,544) ================================================================================== Cash flows from (used for) financing activities Proceeds from issuance of commercial paper 111,000 104,000 Redemptions of commercial paper (125,000) (115,000) Dividend to parent (43,500) (27,500) Preferred stock dividends (778) (778) Other (122) - - ---------------------------------------------------------------------------------- Net cash used for financing activities (58,400) (39,278) ================================================================================== Net increase (decrease) in cash and equivalents (1,172) 3,510 Cash and equivalents at beginning of period 3,428 1,882 ================================================================================== Cash and equivalents at end of period $ 2,256 $ 5,392 ================================================================================== Cash paid during period for Interest, less amount capitalized $ 7,450 $ 7,093 Income taxes 7,285 2,262 ==================================================================================
The accompanying notes are an integral part of these statements. -11- WISCONSIN PUBLIC SERVICE CORPORATION
======================================================================================= CONSOLIDATED STATEMENTS OF RETAINED EARNINGS Three Months Ended (Thousands) March 31 2000 1999 ======================================================================================= Balance at beginning of period $263,922 $284,726 Add Net income 28,063 24,155 - --------------------------------------------------------------------------------------- 291,985 308,881 - --------------------------------------------------------------------------------------- Deduct Cash dividends declared on preferred stock 778 778 Dividend to parent 43,500 27,500 - --------------------------------------------------------------------------------------- 44,278 28,278 - --------------------------------------------------------------------------------------- Balance at end of period $247,707 $280,603 =======================================================================================
The accompanying notes are an integral part of these statements. -12- WPS RESOURCES CORPORATION AND SUBSIDIARIES WISCONSIN PUBLIC SERVICE CORPORATION CONDENSED NOTES TO FINANCIAL STATEMENTS MARCH 31, 2000 NOTE 1. FINANCIAL INFORMATION ______________________________ We have prepared the consolidated financial statements of WPS Resources Corporation and Wisconsin Public Service Corporation under the rules and regulations of the Securities and Exchange Commission. These financial statements have not been audited. Management believes that these financial statements include all normal recurring adjustments which are necessary for a fair presentation of the financial results for each period shown. We have condensed or omitted certain information and footnote disclosures normally included in financial statements prepared under generally accepted accounting principles. We believe that the disclosures made are adequate to make the information presented not misleading. These financial statements should be read along with the financial statements and notes included with our latest annual Form 10-K report. Because of the seasonal nature of utility operations, the results reported for the quarter may not be representative of annual results. NOTE 2. PRICE RISK MANAGEMENT ACTIVITIES _________________________________________ In November 1998, the Emerging Issues Task Force reached a consensus on Issue 98-10, "Accounting for Contracts Involved in Energy Trading and Risk Management Activities." Issue 98-10 requires energy trading contracts to be recorded at fair value on the balance sheet, with changes in fair value included in earnings. Issue 98-10 became effective on January 1, 1999. There was no accounting impact on the effective date because we concluded that the energy contracts of WPS Energy Services did not meet the definition of energy trading contracts under Issue 98-10. WPS Energy Services periodically reevaluates whether its contracts meet the definition of energy trading under Issue 98-10. Primarily as a result of changes in strategic focus in the first quarter of 2000 that resulted in a shift in customer mix more to wholesale than retail, we have concluded that WPS Energy Services meets more of the characteristics of an energy trading operation as defined by Issue 98-10. Therefore, WPS Energy Services began to mark-to-market its energy contracts in the first quarter of 2000, including gas in storage. The impact on the balance sheet as of March 31, 2000 was to record a current asset called, "Assets from Risk Management Activities," of $98.5 million which represents gains based on the fair value of energy contracts and a current liability called, "Liabilities from Risk Management Activities," of $98.3 million which represents losses based on the fair value of energy contracts. The impact on the income statement was not material. Net changes in the fair market value of energy contracts are reported in nonregulated energy cost of sales. Going forward, we expect the change in classification of our energy contracts will increase volatility in WPS Energy Services' balance sheet because of the effect on both assets and liabilities. Volatility in the income statement may increase as well. -13- In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement requires all derivatives to be measured at fair value and recognized as either assets or liabilities in the statement of financial position. The accounting for changes in the fair value of