Form 10-K 12/31/05 WPS Resources & Wis Public Service
UNITED
STATES
SECURITIES
AND
EXCHANGE COMMISSION
Washington,
D. C.
20549
FORM
10-K
(Mark
One)
[X]
|
ANNUAL
REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF
1934
|
For
the fiscal year
ended December 31, 2005
OR
[
]
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the transition
period from ________________ to ___________________
Commission
File
Number
|
Registrants;
State of Incorporation;
Address;
and Telephone Number
|
IRS
Employer
Identification
No.
|
|
|
|
1-11337
|
WPS RESOURCES
CORPORATION
(A
Wisconsin
Corporation)
700
North
Adams Street
P.
O. Box
19001
Green
Bay, WI
54307-9001
920-433-4901
|
39-1775292
|
|
|
|
1-3016
|
WISCONSIN
PUBLIC SERVICE CORPORATION
(A
Wisconsin
Corporation)
700
North
Adams Street
P.
O. Box
19001
Green
Bay, WI
54307-9001
800-450-7260
|
39-0715160
|
Securities
registered pursuant to Section 12(b) of the Act:
|
Title
of
each class
|
Name
of each
exchange
on
which
registered
|
|
|
|
WPS RESOURCES
CORPORATION
|
Common
Stock,
$1
par
value
|
New
York
Stock Exchange
|
|
|
|
|
Rights
to
purchase
Common
Stock
pursuant to
Rights
Agreement dated
December
12,
1996, as amended
|
New
York
Stock Exchange
|
Securities
registered pursuant to Section 12(g) of the Act:
WISCONSIN
PUBLIC SERVICE CORPORATION
|
|
|
Preferred
Stock, Cumulative, $100 par value
|
|
|
5.00%
Series
5.04%
Series
|
5.08%
Series
6.76%
Series
|
Indicate
by check
mark if the Registrants are well-known seasoned issuers, as defined in Rule
405
of the Securities Act.
WPS
Resources
Corporation
|
Yes
[X] No
[
]
|
Wisconsin
Public Service Corporation
|
Yes
[
] No
[X]
|
Indicate
by check
mark if the Registrants are not required to file reports pursuant to Section
13
or Section 15(d) of the Exchange Act.
WPS
Resources
Corporation
|
Yes
[
] No
[X]
|
Wisconsin
Public Service Corporation
|
Yes
[
] No
[X]
|
Indicate
by check
mark whether the Registrants (1) have 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) have been subject to such filing requirements for
the
past 90 days.
Yes
[X] No [
]
Indicate
by check
mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K
is not contained herein, and will not be contained, to the best of Registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.
[
]
Indicate
by check
mark whether the Registrants are large accelerated filers, accelerated filers,
or non-accelerated filers. See definition of "accelerated filer and large
accelerated filer" in Rule 12b-2 of the Exchange Act.
WPS
Resources Corporation
|
Large
accelerated filer [X]
|
Accelerated
filer [ ]
|
Non-accelerated
filer [ ]
|
|
Wisconsin
Public Service Corporation
|
Large
accelerated filer [ ]
|
Accelerated
filer [ ]
|
Non-accelerated
filer [X]
|
Indicate
by check
mark whether the Registrants are shell companies (as defined in Rule 12b-2
of
the Exchange Act).
WPS
Resources
Corporation
|
Yes
[
] No
[X]
|
Wisconsin
Public Service Corporation
|
Yes
[
] No
[X]
|
State
the
aggregate market value of the voting and
non-voting
common equity held by non-affiliates of the Registrants.
|
|
WPS RESOURCES
CORPORATION
|
$2,134,639,238
as of June 30, 2005
|
|
|
WISCONSIN
PUBLIC SERVICE CORPORATION
|
$0
as of June
30, 2005
|
Number
of
shares outstanding of each class
of
common
stock, as of February 21, 2006
|
|
|
WPS RESOURCES
CORPORATION
|
Common
Stock,
$1 par value, 40,160,975 shares
|
|
|
WISCONSIN
PUBLIC SERVICE CORPORATION
|
Common
Stock,
$4 par value, 23,896,962 shares. WPS Resources Corporation is the
sole holder of Wisconsin Public Service Corporation Common
Stock.
|
DOCUMENT
INCORPORATED BY REFERENCE
Definitive
proxy
statement for the WPS Resources Corporation Annual Meeting of Shareholders
to be held on May 18, 2006 is incorporated by reference into Part
III.
WPS
RESOURCES CORPORATION
and
WISCONSIN
PUBLIC SERVICE CORPORATION
ANNUAL
REPORT ON FORM 10-K
For
the
Year Ended December 31, 2005
TABLE
OF
CONTENTS
|
|
|
|
|
Page
|
|
|
|
1
|
|
|
|
3
|
|
|
|
|
ITEM
1.
|
BUSINESS
|
3
|
|
|
|
|
|
GENERAL
|
3
|
|
|
|
|
|
|
|
REGULATED
ELECTRIC OPERATIONS
|
5
|
|
|
|
|
|
|
|
|
Facilities
|
|
|
|
|
Fuel
Supply
|
|
|
|
|
Regulatory
Matters
|
|
|
|
|
Other
Matters
|
|
|
|
|
Electric
Operating Statistics
|
|
|
|
|
|
|
|
|
REGULATED
NATURAL GAS OPERATIONS
|
13
|
|
|
|
|
|
|
|
|
Facilities
|
|
|
|
|
Natural
Gas
Supply
|
|
|
|
|
Regulatory
Matters
|
|
|
|
|
Other
Matters
|
|
|
|
|
Natural
Gas
Operating Statistics
|
|
|
|
|
|
|
|
|
NONREGULATED
ENERGY SERVICES
|
17
|
|
|
|
|
|
|
|
|
Facilities
|
|
|
|
|
Fuel
Supply
|
|
|
|
|
Licenses
|
|
|
|
|
Other
Matters
|
|
|
|
|
|
|
|
|
ENVIRONMENTAL
MATTERS
|
21
|
|
|
|
|
|
|
|
CAPITAL
REQUIREMENTS
|
21
|
|
|
|
|
|
|
|
EMPLOYEES
|
21
|
|
|
|
|
|
|
AVAILABLE
INFORMATION
|
22
|
|
|
|
|
|
RISK
FACTORS
|
23
|
|
|
|
|
|
UNRESOLVED
STAFF COMMENTS
|
27
|
|
|
|
|
|
PROPERTIES
|
28
|
|
|
|
|
|
A.
|
REGULATED
|
28
|
|
|
|
|
|
|
B.
|
NONREGULATED
|
29
|
|
|
|
|
|
|
LEGAL
PROCEEDINGS
|
30
|
|
|
|
|
|
SUBMISSION
OF
MATTERS TO A VOTE OF SECURITY HOLDERS
|
31
|
|
|
|
|
|
|
EXECUTIVE
OFFICERS OF THE REGISTRANTS
|
31
|
|
|
|
|
|
A.
|
Executive
Officers of WPS Resources Corporation as of January 1,
2006
|
31
|
|
B.
|
Executive
Officers of Wisconsin Public Service Corporation as of January
1,
2006
|
32
|
|
33
|
|
|
|
|
|
|
MARKET
FOR
REGISTRANTS' COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
|
33
|
|
|
|
|
SELECTED
FINANCIAL DATA
|
34
|
|
|
|
|
|
|
WPS
Resources
Corporation Comparative Financial Statements and Financial Statistics
(2001 to 2005)
|
34
|
|
|
Wisconsin
Public Service Corporation Comparative Financial Statements and
Financial
Statistics (2001 to 2005)
|
34
|
|
|
|
|
|
ITEM
7.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
35
|
|
|
|
|
|
|
|
35
|
|
|
|
Introduction
|
|
|
|
|
Results
of
Operations
|
|
|
|
|
Balance
Sheet
2005 Compared with 2004
|
|
|
|
|
Liquidity
and
Capital Resources
|
|
|
|
|
Guarantees
and Off Balance Sheet Arrangements
|
|
|
|
|
Market
Price
Risk Management Activities
|
|
|
|
|
Critical
Accounting Policies
|
|
|
|
|
Impact
of
Inflation
|
|
|
|
|
|
|
|
|
|
81
|
|
|
|
Results
of
Operations
|
|
|
|
|
Balance
Sheet
2005 Compared with 2004
|
|
|
|
|
Liquidity
and
Capital Resources
|
|
|
|
|
Off
Balance
Sheet Arrangements
|
|
|
|
|
Critical
Accounting Policies
|
|
|
|
|
Impact
of
Inflation
|
|
|
|
|
|
|
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
93
|
|
|
|
|
ITEM
8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
96
|
|
|
|
|
WPS
RESOURCES
CORPORATION
|
96
|
|
|
|
96
|
|
|
|
97
|
|
|
|
99
|
|
|
|
100
|
|
|
|
101
|
|
|
|
102
|
|
|
|
103
|
|
|
Note
1
|
Summary
Of
Significant Accounting Policies
|
103
|
|
|
|
Note
2
|
Fair
Value Of
Financial Instruments
|
111
|
|
|
|
Note
3
|
Risk
Management Activities
|
112
|
|
|
|
Note
4
|
Sunbury
Plant
|
114
|
|
|
|
Note
5
|
Property,
Plant, And Equipment
|
115
|
|
|
|
Note
6
|
Acquisitions
And Sales Of Assets
|
115
|
|
|
|
Note
7
|
Jointly
Owned
Utility Facilities
|
119
|
|
|
|
Note
8
|
Nuclear
Decommissioning Trust
|
119
|
|
|
|
Note
9
|
Regulatory
Assets And Liabilities
|
120
|
|
|
|
Note
10
|
Investments
In Affiliates, At Equity Method
|
121
|
|
|
|
Note
11
|
Goodwill
And
Other Intangible Assets
|
123
|
|
|
|
Note
12
|
Leases
|
124
|
|
|
|
Note
13
|
Short-Term
Debt And Lines Of Credit
|
124
|
|
|
|
Note
14
|
Long-Term
Debt
|
125
|
|
|
|
Note
15
|
Asset
Retirement Obligations
|
127
|
|
|
|
Note
16
|
Income
Taxes
|
128
|
|
|
|
Note
17
|
Commitments
And Contingencies
|
129
|
|
|
|
Note
18
|
Guarantees
|
138
|
|
|
|
Note
19
|
Employee
Benefit Plans
|
140
|
|
|
|
Note
20
|
Preferred
Stock Of Subsidiary
|
145
|
|
|
|
Note
21
|
Common
Equity
|
145
|
|
|
|
Note
22
|
Stock-Based
Compensation
|
148
|
|
|
|
Note
23
|
Regulatory
Environment
|
152
|
|
|
|
Note
24
|
Variable
Interest Entities
|
155
|
|
|
|
Note
25
|
Company-Obligated
Mandatorily Redeemable Trust Preferred Securities Of Preferred
Stock
Trust
|
156
|
|
|
|
Note
26
|
Segments
Of
Business
|
156
|
|
|
|
Note
27
|
Quarterly
Financial Information (Unaudited)
|
160
|
|
|
|
|
161
|
|
|
|
|
|
WISCONSIN
PUBLIC SERVICE CORPORATION
|
162
|
|
|
|
162
|
|
|
|
163
|
|
|
|
165
|
|
|
|
166
|
|
|
|
167
|
|
|
|
168
|
|
|
|
169
|
|
|
|
170
|
|
|
Note
1
|
Cash
And Cash
Equivalents
|
170
|
|
|
|
Note
2
|
Fair
Value Of
Financial Instruments
|
171
|
|
|
|
Note
3
|
Regulatory
Assets And Liabilities
|
171
|
|
|
|
Note
4
|
Leases
|
172
|
|
|
|
Note
5
|
Common
Equity
|
172
|
|
|
|
Note
6
|
Preferred
Stock
|
172
|
|
|
|
Note
7
|
Short-Term
Debt And Lines Of Credit
|
173
|
|
|
|
Note
8
|
Long-Term
Debt
|
173
|
|
|
|
Note
9
|
Asset
Retirement Obligations
|
174
|
|
|
|
Note
10
|
Income
Taxes
|
174
|
|
|
|
Note
11
|
Segments
Of
Business
|
175
|
|
|
|
Note
12
|
Quarterly
Financial Information (Unaudited)
|
176
|
|
|
|
Note
13
|
Related
Party
Transactions
|
177
|
|
|
|
|
178
|
|
|
|
|
|
CHANGES
IN
AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
179
|
|
|
|
|
CONTROLS
AND
PROCEDURES
|
179
|
|
|
|
|
OTHER
INFORMATION
|
180
|
|
|
|
|
180
|
|
|
|
|
DIRECTORS
AND
EXECUTIVE OFFICERS OF THE REGISTRANTS
|
180
|
|
|
|
|
EXECUTIVE
COMPENSATION
|
180
|
|
|
|
|
|
|
WPS
Resources
Corporation
|
|
|
|
Wisconsin
Public Service Corporation
|
|
|
|
|
|
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
|
186
|
|
|
|
|
|
|
WPS
Resources
Corporation
|
|
|
|
Wisconsin
Public Service Corporation
|
|
|
|
Equity
Compensation Plan Information
|
|
|
|
|
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
|
187
|
|
|
|
|
|
PRINCIPAL
ACCOUNTING FEES AND SERVICES
|
187
|
|
|
|
|
189
|
|
|
|
|
EXHIBITS
AND
FINANCIAL STATEMENT SCHEDULES
|
189
|
|
|
|
|
Documents
Filed as Part of this Report
|
|
|
|
Consolidated
Financial Statements
|
|
|
|
Financial
Statement Schedules
|
|
|
|
Listing
of
Exhibits
|
|
|
|
|
196
|
|
|
|
SCHEDULE
I -
CONDENSED PARENT COMPANY FINANCIAL STATEMENTS WPS RESOURCES
CORPORATION (PARENT COMPANY ONLY)
|
197
|
|
|
|
197
|
|
|
|
198
|
|
|
|
199
|
|
|
|
200
|
|
|
|
|
|
204
|
|
|
|
|
205
|
|
|
|
206
|
Acronyms
Used in this Annual Report on Form 10-K
|
|
|
ATC
|
American
Transmission Company LLC
|
DOE
|
United
States
Department of Energy
|
DPC
|
Dairyland
Power Cooperative
|
EPA
|
United
States
Environmental Protection Agency
|
ESI
|
WPS Energy
Services, Inc.
|
ESOP
|
Employee
Stock Ownership Plan
|
FASB
|
Financial
Accounting Standards Board
|
FERC
|
Federal
Energy Regulatory Commission
|
MISO
|
Midwest
Independent Transmission System Operator
|
MPSC
|
Michigan
Public Service Commission
|
PDI
|
WPS Power
Development, LLC
|
PSCW
|
Public
Service Commission of Wisconsin
|
SEC
|
Securities
and Exchange Commission
|
SFAS
|
Statement
of
Financial Accounting Standards
|
UPPCO
|
Upper
Peninsula Power Company
|
WDNR
|
Wisconsin
Department of Natural Resources
|
WPSC
|
Wisconsin
Public Service Corporation
|
|
|
Except
for
historical data and statements of current fact, the information contained
or
incorporated by reference in this document constitutes forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act
of
1934, as amended. Any references to plans, goals, beliefs or expectations
in
respect to future events and conditions or to estimates are forward-looking
statements. Although we believe that statements of our expectations are based
on
reasonable assumptions, forward-looking statements are inherently uncertain
and
subject to risks and should be viewed with caution. Actual results or experience
could differ materially from the forward-looking statements as a result of
many
factors.
