-----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, UMotPMvv6LOxXB4Sh+pLxT1QWt7AkWju3BcM4PZfgSc5HqlV0CJWL1XxXUg7TKYB DISmhtTUQyY/PQfpTqYmDQ== 0000916863-99-000013.txt : 19990504 0000916863-99-000013.hdr.sgml : 19990504 ACCESSION NUMBER: 0000916863-99-000013 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990503 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: 99608208 BUSINESS ADDRESS: STREET 1: 700 N ADAMS ST STREET 2: PO BOX 19001 CITY: GREEN BAY STATE: WI ZIP: 54307-9001 BUSINESS PHONE: 9204331466 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, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission Registrant; State of Incorporation; IRS Employer File Number Address; and Telephone Number Identification No. - ----------- ----------------------------------- ------------------ 1-11337 WPS RESOURCES CORPORATION 39-1775292 (A Wisconsin Corporation) 700 North Adams Street P. O. Box 19001 Green Bay, WI 54307-9001 920-433-1466 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 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, 26,551,963 shares outstanding at April 30, 1999 WISCONSIN PUBLIC SERVICE CORPORATION Common stock, $4 par value, 23,896,962 shares outstanding at April 30, 1999 ______________________________________________________________________________ ______________________________________________________________________________ WPS RESOURCES CORPORATION AND WISCONSIN PUBLIC SERVICE CORPORATION FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1999 CONTENTS Page FORWARD-LOOKING STATEMENTS 4 PART I. FINANCIAL INFORMATION Item 1. Financial Statements WPS RESOURCES CORPORATION Consolidated Statements of Income, Comprehensive Income, and Retained Earnings 5 Consolidated Balance Sheets 6 Consolidated Statements of Capitalization 7 Consolidated Statements of Cash Flows 8 WISCONSIN PUBLIC SERVICE CORPORATION Consolidated Statements of Income and Comprehensive Income 9 Consolidated Balance Sheets 10 Consolidated Statements of Capitalization 11 Consolidated Statements of Cash Flows 12 Consolidated Statements of Retained Earnings 13 CONDENSED NOTES TO FINANCIAL STATEMENTS OF WPS Resources Corporation and Wisconsin Public Service Corporation 14 - 15 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations for WPS Resources Corporation 16 - 24 Wisconsin Public Service Corporation 25 - 27 Item 3. Quantitative and Qualitative Disclosures About Market Risk 27 PART II. OTHER INFORMATION Item 5. Other Information 28 Item 6. Exhibits and Reports on Form 8-K 29 Signatures 30 - 31 -2- EXHIBIT INDEX 32 Exhibit 11 Statement Regarding Computation of Per Share Earnings WPS Resources Corporation Exhibit 27 Financial Data Schedule WPS Resources Corporation Wisconsin Public Service Corporation -3- 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. 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 expected and historical results. - - 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 - - The extent and timing of new business development and additional competition 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 - - Year 2000 readiness. -4- Part I. FINANCIAL INFORMATION Item 1. Financial Statements WPS RESOURCES CORPORATION
======================================================================================= CONSOLIDATED STATEMENTS OF INCOME, COMPREHENSIVE INCOME, Three Months Ended AND RETAINED EARNINGS (1) March 31 (Thousands, except per share amounts) 1999 1998 ======================================================================================= Operating revenues Electric utility $142,393 $127,223 Gas utility 68,299 65,484 Nonregulated energy and other 119,142 98,519 - --------------------------------------------------------------------------------------- Total operating revenues 329,834 291,226 ======================================================================================= Operating expenses Electric production fuels 26,533 25,648 Purchased power 17,872 12,347 Gas purchased for resale 40,284 43,010 Nonregulated energy cost of sales 116,023 96,488 Other operating expenses 44,380 39,716 Maintenance 14,616 10,598 Depreciation and decommissioning 20,219 21,659 Taxes other than income 8,461 8,257 - --------------------------------------------------------------------------------------- Total operating expenses 288,388 257,723 ======================================================================================= Operating income 41,446 33,503 - --------------------------------------------------------------------------------------- Other income Allowance for equity funds used during construction 196 29 Other, net 2,315 2,431 - --------------------------------------------------------------------------------------- Total other income 2,511 2,460 ======================================================================================= Income before interest expense 43,957 35,963 - --------------------------------------------------------------------------------------- Interest on long-term debt 6,402 6,381 Other interest 919 951 Allowance for borrowed funds used during construction (177) (11) - --------------------------------------------------------------------------------------- Total interest expense 7,144 7,321 ======================================================================================= Distributions - preferred securities of subsidiary trust 875 - ======================================================================================= Income before income taxes 35,938 28,642 Income taxes 12,623 10,119 Minority interest (215) (212) Preferred stock dividends of subsidiaries 778 783 - --------------------------------------------------------------------------------------- Net income 22,752 17,952 - --------------------------------------------------------------------------------------- Other comprehensive income - - - --------------------------------------------------------------------------------------- Comprehensive income 22,752 17,952 ======================================================================================= Retained earnings at beginning of period 335,154 339,508 Cash dividends on common stock 13,157 12,534 - --------------------------------------------------------------------------------------- Retained earnings at end of period $344,749 $344,926 ======================================================================================= Average shares of common stock 26,520 26,516 Basic and diluted earnings per average share of common stock $0.86 $0.68 Dividend per share of common stock $0.495 $0.485 =======================================================================================
(1) The 1998 statement gives effect to the merger with Upper Peninsula Energy Corporation. The accompanying notes are an integral part of these statements. -5- WPS RESOURCES CORPORATION
================================================================================================= CONSOLIDATED BALANCE SHEETS March 31 December 31 (Thousands) 1999 1998 ================================================================================================= ASSETS - ------------------------------------------------------------------------------------------------- Utility plant Electric $1,729,055 $1,715,882 Gas 270,710 267,892 - ------------------------------------------------------------------------------------------------- Total 1,999,765 1,983,774 Less - Accumulated depreciation and decommissioning 1,224,864 1,206,123 - ------------------------------------------------------------------------------------------------- Total 774,901 777,651 Nuclear decommissioning trusts 175,480 171,442 Construction in progress 47,145 42,424 Nuclear fuel, less accumulated amortization 17,108 18,641 - ------------------------------------------------------------------------------------------------- Net utility plant 1,014,634 1,010,158 ================================================================================================= Current assets Cash and equivalents 9,194 7,134 Customer and other receivables, net of reserves 116,850 117,206 Accrued utility revenues 31,234 34,175 Fossil fuel, at average cost 14,928 13,152 Gas in storage, at average cost 3,586 20,795 Materials and supplies, at average cost 23,384 21,788 Prepayments and other 23,312 26,462 - ------------------------------------------------------------------------------------------------- Total current assets 222,488 240,712 ================================================================================================= Regulatory assets 68,700 70,041 Net nonutility and nonregulated plant 39,499 41,235 Pension assets 61,561 60,018 Investments and other assets 79,073 88,223 ================================================================================================= Total $1,485,955 $1,510,387 ================================================================================================= CAPITALIZATION