a derivative depends upon the use of the derivative and its resulting designation. Unless specific hedge accounting criteria are met, changes in the derivative's fair value must be recognized currently in earnings. In June 1999, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 137. This new statement delays the effective date of Standard No. 133 to fiscal periods beginning after June 15, 2000. We will be adopting Statement No. 133 on January 1, 2001. We have certain fixed price contracts for future purchases of commodities in our utility business that may be considered derivatives under Statement No. 133. We believe these contracts would qualify as hedges under current interpretations. Based on the limited number of contracts as of December 31, 1999, we do not expect the amount of derivative assets and liabilities that would be recognized on our balance sheet to be significant. An exposure draft was issued March 3, 2000 and if adopted as a final standard amending Statement No. 133, would result in even fewer of the utilities' commodity contracts being defined as derivatives. The adoption of Statement No. 133 is not expected to have a material effect on WPS Energy Services because we do not anticipate designating any derivative contracts as hedges and will continue to mark our energy trading contracts to market according to Issue 98-10. NOTE 3. SEGMENTS OF BUSINESS _____________________________ We manage our reportable segments separately due to their different operating and regulatory environments. Our principal business segments are the regulated electric utility operations of Wisconsin Public Service Corporation and Upper Peninsula Power Company and the regulated gas utility operations of Wisconsin Public Service. Our other reportable segments include WPS Energy Services and WPS Power Development. WPS Energy Services is a diversified energy supply and services company, and WPS Power Development is an electric generation asset development company. The table below presents summary information pertaining to our operations segmented by lines of business. We restated 1999 data for comparative purposes due to changes in our reportable segments. The changes include adding a utility subtotal column and separating WPS Power Development from Other due to its increase in significance. -14-
Nonutility and Regulated Utilities Nonregulated Operations ------------------- ----------------------- Segments of WPS WPS Business Total Energy WPS Power Reconciling Resources (Thousands) Electric Gas Utility Services Development Other Eliminations Consolidated - ----------- -------- --- ------- -------- ----------- ----- ------------ ------------ Quarter Ended March 31, 2000 - ------------------ Operating revenues $157,993 $76,187 $234,180 $145,990 $29,024 $ 3,209 $(13,554) $398,849 Net income (loss) 20,210 8,498 28,708 513 1,041 (1,030) - 29,232 Quarter Ended March 31, 1999 - ------------------ Operating revenues $144,140 $68,299 $212,439 $115,422 $ 4,074 $ 1,130 $ (3,231) $329,834 Net income (loss) 15,362 9,345 24,707 (834) (835) (286) - 22,752
-15- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS - WPS RESOURCES CORPORATION WPS Resources Corporation is a holding company. Our wholly-owned subsidiaries include two regulated utilities, Wisconsin Public Service Corporation and Upper Peninsula Power Company. Another wholly-owned subsidiary, WPS Resources Capital Corporation, is a holding company for our nonregulated businesses including WPS Energy Services, Inc. and WPS Power Development, Inc. Approximately 72% of our assets at March 31, 2000, was derived from Wisconsin Public Service, an electric and gas utility. Approximately 98% of our net income for the first three months of 2000 was derived from electric and gas utility operations. FIRST QUARTER 2000 COMPARED WITH FIRST QUARTER 1999 WPS RESOURCES OVERVIEW WPS Resources' first quarter 2000 and first quarter 1999 results of operations are shown in the following chart: First Quarter ------------------------------ WPS Resources' Results Percent (Millions, except share amounts) 2000 1999 Change - -------------------------------- ---- ---- ------- Consolidated operating revenues $398.8 $329.8 20.9 Net income 29.2 22.8 28.1 Basic and diluted earnings per share $1.10 $0.86 27.9 The primary reasons for the higher income were increases in the electric utility margin and in WPS Energy Services' gas margin. Tax credits received at WPS Power Development also contributed to higher income. Partially offsetting these factors were increases in operating, maintenance, and interest expenses. OVERVIEW OF UTILITY OPERATIONS (WISCONSIN PUBLIC SERVICE AND UPPER PENINSULA POWER) Revenues and income for our utility operations are shown in the following chart: -16- First Quarter ------------------------------ Percent Results (Millions) 2000 1999 Change - ------------------ ---- ---- ------- Wisconsin Public Service Operating revenues $217.1 $195.8 10.9 Net income 27.3 23.4 16.7 - --------------------------------------------------------------------------- Upper Peninsula Power Operating revenues $ 17.1 $ 16.6 3.0 Net income 1.4 1.3 7.7 - --------------------------------------------------------------------------- ELECTRIC UTILITY OPERATIONS (WISCONSIN PUBLIC SERVICE AND UPPER PENINSULA POWER) Our consolidated electric utility margin increased $11.6 million, or 11.8%, primarily due to increased sales at Wisconsin Public Service and recognition of additional revenue in the second year of its 1999-2000 biennial rate increase. Wisconsin Public Service implemented a 6.3% Wisconsin retail electric rate increase on January 15, 