In
addition to statements regarding trends or estimates in Management's Discussion
and Analysis of Financial Condition and Results of Operations included in
this
Annual Report on Form 10-K, forward-looking statements included or incorporated
in this Annual Report on Form 10-K include, but are not limited to, statements
regarding future:
·
|
Revenues
or
expenses;
|
·
|
Capital
expenditure projections; and
|
·
|
Financing
sources.
|
Forward-looking
statements involve a number of risks and uncertainties. There are many factors
that could cause actual results to differ materially from those expressed
or
implied in this Annual Report on Form 10-K. Some risk factors that could
cause
results different from any forward-looking statement include those described
in
Item 1A - ''Risk Factors'' in this Annual Report on Form 10-K. Other factors
include:
·
|
Timely
completion of the purchase of the Michigan and Minnesota natural
gas
distribution operations from Aquila, Inc. and the successful integration
of these businesses, including receipt of the required regulatory
approval
in Minnesota;
|
·
|
Resolution
of
pending and future rate cases and negotiations (including the recovery
of
deferred costs) and other regulatory decisions regarding WPSC and
UPPCO;
|
·
|
The
impact of
recent and future federal and state regulatory changes, including
legislative and regulatory initiatives regarding deregulation and
restructuring of the electric utility industry, changes in environmental,
tax and other laws and regulations to which we and our subsidiaries
are
subject, as well as changes in application of existing laws and
regulations;
|
·
|
Current
and
future litigation, regulatory investigations, proceedings or inquiries,
including manufactured gas plant site cleanup, pending EPA investigations
of WPSC's generation facilities and the Weston 4 air
permit;
|
·
|
Resolution
of
audits by the Internal Revenue Service and various state revenue
agencies;
|
·
|
The
effects,
extent and timing of additional competition or regulation in the
markets
in which our subsidiaries operate;
|
·
|
The
impact of
fluctuations in commodity prices, interest rates and customer
demand;
|
·
|
Available
sources and costs of fuels and purchased power;
|
·
|
Ability
to
control costs (including asset retirement obligations);
|
·
|
Investment
performance of employee benefit plan assets;
|
·
|
Advances
in
technology;
|
·
|
Effects
of
and changes in political, legal and economic conditions and developments
in the United States and Canada;
|
·
|
The
performance of projects undertaken by nonregulated businesses and
the
success of efforts to invest in and develop new
opportunities;
|
·
|
Potential
business strategies, including acquisitions or dispositions of
assets or
businesses, which cannot be assured to be completed (such as the
acquisition of the Michigan and Minnesota natural gas distribution
operations from Aquila, construction of the Weston 4 power plant
and
construction of the Wausau, Wisconsin, to Duluth, Minnesota, transmission
line);
|
·
|
The
direct or
indirect effect resulting from terrorist incidents, natural disasters
or
responses to such events;
|
·
|
Financial
market conditions and the results of financing efforts, including
credit
ratings and risks associated with commodity prices, interest rates
and
counterparty credit;
|
·
|
Weather
and
other natural phenomena; and
|
·
|
The
effect of
accounting pronouncements issued periodically by standard-setting
bodies.
|
Except
to
the extent required by the federal securities laws, we undertake no obligation
to publicly update or revise any forward-looking statements, whether as a
result
of new information, future events or otherwise after the date of this Annual
Report on Form 10-K.
ITEM
1.
BUSINESS
For
purposes of
this Annual Report on Form 10-K, unless the context otherwise indicates,
when we
refer to "us," "we," "our" or "ours," we are describing WPS Resources.
WPS Resources
Corporation
WPS Resources
is domiciled in the United States and was incorporated in Wisconsin in
1993. WPS Resources is a holding company for regulated utility and
nonregulated business units. The approximate percentages of revenues and
net
income for the year ended 2005 and assets as of December 31, 2005 of
WPS Resources and each of its principal operating subsidiaries respecting
the business as a whole are:
|
Percent
of
Revenues
*
|
Percent
of
Net Income *
|
Percent
of
Assets
*
|
|
|
|
|
Wisconsin
Public Service Corporation
|
21%
|
52%
|
49%
|
Upper Peninsula
Power Company
|
2%
|
5%
|
3%
|
WPS Energy
Services, Inc.
|
78%
|
47%
|
45%
|
WPS Resources
Corporation
|
0%
|
(4%)
|
3%
|
|
*
|
The
percentages above may not total 100% due to intercompany transactions.
Intercompany transactions largely consist of energy sales and purchases
between subsidiaries and related intercompany receivables and
payables.
|
For
the last three
years, the majority of WPS Resources' revenues were earned within the
United States and the majority of long-lived assets were located within the
United States.
|
2005
|
2004
|
2003
|
Domestic
Revenues (millions)
|
$4,797.0
|
$3,823.8
|
$3,830.8
|
Foreign
Revenues (millions)
|
2,165.7
|
1,127.0
|
571.7
|
Total
Revenues (millions)
|
$6,962.7
|
$4,950.8
|
$4,402.5
|
|
|
|
|
Domestic
Long-lived Assets (millions)
|
$2,679.6
|
$2,906.6
|
$2,700.3
|
Foreign
Long-lived Assets (millions)
|
21.7
|
22.9
|
24.1
|
Total
Long-lived Assets (millions)
|
$2,701.3
|
$2,929.5
|
$2,724.4
|
Wisconsin
Public Service Corporation
WPSC,
a Wisconsin
corporation, is domiciled in the United States and began operations in
1883. WPSC is a regulated electric and natural gas utility serving an 11,000
square mile service territory in northeastern Wisconsin and an adjacent portion
of the Upper Peninsula of Michigan. In 2005, WPSC served 424,615 electric
customers and 307,540 natural gas customers. Wholesale electric service is
provided to various customers, including municipal utilities, electric
cooperatives, energy marketers, other investor-owned utilities and municipal
joint action agencies. For the last three years, all WPSC revenues were earned
within the United States and all of its assets were located within the
United States. In 2005, retail sales accounted for 90% of total revenues
while wholesale sales accounted for 10% of total revenues.
In
July 2005, WPSC sold its 59% interest in the Kewaunee nuclear power plant
(a
pressurized water reactor plant with a nameplate capacity of approximately
600 megawatts) to a subsidiary of Dominion Resources, Inc. In 2005, WPSC
also sold a 30% interest in its 500-megawatt Weston 4 power plant (currently
under construction) to DPC. On December 16, 2005, WPSC and
WPS Investments, LLC entered into an agreement with Allete, Inc. that
provides for Allete, through a Wisconsin subsidiary, to invest $60 million
in ATC in 2006 related to a portion of the Wausau, Wisconsin to Duluth,
Minnesota
transmission
line
which was previously being financed solely by WPSC. For more information
regarding these and other sales, see Management's Discussion and Analysis
of
Financial Condition and Results of Operation.
For
more
information regarding revenues, net income and total assets for regulated
electric and natural gas operations, see Note 26 to Consolidated Financial
Statements - Segments of Business.
Upper Peninsula
Power Company
UPPCO,
a Michigan
corporation, is domiciled in the United States and began operations in
1884. UPPCO is a regulated electric utility serving a 4,500 square mile
area of Michigan's Upper Peninsula. In 2005, UPPCO provided retail electric
service to 52,130 customers and wholesale electric service to 37 customers.
Total revenues consisted of 77% retail sales and 23% wholesale sales.
In
December 2005, UPPCO sold 1,366 acres of land along the Bond Falls
Reservoir, Boney Falls Basin and Cataract Basin, which was no longer needed
for
operations of UPPCO. The property was sold for approximately $5.9 million
and potentially up to an additional $3 million pending the removal of
certain contingencies.
For
more
information regarding revenues, net income and total assets for regulated
electric operations, see Note 26 to Consolidated Financial Statements -
Segments of Business.
WPS Investments,
LLC
WPS Investments,
LLC, a Wisconsin limited liability company organized in 2000, is a nonutility
company domiciled in the United States. On December 31, 2005,
WPS Investments was owned 24.91% by WPSC, 6.79% by UPPCO and 68.3% by
WPS Resources. The principal business of WPS Investments is to hold
the investment of WPS Resources and its subsidiaries in ATC and
Guardian Pipeline, LLC. At December 31, 2005, WPS Investments
owned a 31.0% interest in ATC and a 33.3% interest in Guardian Pipeline.
ATC
owns, maintains, monitors and operates electric transmission assets in portions
of Wisconsin, Michigan and Illinois. Guardian Pipeline is a 141-mile interstate
natural gas pipeline that transports natural gas from Joliet, Illinois to
Milwaukee Wisconsin.
WPS Energy
Services, Inc.
ESI,
a Wisconsin
corporation, is domiciled in the United States and was established in 1994.
ESI is a wholly owned non-regulated indirect subsidiary of WPS Resources.
ESI offers nonregulated natural gas, electricity and alternate fuel supplies,
as
well as energy management and consulting services, to retail and wholesale
customers primarily in the northeastern quadrant of the United States and
adjacent portions of Canada. In addition, ESI began operations in Texas in
2005.
Although ESI has a widening array of products and services, revenues are
primarily derived through sales of electricity and natural gas. ESI
had 2005
revenues of $5.4 billion (excluding intercompany revenues) and assets of
$2.4 billion at December 31, 2005.
ESI
currently owns
and operates, through its subsidiaries, electric generation facilities in
Wisconsin, Maine, Pennsylvania and New York in the United States and
New Brunswick in Canada, a 23.3% interest in a synthetic fuel processing
facility located in Kentucky, steam production facilities located in Arkansas
and Oregon and a gas storage field in Michigan.
For
more
information regarding revenues, net income and total assets see Note 26 to
Consolidated Financial Statements - Segments of Business.
WPS Resources'
regulated electric utility operations are provided through WPSC and UPPCO.
WPSC
generates and distributes electric energy in northeastern Wisconsin. The
cities
of Green Bay, Oshkosh, Wausau and Stevens Point are the largest communities
served by WPSC at the electric retail level. WPSC also provides retail electric
energy to a small portion of Michigan's Upper Peninsula, primarily in the
City
of Menominee. UPPCO provides electric energy in Michigan's Upper Peninsula.
The
largest community served by UPPCO at the electric retail level is the
Houghton/Hancock area.
Revenues,
volumes,
customers and plant assets for electric operations of WPSC and UPPCO were
as
follows:
|
2005
|
2004
|
2003
|
Electric
Revenues (millions)
|
|
|
|
Wisconsin
|
$
892.6
|
$769.3
|
$683.4
|
Michigan
|
144.5
|
127.3
|
130.7
|
Total
|
$1,037.1
|
$896.6
|
$814.1
|
|
|
|
|
Electric
Volumes (million megawatt-hours)
|
|
|
|
Wisconsin
|
13.4
|
12.9
|
12.3
|
Michigan
|
2.3
|
1.6
|
2.0
|
Total
|
15.7
|
14.5
|
14.3
|
|
|
|
|
Customers
|
|
|
|
Wisconsin
|
415,623
|
412,246
|
405,415
|
Michigan
|
61,159
|
60,935
|
60,511
|
Total
|
476,782
|
473,181
|
465,926
|
|
|
|
|
Plant
Assets (millions)
|
|
|
|
Wisconsin
|
$1,882.5
|
$2,062.2
|
$1,961.6
|
Michigan
|
215.7
|
204.5
|
184.6
|
Total
|
$2,098.2
|
$2,266.7
|
$2,146.2
|
In
2005, WPSC reached a firm net design peak of 2,189 megawatts on the
afternoon of July 13. At the time of this summer peak, WPSC's total firm
resources (i.e., generation plus firm purchases) totaled 2,681 megawatts.
As a result of continually reaching demand peaks in the summer months, primarily
due to air conditioning demand, the summer period is the most relevant for
WPSC
capacity planning purposes. WPSC expects future supply reserves to meet the
minimum 18% planning reserve margin criteria through 2006 as required by
the PSCW.