AND LIABILITIES - ------------------------------------------------------------------------------------------------- Capitalization Common stock equity $ 529,041 $ 517,190 Preferred stock of subsidiary with no mandatory redemption 51,200 51,200 Company-obligated mandatorily redeemable trust preferred securities of subsidiary trust holding solely WPSR 7.00% subordinated debentures 50,000 50,000 Long-term debt 343,438 343,037 - ------------------------------------------------------------------------------------------------- Total capitalization 973,679 961,427 ================================================================================================= Current liabilities Long-term debt due within one year 884 884 Notes payable 10,303 12,703 Commercial paper 14,000 47,590 Accounts payable 93,676 115,490 Accrued taxes 13,287 2,838 Accrued interest 6,473 7,594 Other 23,189 9,095 - ------------------------------------------------------------------------------------------------- Total current liabilities 161,812 196,194 ================================================================================================= Long-term liabilities and deferred credits Accumulated deferred income taxes 122,601 122,642 Accumulated deferred investment tax credits 27,090 27,150 Regulatory liabilities 50,386 50,474 Environmental remediation liabilities 40,140 40,478 Other long-term liabilities 110,247 112,022 - ------------------------------------------------------------------------------------------------- Total long-term liabilities and deferred credits 350,464 352,766 ================================================================================================= Total $1,485,955 $1,510,387 =================================================================================================
The accompanying notes are an integral part of these statements. -6- WPS RESOURCES CORPORATION
============================================================================================= CONSOLIDATED STATEMENTS OF CAPITALIZATION March 31 December 31 (Thousands, except share amounts) 1999 1998 ============================================================================================= Common stock equity Common stock, $1 par value, 100,000,000 shares authorized; 26,579,795 and 26,551,405 shares outstanding at March 31, 1999 and December 31, 1998, respectively $ 26,580 $ 26,551 Premium on capital stock 165,948 163,438 Retained earnings 344,749 335,154 Shares in deferred compensation trust, 53,523 and 49,477 shares at average cost of $30.60 and $30.42 per share at March 31, 1999 and December 31, 1998, respectively (1,638) (1,505) ESOP loan guarantees (6,598) (6,448) - --------------------------------------------------------------------------------------------- Total common stock equity 529,041 517,190 ============================================================================================= Preferred stock - Wisconsin Public Service Corporation Cumulative, $100 par value, 1,000,000 shares authorized; with no mandatory redemption Series Shares Outstanding ------ ------------------ 5.00% 132,000 13,200 13,200 5.04% 30,000 3,000 3,000 5.08% 50,000 5,000 5,000 6.76% 150,000 15,000 15,000 6.88% 150,000 15,000 15,000 - --------------------------------------------------------------------------------------------- Total preferred stock with no mandatory redemption 51,200 51,200 ============================================================================================= Company-obligated mandatorily redeemable trust preferred securities of subsidiary trust holding solely WPSR 7.00% subordinated debentures 50,000 50,000 ============================================================================================= 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 6,000 6,000 9.32% 2021 18,000 18,000 Installment sales contract for air pollution control equipment - Upper Peninsula Power Company Term Bonds Year Due ---------- -------- 6.90% 1999 120 120 - --------------------------------------------------------------------------------------------- Total 323,295 323,295 Unamortized discount and premium on bonds, net (802) (817) - --------------------------------------------------------------------------------------------- Total first mortgage bonds 322,493 322,478 - --------------------------------------------------------------------------------------------- ESOP loan guarantees 6,598 6,448 Notes payable to bank, secured by nonregulated plant 11,180 10,943 Senior secured note 3,886 3,886 Other long-term debt 165 166 - --------------------------------------------------------------------------------------------- Total long-term debt 344,322 343,921 Less amounts due within one year (884) (884) - --------------------------------------------------------------------------------------------- Net long-term debt 343,438 343,037 ============================================================================================= Total capitalization $973,679 $961,427 =============================================================================================
The accompanying notes are an integral part of these statements. -7- WPS RESOURCES CORPORATION
========================================================================================= CONSOLIDATED STATEMENTS OF CASH FLOWS (1) Three Months Ended (Thousands) March 31 1999 1998 ========================================================================================= Cash flows from operating activities Net income $ 22,752 $ 17,952 Adjustments to reconcile net income to net cash from operating activities Depreciation and decommissioning 20,219 21,659 Amortization of nuclear fuel and other 3,717 4,386 Deferred income taxes (617) (1,298) Investment tax credit restored (60) (435) Allowance for equity funds used during construction (196) (29) Pension income (1,542) (2,334) Postretirement funding 1,117 764 Other, net 5,792 1,199 Changes in Customer and other receivables 356 (14,990) Accrued utility revenues 2,941 2,821 Fossil fuel inventory (1,776) (2,352) Gas in storage 17,209 17,755 Accounts payable (21,814) (2,723) Miscellaneous current and accrued liabilities 14,094 11,174 Accrued taxes 10,449 129 - ----------------------------------------------------------------------------------------- Net cash from operating activities 72,641 53,678 ========================================================================================= Cash flows from (used for) investing activities Construction of utility plant and nuclear fuel expenditures (20,924) (10,788) Purchase of other property and equipment (620) (3,386) Decommissioning funding (2,273) (4,126) Other (260) (312) - ----------------------------------------------------------------------------------------- Net cash used for investing activities (24,077) (18,612) ========================================================================================= Cash flows from (used for) financing activities Issuance of notes payable 34,250 32,811 Redemptions of notes payable (36,650) (31,800) Issuance of other long-term debt 237 377 Issuance of commercial paper 687,595 321,137 Redemptions of commercial paper (721,185) (330,243) Issuance of common stock 2,539 - Cash dividends on common stock (13,157) (12,539) Other (133) (146) - ----------------------------------------------------------------------------------------- Net cash used for financing activities (46,504) (20,403) ========================================================================================= Net decrease in cash and equivalents 2,060 14,663 Cash and equivalents at beginning of period 7,134 8,495 ========================================================================================= Cash and equivalents at end of period $ 9,194 $ 23,158 ========================================================================================= Cash paid during period for Interest, less amount capitalized $ 8,926 $ 9,103 Income taxes 1,306 10,304 Preferred stock dividends of subsidiaries 778 783 =========================================================================================
(1) The 1998 statement gives effect to the merger with Upper Peninsula Energy Corporation. The accompanying notes are an integral part of these statements. -8- WISCONSIN PUBLIC SERVICE CORPORATION