1999 and received an additional 4.6% Wisconsin retail electric rate increase effective January 1, 2000, primarily to recover additional fuel and purchased power costs for the year. First Quarter WPS Resources' Consolidated ------------------------ Electric Utility Results (Thousands) 2000 1999 - ------------------------------------ ---- ---- Revenues $153,431 $142,393 Fuel and purchased power costs 43,893 44,405 ------- ------- Margins $109,538 $ 97,988 ======= ======= Sales in kilowatt-hours 3,138,910 3,144,714 Our consolidated electric utility revenues increased $11.0 million, or 7.8%. Electric utility revenues at Wisconsin Public Service were up 10.5% largely due to the Wisconsin retail electric rate increases and a 4.1% increase in sales to commercial and industrial customers. Our consolidated fuel expense increased $1.7 million, or 6.4%, due to increased production at Wisconsin Public Service's combustion turbine generating plants. Our consolidated purchased power expense decreased $2.2 million, or 12.3%, primarily due to a 1.6% decrease in purchase requirements at Wisconsin Public Service coupled with a 7.0% increase in the cost of purchases. The Public Service Commission of Wisconsin allows Wisconsin Public Service to adjust prospectively the amount billed to Wisconsin retail customers for fuel and purchased power if costs fall outside a specified range. Wisconsin Public Service is required to file an application to adjust rates either higher or lower when costs are plus or minus 2.0% from forecasted costs on an annualized -17- basis. Forecasted annual 2000 fuel costs at March 31, 2000 are expected to be within this 2.0% window. GAS UTILITY OPERATIONS (WISCONSIN PUBLIC SERVICE) The consolidated gas utility margin represents gas revenues less purchases exclusive of intercompany transactions. The gas utility margin at Wisconsin Public Service remained relatively stable for the first quarter of 2000 compared with the first quarter of 1999. First Quarter Wisconsin Public Service's ---------------------------- Gas Utility Results (Thousands) 2000 1999 - ------------------------------- ---- ---- Revenues $76,187 $68,299 Purchase costs 47,634 39,871 ------ ------ Margin $28,553 $28,428 ====== ====== Volume in therms 247,520 250,885 Wisconsin Public Service's gas revenues increased $7.9 million, or 11.5%, while overall therm sales decreased 1.3%. Gas revenues increased as the result of the January 15, 1999 implementation of a 5.1% increase in Wisconsin retail gas rates. The rates were effective for the entire first quarter of 2000 but for only a portion of the first quarter of 1999. Weather in the first quarter of 2000 was 1.2% warmer than in the first quarter of 1999, and was 10.6% warmer than normal. Wisconsin Public Service's gas purchase costs increased $7.8 million, or 19.5%. This increase resulted from higher gas costs of 21.6% in the first quarter of 2000. Under current regulatory practice, the Public Service Commission of Wisconsin and the Michigan Public Service Commission allow Wisconsin Public Service to pass changes in the cost of gas on to customers through a purchased gas adjustment clause. OTHER UTILITY EXPENSES (WISCONSIN PUBLIC SERVICE AND UPPER PENINSULA POWER) Other operating expenses at Wisconsin Public Service increased $2.8 million, or 7.7%, primarily due to increased charges for the transmission of electricity and to higher meter costs. Maintenance expense at Wisconsin Public Service increased $1.7 million as a result of additional maintenance activities at several of its power plants in preparation for summer demand and more maintenance of overhead lines. Maintenance expense at Upper Peninsula Power increased $0.5 million primarily due to storm damage repairs. -18- OVERVIEW OF NONUTILITY AND NONREGULATED OPERATIONS Nonregulated operations include the gas and electric sales at WPS Energy Services, Inc., a diversified energy supply and services company and the operations of WPS Power Development, Inc., an electric generation asset development company. Nonregulated operations also include those of WPS Resources and WPS Resources Capital Corporation as holding companies. Nonutility operations refer to the activities of Wisconsin Public Service and Upper Peninsula Power which do not fall under utility regulation. Nonutility and nonregulated operations experienced income of $0.5 million in the first quarter of 2000 compared with a loss of $1.9 million in the first quarter of 1999. OVERVIEW OF WPS ENERGY SERVICES Revenues at WPS Energy Services were $146.0 million in the first quarter of 2000 compared with $115.4 million in the first quarter of 1999, an increase of 26.5%. WPS Energy Services experienced earnings of $0.5 million in the first quarter of 2000 compared with a loss of $0.8 million in the first quarter of 1999. The primary reason for the increase in income was improved gas margins in 2000. WPS ENERGY SERVICES' MARGINS Gas margins at WPS Energy Services were $3.7 million in the first quarter of 2000 compared with $1.7 million in the first quarter of 1999. Gas revenues at WPS Energy Services were $142.4 million in the first quarter of 2000 compared with $114.5 million in the first quarter of 1999, an increase of 24.4%. This increase was the result of additional sales in the retail and wholesale markets. Electric margins at WPS Energy Services increased $0.3 million in the first quarter of 2000 compared with the first quarter of 1999. Electric revenues at WPS Energy Services were $3.2 million in the first quarter of 2000 and $0.8 million in the first quarter of 1999. This increase was the result of additional retail