In
2005, UPPCO reached a firm net actual peak of 147 megawatts on the afternoon
of
December 19. At the time of this winter peak, UPPCO's total firm resources
totaled 188 megawatts. In 2005, UPPCO purchased 91% of its total energy
requirements. Remaining energy requirements were supplied by hydroelectric
and
combustion turbine facilities owned by UPPCO. During 2005, UPPCO purchased
65 megawatts of firm power from WPSC and 15 megawatts of firm power from a
nonaffiliated independent power producer. UPPCO also purchased non-firm power
from WPSC and Alliant Energy Corporation, among others. The purchases from
WPSC
represented 80% of UPPCO's total energy requirements in 2005. UPPCO has
contracted for 65 megawatts of capacity and energy from WPSC and 17
megawatts from a nonaffiliated independent power producer for 2006.
Facilities
Weston
Unit
4
In
October 2004, WPSC began construction of Weston 4, a 500-megawatt coal-fired
generation facility near Wausau, Wisconsin. The facility is estimated to
cost
approximately $779 million (including the acquisition of coal trains). The
plant is expected to be operational in June 2008.
In
November 2005, WPSC and DPC closed a transaction in which DPC acquired a
30%
ownership share of the Weston 4 power plant. The agreement gives DPC a
150-megawatt share of the plant. Under terms of the agreement, WPSC received
$95.1 million in cash from DPC for its share of the construction costs to
date. DPC will also provide 30% of all remaining costs to complete the
construction of the Weston 4 power plant. In addition, DPC will pay 30% of
the
cost of the coal train and of future operating and maintenance costs after
completion in 2008.
The
Weston 4
project is progressing on schedule with commercial operation expected by
June 1,
2008. At December 31, 2005, 80% of the project engineering costs were
complete and 24% of project construction work was complete. At December 31,
2005, WPSC as contractor for the project had entered into agreements for
approximately $640 million of project costs, which includes incurred costs
of approximately $381 million.
On
November 15, 2004, the Sierra Club filed a petition with the WDNR under Section
285.61, Wis. Stats. seeking a contested case hearing on the air permit issued
for the Weston 4 generation station. In February 2006, the Administrative
Law
Judge affirmed the Weston 4 air permit with modifications to the emission
limits for sulfur dioxide and nitrogen oxide from the coal-fired boiler and
particulate from the cooling tower. The modifications set limits that are
more
stringent than those set by the WDNR. WPS Resources is currently evaluating
the impact this decision may have on future operating costs. WPS Resources
expects construction of the Weston 4 facility to be completed in 2008 as
originally scheduled and within expected costs.
Weston
Units 1 through 3
WPSC
currently owns
and operates three coal-fired generation facilities at its Weston location.
The
plants have a total nameplate capacity of 492 megawatts. Weston 3 is the
largest with a nameplate capacity of 350 megawatts.
Pulliam
WPSC
also owns and
operates six coal-fired generation units at its Pulliam plant located in
Green Bay, Wisconsin. The units at the Pulliam site have a combined
nameplate capacity of 370 megawatts, with the largest unit having a
nameplate capacity of 125 megawatts.
Other
Generation Facilities
WPSC
has a 31.8%
ownership interest in Columbia Units 1 and 2, located in Portage, Wisconsin
(each a 527 megawatt generating station operated by Wisconsin Power and
Light Company) and a 31.8% ownership interest in Edgewater Unit 4 located
in
Sheboygan, Wisconsin (a 330 megawatt generating station operated by Wisconsin
Power and Light Company). These facilities are jointly owned by WPSC, Wisconsin
Power and Light and various other utilities.
In
addition to the facilities described above, WPSC and UPPCO own 24 hydroelectric
generation facilities and 11 combustion turbine generation units. In addition,
WPSC owns a 50% interest in Wisconsin River Power Company. Wisconsin River
Power
is the owner and operator of a combustion turbine and two hydroelectric plants
on the Wisconsin River, which have a forecasted aggregate capacity rating
of
70 megawatts. For a complete listing of these facilities, see Item
2 - Properties in this Annual Report on Form 10-K.
Power
Purchase Agreements
In
conjunction with the 2005 sale of WPSC's 59% interest in the Kewaunee nuclear
power plant, WPSC entered into a long-term power purchase agreement with
Dominion Energy Kewaunee, a subsidiary of Dominion Resources, to purchase
energy
and capacity approximately equivalent to WPSC's share of forecasted production
had WPSC retained its ownership in Kewaunee. The power purchase agreement
will
extend through 2013 when the plant's current operating license expires. Monthly
payments under the power purchase agreement approximate the expected costs
of
production had WPSC continued to own the plant.
In
April 2004, WPSC entered into an exclusivity agreement with Dominion. Under
this
agreement, Dominion agreed to an exclusivity period starting with the closing
of
the sale of Kewaunee and extending to December 21, 2011. If Dominion
decides to extend the operating license of Kewaunee, the agreement provides
that
during the exclusivity period Dominion would negotiate only with WPSC for
a new
power purchase agreement for 59% of the plant output.
WPSC
currently has
a power purchase agreement with Calpine Corporation for capacity and energy
from
the Fox Energy Center Side 1 (a 300 megawatt natural gas-fired
combined cycle generation facility near Kaukauna, Wisconsin). The
agreement called for WPSC to purchase 150 megawatts of capacity beginning
on June 1, 2005, escalating to approximately 500 megawatts of capacity
on June 1, 2006, (when a second unit is scheduled for completion) through
May 31, 2015, when it decreases to 235 megawatts. The agreement
terminates on May 31, 2016. WPSC is responsible for fuel supply to the
facility for its portion of contracted generation over the life of the
agreement. Although Calpine currently has financial issues (including bankruptcy
of Calpine and some of its affiliates) WPSC does not expect any performance
issues related to these contracts.
Other
Facilities
WPSC,
Minnesota
Power Company and ATC are currently constructing a 220-mile, 345-kilovolt
transmission line from Wausau, Wisconsin, to Duluth, Minnesota. Completion
of
the line is expected in 2008 at a total cost of approximately
$420 million.
For
additional
information regarding the above and other facilities, see Item
2 - Properties in this Annual Report on Form 10-K.
Fuel
Supply
Electric
Supply Mix
WPSC's
electric
supply mix for 2005 and 2004 was:
Energy
Source
|
2005
|
2004
|
|
Coal
|
|
59.4%
|
|
61.7%
|
|
Purchased
power *
|
|
|
|
|
|
Kewaunee
nuclear power plant
|
9.6%
|
|
-
|
|
|
Fox
Energy
Center
|
1.9%
|
|
-
|
|
|
All
other
|
21.2%
|
|
18.4%
|
|
|
Total
purchased power *
|
|
32.7%
|
|
18.4%
|
|
Nuclear
*
|
|
2.8%
|
|
16.1%
|
|
Natural
gas/fuel oil
|
|
3.7%
|
|
1.9%
|
|
Hydro
|
|
1.4%
|
|
1.9%
|
*
Purchased power
has increased and nuclear generation decreased as a result of the sale of
the
Kewaunee plant in 2005 and entering into the Kewaunee and Fox Energy Center
power purchase agreements.
Fuel
Costs
WPSC's
fuel costs
for 2005 and 2004 were:
Fuel
Cost by
Source (per million Btus)
|
2005
|
2004
|
|
Coal
|
$
1.31
|
$1.15
|
|
Nuclear
|
0.56
|
0.44
|
|
Natural
gas
|
8.18
|
6.88
|
|
Fuel
oil
|
12.18
|
6.45
|
Coal
Supply
Coal
is the primary
fuel source for WPSC, the majority of which is from the Powder River Basin
mines
located in Wyoming. This low sulfur coal has been our least-cost coal source
from any of the subbituminous coal-producing regions in the United States.
WPSC's fuel portfolio strategy is to maintain a 25 to 40 day supply of coal
at
each plant site.
Historically,
WPSC
has purchased coal directly from the producer. WPSC purchases coal for its
wholly owned plants. Wisconsin Power and Light purchases coal for the jointly
owned Edgewater and Columbia plants.
Annual
coal
requirements for WPSC's wholly owned plants generally range between 3.5 to
4.0 million tons. WPSC's fuel portfolio strategy is to purchase coal
through a mix of spot, short-term, mid-term and long-term contracts and maintain
a broad base of suppliers and mine sources. The fuel portfolio strategy for
2006
is as follows:
|
Target
|
Wholly
Owned
Facilities
|
All
Facilities
|
Spot
(less
than 1 year)
|
0
to
15%
|
10%
|
12%
|
Short-Term
(1
to 2 years)
|
10
to
15%
|
25%
|
18%
|
Mid-Term
(3
to 5 years)
|
50%
|
45%
|
51%
|
Long-Term
(more than 5 years)
|
25%
|
20%
|
19%
|
WPSC
currently
contracts for coal transportation for its wholly owned plants under contracts
of
up to five years duration. WPSC has transportation contracts in place for
90% of
its 2006 coal transportation requirements for its wholly owned
plants.
Obligations
related
to coal supply and transportation extending through 2016 total
$413.9 million.
For
more
information on coal supply see Management's Discussion and Analysis - Liquidity
and Capital Resources - WPS Resources, Other Future Considerations - Coal
Supply.
Natural
Gas
Supply - Generation
WPSC
is committed
to provide fuel for the 150 megawatt contracted portion of the Fox Energy
Center Side 1, a 300-megawatt natural gas-fired combined cycle generation
facility. Once fully constructed, the Fox Energy Center Facility (Side 1
and 2) will have a total combined electric capacity of approximately
600 megawatts. Beginning June 1, 2006, WPSC's electric capacity commitment
increases to approximately 500 megawatts. WPSC will be committed to provide
fuel for the total contracted electric capacity. In 2005, natural gas supplies
were purchased in the spot market. WPSC has a 10-year pipeline transportation
contract with ANR Pipeline Company to deliver 50% of the forecasted natural
gas
needs for the 500 megawatts of contracted electric capacity. WPSC has
contracted for a 10-day firm storage service to provide natural gas for supply
interruptions during the winter months. The storage service can also provide
additional supplies or access for real-time electric dispatches of the facility.
Estimated 2006 fuel requirements for WPSC's contracted electric capacity
is
approximately 11.8 million MMBtus.
In
addition, WPSC supplies natural gas through its natural gas distribution
system
to its 480 megawatts of gas-fired combustion turbine generation
facilities.
In
2005, WPSC developed an Energy Market Risk Management Policy to govern its
activities in the developing MISO energy market and the PJM electric market.
The
plan was approved by the PSCW in September 2005.
As
part of its market activities, in January 2006, WPSC implemented a plan to
reduce its exposure to the volatility of natural gas prices affecting its
electric generation. The plan provides for the purchase of financial futures
contracts for natural gas and the purchase of financial options on the price
of
natural gas for a portion of WPSC's forecasted natural gas fuel generation
requirements.
For
additional
information, see Note 17 to WPS Resources' Consolidated Financial
Statements - Commitments
and
Contingencies.
Regulatory
Matters
Both
the PSCW and
MPSC regulate retail electric rates for WPSC. The MPSC regulates retail electric
rates for UPPCO. The FERC regulates wholesale electric rates of both utility
companies.
On
April 1, 2005, the MISO market began operation of its "Day 2" energy market.
WPSC and UPPCO are members of MISO. Within the Day 2 market, MISO centrally
dispatches wholesale electricity and provides transmission service to an
area
mainly in the Midwest. MISO determines prices in the market based on a
locational marginal pricing system determined by the accepted generation
bids
and offers and the load to be served by all market participants. The MISO
dispatching system has provided for more efficient use of the transmission
system to serve our load during outages and times of peak load.
For
additional
information, see Note 23 to WPS Resources' Consolidated Financial
Statements - Regulatory
Environment.
Hydroelectric
Licenses
WPSC,
UPPCO and
Wisconsin River Power have long-term licenses from FERC for all of their
hydroelectric facilities.
In
November 2005, UPPCO announced it had not made a final decision whether to
restore Silver Lake as a reservoir for power generation or to forego refilling
the reservoir and that more time is needed to study the ramifications of
design
changes recommended by consultants and FERC. UPPCO will undertake additional
studies of the new design recommendations to see if there are alternatives
that
would make restoring the Silver Lake Dam and refilling the reservoir
economically beneficial for its customers. UPPCO expects to make its final
decision on Silver Lake in the first half of 2006.
For
more
information on the Dead River Flooding, see Note 17 - Commitments and
Contingencies to our Notes to Consolidated Financial Statements.
Other
Matters
Research
and Development
The
only business
segment of WPS Resources that incurred noteworthy research and development
costs in 2005 was WPSC's electric operations. Electric research and development
expenditures for WPSC totaled $0.7 million for 2005, $0.7 million for
2004 and $0.6 million for 2003. These expenditures were primarily charged
to electric operations as incurred.
Customer
Segmentation
In
2005, paper production facilities and one wholesale customer (a private utility
that primarily provides power to other paper mills) accounted for 15.8% of
WPS Resources' regulated electric revenues. There is no single customer,
the loss of which would have a material adverse effect on the regulated electric
operations of WPS Resources in the current regulatory
environment.
Seasonality
The
electric sales
of WPSC follow a seasonal pattern due to the air conditioning requirements
of
customers that are primarily impacted by the variability of summer temperatures.
Although UPPCO hit its electric peak in December, electric sales at UPPCO
follow
no significant seasonal trend due to cooler climate conditions in the Upper
Peninsula of Michigan.
Generally
during
the winter months, the purchase price of fuel (natural gas and fuel oil)
for
heating load and generation production is heavily influenced by weather and
the
availability of baseload generation units within the MISO energy market.
Sustained colder-than-normal weather and unexpected extended generation outages
can influence fuel supply and demand, impacting the production
costs at WPSC's natural gas and oil-fired facilities, as well as gas supply
commitments under power purchase agreements.
Competition
The
electric energy
market in Wisconsin continues to be regulated by the PSCW. Retail electric
customers currently do not have the ability to choose their electric supplier.
However, in order to increase sales, utilities work to attract new
commercial/industrial customers into their service territory. As a result,
there
is competition among utilities to keep energy rates low. Wisconsin utilities
have continued to refine regulated tariffs in order to provide customers
with
the true cost of electric energy to each class of customer by reducing or
eliminating rate subsidies among different ratepayer classes. Although Wisconsin
electric energy markets are regulated, utilities still face competition from
other energy sources.