======================================================================================= CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME Three Months Ended (Thousands) March 31 1999 1998 ======================================================================================= Operating revenues Electric $127,537 $112,806 Gas 68,299 65,484 - --------------------------------------------------------------------------------------- Total operating revenues 195,836 178,290 ======================================================================================= Operating expenses Electric production fuels 26,487 25,618 Purchased power 13,287 8,165 Gas purchased for resale 39,871 42,394 Other operating expenses 36,046 32,515 Maintenance 14,063 9,938 Depreciation and decommissioning 17,977 19,642 Federal income taxes 10,834 8,296 Investment tax credit restored (402) (436) State income taxes 2,646 2,257 Gross receipts tax and other 6,987 6,786 - --------------------------------------------------------------------------------------- Total operating expenses 167,796 155,175 ======================================================================================= Operating income 28,040 23,115 - --------------------------------------------------------------------------------------- Other income and (deductions) Allowance for equity funds used during construction 196 29 Other, net 2,295 1,820 Income taxes (381) (281) - --------------------------------------------------------------------------------------- Total other income and (deductions) 2,110 1,568 ======================================================================================= Income before interest expense 30,150 24,683 - --------------------------------------------------------------------------------------- Interest expense Interest on long-term debt 5,465 5,480 Other interest 707 545 Allowance for borrowed funds used during construction (177) (11) - --------------------------------------------------------------------------------------- Total interest expense 5,995 6,014 ======================================================================================= Net income 24,155 18,669 Preferred stock dividend requirements 778 778 - --------------------------------------------------------------------------------------- Earnings on common stock 23,377 17,891 ======================================================================================= Other comprehensive income - - Comprehensive income $ 23,377 $ 17,891 =======================================================================================
The accompanying notes are an integral part of these statements. -9- WISCONSIN PUBLIC SERVICE CORPORATION
============================================================================================== CONSOLIDATED BALANCE SHEETS March 31 December 31 (Thousands) 1999 1998 ============================================================================================== ASSETS - ---------------------------------------------------------------------------------------------- Utility plant Electric $1,548,020 $1,534,711 Gas 270,710 267,892 - ---------------------------------------------------------------------------------------------- Total 1,818,730 1,802,603 Less - Accumulated depreciation and decommissioning 1,137,413 1,120,058 - ---------------------------------------------------------------------------------------------- Total 681,317 682,545 Nuclear decommissioning trusts 175,480 171,442 Construction in progress 39,692 35,996 Nuclear fuel, less accumulated amortization 17,108 18,641 - ---------------------------------------------------------------------------------------------- Net utility plant 913,597 908,624 ============================================================================================== Current assets Cash and equivalents 5,392 1,882 Customer and other receivables, net of reserves 68,169 63,193 Accrued utility revenues 28,506 30,877 Fossil fuel, at average cost 14,205 12,433 Gas in storage, at average cost 2,589 14,855 Materials and supplies, at average cost 21,594 20,054 Prepayments and other 15,586 19,491 - ---------------------------------------------------------------------------------------------- Total current assets 156,041 162,785 ============================================================================================== Regulatory assets 66,998 68,335 Net nonutility plant 1,437 2,888 Pension assets 61,561 60,018 Investments and other assets 62,975 64,932 ============================================================================================== Total $1,262,609 $1,267,582 ============================================================================================== CAPITALIZATION AND LIABILITIES - ---------------------------------------------------------------------------------------------- Capitalization Common stock equity $ 477,435 $ 481,708 Preferred stock with no mandatory redemption 51,200 51,200 Long-term debt to parent 13,993 14,061 Long-term debt 290,136 289,972 - ---------------------------------------------------------------------------------------------- Total capitalization 832,764 836,941 ============================================================================================== Current liabilities Note payable 10,000 10,000 Commercial paper 14,000 25,000 Accounts payable 48,969 60,680 Accrued interest and taxes 12,867 2,590 Other 21,146 6,564 - ---------------------------------------------------------------------------------------------- Total current liabilities 106,982 104,834 ============================================================================================== Long-term liabilities and deferred credits Accumulated deferred income taxes 118,249 118,476 Accumulated deferred investment tax credits 24,757 24,772 Regulatory liabilities 43,385 43,591 Environmental remediation liabilities 38,836 39,028 Other long-term liabilities 97,636 99,940 - ---------------------------------------------------------------------------------------------- Total long-term liabilities and deferred credits 322,863 325,807 ============================================================================================== Total $1,262,609 $1,267,582 ==============================================================================================
The accompanying notes are an integral part of these statements. -10- WISCONSIN PUBLIC SERVICE CORPORATION
=================================================================================================== CONSOLIDATED STATEMENTS OF CAPITALIZATION March 31 December 31 (Thousands, except share amounts) 1999 1998 =================================================================================================== Common stock equity Common stock $ 95,588 $ 95,588 Premium on capital stock 107,842 107,842 Retained earnings 280,603 284,726 ESOP loan guarantees (6,598) (6,448) - --------------------------------------------------------------------------------------------------- Total common stock equity 477,435 481,708 =================================================================================================== Preferred stock Cumulative, $100 par value, 1,000,000 shares authorized; with no mandatory redemption Series Shares Outstanding ------ ------------------ 5.00% 132,000 13,200 13,200 5.04% 30,000 3,000 3,000 5.08% 50,000 5,000 5,000 6.76% 150,000 15,000 15,000 6.88% 150,000 15,000 15,000 - --------------------------------------------------------------------------------------------------- Total preferred stock 51,200 51,200 =================================================================================================== Long-term debt to parent Series Year Due ------ -------- 8.76% 2015 5,780 5,808 7.35% 2016 8,213 8,253 - --------------------------------------------------------------------------------------------------- Total long-term debt to parent 13,993 14,061 =================================================================================================== 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 (802) (817) - --------------------------------------------------------------------------------------------------- Total first mortgage bonds 283,373 283,358 - --------------------------------------------------------------------------------------------------- ESOP loan guarantees 6,598 6,448 Other long-term debt 165 166 - --------------------------------------------------------------------------------------------------- Total long-term debt 290,136 289,972 =================================================================================================== Total capitalization $832,764 $836,941 ===================================================================================================
The accompanying notes are an integral part of these statements. -11- WISCONSIN PUBLIC SERVICE CORPORATION