electric sales in Maine and Pennsylvania associated with the WPS Power Development assets that were acquired in the second and fourth quarter of 1999. WPS Energy Services' cost of sales was $141.5 million in the first quarter of 2000 compared with $113.5 million in the first quarter of 1999, an increase of 24.7%. This increase was due to higher gas purchases of $25.9 million and higher electric purchases of $2.1 million, both due primarily to increased sales. WPS ENERGY SERVICES' OTHER EXPENSES/INCOME Operating expenses at WPS Energy Services increased $0.6 million in the first quarter of 2000 compared with the first quarter of 1999 due to more payroll and other operational costs associated with business expansion. -19- WPS ENERGY SERVICES' PRICE RISK MANAGEMENT ACTIVITIES WPS Energy Services uses derivative financial and commodity instruments to reduce market risk associated with the changing prices of natural gas and electricity sold at firm prices to customers. WPS Energy Services also uses derivatives to manage market risk associated with anticipated energy purchases, as well as trading activities. Derivatives may include futures and forward contracts, basis swap agreements, or call and put options. WPS Energy Services adopted the Emerging Issues Task Force Issue 98-10, "Accounting for Contracts Involved in Energy Trading and Risk Management Activities," on January 1, 1999. No accounting impact occurred at that time because management concluded that WPS Energy Services did not meet the definition of a trading company under Issue 98-10. WPS Energy Services periodically reevaluates whether its contracts meet the definition of energy trading under Issue 98-10. Primarily as a result of changes in strategic focus in the first quarter of 2000 that resulted in a shift in customer mix more to wholesale than retail, we have concluded that WPS Energy Services meets more of the characteristics of an energy trading operation as defined by Issue 98-10. Therefore, WPS Energy Services began to mark-to-market its energy contracts in the first quarter of 2000, including gas in storage. The impact on the balance sheet as of March 31, 2000 was to record a current asset called, "Assets from Risk Management Activities," of $98.5 million which represents gains based on the fair value of energy contracts and a current liability called, "Liabilities from Risk Management Activities," of $98.3 million which represents losses based on the fair value of energy contracts. The impact on the income statement was not material. Net changes in the fair market value of energy contracts are reported in nonregulated energy cost of sales. Going forward, we expect the change in classification of our energy contracts will increase volatility in WPS Energy Services' balance sheet because of the effect on both assets and liabilities. Volatility in the income statement may increase as well. OVERVIEW OF WPS POWER DEVELOPMENT Income at WPS Power Development was $1.0 million in the first quarter of 2000 compared with a loss of $0.8 million in the first quarter of 1999. The increase in income was primarily due to additional tax credits of approximately $4.7 million received in the first quarter of 2000 from the ECO #12 synthetic fuel operation. Production at ECO #12 was higher than anticipated in the first quarter of 2000 because we were able to take advantage of good weather and spot contracts for the sale of synthetic fuel. We do not expect to maintain spot sales at this level during the second quarter as we evaluate options for this portable equipment. The evaluation is resulting from the mine operator filing Chapter 7 bankruptcy. In addition, WPS Power Development realized income of $0.9 million in the first quarter of 2000 as a result of an equity contribution in the ECO #12 synthetic fuel project by the minority owner. Prior to this transaction, WPS Power Development had been recording 100% of the operating losses of this project because the minority owner's equity had been reduced to zero, but had been allocated only 66.7% of the tax credits. Beginning in 2000, WPS Power Development is receiving 100% of the tax credits and operating results from the project until the minority owner is able to contribute further capital to fund its share of the operating costs. -20- WPS Power Development experienced an increase of $10.1 million in its margin on operating generation facilities in the first quarter of 2000. This increase was largely due to the operation of the electric generation assets acquired in Maine and Canada in the second quarter of 1999 and Pennsylvania in the fourth quarter of 1999. Other operating expenses at WPS Power Development increased $13.6 million due to operating expenses related to the generation assets acquired in 1999, including a major overhaul of two generation units at the Sunbury plant, and to higher operating expenses at ECO #12. OVERVIEW OF OTHER NONUTILITY AND NONREGULATED OPERATIONS Other nonutility and nonregulated operations include the activities at Wisconsin Public Service and Upper Peninsula Power that are not regulated and the operations of WPS Resources and WPS Resources Capital as holding companies. Other nonutility and nonregulated operations experienced a loss of $1.0 million in the first quarter of 2000 compared with a loss of $0.3 million in the first quarter of 1999. This increase in losses was primarily due to higher interest expense of $2.6 million at WPS Resources holding company due to increased financing to provide capital for nonregulated projects. FINANCIAL CONDITION - WPS RESOURCES INVESTMENTS AND FINANCING Special common