Michigan
electric
energy markets are open to competition, although a competitive market has
not
yet developed in the Upper Peninsula of Michigan primarily due to a lack
of
excess generation and transmission system capacity.
Working
Capital Requirements
For
information on
capital requirements related to WPSC, see Management's Discussion and Analysis
of Financial Condition and Results of Operation - Liquidity and Capital
Resources - Wisconsin Public Service Corporation.
|
|
|
|
|
|
|
|
Electric
Operating Statistics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WISCONSIN
PUBLIC SERVICE CORPORATION
|
|
2005
|
|
2004
|
|
2003
|
|
Operating
revenues (Millions)
|
|
|
|
|
|
|
|
Residential
and farm
|
|
$
|
319.4
|
|
$
|
286.0
|
|
$
|
261.7
|
|
Small
commercial and industrial
|
|
|
225.2
|
|
|
227.8
|
|
|
205.9
|
|
Large
commercial and industrial
|
|
|
193.3
|
|
|
174.7
|
|
|
155.5
|
|
Resale
and
other
|
|
|
195.0
|
|
|
112.7
|
|
|
101.8
|
|
Total
|
|
$
|
932.9
|
|
$
|
801.2
|
|
$
|
724.9
|
|
Kilowatt-hour
sales (Millions)
|
|
|
|
|
|
|
|
|
|
|
Residential
and farm
|
|
|
3,138.7
|
|
|
2,999.6
|
|
|
3,037.3
|
|
Small
commercial and industrial
|
|
|
3,631.4
|
|
|
3,521.0
|
|
|
3,496.4
|
|
Large
commercial and industrial
|
|
|
4,264.2
|
|
|
4,225.9
|
|
|
4,135.1
|
|
Resale
and
other
|
|
|
3,503.6
|
|
|
2,746.9
|
|
|
2,742.6
|
|
Total
|
|
|
14,537.9
|
|
|
13,493.4
|
|
|
13,411.4
|
|
Customers
served (End of period)
|
|
|
|
|
|
|
|
|
|
|
Residential
and farm
|
|
|
377,921
|
|
|
374,961
|
|
|
368,702
|
|
Small
commercial and industrial
|
|
|
45,509
|
|
|
45,108
|
|
|
44,508
|
|
Large
commercial and industrial
|
|
|
269
|
|
|
263
|
|
|
257
|
|
Resale
and
other
|
|
|
916
|
|
|
908
|
|
|
903
|
|
Total
|
|
|
424,615
|
|
|
421,240
|
|
|
414,370
|
|
Average
kilowatt-hour price (Cents)
|
|
|
|
|
|
|
|
|
|
|
Residential
and farm
|
|
|
10.18
|
|
|
9.53
|
|
|
8.61
|
|
Small
commercial and industrial
|
|
|
7.03
|
|
|
6.47
|
|
|
5.89
|
|
Large
commercial and industrial
|
|
|
4.53
|
|
|
4.13
|
|
|
3.76
|
|
Production
capacity (Summer - kilowatts)
|
|
|
|
|
|
|
|
|
|
|
Coal
|
|
|
1,318,700
|
|
|
1,334,300
|
|
|
1,326,700
|
|
Nuclear
|
|
|
-
|
|
|
332,800
|
|
|
315,600
|
|
Hydroelectric
|
|
|
40,400
|
|
|
40,000
|
|
|
40,000
|
|
Combustion
turbine
|
|
|
481,100
|
|
|
485,000
|
|
|
449,200
|
|
Other
|
|
|
9,800
|
|
|
9,900
|
|
|
9,900
|
|
Purchased
capacity
|
|
|
1,131,700
|
|
|
469,500
|
|
|
267,600
|
|
Total
system capacity
|
|
|
2,981,700
|
|
|
2,671,500
|
|
|
2,409,000
|
|
Generation
and purchases (Thousands of kilowatt-hours)
|
|
|
|
|
|
|
|
|
|
|
Coal
|
|
|
8,889,214
|
|
|
8,781,165
|
|
|
8,573,305
|
|
Nuclear
|
|
|
414,984
|
|
|
2,284,101
|
|
|
2,451,896
|
|
Hydroelectric
|
|
|
215,356
|
|
|
262,536
|
|
|
252,961
|
|
Purchases
and
other
|
|
|
5,477,968
|
|
|
2,847,279
|
|
|
2,771,870
|
|
Total
|
|
|
14,997,522
|
|
|
14,175,081
|
|
|
14,050,032
|
|
Steam
fuel costs (Cents per million Btu)
|
|
|
|
|
|
|
|
|
|
|
Fossil
|
|
|
133.208
|
|
|
116.881
|
|
|
110.747
|
|
Nuclear
|
|
|
55.955
|
|
|
44.212
|
|
|
42.922
|
|
Total
|
|
|
129.868
|
|
|
102.239
|
|
|
95.959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric
Operating Statistics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UPPER
PENINSULA POWER COMPANY
|
|
2005
|
|
2004
|
|
2003
|
|
Operating
revenues (Millions)
|
|
|
|
|
|
|
|
Residential
and farm
|
|
$
|
35.7
|
|
$
|
34.4
|
|
$
|
31.5
|
|
Small
commercial and industrial
|
|
|
27.2
|
|
|
26.4
|
|
|
24.0
|
|
Large
commercial and industrial
|
|
|
16.0
|
|
|
15.0
|
|
|
11.6
|
|
Resale
and
other
|
|
|
25.3
|
|
|
19.6
|
|
|
22.1
|
|
Total
|
|
$
|
104.2
|
|
$
|
95.4
|
|
$
|
89.2
|
|
Kilowatt-hour
sales (Millions)
|
|
|
|
|
|
|
|
|
|
|
Residential
and farm
|
|
|
277.2
|
|
|
273.8
|
|
|
277.0
|
|
Small
commercial and industrial
|
|
|
250.1
|
|
|
250.3
|
|
|
252.5
|
|
Large
commercial and industrial
|
|
|
207.6
|
|
|
231.2
|
|
|
211.1
|
|
Resale
and
other
|
|
|
387.3
|
|
|
217.0
|
|
|
194.7
|
|
Total
|
|
|
1,122.2
|
|
|
972.3
|
|
|
935.3
|
|
Customers
served (End of period)
|
|
|
|
|
|
|
|
|
|
|
Residential
and farm
|
|
|
46,178
|
|
|
45,954
|
|
|
45,613
|
|
Small
commercial and industrial
|
|
|
5,646
|
|
|
5,644
|
|
|
5,613
|
|
Large
commercial and industrial
|
|
|
13
|
|
|
13
|
|
|
13
|
|
Resale
and
other
|
|
|
330
|
|
|
330
|
|
|
317
|
|
Total
|
|
|
52,167
|
|
|
51,941
|
|
|
51,556
|
|
Average
kilowatt-hour price (Cents)
|
|
|
|
|
|
|
|
|
|
|
Residential
and farm
|
|
|
12.86
|
|
|
12.58
|
|
|
11.38
|
|
Small
commercial and industrial
|
|
|
10.86
|
|
|
10.55
|
|
|
9.49
|
|
Large
commercial and industrial
|
|
|
7.70
|
|
|
6.48
|
|
|
5.48
|
|
Production
capacity (Summer - kilowatts)
|
|
|
|
|
|
|
|
|
|
|
Natural
gas
|
|
|
18,800
|
|
|
18,800
|
|
|
18,800
|
|
Hydroelectric
|
|
|
21,700
|
|
|
21,700
|
|
|
25,900
|
|
Combustion
turbine
|
|
|
36,200
|
|
|
36,200
|
|
|
41,800
|
|
Purchased
capacity
|
|
|
92,000
|
|
|
77,000
|
|
|
80,700
|
|
Total
system capacity
|
|
|
168,700
|
|
|
153,700
|
|
|
167,200
|
|
Generation
and purchases (Thousands of kilowatt-hours)
|
|
|
|
|
|
|
|
|
|
|
Natural
gas
|
|
|
-
|
|
|
-
|
|
|
7,021
|
|
Hydroelectric
|
|
|
114,590
|
|
|
118,752
|
|
|
150,398
|
|
Purchases
and
other
|
|
|
954,015
|
|
|
943,779
|
|
|
876,885
|
|
Total
|
|
|
1,068,605
|
|
|
1,062,531
|
|
|
1,034,304
|
|
Steam
fuel costs (Cents per million Btu)
|
|
|
|
|
|
|
|
|
|
|
Fossil
*
|
|
|
-
|
|
|
-
|
|
|
652.999
|
|
|
|
|
|
|
|
|
|
|
|
|
*
Upper
Peninsula Power Company had no steam generation during 2004 or
2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WPSC
provides
regulated natural gas service to nearly 300 municipalities in northeastern
Wisconsin and adjacent portions of Michigan's Upper Peninsula.
Revenues,
volumes,
customers and plant assets for natural gas operations of WPSC were as
follows:
|
2005
|
2004
|
2003
|
Natural
Gas Revenues (millions)
|
|
|
|
Wisconsin
|
$514.6
|
$414.7
|
$397.9
|
Michigan
|
7.4
|
6.2
|
6.3
|
Total
|
$522.0
|
$420.9
|
$404.2
|
|
|
|
|
Natural
Gas Volumes (million
therms)
|
|
|
|
Wisconsin
|
740.4
|
750.7
|
789.4
|
Michigan
|
16.0
|
16.6
|
17.9
|
Internal
electric generation
|
70.8
|
34.0
|
47.2
|
Total
|
827.2
|
801.3
|
854.5
|
|
|
|
|
Customers
|
|
|
|
Wisconsin
|
302,191
|
300,297
|
295,513
|
Michigan
|
5,349
|
5,351
|
5,346
|
Total
|
307,540
|
305,648
|
300,859
|
|
|
|
|
Plant
Assets (millions)
|
|
|
|
Wisconsin
|
$536.3
|
$498.3
|
$445.7
|
Michigan
|
6.4
|
6.1
|
6.0
|
Total
|
$542.7
|
$504.4
|
$451.7
|
Facilities
For
information
regarding our natural gas facilities, see Item 2 - Properties in this
Annual Report on Form 10-K.
Natural
Gas
Supply
WPSC
manages a
portfolio of natural gas supply contracts, storage services and pipeline
transportation services designed to meet its varying load pattern at the
lowest
reasonable cost.
Annual
natural gas
supply needs for WPSC are estimated at approximately 497 million therms.
WPSC contracts for fixed-term firm natural gas supplies with approximately
10 natural gas suppliers each year (in the United States and Canada)
to meet the December through February peak day demand of firm system
sales customers. To supplement natural gas supplies and minimize risk, WPSC
purchases additional natural gas supplies on the monthly spot market through
fixed-term firm contracts rather than on the daily spot market. As of
December 31, 2005, WPSC's domestic natural gas supply contracts had
remaining terms of up to two months and its Canadian natural gas supply
contracts had remaining terms of up to three months. WPSC intends to contract
for domestic natural gas supplies for terms of two years or less to minimize
potential stranded natural gas supply contract costs if retail natural gas
deregulation should proceed in Wisconsin.
Under
current
regulatory practice, the PSCW and the MPSC allow WPSC to pass decreases and
prudently incurred increases in the cost of natural gas on to customers on
a
dollar-for-dollar basis through a purchased gas adjustment clause. Changes
in
the cost of natural gas are reflected in both gas revenues and gas purchases,
thus having little or no impact on net income.
WPSC
contracts with
ANR Pipeline Company for firm underground natural gas storage capacity located
in Michigan and with Nexen and People's Energy Resources Corporation in
Illinois. WPSC has approximately 116 million therms of firm natural gas
storage capacity in Michigan and approximately 17 million therms of firm
natural gas storage capacity in Illinois. Besides providing the ability to
manage significant changes in daily natural gas demand, storage also provides
WPSC with the ability to purchase natural gas at high load factors on a
year-round basis, thus lowering supply cost volatility. In 2005, natural
gas
from storage provided approximately 62% of WPSC's supply on winter peak days,
approximately 32% of
its winter sales
volumes and approximately 22% of its total annual sales volumes under normal
weather conditions. WPSC also contracts with third-party natural gas suppliers
for high deliverability storage. This high deliverability storage capacity
is
designed to deliver natural gas when other supplies cannot be delivered during
extremely cold weather in the producing areas, which can temporarily limit
wellhead natural gas supplies.
WPSC
holds firm
long-term transportation capacity contracts on the ANR Pipeline. The majority
of
these contracts expire in 2010. WPSC also holds firm transportation capacity
with Viking Gas Transmission Company to deliver natural gas from its
interconnection with TransCanada Pipelines near Emerson, Manitoba to the
interconnection of Viking Gas Transmission with ANR Pipeline near
Marshfield, Wisconsin. The Canadian natural gas suppliers at Emerson hold
firm
capacity on TransCanada Pipelines from Emerson back into the Canadian production
areas in Alberta, Canada. WPSC contracts with Viking Gas Transmission Company
expire in 2010. These contracts provide WPSC sufficient contracted pipeline
transportation capacity to fully meet the annual and daily requirements of
its
customers.
Regulatory
Matters
The
PSCW and the
MPSC regulate WPSC's natural gas retail rates.
For
additional
information, see Note 23 to WPS Resources' Consolidated Financial
Statements - Regulatory
Environment.
Other
Matters
Customer
Segmentation
WPSC
has no single
customer industry segment that accounts for more than 4% of natural gas
revenues. The largest industry segment among WPSC's natural gas customers
is the
paper industry.
Seasonality
The
gas throughput
of WPSC follows a seasonal pattern due to the heating requirements of customers
that is primarily impacted by the variability in winter temperatures.