======================================================================================= CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended (Thousands) March 31 1999 1998 ======================================================================================= Cash flows from operating activities Net income $ 24,155 $ 18,669 Adjustments to reconcile net income to net cash from operating activities Depreciation and decommissioning 17,977 19,642 Amortization of nuclear fuel and other 3,558 4,366 Deferred income taxes (803) (1,365) Investment tax credit restored (15) (435) Allowance for equity funds used during construction (196) (29) Pension income (1,542) (2,334) Postretirement funding 1,117 1,019 Other, net 1,016 4,044 Changes in Customer and other receivables (4,976) (2,846) Accrued utility revenues 2,371 2,821 Fossil fuel inventory (1,772) (2,345) Gas in storage 12,266 13,384 Accounts payable (11,711) (4,876) Miscellaneous current and accrued liabilities 12,133 7,127 Accrued taxes 11,754 369 - --------------------------------------------------------------------------------------- Net cash from operating activities 65,332 57,211 ======================================================================================= Cash flows from (used for) investing activities Construction of utility plant and nuclear fuel expenditures (19,899) (10,155) Decommissioning funding (2,273) (4,126) Purchase of other property and equipment (54) - Other (318) 312 - --------------------------------------------------------------------------------------- Net cash used for investing activities (22,544) (13,969) ======================================================================================= Cash flows from (used for) financing activities Proceeds from issuance of commercial paper 104,000 47,000 Redemptions of commercial paper (115,000) (62,500) Dividend to parent (15,000) - Preferred stock dividends (778) (778) Common stock dividends (12,500) (11,590) - --------------------------------------------------------------------------------------- Net cash used for financing activities (39,278) (27,868) ======================================================================================= Net decrease in cash and equivalents 3,510 15,374 Cash and equivalents at beginning of period 1,882 3,921 ======================================================================================= Cash and equivalents at end of period $ 5,392 $ 19,295 ======================================================================================= Cash paid during period for Interest, less amount capitalized $ 7,093 $ 8,439 Income taxes 2,262 9,991 =======================================================================================
The accompanying notes are an integral part of these statements. -12- WISCONSIN PUBLIC SERVICE CORPORATION
======================================================================================== CONSOLIDATED STATEMENTS OF RETAINED EARNINGS Three Months Ended (Thousands) March 31 1999 1998 ======================================================================================== Balance at beginning of period $284,726 $297,489 Add Net income 24,155 18,669 - ---------------------------------------------------------------------------------------- 308,881 316,158 - ---------------------------------------------------------------------------------------- Deduct Cash dividends declared on preferred stock 778 778 Dividends declared on common stock 12,500 11,590 Dividend to parent 15,000 - - ---------------------------------------------------------------------------------------- 28,278 12,368 - ---------------------------------------------------------------------------------------- Balance at end of period $280,603 $303,790 ========================================================================================
The accompanying notes are an integral part of these statements. -13- WPS RESOURCES CORPORATION AND SUBSIDIARIES WISCONSIN PUBLIC SERVICE CORPORATION CONDENSED NOTES TO FINANCIAL STATEMENTS March 31, 1999 NOTE 1. FINANCIAL INFORMATION ______________________________ The foregoing consolidated financial statements have been prepared by WPS Resources Corporation ("WPSR") and Wisconsin Public Service Corporation ("WPSC"), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and, in the opinion of Management, include all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of results for each period shown. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such SEC rules and regulations. WPSR and WPSC believe that the disclosures made are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the financial statements and notes thereto included in WPSR's and WPSC's latest annual report on Form 10-K. The first quarter 1998 WPSR financial statements have been restated to give effect to the September 1998 merger between WPSR and Upper Peninsula Energy Corporation which has been accounted for as a pooling of interests. Because of the seasonal nature of WPSC's and Upper Peninsula Power Company's ("UPPCO") operations, interim results are not necessarily indicative of annual results. NOTE 2. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES ______________________________________________________ In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard 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 is dependent 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. This statement is effective for fiscal periods beginning after June 15, 1999. WPSR will be adopting the requirements of this statement on January 1, 2000, and has not yet determined its impact on WPSR's financial statements. However, the requirements of this statement could increase volatility in earnings and other comprehensive income. NOTE 3. INTERNALLY-DEVELOPED SOFTWARE ______________________________________ In March 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This statement -14- requires the capitalization of certain costs related to software developed or obtained for internal use. The statement is effective for periods beginning after December 15, 1998. WPSR adopted the requirements of this statement on January 1, 1999, with no material impact to its financial statements. NOTE 4. COSTS OF START-UP ACTIVITIES _____________________________________ In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on the Costs of Start-up Activities." This statement provides guidance on the financial reporting of start-up costs and organization costs. Costs of start-up activities and organization costs are required to be expensed as incurred. The statement is effective for periods beginning after December 15, 1998. WPSR adopted the requirements of this statement on January 1, 1999, with no material impact to its financial statements. NOTE 5. SEGMENTS OF BUSINESS _____________________________ Effective December 31, 1998, WPSR adopted Statement of Financial Accounting Standard No. 131, "Disclosures about Segments of an Enterprise and Related Information." WPSR's reportable segments are managed separately due to their different operating and regulatory environments. WPSR's principal business segments are the regulated electric utility operations of WPSC and UPPCO and the regulated gas utility operations of WPSC. The other reportable business segment, WPS Energy Services, Inc. ("ESI"), participates in nonregulated energy marketing operations. Reconciling eliminations represent intercompany transactions. The table below presents summary information pertaining to WPSR's operations segmented by lines of business.
Nonutility and Regulated Utilities Nonregulated Operations Segments of Business ------------------- ----------------------- Reconciling WPSR (Thousands) Electric Gas ESI PDI and Other Eliminations Consolidated - -------------------- -------- --- --- ------------- ------------ ------------ 1999 First Quarter - ------------------ Operating revenues $144,140 $68,299 $115,422 $ 5,204 $(3,231) $329,834 Net income (loss) 15,362 9,345 (834) (1,121) - 22,752 1998 First Quarter - ------------------ Operating revenues 128,404 65,484 98,522 872 (2,056) 291,226 Net income (loss) 12,499 6,571 (1,515) 397 - 17,952
-15- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS - WPS RESOURCES CORPORATION WPSR is a holding company. Approximately 85% of WPSR's assets at March 31, 1999, and approximately 59% of its revenues for the first three months of 1999 were derived from WPSC, an electric and gas utility. Substantially all of WPSR's net income for the first three months of 1999 was derived from WPSC and UPPCO, an electric utility. WPSR's wholly-owned subsidiaries include two regulated utilities, WPSC and UPPCO, and two primary nonregulated subsidiaries, ESI, and WPS Power Development, Inc. ("PDI"). FIRST QUARTER 1999 COMPARED WITH FIRST QUARTER 1998 WPS RESOURCES CORPORATION OVERVIEW WPSR consolidated operating revenues were $329.8 million in the first quarter of 1999 compared with $291.2 million in the first quarter of 1998, an increase of 13.3%. Net income was $22.8 million in the first quarter of 1999 and $18.0 million in the first quarter of 1998, an increase of 26.7%. Basic and diluted earnings per share were $0.86 in the first quarter of 1999 compared with $0.68 in the first quarter of 1998, an increase of 26.5%. The primary reason for the increase in earnings, as explained below, were increases in the electric and gas utility margins. Partially offsetting these factors were increases in other operating expenses and in maintenance expense. OVERVIEW OF UTILITY OPERATIONS (WPSC AND UPPCO) Revenues at WPSC were $195.8 million in the first quarter of 1999 compared with $178.3 