stock dividends of $30.0 million were paid by Wisconsin Public Service to WPS Resources in the first quarter of 2000. These special dividends allowed Wisconsin Public Service's average equity capitalization ratio for ratemaking to remain at its target level as established by the Public Service Commission of Wisconsin in its most recent rate order. Internally generated funds exceeded cash requirements in the first quarter of 2000 and short-term borrowings decreased $34.2 million. Our pretax interest coverage was 2.99 times for the 12 months ended March 31, 2000. See the table below for WPS Resources' credit ratings. Credit Ratings Standard & Poor's Moody's - -------------- ----------------- ------- WPS Resources Corporation Senior unsecured debt AA Aa3 Commercial paper A1+ P1 Trust preferred securities A+ aa3 WPS Resources Capital Corporation Unsecured debt* AA Aa3 Wisconsin Public Service Corporation Bonds AA+ Aa1 Preferred stock AA aa2 Commercial paper A1+ P1 * No securities currently outstanding. We normally use internally-generated funds and short-term borrowing to satisfy most of our capital requirements. We may periodically issue additional long-term debt and common stock to reduce short-term debt and to maintain desired capitalization ratios. -21- The specific forms of financing, amounts, and timing will depend on the availability of projects, market conditions, and other factors. In October 1999 we filed a shelf registration with the Securities and Exchange Commission which allows the issuance of $400.0 million in the aggregate of public long-term debt and common stock. Long-term debt of $150.0 million has been issued under the shelf registration. We repurchased $9.8 million of common stock for our stock option plan and other corporate purposes including the employee stock ownership plan. We may expand our employee stock ownership plan during the next three-year period. Wisconsin Public Service makes large investments in capital assets. Construction expenditures for Wisconsin Public Service are expected to be approximately $530.0 million in the aggregate for the 2000 through 2002 period. This includes expenditures for the replacement of the Kewaunee Nuclear Power Plant steam generators and construction of a proposed transmission line between Wausau, Wisconsin and Duluth, Minnesota. In addition, other capital requirements for Wisconsin Public Service for the three-year period will include contributions of approximately $14.1 million to the Kewaunee Nuclear Power Plant decommissioning trust fund. Wisconsin Public Service's agreement to purchase electricity from the De Pere Energy Center, a gas-fired cogeneration facility, is accounted for as a capital lease. Upper Peninsula Power is expected to incur construction expenditures of about $22.0 million in the aggregate for the period 2000 through 2002, primarily for electric distribution improvements. In April 2000, Sunbury Generation, LLC, an indirect subsidiary of WPS Power Development, obtained $83.7 million of nonrecourse financing which is secured by the Sunbury Generation plant. Other investment expenditures for nonregulated projects are uncertain. Financing for most nonregulated projects is expected to be obtained through nonrecourse project financing and/or through WPS Resources Capital Corporation. ELECTRIC RELIABILITY WPS Resources purchased a summer 50-megawatt fixed-price physical contract in April 2000. The contract is intended for earnings protection against summer energy price spikes in the event of a loss of generating units. REGULATORY Wisconsin Public Service received a rate order in the Wisconsin jurisdiction on January 15, 1999. The impact is a $26.9 million increase in electric revenues and a $10.3 million increase in gas revenues on an annual basis. The new rates are effective for 1999 and 2000. The Public Service Commission of Wisconsin authorized a 12.1% return on Wisconsin Public Service's equity for 1999 and 2000. Wisconsin Public Service received an additional rate order in the Wisconsin jurisdiction on December 15, 1999. This order approved a 4.6% electric rate -22- increase primarily to recover additional fuel and purchased power costs for 2000. The new rates were implemented on January 1, 2000. On March 31, 2000 Wisconsin Public Service filed a biennial rate case application with the Public Service Commission of Wisconsin for the years 2001 and 2002. Wisconsin Public Service requested an 8.9% increase in retail electric rates and a 2.1% increase in retail gas rates for 2001. An additional 2.2% increase in retail electric rates and a 1.5% increase in retail gas rates were requested for 2002. A 12.1% return on equity was requested. The Public Service Commission of Wisconsin is expected to issue a rate order in November 2000 with new Wisconsin retail rates effective January 1, 2001. ENVIRONMENTAL Wisconsin Public Service challenged the United States Environmental Protection Agency's regulations that required Wisconsin to prepare and submit a Nitrogen Oxide State Implementation Plan. On March 3, 2000, the United States Court of Appeals for the District of Columbia, held that the United States Environmental Protection Agency Nitrogen Oxide State Implementation Plan call was inappropriately issued to the state of Wisconsin. The decision is being reviewed by the Wisconsin Department of Natural Resources, which indicated that reductions in nitrogen oxides may still be necessary to show continued progress in achieving attainment within the national ambient air quality standard for ozone. The affect of any Wisconsin Department of Natural Resources' requirements is not