Competition
WPSC's
natural gas
operations face competition with other entities and forms of energy in varying
degrees, particularly for large commercial and industrial customers who have
the
ability to switch between natural gas and alternate fuels. Due to the volatility
of natural gas prices, WPSC has seen its customers with dual fuel capability
switch to alternate fuels for short periods of time, then switch back to
natural
gas as market rates change. WPSC offers interruptible natural gas sales and
natural gas transportation service for these customers to enable them to
reduce
their energy costs. Transportation customers purchase their natural gas directly
from third-party natural gas suppliers at market prices and contract with
WPSC
to transport the natural gas from ANR Pipeline to their facilities.
Additionally, some customers still purchase their natural gas commodity directly
from WPSC, but have elected to do so on an interruptible basis, as a means
to
reduce their costs. Customers continue to switch between firm system supply,
interruptible system supply and transportation service each year as the
economics and service options change.
Working
Capital Requirements
For
information on
capital requirements related to WPSC, see Management's Discussion and Analysis
of Financial Condition and Results of Operation - Liquidity and Capital
Resources - Wisconsin Public Service Corporation.
Natural
Gas Operating Statistics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wisconsin
Public Service Corporation
|
|
2005
|
|
2004
|
|
2003
|
|
Operating
revenues (Millions)
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
$
|
291.9
|
|
$
|
244.9
|
|
$
|
229.2
|
|
Small
commercial and industrial
|
|
|
79.3
|
|
|
51.3
|
|
|
55.6
|
|
Large
commercial and industrial
|
|
|
58.4
|
|
|
60.7
|
|
|
77.0
|
|
Other
|
|
|
92.4
|
|
|
64.0
|
|
|
42.4
|
|
Total
|
|
$
|
522.0
|
|
$
|
420.9
|
|
$
|
404.2
|
|
Therms
delivered (Millions)
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
241.6
|
|
|
248.1
|
|
|
263.1
|
|
Small
commercial and industrial
|
|
|
75.0
|
|
|
58.9
|
|
|
72.6
|
|
Large
commercial and industrial
|
|
|
95.8
|
|
|
108.6
|
|
|
117.1
|
|
Other
|
|
|
70.8
|
|
|
34.0
|
|
|
47.2
|
|
Total
therm
sales
|
|
|
483.2
|
|
|
449.6
|
|
|
500.0
|
|
Transportation
|
|
|
344.0
|
|
|
351.7
|
|
|
354.5
|
|
Total
|
|
|
827.2
|
|
|
801.3
|
|
|
854.5
|
|
Customers
served (End of period)
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
279,288
|
|
|
277,484
|
|
|
273,041
|
|
Small
commercial and industrial
|
|
|
25,617
|
|
|
23,914
|
|
|
23,983
|
|
Large
commercial and industrial
|
|
|
2,034
|
|
|
3,655
|
|
|
3,236
|
|
Other
|
|
|
1
|
|
|
-
|
|
|
1
|
|
Transportation
customers
|
|
|
600
|
|
|
595
|
|
|
598
|
|
Total
|
|
|
307,540
|
|
|
305,648
|
|
|
300,859
|
|
Average
therm price (Cents)
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
120.50
|
|
|
98.73
|
|
|
87.12
|
|
Small
commercial and industrial
|
|
|
105.79
|
|
|
87.11
|
|
|
76.61
|
|
Large
commercial and industrial
|
|
|
97.82
|
|
|
78.24
|
|
|
64.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WPS Resources'
nonregulated energy services operations are provided through ESI. In 2005,
WPS Power Development, Inc. was merged into ESI and all of the former
assets of WPS Power Development, Inc. were transferred to a newly formed
entity, WPS Power Development, LLC. WPS Power Development, LLC is a
wholly owned subsidiary of ESI.
ESI
is a
diversified, energy supply and services company operating in the retail and
wholesale non-regulated energy marketplace providing individualized energy
supply options and strategies that allow customers to manage energy needs
while
capitalizing on opportunities resulting from deregulation. Principal operations
of ESI are located in the northeastern quadrant of the United States and
adjacent portions of Canada. In addition, ESI has a natural gas supply presence
in Alberta, Canada and is establishing electric and natural gas supply
operations in Texas.
ESI,
through its
subsidiaries, owns and operates nonregulated electric generation facilities
in
the northeastern quadrant of the United States and adjacent portions of
Canada.
ESI
and several of
its subsidiaries (Advantage Energy, Quest Energy, WPS Gas Storage and
WPS Energy Services of Canada) market energy products in the retail and
wholesale markets. Its retail emphasis is on serving commercial and industrial
customers, as well as "aggregated" small commercial and residential customers
and standard offer service. Aggregated customers are associations or groups
of
customers, which have joined together to negotiate purchases of electric
or
natural gas energy as a larger group. Additionally, ESI markets energy products
directly to small end users in deregulated markets.
ESI's
wholesale
focus is on the execution and optimization of structured contracts with large
end-users, regulated local distribution companies, pipelines, storage companies
and other nonregulated energy marketing and trading companies. ESI utilizes
derivative instruments, including forwards, futures, options and swaps, to
manage its exposures within defined risk limits.
Energy
revenues,
volumes and assets are as follows:
|
|
2005
|
|
2004*
|
|
2003*
|
|
Electric
Revenues (millions)
|
|
|
|
|
|
|
|
United States
|
|
$
|
761
|
|
$
|
644
|
|
$
|
538
|
|
Canada
|
|
|
2
|
|
|
1
|
|
|
1
|
|
Total
|
|
$
|
763
|
|
$
|
645
|
|
$
|
539
|
|
Gas
Revenues (millions)
*
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
2,716
|
|
$
|
1,977
|
|
$
|
2,154
|
|
Canada
|
|
|
1,973
|
|
|
1,052
|
|
|
532
|
|
Total
|
|
$
|
4,689
|
|
$
|
3,029
|
|
$
|
2,686
|
|
Electric
Volumes (million megawatt
hours)
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
9.3
|
|
|
12.4
|
|
|
12.8
|
|
Canada
|
|
|
0.1
|
|
|
0.1
|
|
|
0.1
|
|
Total
|
|
|
9.4
|
|
|
12.5
|
|
|
12.9
|
|
Gas
Volumes (billion
cubic feet)
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
298
|
|
|
321
|
|
|
369
|
|
Canada
|
|
|
257
|
|
|
191
|
|
|
122
|
|
Total
|
|
|
555
|
|
|
512
|
|
|
491
|
|
Assets
(millions)
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
1,739
|
|
$
|
967
|
|
$
|
1,067
|
|
Canada
|
|
|
697
|
|
|
424
|
|
|
465
|
|
Total
|
|
$
|
2,436
|
|
$
|
1,391
|
|
$
|
1,532
|
|
|
*
|
2004
and 2003
information has been restated to reflect the integration of PDI
and ESI as
one business segment.
|
ESI
manages its
exposure to market risks in accordance with the limits and approvals established
in its risk management and credit policies. The Market Risk Oversight Committee,
comprised of cross-functional members of senior management, monitors compliance
with these policies.
The
2005 merger of
WPS Power Development, Inc. and ESI allows for more efficient management
of the
market risk associated with its generation facilities and related contracts.
ESI
focuses on effective economic dispatch and risk management strategies in
order
to enhance the returns of its generation facilities.
For
more
information on the trading and risk management activities of ESI see Item
7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operation Introduction, WPS Resources - WPS Energy Services and Market
Price Risk Management Activities - WPS Resources.
Facilities
In
the second quarter of 2005, the allocated emission allowances associated
with
the Sunbury generation station, located in Shamokin Dam, Pennsylvania were
sold
for approximately $110 million to multiple counterparties. The Sunbury
plant will be operated in the future when market conditions make operations
economical. ESI has emission allowances available for expected operations
in
2006. ESI will purchase additional emission allowances as needed to support
planned operations. As part of the asset management strategy of
WPS Resources, ESI continues to explore opportunities regarding the future
of its electric generation and natural gas storage facilities. Opportunities
include, but are not limited to sales of certain facilities, joint ventures
and
long-term contracts. Opportunities change and develop with the dynamics of
the
markets in which we operate.
ESI
owns and
operates electric generation facilities in the Midwest and Northeast regions
of
the United States with a total capacity of approximately
825 megawatts. At December 31, 2005, ESI owned 81.5% of a
3 billion cubic foot natural gas storage field in Kimball, Michigan. In
February 2006, ESI acquired the remaining 18.5% ownership interest in the
facility. The storage field allows for additional flexibility in supplying
natural gas retail and wholesale customers, sale of storage services to the
market and potential power generation peaking services.
ESI's
Beaver Falls
generation facility is currently out of service as a result of damage to
its
turbine blades. ESI is reviewing its options regarding future operations
of the
facility.
For
additional
information regarding generation facilities of ESI, see Item
2 - Properties in this Annual Report on Form 10-K.
Fuel
Supply
ESI's
fuel
inventory policy varies for each generation facility depending on the type
of
fuel used and available storage facilities. ESI's merchant generation facilities
(excluding its gas-fired plants) historically, burn in excess of
1.5 million tons of solid fuel annually. Fuel for these facilities includes
coal, fluid coke, tire-derived fuel and wood. The majority of these needs
will
be met through the burning of coal products, including bituminous coal, culm,
silt and fluid coke (a petroleum product). Actual fuel needs in 2006 will
depend
on market conditions and operational capability of these
facilities.
The
Sunbury
facility's inventory policy is to have a 20 to 30 day coal supply on
site. ESI has coal supply under contract for all Sunbury committed generation.
Fuel needs for any additional generation will be purchased on the spot market.
ESI also has sufficient transportation services under contract for all of
2006.
The
Niagara
facility maintains an eight-day fuel inventory on site, with additional
inventory maintained off site. Currently all fuel needs are purchased in
the
spot market with no long-term fuel contracts in effect.
ESI's
Westwood
facility burns waste coal left behind by mining operations and has several
years
supply on site. All fuel is located within a seven-mile radius of the
plant.
The
Stoneman
facility currently has all of its 2006 coal needs under contract with options
for 2007 fuel needs.
ESI
provides all
natural gas supply for the natural gas-fired facilities in Beaver Falls,
Syracuse and Combined Locks and currently has adequate transport and supply
arrangements for projected 2006 needs.
Licenses
ESI
is a FERC
licensed power marketer with import/export authorization through the DOE.
ESI
and certain of its subsidiaries are registered to sell retail electric service
in various states including Illinois, Maine, Massachusetts, Michigan, New
York,
Ohio, Pennsylvania, Rhode Island, and Virginia in the United States and the
province of Ontario in Canada. In December 2005, ESI began to develop a
presence in the retail electricity market in Texas and expects to be operational
before the end of the second quarter of 2006.
ESI
is registered
to sell natural gas in various states including Illinois, Iowa, Michigan,
Ohio,
Pennsylvania, New York and Alberta Canada. ESI also sells natural gas in
Wisconsin where no license is required. ESI's subsidiary, WPS Energy
Services of Canada, is registered in the Canadian provinces of Alberta, British
Columbia, Manitoba, Nova Scotia, Ontario, Quebec and Saskatchewan. ESI is
also a member of the following regional transmission operators and North
American Electric Reliability Council reliability regions:
·
|
Independent
Electricity System Operator (located in Ontario);
|
·
|
Electric
Reliability Council of Texas (application pending);
|
·
|
ISO
New
England;
|
·
|
MISO;
|
·
|
New
Brunswick
System Operator;
|
·
|
Northern
Maine Independent System Administrator;
|
·
|
New
York
Independent System Operator; and
|
·
|
PJM
Interconnection.
|
Beginning
January
1, 2001 and extending to December 31, 2005, Ohio established an electric
market development period, after which rates would be set at market-based
prices. During this market development period, ESI contracted to be the supplier
for approximately 100,000 residential, small commercial and government
facilities in the FirstEnergy service areas under the State of Ohio provisions
for Opt-out Electric Aggregation Programs.
The
Public
Utilities Commission of Ohio and FirstEnergy established electric rates for
consumers beginning in 2006 because a competitive bid auction ordered by
the
Public Utilities Commission of Ohio did not produce better benefits. Because
the
FirstEnergy plan is priced lower than current market power prices, ESI
discontinued service to customers of the existing aggregation programs after
the
expiration of these contracts in December 2005.
The
Ohio
legislature continues to work on the development of a statewide energy policy.
If the regulatory climate and market change ESI may re-enter the electric
power
market in Ohio.
ESI,
through its
Michigan subsidiary, has established itself as a significant supplier to
the
industrial and commercial markets under the Electric Choice program in Michigan.
Recent high wholesale energy prices, coupled with approved and pending tariff
changes for the Michigan regulated utilities, have significantly lowered
the
savings customers can obtain from contracting with non-utility suppliers.
As a
result, many customers have returned to the bundled tariff service of the
resident utility. This has caused the Michigan retail electric business at
the
beginning of 2006 to decline to one-third of what it was at the start of
2005.
Future orders of the MPSC should clarify the outlook for Electric Choice.
The
impact on ESI could range from maintaining Michigan business with little
or no
growth to an inability to re-contract any business, leading to a possible
decision by ESI to exit Michigan's electric market and redirect resources
to
other markets.
For
more
information on the legislative activity in Michigan and Ohio and its impact
on
ESI, see the discussion on Industry Restructuring in Item
7 - Management's Discussion and Analysis of Financial Condition and
Results of Operation.
All
the FERC
hydroelectric facility licenses held by ESI subsidiaries are current. The
33-megawatt hydroelectric facility owned in New Brunswick, Canada, is not
subject to licensing.
Other
Matters
Customer
Segmentation
Although
ESI is not
dependent on any one customer, a significant percentage of its retail sales
volume is derived from industries related to:
·
|
Paper
and
allied products;
|
·
|
Food
and
kindred products;
|
·
|
Chemicals
and
paint; and
|
·
|
Steel
and
foundries.
|
ESI's
concentration
of sales in any single market sector is decreasing as it expands into the
Texas
and northeast United States retail electric markets and eastern Canada
retail natural gas markets.