million in the first quarter of 1998, an increase of 9.8%. Earnings were $23.4 million in the first quarter of 1999 and $17.9 million in the first quarter of 1998, an increase of 30.7%. The primary reasons for the increase in earnings at WPSC were increased electric and gas utility margins largely as a result of the implementation of a January 15, 1999, Public Service Commission of Wisconsin ("PSCW") rate order which authorized a 6.3% increase in Wisconsin retail electric rates and a 5.1% increase in Wisconsin retail gas rates. Partially offsetting these factors were increases in other operating expenses and in maintenance expense. Revenues at UPPCO were $16.6 million in the first quarter of 1999 compared with $15.6 million in the first quarter of 1998, an increase of 6.4%. Earnings were $1.3 million in the first quarter of 1999 compared with $1.2 million in the first quarter of 1998, an increase of 8.3%. The primary reasons for the increase in earnings at UPPCO were an increase in the electric margin and lower interest expense. ELECTRIC UTILITY OPERATIONS (WPSC AND UPPCO) WPSR consolidated electric utility margins increased $8.8 million, or 9.8%, primarily due to WPSC's implementation of a January 15, 1999, PSCW rate order which authorized a 6.3% increase in Wisconsin retail electric rates. -16- First Quarter WPSR Consolidated ------------------------ Electric Margins (Thousands) 1999 1998 - ---------------------------- ---- ---- Revenues $142,393 $127,223 Fuel and purchased power 44,405 37,995 ------- ------- Margin $ 97,988 $ 89,228 ======= ======= Sales in kilowatt-hours (Thousands) 3,144,714 2,946,366 WPSR consolidated electric utility revenues increased $15.2 million, or 11.9%, largely due to the electric rate increase at WPSC. Also contributing to higher electric revenues was a 7.2% increase in overall kilowatt-hour sales at WPSC and a 6.9% increase in kilowatt-hour sales at UPPCO. These sales were largely the result of weather that was 8.7% colder in the first quarter of 1999 than in the first quarter of 1998. WPSR consolidated electric production fuel expense increased $0.9 million, or 3.5%, primarily as a result of increased generation requirements at WPSC's combustion turbine and nuclear generating plants in the first quarter of 1999. Partially offsetting this factor was a decrease in production at WPSC's fossil fuel generating plants as a result of scheduled maintenance activities. WPSR consolidated purchased power expense increased $5.5 million, or 44.7%, primarily due to additional purchase requirements and higher cost of purchases at both WPSC and UPPCO in the first quarter of 1999. Purchase requirements at WPSC in the first quarter of 1999 were higher due to lack of production at WPSC's fossil fuel generating plants which were off-line for scheduled maintenance activities. The PSCW allows WPSC to prospectively adjust the amount billed to Wisconsin retail customers for fuel and purchased power if costs fall outside a specified range. WPSC 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 1999 fuel costs at March 31, 1999 are within this 2.0% window. GAS UTILITY OPERATIONS (WPSC) WPSR consolidated gas margin increased $5.5 million in the first quarter of 1999, or 24.7%, primarily due to the implementation of the PSCW rate order which authorized a 5.1% increase in Wisconsin retail gas rates. -17- First Quarter WPSR Consolidated ---------------------- Gas Margins (Thousands) 1999 1998 - ----------------------- ---- ---- Revenues $68,299 $65,484 Purchase costs 40,284 43,010 ------ ------ Margin $28,015 $22,474 ====== ====== Volume in therms (Thousands) 250,885 223,804 WPSR consolidated gas operating revenues increased $2.8 million, or 4.3%. This increase was due to the implementation of new Wisconsin retail gas rates and a 12.1% increase in overall therm sales as a result of colder weather in the first quarter of 1999. Although weather was 8.4% warmer than normal in the first quarter of 1999, it was 8.7% colder than in the first quarter of 1998. WPSR consolidated gas purchase costs decreased $2.7 million, or 6.3%. This decrease was due to lower gas prices in the first quarter of 1999 which more than offset increased purchases due to additional customer demand. Under current regulatory practice, the PSCW and the Michigan Public Service Commission allow WPSC to pass changes in the cost of gas on to customers through a purchased gas adjustment clause. OTHER UTILITY EXPENSES/INCOME (WPSC AND UPPCO) Other operating expenses at WPSC increased $3.5 million, or 10.9%, primarily due to higher customer service expense of $0.8 million, higher administrative salary expense of $0.8 million, higher miscellaneous distribution expense of $0.8 million, and higher pension costs of $0.6 million in the first quarter of 1999. Maintenance expense at WPSC increased $4.1 million, or 41.5%, primarily due to additional costs of $3.5 million for scheduled maintenance activities at the fossil generating plants. OVERVIEW OF NONREGULATED OPERATIONS Nonregulated operations primarily consist of the gas and electric sales at ESI, an energy marketing subsidiary. Nonregulated operations also include those of WPSR as a holding company (primarily investments, borrowings, and certain unallocated corporate costs) and those of PDI which develops electric generation projects, invests in generating projects, and provides services to the electric power generation industry. Nonregulated operations experienced a loss of $1.9 million in the first quarter of 1999 compared with a loss of $1.1 million in the first quarter of 1998. Although margins on nonregulated energy sales continue to grow, losses are being experienced primarily due to expenses associated with the expansion of customer base. In addition, nonregulated earnings decreased in the first quarter of 1999 compared with the first quarter of 1998 due to a one-time -18- dividend of $2.0 million received by WPSR from a venture capital investment in the first quarter of 1998. OVERVIEW OF WPS ENERGY SERVICES, INC. Revenues at ESI were $115.4 million in the first quarter of 1999 compared with $98.5 million in the first quarter of 1998, an increase of 17.2%. ESI experienced a loss of $0.8 million in the first quarter of 1999 compared with a loss of $1.5 million in the first quarter of 1998. The primary reasons for the decrease in losses at ESI were lower electric and gas trading losses primarily due to decreased trading activities in 1999 and an increase in the gas margin due to additional sales and improved gas procurement. NONREGULATED MARGINS (ESI) Gas margins at ESI were $1.7 million in the first quarter of 1999 compared with $1.2 million in the first quarter of 1998, an increase of 41.7%. Electric margins at ESI remained fairly stable. Gas revenues at ESI were $114.5 million in the first quarter of 1999 compared with $93.9 million in the first quarter of 1998, an increase of $20.6 million, or 21.9%. This increase was the result of customer growth and increased wholesale activity. Electric revenues at ESI were $0.8 million in the first quarter of 1999 and $4.4 million in 1998, a decrease of $3.6 million, or 81.8%. This decrease was the result of ESI's decreased activity in the electric markets. ESI's cost of sales were $113.5 million in the first quarter of 1999 and $97.1 million in the first quarter of 1998, an increase of $16.4 million or 16.9%. This increase was primarily due to increased gas purchases of $20.1 million as a result of increased sales and customer growth. OTHER NONREGULATED EXPENSES/INCOME (ESI) Other operating expenses at ESI increased $0.8 million, or 39.9%, due to costs of $0.5 million associated with entering into gas pilot programs and increased benefit and payroll expenses of $0.3 million. ESI experienced gas trading losses of $0.2 million in the first quarter of 1999 and $1.1 million in the first quarter of 1998 due to decreased trading activities. PRICE RISK MANAGEMENT ACTIVITIES (ESI) WPSR has minimal price risk management activities at its utility operations, and much of that price risk exposure is recoverable through customer rates; however, ESI actively engages in price risk management activities. ESI utilizes derivative financial and commodity instruments ("derivatives"), including futures and forward contracts, to reduce market risk associated with fluctuations in the price of natural gas and electricity sold under firm commitments with certain of its customers. ESI also utilizes derivatives, including price swap agreements, call and put option contracts, and futures and forward contracts, to manage risk associated with a portion of its anticipated supply requirements. In addition, ESI utilizes derivatives, within specified guidelines, for trading purposes. The notional amount of derivatives outstanding at March 31, 1999, decreased from December 31, 1998, primarily due to the end of the 1999 winter season. This amounted to a decrease of