yet known. We believe that the Public Service Commission of Wisconsin will allow rate recovery for any expenditures associated with nitrogen oxide compliance. KEWAUNEE NUCLEAR POWER PLANT The Kewaunee Nuclear Power Plant began its scheduled outage for refueling and maintenance on April 22, 2000. The plant had operated continuously for 511 days (beginning in 1998) as a result of a move to an 18-month refueling cycle. Second quarter expenditures for maintenance and purchased power as a result of this planned outage are expected to be higher than for the second quarter of 1999 when the plant was in operation for the entire quarter. Absent any unanticipated maintenance, the Kewaunee plant is expected to return to service during the week of May 28, 2000. Wisconsin Public Service is the operator and 41.2% owner of the Kewaunee plant. -23- RESULTS OF OPERATIONS - WISCONSIN PUBLIC SERVICE CORPORATION Wisconsin Public Service Corporation is a regulated electric and gas utility. Electric operations accounted for approximately 65% of first quarter 2000 revenues, while gas operations contributed 35% to first quarter 2000 revenues. FIRST QUARTER 2000 COMPARED WITH FIRST QUARTER 1999 WISCONSIN PUBLIC SERVICE CORPORATION OVERVIEW Wisconsin Public Service's first quarter 2000 and first quarter 1999 results of operations are shown in the following chart: First Quarter ------------------------------ Wisconsin Public Service's Percent Results (Millions) 2000 1999 Change - -------------------------- ---- ---- ------- Consolidated operating revenues $217.1 $195.8 10.9 Net income 27.3 23.4 16.7 The primary reason for the higher income was an increase in the electric utility margin. Partially offsetting this factor was increases in operating and maintenance expenses. ELECTRIC UTILITY OPERATIONS Wisconsin Public Service's electric utility margin increased $11.0 million, or 12.6%, primarily due to increased sales and recognition of additional revenue in the second year of its 1999-2000 biennial rate increase. Wisconsin Public Service implemented a 6.3% Wisconsin retail electric rate increase on January 15, 1999 and received an additional 4.6% Wisconsin retail electric rate increase effective January 1, 2000, primarily to recover additional fuel and purchased power costs for the year. First Quarter Wisconsin Public Service's ------------------------ Electric Utility Results (Thousands) 2000 1999 - ------------------------------------ ---- ---- Revenues $140,920 $127,537 Fuel and purchased power costs 42,142 39,774 ------- ------- Margins $ 98,778 $ 87,763 ======= ======= Sales in kilowatt-hours 3,070,405 2,974,684 Wisconsin Public Service's electric utility revenues increased $13.4 million, or 10.5%, largely due to the Wisconsin retail electric rate increases and a 4.1% increase in sales to commercial and industrial customers. -24- Electric production fuel expense increased $1.7 million, or 6.3%, due to increased production at Wisconsin Public Service's combustion turbine generating plants. Purchased power expense increased $0.7 million, or 5.2, primarily due to a 1.6% decrease in purchase requirements coupled with a 7.0% increase in the cost of purchases. The Public Service Commission of Wisconsin allows Wisconsin Public Service to adjust prospectively the amount billed to Wisconsin retail customers for fuel and purchased power if costs fall outside a specified range. Wisconsin Public Service is required to file an application to adjust rates either higher or lower when costs are plus or minus 2.0% from forecasted costs on an annualized basis. Forecasted annual 2000 fuel costs at March 31, 2000 are expected to be within this 2.0% window. GAS UTILITY OPERATIONS The consolidated gas utility margin represents gas revenues less purchases exclusive of intercompany transactions. The gas utility margin at Wisconsin Public Service remained relatively stable for the first quarter of 2000 compared with the first quarter of 1999. First Quarter Wisconsin Public Service's ---------------------------- Gas Utility Results (Thousands) 2000 1999 - ------------------------------- ---- ---- Revenues $76,187 $68,299 Purchase costs 47,634 39,871 ------ ------ Margin $28,553 $28,428 ====== ====== Volume in therms 247,520 250,885 Wisconsin Public Service's gas revenues increased $7.9 million, or 11.5%, while overall therm sales decreased 1.3%. Gas revenues increased as the result of the January 15, 1999 implementation of a 5.1% increase in Wisconsin retail gas rates. The rates were effective for the entire first quarter of 2000 but for only a portion of the first quarter of 1999. Weather in the first quarter of 2000 was 1.2% warmer than in the first quarter of 1999, and was 10.6% warmer than normal. Wisconsin Public Service's gas purchase costs increased $7.8 million, or 19.5%. This increase resulted from higher gas costs of 21.6% in the first quarter of 2000. Under current regulatory practice, the Public Service Commission of Wisconsin and the Michigan Public Service Commission allow Wisconsin Public Service to pass changes in the cost of gas on to customers through a purchased gas adjustment clause. OTHER UTILITY EXPENSES Other operating expenses at Wisconsin Public Service increased $2.8 million, or 7.7%, primarily due to increased charges for the transmission of electricity and to higher meter costs. -25- Maintenance expense at Wisconsin Public Service increased $1.7 million as a result of additional maintenance activities at several of its power plants in preparation for summer demand and more maintenance of overhead lines. FINANCIAL CONDITION - WISCONSIN PUBLIC SERVICE INVESTMENTS