Seasonality
ESI
believes that
its business, in the aggregate, is not seasonal, even though certain products
sell more heavily in some seasons than in others. Sales of natural gas generally
peak in the winter months, while sales of electric energy generally peak
in the
summer months. Generally in the summer months, the demand for electric energy
is
high, which increases the price at which energy can be sold. In periods of
high
residential fuel consumption, (generally the winter months) the purchase
price
of oil and natural gas increases, which increases the production costs at
ESI's
gas- and oil-fired generation facilities. ESI's business is volatile as a
result
of market conditions and the related market opportunities available to its
customers.
Competition
ESI
is a
nonregulated energy marketer that competes against regulated utilities, large
energy trading companies and other energy marketers. ESI competes with other
energy providers on the basis of price, reliability, service, financial
strength, consumer convenience, performance and reputation. The nonregulated
energy market has seen a decrease in the number of large energy providers
and
there continues to be consolidation of small energy marketers. The liquidity
in
the nonregulated energy market continues to improve with the increase of
well-capitalized wholesale market participants. Although this increases
competition, it also allows ESI to operate more efficiently.
Working
Capital
Currently,
capital
requirements of ESI are provided through equity infusions, long-term debt
and
short-term debt by its parent company, WPS Resources. The working capital
needs of ESI vary significantly over time due to volatility in commodity
prices
(including margin calls), levels of natural gas inventories, the structure
of
wholesale transactions, the price of natural gas and alternative energy
opportunities available to its customers. WPS Resources provides guarantees
for ESI's supply contracts. These guarantees provide the financial strength
needed to participate in the nonregulated energy market.
See
Management's
Discussion and Analysis of Financial Condition and Results of Operation for
additional information regarding working capital needs of nonregulated
operations.
For
information on
environmental matters related to WPS Resources and any of its subsidiaries,
see Note 17 - Commitments and Contingencies to our Notes to Consolidated
Financial Statements.
For
information on
capital requirements related to WPS Resources, see Management's Discussion
and Analysis of Financial Condition and Results of Operation - Liquidity
and Capital Resources - WPS Resources.
For
information on
capital requirements related to WPSC, see Management's Discussion and Analysis
of Financial Condition and Results of Operation - Liquidity and Capital
Resources - Wisconsin Public Service Corporation.
At
December 31, 2005, WPS Resources and its subsidiaries had the
following employees:
|
Wisconsin
Public Service
|
Upper
Peninsula Power
|
WPS Energy
Services
|
WPS Resources
|
Total
|
Electric
Utility
|
256
|
165
|
-
|
-
|
421
|
Natural
Gas
Utility
|
152
|
-
|
-
|
-
|
152
|
Common
Utility
|
1,902
|
-
|
-
|
-
|
1,902
|
Nonregulated
|
-
|
-
|
423
|
47
|
470
|
TOTAL
|
2,310
|
165
|
423
|
47
|
2,945
|
Local
310 of the
International Union of Operating Engineers represents 1,087 WPSC employees.
The
current Local 310 collective bargaining agreement expires on October 21,
2006.
Local
510 of the
International Brotherhood of Electrical Workers, AFL-CIO, represents
126 UPPCO employees. The current Local 510 collective bargaining agreement
expires on April 19, 2008.
Local
1600 of the
International Brotherhood of Electrical Workers, AFL CIO, represents
approximately 93 employees at the Sunbury generation station. The current
collective bargaining agreement with Local 1600 expired on May 10, 2005.
ESI
delivered a final offer on September 7, 2005. On January 27, 2006, ESI declared
an impasse in negotiations. Local 1600 is currently deciding whether to bring
ESI's final offer to a vote. ESI and Local 1600 continue to operate under
the
existing labor agreement.
WPS Resources
and WPSC file with the SEC:
·
|
Annual
Reports on Form 10-K;
|
·
|
Quarterly
Reports on Form 10-Q;
|
·
|
WPS Resources
proxy statements;
|
·
|
Registration
statements, including prospectuses;
|
·
|
Current
Reports on Form 8-K; and
|
·
|
Any
amendments to these documents.
|
WPS Resources
and WPSC make these reports available free of charge, on WPS Resources'
Internet Web site, as soon as reasonably practicable after they are filed
with
the SEC. WPS Resources' Internet address is www.wpsr.com. Statements and
amendments posted on WPS Resources' Web site do not include access to
exhibits and supplemental schedules electronically filed with the reports
or
amendments. WPS Resources and WPSC are not including the information
contained on or available through their Web sites as a part of, or incorporating
such information by reference into, this Annual Report on Form
10-K.
You
may also
obtain materials filed with the SEC by WPS Resources and WPSC at the SEC
Public Reference Room at 100 F Street, N.E., Washington, DC 20549. To
obtain information on the operation of the Public Reference Room, you
may call 1-800-SEC-0330. You may also view reports, proxy statements
and other information regarding WPS Resources and WPSC (including
exhibits), filed with the SEC, at their Web site at
www.sec.gov.
You
should
carefully consider the following risk factors, as well as the other information
included or incorporated by reference in this Annual Report on Form 10-K,
when
making an investment decision. The risks and uncertainties described below
are
not the only ones we face. Additional risks and uncertainties not presently
known or that we currently believe to be immaterial may also adversely affect
us.
We
may
not successfully integrate pending or future acquisitions into our operations
or
otherwise achieve the anticipated benefits of those acquisitions.
As
part of our growth strategy, we continue to pursue a disciplined acquisition
strategy. While we expect to identify cost savings and growth opportunities
before we acquire companies or assets, we may not be able to achieve these
anticipated benefits due to, among other things:
·
|
Delays
or
difficulties in completing the integration of acquired companies
or
assets;
|
·
|
Higher
than
expected costs or a need to allocate additional resources to manage
unexpected operating difficulties;
|
·
|
Parameters
imposed or delays caused by regulatory agencies;
|
·
|
Reliance
on
inaccurate assumptions in evaluating the expected benefits of a
given
acquisition;
|
·
|
Inability
to
retain key employees or customers of acquired companies;
and
|
·
|
Assumption
of
liabilities not identified in the due diligence
process.
|
These
risks apply
to our pending acquisition of Aquila's Michigan and Minnesota natural gas
distribution operations.
We
may
not complete construction projects within estimated project costs.
WPSC
is currently
in the process of constructing the 500-megawatt Weston 4 base-load generation
facility at an estimated cost of $779 million (including the coal trains).
WPSC will be responsible for 70% of these costs. WPSC is also considering
the
possible construction of additional generation facilities in the future.
These
and other projects also may be subject to joint ownership or operation
agreements, completion of which will impact estimated project costs.
These
are very
large and complex construction projects, subject to numerous unpredictable
events that could affect our ability to timely complete construction of these
projects within estimated costs. We may not be able to meet these construction
estimates due to, among other things:
·
|
Fluctuating
or unanticipated construction costs;
|
·
|
Supply
delays;
|
·
|
Legal
claims;
and
|
·
|
Environmental
regulation.
|
We
may
not utilize Section 29 synthetic fuel production tax credits.
We
have significantly reduced our consolidated federal income tax liability
for the
past several years through tax credits available to us under Section 29 of
the
Internal Revenue Code for the production and sale of solid synthetic fuel
from
coal. We have not fully utilized Section 29 tax credits previously available
to
us. Our ability to fully utilize the Section 29 tax credits available to
us in
connection with our interest in the production facility will depend on whether
the amount of our federal taxable income and related income tax liability
is
sufficient to permit the use of such credits. The Internal Revenue Service
strictly enforces compliance with all of the technical requirements of Section
29. Section 29 tax credits are currently scheduled to expire at the end of
2007.
Any
disallowance of
some or all of those tax credits could materially affect our tax obligations
and
may also result in a reduction of the level of synthetic fuel production
at the
facility, thus reducing the likelihood and amount of future payments from
other
participants in the project. Future tax legislation and Internal
Revenue
Service
review may also affect the value of the credits and of our share of the
facility. At this time, we cannot predict the potential for or the outcome
of
any Internal Revenue Service review.
We
may
not earn Section 29 synthetic fuel production tax credits or match related
hedge
earnings to production due to increasing oil prices.
The
Internal
Revenue Code provides Section 29 tax credits based on the price of crude
oil. As
the price of oil rises above certain thresholds, the allowable tax credit
decreases. If the price of oil rises high enough, the credit is eliminated.
In
order to manage exposure to the risk that an increase in oil prices could
reduce
or eliminate the recognizable amount of Section 29 credits, ESI has entered
into
a series of derivative contracts (options) covering a specified number of
barrels of oil. These derivatives mitigate Section 29 tax credit exposure
related to rising oil prices in 2006 (95% hedged) and 2007 (40% hedged).
However, the accounting period in which gains on these hedge agreements are
recognized may not coincide with the accounting period projected for recognition
of tax credits. As a result, if the price of oil rises above the Internal
Revenue Code thresholds, income may be recognized in periods other than the
period for which the Section 29 tax credits are projected.
Our
operations are subject to risks beyond our control, including but not limited
to
weather, terrorist attacks or related acts of war.
Our
revenues are
affected by the demand for electricity and natural gas. That demand can vary
greatly based upon:
·
|
Weather
conditions, seasonality and temperature extremes;
|
·
|
Fluctuations
in economic activity and growth in our regulated service areas,
as well as
Texas, the northeast quadrant of the United States and adjacent
portion of
Canada; and
|
·
|
The
amount of
additional energy available from current or new
competitors.
|
Weather
conditions
directly influence the demand for electricity and natural gas and affect
the
price of energy commodities.
In
addition, the cost of repairing damage to our facilities due to storms, natural
disasters, wars, terrorist acts and other catastrophic events, in excess
of
reserves established for such repairs, may adversely impact our results of
operations, financial condition and cash flows. The occurrence or risk of
occurrence of future terrorist activity and the high cost or potential
unavailability of insurance to cover such terrorist activity may impact our
results of operations and financial condition in unpredictable ways. These
actions could also result in disruptions of power and fuel markets. In addition,
our natural gas distribution system and pipelines could be directly or
indirectly harmed by future terrorist activity.
Costs
of environmental compliance, liabilities, fines, penalties and litigation
could
exceed our estimates.
Compliance
with
current and future federal and state environmental laws and regulations may
result in increased capital, operating and other costs, including remediation
and containment expenses and monitoring obligations. Management cannot predict
with certainty the amount and timing of all future expenditures (including
the
potential or magnitude of fines or penalties) related to environmental matters
because of the difficulty of estimating clean-up and compliance costs and
the
possibility that changes will be made to the current environmental laws and
regulations. Any future changes in the interpretation of the Clean Air Act's
New
Source Review provisions could potentially increase our operating and
maintenance costs substantially.
On
March 15, 2005, the EPA adopted the Clean Air Mercury Rule, which is intended
to
reduce mercury emissions from coal-fired generation plants. The EPA has also
issued the Clean Air Interstate Rule requiring reductions of sulfur dioxide
and
nitrogen oxide emissions. In addition, the possibility exists of future
regulation of greenhouse gases emitted from generation facilities. We cannot
be
certain how these rules will affect us. There is also uncertainty in quantifying
liabilities under environmental laws that impose joint and several liabilities
on all potentially responsible parties.
Citizen
groups that
feel there are compliance issues not sufficiently enforced by environmental
regulatory agencies may bring citizen enforcement actions against us. Such
actions could seek penalties, injunctive relief and costs of litigation.
The
Sierra Club, Inc. and Clean Wisconsin, Inc. recently filed a complaint in
the
United States District Court, Eastern District of Wisconsin, claiming that
WPSC's Pulliam facility violated provisions of its air permit.
On
November 15, 2004, the Sierra Club filed a petition with the WDNR under Section
285.61, Wis. Stats. seeking a contested case hearing on the air permit issued
for the Weston 4 generation station. In February 2006, the Administrative
Law
Judge affirmed the Weston 4 air permit with modifications to the emission
limits for sulfur dioxide and nitrogen oxide from the coal-fired boiler and
particulate from the cooling tower. The modifications set limits that are
more
stringent than those set by the WDNR. WPS Resources is currently evaluating
the impact this decision may have on future operating costs.
Any
change in our ability to sell electricity generated from our nonregulated
facilities at market-based rates may impact earnings.
The
FERC has
authorized us to sell generation from our nonregulated facilities at market
prices. The FERC retains the authority to modify or withdraw our market based
rate authority. If the FERC determines that the market is not workably
competitive, that we possess market power or that we are not charging just
and
reasonable rates, it may require our nonregulated subsidiaries to sell power
at
a price based upon the costs incurred in producing the power. Our revenues
and
profit margins may be negatively affected by any reduction by the FERC of
the
rates we may receive.
Fluctuating
commodity prices may reduce regulated and nonregulated energy margins.
Our
regulated
energy margins are directly affected by commodity costs related to coal,
natural
gas and other fuels used in the electric generation process. The commodity
price
of market purchases of electricity also directly affects our regulated energy
margins.
Higher
commodity
prices increase energy prices and may impact customer demand for energy in
the
nonregulated market and increase counterparty risk. This may stress margins
at
our nonregulated subsidiaries.
ESI
may experience
increased expenses, including interest costs and uncollectibles, higher working
capital requirements and possibly some reduction in volumes sold as a result
of
any increase in the cost of fuel or purchased power. If market prices for
electric energy decline below the cost of production at our nonregulated
facilities, these units may be temporarily shut down and alternative sources
of
energy found to meet energy commitments.
We
are
subject to changes in government regulation, which may have a negative impact
on
our business, financial position and results of operations.
We
are subject to comprehensive regulation by several federal and state regulatory
agencies, which significantly influences our operating environment and may
affect our ability to recover costs from utility customers. In particular,
the
PSCW, MPSC, FERC, SEC, EPA and the WDNR regulate many aspects of our utility
operations, including siting and construction of facilities, conditions of
service, the issuance of securities and the rates that we can charge customers.
We are required to have numerous permits, approvals and certificates from
these
agencies to operate our business. Our acquisition of Aquila's natural gas
distribution operations in Minnesota is subject to the approval of the
regulatory commission in the state.