approximately 52.0% for hedging activities and 84.0% for trading -19- activities. As ESI enters into supply commitments for the 1999-2000 winter season, it expects that the notional amount of derivatives outstanding will increase. OTHER NONREGULATED OPERATIONS Losses at PDI were $0.8 million in the first quarter of 1999 compared with $0.6 million in the first quarter of 1998. The increase in losses at PDI was primarily due to additional costs incurred in the first quarter of 1999 for the operation of new projects. Other operating expenses at PDI increased $1.2 million due to the higher project expenses. Operational problems related to the bonding process at ECO Coal Pelletization #12, LLC have been resolved with additional sales expected in the second quarter of 1999. The first quarter of 1998 included a one-time dividend of $2.0 million received by WPSR from a venture capital investment. This dividend represented a four cents per share increase to 1998 first quarter earnings. FINANCIAL CONDITION - WPSR INVESTMENTS AND FINANCING A special common stock dividend of $15.0 million was paid by WPSC to WPSR in February 1999. The special dividend allowed WPSC's average equity capitalization ratio for ratemaking to remain at approximately 54%, the level approved by the PSCW. Internally generated funds exceeded WPSR's cash requirements in the first quarter of 1999 resulting in a $36.0 million reduction in short-term borrowings. WPSR's pretax interest coverage was 3.35 times for the 12 months ended March 31, 1999. See the table below for WPSR's credit ratings. Credit Ratings Standard & Poor's Moody's - -------------- ----------------- ------- Wisconsin Public Service Corporation Bonds AA+ Aa2 Preferred stock AA aa3 Commercial paper A1+ P1 WPS Resources Corporation Trust preferred securities A+ a1 Commercial paper A1+ P1 WPS Resources Capital Corporation Unsecured debt* AA A1 * No securities currently outstanding. WPSR will use internally-generated funds and short-term borrowing to 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. WPSR began issuing new shares of common stock for the Stock Investment Plan in January -20- 1999. WPSR may also expand its leveraged employee stock ownership plan during the next three-year period. WPSC makes large investments in capital assets. Construction expenditures for WPSC are expected to be approximately $376.0 million in the aggregate for the 1999 through 2001 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 WPSC for the three-year period will include the Kewaunee Nuclear Power Plant decommissioning trust fund contributions of $16.8 million. WPSC's agreement to purchase electricity from the De Pere Energy Center, a gas-fired cogeneration facility, will be accounted for as a capital lease. The De Pere Energy Center lease will be capitalized at approximately $78.0 million at the in-service date, expected to be June 1999. While not a capital expenditure, this will affect the capital structure. UPPCO will incur construction expenditures of about $23.0 million in the aggregate for the period 1999 through 2001, primarily for electric distribution improvements. Investment expenditures for nonregulated projects are uncertain since there are few firm commitments at this time. Approximately $38.0 million will be incurred in 1999 to purchase generating units located in the State of Maine and the Canadian Province of New Brunswick. Financing for most nonregulated projects is expected to be obtained through nonrecourse project financing and/or through a new subsidiary, WPS Resources Capital Corporation, which was formed in January 1999 to obtain funding for those projects. REGULATORY WPSC 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 will be effective for 1999 and 2000. The PSCW authorized a 12.1% return on WPSC equity for 1999 and 2000. This PSCW rate order will be reopened in the fall of 1999 to consider issues related to the Kewaunee Nuclear Power Plant, the recovery of deferred expenses related to the repowering of Pulliam Unit 3, and the fuel forecast for 2000. KEWAUNEE NUCLEAR POWER PLANT STEAM GENERATOR REPLACEMENT STATUS Replacement of the two steam generators at the Kewaunee Nuclear Power Plant is now scheduled for the fall of 2001. This reflects a delay of approximately 18 months. The previous schedule called for replacement in the spring of 2000. The delay is attributable to the inability of the manufacturer to meet the spring 2000 delivery schedule. Delays in meeting the delivery schedule did not allow for steam generator replacement to occur prior to the start of the hot summer weather in 2000. Therefore, the decision was made to store the steam generators after they are received and wait until the next scheduled refueling outage in the fall of 2001. It is anticipated that the delay will not adversely impact the reliability of Kewaunee in the interim. Plans to shutdown the plant for a spring of 2000 refueling remain unchanged. -21- Kewaunee is operated by WPSC and is jointly owned by WPSC, Alliant Energy, and Madison Gas and Electric Company. WPSC's agreement to buy Madison Gas and Electric's 17.8% share of the plant at the time of steam generator replacement remains unchanged. YEAR 2000 COMPLIANCE The Year 2000 issue arises because software programs, computer hardware, and equipment that have date sensitive software or embedded chips may recognize a date using "00" as the year 1900 rather than the year 2000. This may result in system failures or other disruptions of operations. WPSR and its subsidiary companies are committed to eliminating or minimizing adverse effects of the Year 2000 computer compliance issue on their business operations, including the products and services provided to customers, and to maintaining WPSR's reputation as an efficient and reliable supplier of energy. WPSR, however, is unable to guarantee that there will be no adverse effects as a result of the Year 2000 computer compliance issue because many aspects of compliance are beyond WPSR's direct control. WPSR has undertaken a program to assess Year 2000 compliance and to bring computer systems into compliance by the year 2000. All systems, including energy production and delivery systems, other embedded systems, and third party systems of suppliers are being evaluated to identify and resolve potential problems. A Year 2000 project plan which includes awareness, inventory and assessment, remediation, testing, and implementation has been developed. The formal awareness phase of the Year 2000 project which includes understanding and communication of the issue to employees, customers, suppliers, and other affected parties has been completed. The Year 2000 issue has been communicated to WPSR employees and customers via several media. All WPSR business unit leaders have been made aware of the Year 2000 project plan and their roles in implementing the plan. Communication and response to Year 2000 inquiries continue. The inventory and assessment phase which includes identification of all information and non-information technology systems and of non-compliant systems, applications, and hardware, has been completed. Action plans for remediation, which include modifications to bring systems into compliance, and action plans for testing including validation of compliance have been completed. Modifications of major in-house supported systems to correct Year 2000 problems have been underway since 1996. WPSR's Information Technology Department has identified five major systems. All of these systems (customer information, finance, human resources, materials management, and facility management) are currently Year 2000 compliant. In addition, all other systems including non-information technology systems have been identified and ranked as to the risk posed by non-compliance. Non-information technology systems include computer and embedded systems related to WPSR's power plant, system operating, hydroelectric, transmission, -22- and other operating functions. All systems ranked as "critical," "severe," or "high" are scheduled to be Year 2000 compliant by early May 1999. WPSR has hired an external consulting group to monitor the progress of its Year 2000 compliance activities. The consulting group's responsibilities include performing a status check on WPSR's ability to achieve Year 2000 compliance. In addition, WPSR is identifying, contacting, and assessing suppliers and other business partners for Year 2000 readiness, as these external parties may have the potential to impact WPSR's Year 2000 readiness. WPSR is also working to address Year 2000 issues related to all joint ownership facilities. At the present time, WPSR is not aware of problems that would materially impact the company's operations. However, WPSR has no means of ensuring that all third parties will be Year 2000 compliant in a timely manner, and the inability of these parties to resolve successfully their Year 2000 issues could