AND FINANCING Special common stock dividends of $30.0 million were paid by Wisconsin Public Service to WPS Resources in the first quarter of 2000. These special dividends allowed Wisconsin Public Service's average equity capitalization ratio for ratemaking to remain at its target level as established by the Public Service Commission of Wisconsin in its most recent rate order. Internally generated funds exceeded cash requirements in the first quarter of 2000 resulting in a $14.0 million reduction in short-term borrowings. Pretax interest coverage was 4.68 times for the 12 months ended March 31, 2000. See the table below for Wisconsin Public Service's credit ratings. Credit Ratings Standard & Poor's Moody's - -------------- ----------------- ------- Wisconsin Public Service Corporation Bonds AA+ Aa1 Preferred stock AA aa2 Commercial paper A1+ P1 See WPS Resources' management discussion at page 21 for additional information regarding Wisconsin Public Service's financial condition. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK MARKET RISKS WPS Resources has potential market risk exposure related to interest rate risk, equity return and principal preservation risk, and commodity price risk. There currently is no material exposure due to any foreign currency risk. Our exposure to interest rate risk relates primarily to ongoing short-term financing and a long-term nonrecourse debt financing at one of our indirect subsidiaries. Exposure to equity return and principal preservation risk results from various debt and equity security investments in our employee benefit trusts and decommissioning trusts. Exposure to commodity price risk exists with respect to the cost of coal, uranium, natural gas, and fuel oil. Much of the price risk exposure related to these fuel costs is recoverable through customer rates. INTEREST RATE RISK WPS Resources generally issues commercial paper, subject to varying interest rates, for short-term borrowing. The fluctuation of interest rates will have an impact on interest expense related to this short-term borrowing. The amount of commercial paper outstanding is generally 5% of the outstanding capital of WPS Resources. Based on total capitalization as of December 31, 1999, 5% would be approximately $60.0 million of commercial paper. A change in interest rates of 100 basis points would affect annual interest expense by $0.6 million. -26- Sunbury Generation, LLC, an indirect subsidiary of WPS Resources, obtained an $83.7 million variable rate nonrecourse loan in 2000. Sunbury Generation, LLC has fixed the interest rate for 50% of the amount of the loan through the purchase of an interest rate swap. It is anticipated that the remaining 50% will be fixed should the annual exposure of continuing to pay the variable rate on the remaining 50% of the debt reach approximately $585,000. Other than this interest rate swap WPS Resources currently does not employ any other interest rate swaps. Mid American Power, LLC, an indirect subsidiary of WPS Resources, currently has outstanding an $8.2 million variable rate loan. The interest rate, which is tied to 90-day treasury security yields is 6.65% on March 31, 2000. The interest rate is adjusted quarterly. EQUITY RETURN AND PRINCIPAL PRESERVATION RISK WPS Resources currently funds its liabilities related to employee benefits and nuclear decommissioning through various trusts. These trusts hold investments in debt and equity securities. Changes in the market value of these investments can have an impact on the future expenses related to these liabilities. Although the pension liability is adequately funded and under normal market conditions future required contributions to the plan are unlikely, changes in the market value of investments could impact future contributions for healthcare benefits and decommissioning costs. All decommissioning costs and most of the employee benefit costs relate to the regulated entities of Wisconsin Public Service and Upper Peninsula Power. The majority of these costs are reflected in rates and, therefore, any equity return and principal preservation risk on these assets would be mitigated. At March 31, 2000, the fair value of assets exposed to potential equity return and principal preservation risk is: Pension $ 685,870,738 Other post-retirement benefits 159,022,120 Nuclear decommissioning 237,468,418 ------------- TOTAL $1,082,361,276 ============= COMMODITY PRICE RISK Exposure to commodity price risk exists with respect to the cost of coal, uranium, natural gas, and fuel oil. Much of the price risk exposure related to these fuel costs is recoverable through customer rates. WPS Resources and its affiliates utilize various types of financial instruments that may qualify as derivatives to reduce market risk associated with changing prices of natural gas and electricity. Currently, we believe such activities in our regulated subsidiaries are immaterial. In addition, the fuel cost adjustments and purchase gas cost adjustment mechanisms in Wisconsin's regulatory environment should mitigate many of these costs. For additional information on the regulated subsidiaries activities in this area, please see Note 2 entitled Price Risk Management Activities on page 13. -27- The nonregulated subsidiaries of WPS Resources also use various derivative instruments to reduce market risk associated with potential changes in prices of natural gas and electricity. For additional information on these activities, see the discussion entitled Price Risk Management Activities on page 20. -28- PART II. OTHER INFORMATION ITEM 5. OTHER INFORMATION GENERATING CAPACITY