The
rates our
regulated utilities are allowed to charge for their retail and wholesale
services are some of the most important items influencing our business,
financial position, results of operations and liquidity.
We
are unable to predict the impact on our business and operating results from
the
future regulatory activities of any of these agencies. Changes in regulations
or
the imposition of additional regulations may
require
us to incur
additional expenses or change business operations, which may have an adverse
impact on our results of operations. In addition, federal regulatory reforms
may
produce unexpected changes and costs in the public utility industry.
A
reduction in our credit ratings could materially and adversely affect our
business, financial position, results of operations and liquidity.
We
cannot be sure that any of our credit ratings will remain in effect for any
given period of time or that a credit rating will not be lowered by a rating
agency if, in its judgment, circumstances in the future so warrant. Any
downgrade could:
·
|
Increase
our
borrowing costs;
|
·
|
Require
us to
pay a higher interest rate in future financings and possibly reduce
the
potential pool of creditors;
|
·
|
Increase
our
borrowing costs under certain of our existing credit
facilities;
|
·
|
Limit
our
access to the commercial paper market; and
|
·
|
Limit
the
availability of adequate credit support for ESI's
operations.
|
Actual
results could differ from estimates used to prepare our financial statements.
In
preparing the financial statements in accordance with generally accepted
accounting principles, management must often make estimates and assumptions
that
affect the reported amounts of assets, liabilities, revenues, expenses and
related disclosures at the date of the financial statements and during the
reporting period. Some of those judgments can be subjective and complex and
actual results could differ from those estimates. For more information about
these estimates and assumptions, see ''Management's Discussion and Analysis
of
Financial Condition and Results of Operations - Critical Accounting Policies''
in this Annual Report on Form 10-K.
The
use
of derivative instruments could result in financial losses and liquidity
constraints.
We
use derivative instruments, including futures, forwards, options and swaps,
to
manage our commodity and financial market risks. In addition, we purchase
and
sell commodity-based contracts in the natural gas and electric energy markets
for trading purposes. In the future, we could recognize financial losses
on
these contracts as a result of volatility in the market values of the underlying
commodities or if a counterparty fails to perform under a contract. In the
absence of actively quoted market prices and pricing information from external
sources, the valuation of these contracts involves management's judgment
or use
of estimates. As a result, changes in the underlying assumptions or use of
alternative valuation methods could affect the reported fair value of these
contracts. Additionally, realized values could differ from values determined
by
management.
For
additional
information concerning derivatives and commodity-based trading contracts,
see
Note 3 - Risk Management Activities in this Annual Report on Form
10-K.
We
are
subject to provisions that can limit merger and acquisition opportunities
for
our shareholders.
The
Wisconsin
Public Utility Holding Company Law precludes the acquisition of 10% or more
of
the voting shares of a holding company of a Wisconsin public utility unless
the
PSCW has first determined that the acquisition is in the best interests of
utility consumers, investors and the public. Those interests may, to some
extent, be mutually exclusive. This provision and other requirements of the
Wisconsin Public Utility Holding Company Law may delay, or reduce the likelihood
of, a sale or change of control thus reducing the likelihood that shareholders
will receive a takeover premium for their shares.
Provisions
of our
articles of incorporation and bylaws may delay or frustrate the removal of
incumbent directors and may prevent or delay a merger, tender offer or proxy
contest involving our company that is not approved by our board of directors,
even if the shareholders believe that such events may be beneficial to their
interests. In addition, our shareholder rights plan may have anti-takeover
effects by
delaying,
deferring
or preventing an unsolicited acquisition proposal not approved by our board
of
directors, even if the shareholders believe that the proposal may be beneficial
to their interests. Further, the Wisconsin Business Corporation Law contains
provisions that may have the effect of delaying or making more difficult
attempts by others to obtain control of our company without the approval
of our
board of directors.
None.
A.
REGULATED
Wisconsin
Public Service Facilities
The
following table
summarizes information on the electric generation facilities of WPSC, including
owned or jointly owned facilities as of December 31, 2005:
Type
|
Name
|
Location
|
Fuel
|
Rated
Capacity
(Megawatts)
|
(a)
|
|
|
|
|
|
|
Steam
|
Pulliam
(6
units)
|
Green
Bay,
WI
|
Coal
|
385.8
|
|
|
Weston
(3
units)
|
Wausau,
WI
|
Coal
|
477.5
|
|
|
Columbia
Units 1 and 2
|
Portage,
WI
|
Coal
|
352.5
|
(b)
|
|
Edgewater
Unit 4
|
Sheboygan,
WI
|
Coal
|
102.9
|
(b)
|
Total
Steam
|
|
|
|
1,318.7
|
|
|
|
|
|
|
|
Hydroelectric
|
Alexander
|
Lincoln
County, WI
|
Hydro
|
2.3
|
|
|
Caldron
Falls
|
Marinette
County, WI
|
Hydro
|
6.8
|
|
|
Castle
Rock
|
Adams
County,
WI
|
Hydro
|
12.8
|
(b)
|
|
Grand
Rapids
|
Menominee
County, WI
|
Hydro
|
3.4
|
|
|
Grandfather
Falls
|
Lincoln
County, WI
|
Hydro
|
16.9
|
|
|
Hat
Rapids
|
Oneida
County,
WI
|
Hydro
|
0.6
|
|
|
High
Falls
|
Marinette
County, WI
|
Hydro
|
1.1
|
|
|
Jersey
|
Lincoln
County, WI
|
Hydro
|
0.2
|
|
|
Johnson
Falls
|
Marinette
County, WI
|
Hydro
|
0.9
|
|
|
Merrill
|
Lincoln
County, WI
|
Hydro
|
1.0
|
|
|
Otter
Rapids
|
Vilas
County,
WI
|
Hydro
|
0.3
|
|
|
Peshtigo
|
Marinette
County, WI
|
Hydro
|
0.2
|
|
|
Petenwell
|
Adams
County,
WI
|
Hydro
|
13.5
|
(b)
|
|
Potato
Rapids
|
Marinette
County, WI
|
Hydro
|
0.4
|
|
|
Sandstone
Rapids
|
Marinette
County, WI
|
Hydro
|
0.8
|
|
|
Tomahawk
|
Lincoln
County, WI
|
Hydro
|
2.4
|
|
|
Wausau
|
Marathon
County, WI
|
Hydro
|
3.1
|
|
Total
Hydroelectric
|
|
|
|
66.7
|
|
|
|
|
|
|
|
Combustion
|
De
Pere Energy
Center
|
De
Pere,
WI
|
Natural
Gas
|
175.1
|
|
Turbine
and
|
Eagle
River
|
Eagle
River,
WI
|
Distillate
Fuel Oil
|
4.1
|
|
Diesel
|
Oneida
Casino
|
Green
Bay,
WI
|
Distillate
Fuel Oil
|
3.9
|
|
|
Juneau
#31
|
Adams
County,
WI
|
Distillate
Fuel Oil
|
8.8
|
(b)
|
|
West
Marinette
#31
|
Marinette,
WI
|
Natural
Gas
|
44.7
|
|
|
West
Marinette
#32
|
Marinette,
WI
|
Natural
Gas
|
44.1
|
|
|
West
Marinette
#33
|
Marinette,
WI
|
Natural
Gas
|
50.9
|
(b)
|
|
Weston
#31
|
Marathon
County, WI
|
Natural
Gas
|
18.7
|
|
|
Weston
#32
|
Marathon
County, WI
|
Natural
Gas
|
49.9
|
|
|
Pulliam
#31
|
Green
Bay,
WI
|
Natural
Gas
|
73.7
|
|
Total
Combustion Turbine and Diesel
|
|
|
473.9
|
|
|
|
|
|
|
|
Wind
|
Lincoln
|
Kewaunee
County, WI
|
Wind
|
1.8
|
|
|
Glenmore
(2)
|
Brown
County,
WI
|
Wind
|
0.0
|
|
|
|
|
|
1.8
|
|
|
|
|
|
|
|
Total
System
|
|
|
|
1,861.1
|
|
(a)
|
Based
on
capacity ratings for July 2006. As a result of continually reaching
demand peaks in the summer months, primarily due to air conditioning
demand, the summer period is the most relevant for capacity planning
purposes.
|
(b)
|
These
facilities are jointly owned by WPSC and various other utilities.
Wisconsin Power and Light Company operates the Columbia and Edgewater
units. Wisconsin River Power Company operates the Castle Rock,
Petenwell and Juneau units. WPSC and Marshfield Electric and Water
Department jointly own West Marinette 33. WPSC is the operator
of this
facility. The capacity indicated is our portion of total plant
capacity
based on the percent of ownership.
|
As
of December 31, 2005, WPSC owned 123 distribution substations and
21,029 miles of electric distribution lines. Effective January 1, 2001, all
transmission property of WPSC was transferred to ATC.
Natural
gas
properties include approximately 7,579 miles of main, 86 gate and city regulator
stations and 287,104 lateral services. All natural gas facilities are located
in
Wisconsin except for distribution facilities in and near the City of Menominee,
Michigan.
Substantially
all
of WPSC's utility plant is subject to a first mortgage lien.
Upper Peninsula
Power Facilities
The
following table
summarizes information on the electric generation facilities of UPPCO as
of
December 31, 2005:
Type
|
Name
|
Location
|
Fuel
|
Rated
Capacity
(Megawatts)
|
(a)
|
|
|
|
|
|
|
Steam
|
Warden
|
L'Anse,
MI
|
Gas
|
18.8
|
(b)
|
|
|
|
|
18.8
|
|
|
|
|
|
|
|
Hydroelectric
|
Victoria
(2
units)
|
Ontonagon
County, MI
|
Hydro
|
10.6
|
|
|
Hoist
(3
units)
|
Marquette
County, MI
|
Hydro
|
1.3
|
|
|
McClure
(2
units)
|
Marquette
County, MI
|
Hydro
|
3.2
|
|
|
Prickett
(2
units)
|
Houghton
County, MI
|
Hydro
|
0.6
|
|
|
Autrain
(2
units)
|
Alger
County,
MI
|
Hydro
|
0.5
|
|
|
Cataract
|
Marquette
County, MI
|
Hydro
|
0.4
|
|
|
Escanaba
#1
|
Delta
County,
MI
|
Hydro
|
0.7
|
|
|
Escanaba
#3
|
Delta
County,
MI
|
Hydro
|
0.9
|
|
|
Boney
Falls
|
Delta
County,
MI
|
Hydro
|
1.0
|
|
|
|
|
|
19.2
|
|
|
|
|
|
|
|
Combustion
Turbine
|
Portage
|
Houghton,
MI
|
Oil
|
19.5
|
|
|
Gladstone
|
Gladstone,
MI
|
Oil
|
20.1
|
|
|
|
|
|
39.6
|
|
|
|
|
|
|
|
Total
System
|
|
|
|
77.6
|
|
(a)
|
Based
on
July 2006 rated capacity.
|
(b)
|
The
J. H.
Warden station was taken out of service on January 1, 1994. The
facility was put into service for a short period after the Dead
River
Flood in 2003 and is now once again in standby or inactive reserve
status.
|
UPPCO
owns
3,070 miles of electric distribution lines.
Effective
June 28, 2001, all transmission property of UPPCO was transferred to
ATC.
Substantially
all
of UPPCO's utility plant is subject to a first mortgage lien.
B.
NONREGULATED
WPS Resources
Corporation
Asset
Management Strategy
WPS Resources'
asset management strategy includes the continual evaluation of all properties
and businesses held by WPS Resources to identify their best use.
WPS Resources will evaluate whether the best use of the property or
business is in current operations or if sale and reinvestment of proceeds
is in
the best interest of WPS Resources, its shareholders and customers.
As
part of this strategy, in December 2005, UPPCO sold 1,366 acres of land
along the Bond Falls Reservoir, Boney Falls Basin and Cataract Basin, which
were
no longer needed for operations of UPPCO. The property was sold for
approximately $5.9 million and up to an additional $3 million pending
the removal of certain contingencies.
WPS Resources
had originally identified approximately 7,300 acres of excess land associated
with its UPPCO hydroelectric facilities. UPPCO is currently working with
various
interested parties to develop a sales strategy for more of these
properties.
WPS Energy
Services Natural Gas Facilities
At
December 31, 2005,ESI owned an 81.5% interest in a 3 billion cubic foot
natural gas storage field in Kimball, Michigan. In 2006, ESI acquired the
remaining 18.5% interest in the facility.