have a material impact on the operations of WPSR's subsidiaries. Due to fewer expenditures for hardware and software than originally anticipated, the estimate of total Year 2000 project costs has been reduced to $9.0 million. This estimate is considered reasonable and the Wisconsin retail portion of this cost has been approved for rate recovery by the PSCW. This estimate includes internal labor costs of $4.5 million, software replacement costs for non-compliant products of $2.0 million, and contract labor costs of $2.5 million. Expenditures for the Year 2000 project incurred through March 31, 1999, were $2.4 million. Major expenditures for hardware, software, and other equipment were made in the fourth quarter of 1998 and additional expenditures will be made in the first half of 1999. The failure to correct a material Year 2000 problem could result in an interruption in, or the failure of, certain normal business activities or operations which could materially affect WPSR's results of operations. However, due to the general uncertainty inherent in the Year 2000 issue, WPSR is unable to determine at this time whether the consequences of Year 2000 failures will have a material impact on operations. A preliminary identification of potential risks related to the failure to be in compliance by the Year 2000 has been made. The most reasonably likely worst case Year 2000 scenario includes loss or unavailability of some generation, partial loss of system monitoring and control functions, partial loss of voice communications, loss of transmission facilities and loss of load or uncharacteristic loads. Management believes that the probable extent of any of these events is not significantly in excess of similar events caused by normal risks and the handling of such events is within the capabilities of the systems. WPSR is assessing the potential impact of failure to achieve Year 2000 compliance with respect to each of the following: - - Generation availability - - System monitoring and control functions - - Ability to restart generators that are out of service for planned or unplanned outages - - Company-owned voice/data communications - - Transmission facilities - - System protection -23- - - Critical operating data (i.e., generation plant data) - - Electric and gas distribution systems - - Pipelines' constraints to the supply or pressure of natural gas - - Major support systems Contingency plans for dealing with Year 2000 issues have been developed for each application that has been identified as "critical" or "severe." In addition, a proposal for a "quick response team" concept has been drafted, and a process for handling unexpected Year 2000 problems has been formalized. Plans to conduct a crisis management training session utilizing a Year 2000 case study will be completed during the second quarter of 1999. GENERATION ASSET ACQUISITION PDI has received approval from the Maine Public Service Commission to purchase generation assets from Maine Public Service Company for approximately $38.0 million. The closing of the agreement to purchase hydroelectric, steam, and diesel units in the State of Maine and in the Canadian Province of New Brunswick is scheduled for June 1999. ENVIRONMENTAL In September 1998, the Environmental Protection Agency required certain states, including Wisconsin, to develop plans to reduce the emission of nitrogen oxides from sources within the state by May of 2003. WPSC requested and was granted authority from the PSCW to proceed immediately with a plan to make necessary modifications to comply with the new nitrogen oxide emission requirements. WPSC was also granted approval to defer the costs associated with the modifications until such time as the deferred costs can be considered for rate recovery. Capital expenditures to comply with the new requirements in current year dollars are projected to be between $62.4 million and $112.3 million and operating and maintenance expenditures are projected to be between $2.0 million and $6.0 million annually. -24- RESULTS OF OPERATIONS - WISCONSIN PUBLIC SERVICE CORPORATION WPSC is a regulated electric and gas utility. Electric operations accounted for 65% of first quarter 1999 revenues, while gas operations contributed 35% to first quarter 1999 revenues. FIRST QUARTER 1999 COMPARED WITH FIRST QUARTER 1998 WISCONSIN PUBLIC SERVICE CORPORATION OVERVIEW Revenues at WPSC were $195.8 million in the first quarter of 1999 compared with $178.3 million in the first quarter of 1998, an increase of 9.8%. Earnings were $23.4 million in the first quarter of 1999 and $17.9 million in the first quarter of 1998, an increase of 30.7%. The primary reasons for the increase in earnings at WPSC were increased electric and gas utility margins largely as a result of the implementation of a January 15, 1999, PSCW rate order. Partially offsetting these factors were increases in other operating expenses and in maintenance expense. ELECTRIC UTILITY OPERATIONS WPSC's electric utility margin increased $8.8 million, or 9.8%, primarily due to the implementation of a January 15, 1999, PSCW rate order which authorized a 6.3% increase in Wisconsin retail electric rates. First Quarter WPSC ------------------------ Electric Margins (Thousands) 1999 1998 - ---------------------------- ---- ---- Revenues $127,537 $112,806 Fuel and purchased power 39,774 33,783 ------- ------- Margin $ 87,763 $ 79,023 ======= ======= Sales in kilowatt-hours (Thousands) 2,974,684 2,773,751 WPSC's electric utility revenues increased $14.7 million, or 13.1%, largely due to the electric rate increase at WPSC. Also contributing to higher electric revenues was a 7.2% increase in overall kilowatt-hour sales. These sales were largely the result of weather that was 8.7% colder in the first quarter of 1999 than in the first quarter of 1998. WPSC's electric production fuel expense increased $0.9 million, or 3.4%, primarily as a result of increased generation requirements at WPSC's combustion turbine and nuclear plants in the first quarter of 1999. Partially offsetting this factor was a decrease in production at WPSC's fossil fuel plants as a result of scheduled maintenance activities. WPSC's purchased power expense increased $5.1 million, or 62.7%, primarily due to additional purchase requirements and higher cost of purchases in the first -25- quarter of 1999. Purchase requirements were higher due to lack of production at WPSC's fossil fuel plants which were off-line for scheduled maintenance activities. The PSCW allows WPSC to prospectively adjust the amount billed to Wisconsin retail customers for fuel and purchased power if costs fall outside a specified range. WPSC 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 1999 fuel costs at March 31, 1999 are within this 2.0% window. GAS UTILITY OPERATIONS WPSC's gas margin increased $5.3 million in the first quarter of 1999, or 23.1%, primarily due to the implementation of the PSCW rate order which authorized a 5.1% increase in Wisconsin retail gas rates. First Quarter WPSC ---------------------- Gas Margins (Thousands) 1999 1998 - ----------------------- ---- ---- Revenues $68,299 $65,484 Purchase costs 39,871 42,394 ------ ------ Margin $28,428 $23,090 ====== ====== Volume in therms (Thousands) 250,885 223,804 WPSC's gas operating revenues increased $2.8 million, or 4.3%. This increase was due to the implementation of new Wisconsin retail gas rates and a 12.1% increase in overall therm sales as a result of colder weather. WPSC's gas purchase costs decreased $2.5 million, or 6.0%. This decrease was due to lower gas prices in the first quarter of 1999 which more than offset increased purchases due to additional customer demand. Under current regulatory practice, the PSCW and the Michigan Public Service Commission allow WPSC to pass changes in the cost of gas on to customers through a purchased gas adjustment clause. OTHER UTILITY EXPENSES/INCOME Other operating expenses at WPSC increased $3.5 million, or 10.9%, primarily due to higher customer service expense of $0.8 million, higher administrative salary expense of $0.8 million, higher miscellaneous distribution expense of $0.8 million, and higher pension costs of $0.6 million in the first quarter of 1999. Maintenance expense at WPSC increased $4.1 million, or 41.5%, primarily due to additional costs of $3.5 million for scheduled maintenance activities at the fossil plants. -26- FINANCIAL CONDITION - WPSC INVESTMENTS AND FINANCING A special common stock dividend of $15.0 million was paid by WPSC to WPSR in February 1999. The special dividend allowed WPSC's average equity capitalization ratio for ratemaking to remain at approximately 54%, the level approved by the PSCW. Internally generated funds exceeded WPSC's cash requirements in the first quarter of 1999 resulting in an $11.0 million reduction in short-term borrowings. WPSC's pretax interest coverage was 4.80 times for the 12 months ended March 31, 1999. See the table below for WPSC's credit ratings. Credit Ratings Standard & Poor's Moody's - -------------- ----------------- ------- Wisconsin Public Service Corporation Bonds AA+ Aa2 Preferred stock AA aa3 Commercial paper A1+ P1 See WPSR's management discussion at page 19 for additional information regarding WPSC's financial condition. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Quantitative and Qualitative Disclosures About Market Risk are reported under "Price Risk Management Activities (ESI)" as part of Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, on pages 19 and 20. -27- PART II. OTHER INFORMATION ITEM 5. OTHER INFORMATION RELIABILITY On April 15, 1999, WPSC and Minnesota Power Company announced a joint proposal to construct a 345,000 volt transmission line between WPSC's Weston Substation near Wausau, Wisconsin and Minnesota Power's Arrowhead Substation near Duluth, Minnesota, a distance of about 250 miles. WPSC is also proposing to construct a new substation and a 115,000 volt transmission line that would connect the existing Rhinelander area transmission system to the new 345,000 volt transmission line. If approved by the PSCW and the Minnesota Environmental Quality Board, the proposed 345,000 volt transmission line would substantially enhance the reliability of the electric system in northern and eastern Wisconsin. It also would provide an additional path for power to be imported into Wisconsin from the north and west and enhance the reliability of the existing Wisconsin-Minnesota transmission system interface. Depending on siting and regulatory review and approval, it is estimated that the new line could be in service by the end of 2002. The cost of WPSC's portion of this project could range from $75 million to $120 million, depending on the final determination of the portion to be owned by WPSC in Wisconsin. KEWAUNEE NUCLEAR POWER PLANT STEAM GENERATOR REPLACEMENT STATUS Replacement of the two steam generators at the Kewaunee Nuclear Power Plant is now scheduled for the fall of 2001. This reflects a delay of approximately 18 months. The previous schedule called for replacement in the spring of 2000. The delay is attributable to the inability of the manufacturer to meet the spring 2000 delivery schedule. Delays in meeting the delivery schedule did not allow for steam generator replacement to occur prior to the start of the hot summer weather in 2000. Therefore, the decision was made to store the steam generators after they are received and wait until the next scheduled refueling outage in the fall of 2001. It is anticipated that the delay will not adversely impact the reliability of Kewaunee in the interim. Plans to shutdown the plant for a spring of 2000 refueling remain unchanged. Kewaunee is operated by WPSC and is jointly owned by WPSC, Alliant Energy, and Madison Gas and Electric Company. WPSC's agreement to buy Madison Gas and Electric's 17.8% share of the plant at the time of steam generator replacement remains unchanged. KEWAUNEE NUCLEAR POWER PLANT PERFORMANCE REVIEW The Nuclear Regulatory Commission completed a Plant Performance Review of the Kewaunee plant on February 4, 1999. This process replaced the previous Systematic Assessment of Licensee Performance which provided numerical rankings of various plant performance characteristics. The Plant Performance Review process does not provide numerical rankings but is designed to concentrate on identifying areas for improvement. The Nuclear Regulatory Commission indicated that overall performance has been acceptable during the assessment period. The report identified some aspects of operations and timeliness in closing out corrective actions as areas that warranted -28- improvement. The report also noted strengths related to plant material condition, teamwork, and the fact that the plant had few operational events. UPPER PENINSULA POWER COMPANY On April 27, 1999, UPPCO, a utility subsidiary of WPSR, reached final agreement on a new three-year collective bargaining agreement with Local 510 of the International Brotherhood of Electrical Workers, AFL-CIO. The existing collective bargaining agreement expired on April 30, 1999. Approximately 131 of the 195 employees of UPPCO are covered by this collective bargaining agreement. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS The following documents are filed herewith: Exhibit 11 Statement Regarding Computation of Per Share Earnings WPS Resources Corporation Exhibit 27 Financial Data Schedule WPS Resources Corporation Wisconsin Public Service Corporation (b) REPORT ON FORM 8-K An amendment on Form 8-K/A filed March 1, 1999 amending the Current Report on Form 8-K dated December 10, 1999 to indicate that portions of Exhibit 99-2, the settlement and ownership transfer agreement between Wisconsin Public Service Corporation and Madison Gas and Electric Company, had been omitted based upon a request for confidential treatment. The non-public information has been filed separately with the Securities and Exchange Commission. -29- 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: April 30, 1999 /s/ Diane L. Ford _________________________________ Diane L. Ford Controller and Chief Accounting Officer (Duly Authorized Officer and Chief Accounting Officer) -30- 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: April 30, 1999 /s/ Diane L. Ford ____________________________________ Diane L. Ford Controller (Duly Authorized Officer and Chief Accounting Officer) -31- WPS RESOURCES CORPORATION AND WISCONSIN PUBLIC SERVICE CORPORATION EXHIBIT INDEX TO FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1999 Exhibit No. Description ___________ ___________ 11 Statement Regarding Computation of Per Share Earnings WPS Resources Corporation 27 Financial Data Schedule WPS Resources Corporation Wisconsin Public Service Corporation -32- EX-11 2 EXHIBIT 11 WPS RESOURCES CORPORATION
================================================================================= INFORMATION WITH RESPECT TO THE COMPUTATION Three Months Ended OF EARNINGS PER SHARE OF COMMON STOCK March 31 (Thousands) 1999 1998 ================================================================================= Shares of common stock at beginning of period 26,502 26,519 Shares of common stock purchased for deferred compensation trust - Date of Deferred Number Compensation Trust Purchase of Shares - --------------------------- --------- January 20, 1998 2 2 February 23, 1998 1 1 March 23, 1998 2 2 January 20, 1999 1 1 February 22, 1999 1 1 March 22, 1999 2 2 Shares of Common Stock Issued Number During this Period of Shares - ----------------------------- --------- January 25, 1999 12 12 February 25, 1999 16 16 March 25, 1999 54 54 - --------------------------------------------------------------------------------- Shares of common stock at end of period 26,580 26,514 ================================================================================= Computation of daily weighted average shares: Shares of common stock at beginning of period - Number Number of of Days Shares ------ ------ March 31, 1998 19 26,519 503,861 March 31, 1999 19 26,502 503,538 Shares of common stock after purchase for deferred compensation trust - Number Number of of Days Shares ------ ------ March 31, 1998 34 26,517 901,578 March 31, 1998 28 26,516 742,448 March 31, 1998 9 26,514 238,626 March 31, 1999 5 26,501 132,505 March 31, 1999 28 26,513 742,364 March 31, 1999 3 26,512 79,536 March 31, 1999 25 26,528 663,200 March 31, 1999 3 26,526 79,578 March 31, 1999 7 26,580 186,060 - --------------------------------------------------------------------------------- Total days - weighted 2,386,781 2,386,513 ================================================================================= Average number of shares of common stock based on daily weighted average computations 26,520 26,516 ================================================================================= Earnings on common stock, as set forth in statements of income $22,752 $17,952 ================================================================================= Earnings per share of common stock based on weighted average shares $0.86 $0.68 =================================================================================
EX-27 3
UT EXHIBIT 27 0000916863 WPS RESOURCES CORPORATION 1 WISCONSIN PUBLIC SERVICE CORPORATION 1,000 3-MOS DEC-31-1998 JAN-01-1999 MAR-31-1999 PER-BOOK 1,014,634 39,499 222,488 68,700 140,634 1,485,955 26,580 165,948 336,513 529,041 0 51,200 343,438 10,303 0 14,000 884 0 0 0 537,089 1,485,955 329,834 12,623 288,388 288,388 41,446 2,511 43,957 8,019 23,530 778 22,752 13,157 8,926 72,641 0.86 0.86 Operating expenses exclude income taxes of $12,623. Operating income is before income taxes of $12,623. Income before interest expense is before income taxes of $12,623. Net income includes minority interest of $(215).
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