Wisconsin Public Service has entered into several definitive agreements with Madison Gas and Electric Company under which Wisconsin Public Service will design and construct a combustion turbine electric generation facility to be sold to Madison Gas and Electric. The natural gas fired single cycle facility will be located at the Wisconsin Public Service West Marinette site and will generate approximately 83 megawatts of electricity. Wisconsin Public Service will operate and maintain the facility for Madison Gas and Electric. Under an energy exchange agreement, Wisconsin Public Service will receive the output of the facility when dispatched by Madison Gas and Electric in exchange for energy from the Wisconsin Public Service share of output from the Columbia Energy Center and/or Wisconsin Public Service energy system. The energy exchange and interconnection aspects of this arrangement are currently under review by the Federal Energy Regulatory Commission. Approval to construct the facility was received from the Public Service Commission of Wisconsin in December 1998. Construction is to be completed and the facility transferred to Madison Gas and Electric by June 1, 2000. AMERICAN TRANSMISSION COMPANY 1999 Wisconsin Act 9 requires the formation of a transmission company that could own electric transmission facilities throughout Wisconsin and neighboring states. The transmission company was required to begin operation no later than November 1, 2000. On April 12, 2000, 1999 Wisconsin Act 75 was signed which set January 1, 2001 as the new required date for the transfer of assets and "day one" operations for the transmission company. Wisconsin Public Service and five other regional energy companies are working to create the nation's first for-profit electric transmission company. The company will be the American Transmission Company, LLC. The six companies working to develop the American Transmission Company are Alliant-Energy, Madison Gas and Electric Company, Minnesota Power Inc., Wisconsin Electric Power Company, Wisconsin Public Power Inc., and Wisconsin Public Service Corporation. At this time, only Wisconsin Electric Power Company and Alliant-Wisconsin Power and Light have committed to transfer ownership and control of their transmission systems to the American Transmission Company. ELECTRIC AND NATURAL GAS RATES Wisconsin Public Service is requesting approval from the Public Service Commission of Wisconsin to increase retail electric and natural gas rates for its Wisconsin customers in 2001 and 2002. The request includes a return on equity rate of 12.1%. If approved, electric rates will increase 8.9% in 2001 and 2.2% in 2002. Increases of 2.1% in 2001 and 1.5% in 2002 are also being requested in gas rates. The application for increased rates was filed on March 31, 2000. -29- NUCLEAR POWER PLANT PLANNED OUTAGE The Kewaunee Nuclear Power Plant began its scheduled outage for refueling and maintenance on April 22, 2000. Maintenance and refueling is expected to be completed and the plant returned to service during the week of May 28, 2000. During the prior refueling in the fall of 1998, the Nuclear Regulatory Commission issued a Technical Specification that increased the number of steam generator tubes allowed to remain in service. The Technical Specification has now been amended to allow these tubes to remain in service through the upcoming refueling cycle. Although no delays are expected at this time, the outage could be extended if unexpected maintenance is necessary. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS The following documents are attached as exhibits: Exhibit 27 Financial Data WPS Resources Corporation Wisconsin Public Service Corporation (b) REPORT ON FORM 8-K A Form 8-K was filed on March 8, 2000 to report that WPS Resources Corporation will increase its purchases of shares of its common stock in the open market to further fund its stock-based employee benefit plans, including certain of its stock option plans. -30- SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant, WPS Resources Corporation, has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. WPS Resources Corporation Date: May 9, 2000 /s/ Diane L. Ford _________________________________ Diane L. Ford Vice President-Controller and Chief Accounting Officer (Duly Authorized Officer and Chief Accounting Officer) -31- SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant, Wisconsin Public Service Corporation, has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Wisconsin Public Service Corporation Date: May 9, 2000 /s/ Diane L. Ford ____________________________________ Diane L. Ford Vice President-Controller (Duly Authorized Officer and Chief Accounting Officer) -32- WPS RESOURCES CORPORATION AND WISCONSIN PUBLIC SERVICE CORPORATION EXHIBIT INDEX TO FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2000 Exhibit No. Description ___________ ___________ 27 Financial Data Schedule WPS Resources Corporation Wisconsin Public Service Corporation -33- EX-27 2
UT 0000916863 WPS RESOURCES CORPORATION 1 WISCONSIN PUBLIC SERVICE CORPORATION 1,000 3-MOS DEC-31-1999 JAN-01-2000 MAR-31-2000 PER-BOOK 1,164,544 134,274 390,122 67,701 185,774 1,942,415 26,851 172,108 343,166 542,125 0 51,190 510,891 10,100 0 45,950 943 0 73,483 419 707,314 1,942,415 398,849 7,237 356,116 356,116 42,733 6,564 49,297 12,050 30,010 778 29,232 13,521 10,129 114,285 1.10 1.10 Operating expenses exclude income taxes of $7,237. Operating income is before income taxes of $7,237. Income before interest expense is before income taxes of $7,237.
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