WPS Energy
Services Generation Facilities
The
following table
summarizes information on the electric generation facilities owned by ESI,
including jointly owned facilities as of December 31, 2005:
Type
|
Name
|
Location
|
Fuel
|
Rated
Capacity
(Megawatts)
|
(a)
|
|
|
|
|
|
|
Steam
|
Caribou
Unit
1
|
Caribou,
ME
|
Oil
|
9.0
|
(b)
|
|
Sunbury
|
Shamokin
Dam,
PA
|
Coal
|
362.0
|
|
|
Niagara
Falls
|
Niagara
Falls,
NY
|
Coal
|
50.5
|
|
|
Stoneman
|
Cassville,
WI
|
Coal
|
45.4
|
|
|
Westwood
|
Tremont,
PA
|
Culm
|
30.0
|
|
|
Wyman
|
Yarmouth,
ME
|
Oil
|
20.4
|
(c)
|
|
|
|
|
517.3
|
|
|
|
|
|
|
|
Combined
Cycle
|
Syracuse
|
Syracuse,
NY
|
Gas/Oil
|
86.4
|
|
|
Beaver
Falls
|
Beaver
Falls,
NY
|
Gas/Oil
|
78.9
|
|
|
Combined
Locks
|
Combined
Locks, WI
|
Gas
|
46.8
|
(d)
|
|
|
|
|
212.1
|
|
|
|
|
|
|
|
Hydroelectric
|
Tinker
|
New
Brunswick,
Canada
|
Hydro
|
34.5
|
|
|
Squa
Pan
|
Ashland,
ME
|
Hydro
|
1.2
|
|
|
Caribou
|
Caribou,
ME
|
Hydro
|
0.9
|
|
|
|
|
|
36.6
|
|
|
|
|
|
|
|
Combustion
Turbine
|
Sunbury
|
Shamokin
Dam,
PA
|
Oil
|
36.0
|
|
and
Diesel
|
Sunbury
|
Shamokin
Dam,
PA
|
Diesel
|
6.0
|
|
|
Caribou
|
Caribou,
ME
|
Diesel
|
7.0
|
|
|
Tinker
|
New
Brunswick,
Canada
|
Diesel
|
1.0
|
|
|
Flo's
Inn
|
Presque
Isle,
ME
|
Diesel
|
4.2
|
|
|
Loring
|
Limestone,
ME
|
Diesel
|
5.1
|
|
|
|
|
|
59.3
|
|
|
|
|
|
|
|
Total
System
|
|
|
|
825.3
|
|
(a)
|
Based
on
summer rated capacity.
|
(b)
|
Caribou
Steam
Unit 1 was reactivated on December 12, 2005 at 9-megawatts. Caribou
Steam Unit 2 was reactivated on January 6, 2006 (not included above)
for a
total (Units 1 and 2) of 21.7-megawatts.
|
(c)
|
ESI
owns a
3.3455% interest in the Wyman plant. The plant is a 610-megawatt
oil-fired
facility operated by a subsidiary of FPL Group, Inc.
|
(d)
|
ESI
also has
an additional five megawatts of capacity available at this facility
through the lease of an additional steam
turbine.
|
For
information on
material legal proceedings and matters related to WPS Resources and its
subsidiaries, see Note 17 - Commitments and Contingencies to
WPS Resources' Notes to Consolidated Financial Statements.
No
matters were submitted to a vote of the security holders of either
WPS Resources or WPSC during the fourth quarter of 2005.
A.
Executive Officers of WPS Resources Corporation
as
of
January 1, 2006
|
|
|
|
|
Name
and
Age
|
|
Current
Position and Business
Experience
During Past Five Years
|
Effective
Date
|
|
|
|
|
Larry
L.
Weyers
|
60
|
Chairman,
President and Chief Executive Officer
|
02-12-98
|
|
|
|
|
Thomas
P.
Meinz
|
59
|
Executive
Vice President - Public Affairs
|
09-12-04
|
|
|
Senior
Vice
President - Public Affairs
|
12-24-00
|
|
|
|
|
Phillip
M.
Mikulsky
|
57
|
Executive
Vice President - Development
|
09-12-04
|
|
|
Senior
Vice
President - Development
|
02-12-98
|
|
|
|
|
Joseph
P.
O'Leary *
|
51
|
Senior
Vice
President and Chief Financial Officer
|
06-04-01
|
|
|
Vice
President - Finance of United Stationers Corporation
|
05-01-99
|
|
|
|
|
Bernard
J.
Treml
|
56
|
Senior
Vice
President - Human Resources
|
12-19-04
|
|
|
Vice
President - Human Resources
|
02-12-98
|
|
|
|
|
Diane
L.
Ford
|
52
|
Vice
President - Controller and Chief Accounting Officer
|
07-11-99
|
|
|
|
|
Richard
E.
James
|
52
|
Vice
President - Corporate Planning
|
12-29-96
|
|
|
|
|
Barbara
A.
Nick
|
47
|
Vice
President - Corporate Services
|
07-18-04
|
|
|
Assistant
Vice President - Corporate Services
|
04-14-02
|
|
|
Manager
-
Corporate Services
|
11-20-00
|
|
|
|
|
Bradley
A.
Johnson
|
51
|
Vice
President and Treasurer
|
07-18-04
|
|
|
Treasurer
|
06-23-02
|
|
|
Assistant
Treasurer
|
04-01-01
|
|
|
Corporate
Planning Executive
|
12-31-95
|
|
|
|
|
Barth
J.
Wolf
|
48
|
Secretary
and
Manager - Legal Services
|
09-19-99
|
*
|
Prior
to
joining WPS Resources, Joseph P. O'Leary's responsibilities at United
Stationers included leading the finance, treasury and accounting
functions. United Stationers was the largest provider of wholesale
business office products in North America.
|
NOTE:
|
All
ages are
as of December 31, 2005. None of the executives listed above are
related by blood, marriage, or adoption to any of the other officers
listed or to any director of the Registrants. Each officer holds
office
until his or her successor has been duly elected and qualified,
or until
his or her death, resignation, disqualification, or removal.
|
B.
Executive Officers of Wisconsin Public Service
Corporation
as
of
January 1, 2006
|
|
|
|
|
Name
and
Age
|
Current
Position and Business
Experience
During Past Five Years
|
Effective
Date
|
|
|
|
|
Larry
L.
Weyers
|
60
|
Chairman
and
Chief Executive Officer
|
08-15-04
|
|
|
Chairman,
President and Chief Executive Officer
|
04-14-02
|
|
|
Chairman
and
Chief Executive Officer
|
02-12-98
|
|
|
|
|
Lawrence
T.
Borgard
|
44
|
President
and
Chief Operating Officer - Energy Delivery
|
08-15-04
|
|
|
Vice
President - Distribution and Customer Service
|
11-25-01
|
|
|
Vice
President - Transmission and Engineering
|
07-23-00
|
|
|
|
|
Charles
A.
Schrock
|
52
|
President
and
Chief Operating Officer - Generation
|
08-15-04
|
|
|
Senior
Vice
President of WPS Resources Corporation
|
09-14-03
|
|
|
President
of
WPS Power Development, Inc.
|
11-11-01
|
|
|
Senior
Vice
President of WPS Resources Corporation
|
08-31-01
|
|
|
Senior
Vice
President - Operations of Nuclear Management Company, LLC
|
11-26-00
|
|
|
|
|
Thomas
P.
Meinz
|
59
|
Executive
Vice President - Public Affairs
|
09-12-04
|
|
|
Senior
Vice
President - Public Affairs
|
12-24-00
|
|
|
|
|
Joseph
P.
O'Leary *
|
51
|
Senior
Vice
President and Chief Financial Officer
|
06-04-01
|
|
|
Vice
President - Finance of United Stationers Corporation
|
05-01-99
|
|
|
|
|
Bernard
J.
Treml
|
56
|
Senior
Vice
President - Human Resources
|
12-19-04
|
|
|
Vice
President - Human Resources
|
05-09-94
|
|
|
|
|
David
W.
Harpole
|
50
|
Vice
President - Energy Supply - Projects
|
02-14-04
|
|
|
Vice
President - Energy Supply
|
04-14-02
|
|
|
Assistant
Vice President Energy Supply
|
11-12-00
|
|
|
|
|
Diane
L.
Ford
|
52
|
Vice
President - Controller and Chief Accounting Officer
|
07-11-99
|
|
|
|
|
Bradley
A.
Johnson
|
51
|
Vice
President and Treasurer
|
07-18-04
|
|
|
Treasurer
|
06-23-02
|
|
|
Assistant
Treasurer
|
04-01-01
|
|
|
Corporate
Planning Executive
|
12-31-95
|
|
|
|
|
Barth
J.
Wolf
|
48
|
Secretary
and
Manager - Legal Services
|
09-19-99
|
|
|
|
|
*
|
Prior
to
joining WPS Resources, Joseph P. O'Leary's responsibilities at United
Stationers included leading the finance, treasury and accounting
functions. United Stationers was the largest provider of wholesale
business office products in North America.
|
NOTE:
|
All
ages are
as of December 31, 2005. None of the executives listed above are
related by blood, marriage, or adoption to any of the other officers
listed or to any director of the Registrants. Each officer holds
office
until his or her successor has been duly elected and qualified,
or until
his or her death, resignation, disqualification, or
removal.
|
|
MARKET
FOR REGISTRANTS' COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY
SECURITIES
|
WPS Resources
Corporation Common Stock Two-Year Comparison
Share
Data
|
Dividends
Per
Share
|
Price
Range
|
High
|
Low
|
|
|
|
|
2005
|
|
|
|
1st
Quarter
|
$
.555
|
$54.90
|
$47.67
|
2nd
Quarter
|
.555
|
56.90
|
51.11
|
3rd
Quarter
|
.565
|
60.00
|
54.50
|
4th
Quarter
|
.565
|
58.95
|
51.50
|
Total
|
$2.240
|
|
|
|
|
|
|
2004
|
|
|
|
1st
Quarter
|
$
.545
|
$48.93
|
$44.99
|
2nd
Quarter
|
.545
|
48.70
|
43.50
|
3rd
Quarter
|
.555
|
48.81
|
44.85
|
4th
Quarter
|
.555
|
50.53
|
45.35
|
Total
|
$2.200
|
|
|
WPS Resources
common stock is traded on the New York Stock Exchange under the ticker symbol
"WPS." WPS Resources is the sole holder of WPSC's common
stock.
Dividend
Restrictions
For
information on
dividend restrictions related to WPS Resources and any of its subsidiaries,
see Note 21 - Common Equity to WPS Resources' Notes to
Consolidated Financial Statements.
Common
Stock
Listed:
|
New
York
Stock Exchange
|
|
|
Ticker
Symbol:
|
WPS
|
|
|
Transfer
Agent and Registrar:
|
American
Stock Transfer & Trust Company
59
Maiden
Lane
New
York, NY
10038
|
As
of February 21, 2006, there were 20,626 common stock shareholders of
record.
See
Item 11 of this
Annual Report on Form 10-K for information regarding our equity compensation
plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WPS
RESOURCES CORPORATION
|
|
COMPARATIVE
FINANCIAL STATEMENTS AND
|
|
FINANCIAL
STATISTICS (2001 TO 2005)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of or for
Year Ended December 31
|
|
|
|
|
|
|
|
|
|
|
|
(Millions,
except per share amounts, stock price, return on average
equity
|
|
|
|
|
|
|
|
|
|
|
and
number of
shareholders and employees)
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
*
|
|
$
|
6,962.7
|
|
$
|
4,950.8
|
|
$
|
4,402.5
|
|
$
|
1,548.3
|
|
$
|
1,431.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
available for common shareholders
|
|
|
157.4
|
|
|
139.7
|
|
|
94.7
|
|
|
109.4
|
|
|
77.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
5,455.2
|
|
|
4,376.8
|
|
|
4,296.5
|
|
|
3,671.2
|
|
|
3,346.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock of subsidiaries
|
|
|
51.1
|
|
|
51.1
|
|
|
51.1
|
|
|
51.1
|
|
|
51.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
and capital lease obligation (excluding current portion)
|
|
|
867.1
|
|
|
865.7
|
|
|
871.9
|
|
|
824.4
|
|
|
727.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
of
common stock (less treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
shares in deferred compensation trust)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
39.8
|
|
|
37.3
|
|
|
36.6
|
|
|
31.8
|
|
|
31.1
|
|
Average
|
|
|
38.3
|
|
|
37.4
|
|
|
33.0
|
|
|
31.7
|
|
|
28.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per
common share (basic)
|
|
$
|
4.11
|
|
$
|
3.74
|
|
$
|
2.87
|
|
$
|
3.45
|
|
$
|
2.75
|
|
Earnings
per
common share (diluted)
|
|
|
4.07
|
|
|
3.72
|
|
|
2.85
|
|
|
3.42
|
|
|
2.74
|
|
Dividend
per
share of common stock
|
|
|
2.24
|
|
|
2.20
|
|
|
2.16
|
|
|
2.12
|
|
|
2.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
price at
year-end
|
|
$
|
55.31
|
|
$
|
49.96
|
|
$
|
46.23
|
|
$
|
38.82
|
|
$
|
36.55
|
|
Book
value per
share
|
|
$
|
32.76
|
|
$
|
29.30
|
|
$
|
27.40
|
|
$
|
24.62
|
|
$
|
23.02
|
|
Return
on
average equity
|
|
|
13.6
|
%
|
|
13.5
|
%
|
|
11.5
|
%
|
|
14.6
|
%
|
|
12.8
|
%
|
Number
of
common stock shareholders
|
|
|
20,701
|
|
|
21,358
|
|
|
22,172
|
|
|
22,768
|
|
|
23,478
|
|
Number
of
employees
|
|
|
2,945
|
|
|
3,048
|
|
|
3,080
|
|
|
2,963
|
|
|
2,856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
Approximately $1,127 million of the increase in revenue in 2003
compared
to 2002 relates to ESI's required adoption of Issue No. 02-03,
"Issues
|
|
Involved in Accounting for Derivative Contracts Held for Trading
Purposes
and Contracts Involved in Energy Trading and Risk Management
Activities,"
|
|
effective January 1, 2003.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WISCONSIN
PUBLIC SERVICE CORPORATION
|
|
COMPARATIVE
FINANCIAL STATEMENTS AND
|
|
FINANCIAL
STATISTICS (2001 TO 2005)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of or for
Year Ended December 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions,
except weather information)
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
|
$
|
1,454.9
|
|
$
|
1,222.1
|
|
$
|
1,129.1
|
|
$
|
1,007.6
|
|
$
|
932.3
|
|
Earnings
on
common stock
|
|
|
81.4
|
|
|
104.8
|
|
|
78.9
|
|
|
83.1
|
|
|
80.6
|
|
Total
assets
|
|
|
2,686.5
|
|
|
2,768.6
|
|
|
2,577.7
|
|
|
2,324.2
|
|
|
2,196.3
|
|
Long-term
debt
(excluding current portion)
|
|
|
507.6
|
|
|
508.0
|
|
|
507.8
|
|
|
442.5
|
|
|
415.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weather
information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cooling
degree
days
|
|
|
649
|
|
|
328
|
|
|
351
|
|
|
586
|
|
|
546
|
|
Cooling
degree
days as a percent of normal
|
|
|
135.2
|
%
|
|
66.7
|
%
|
|
72.2
|
%
|
|
122.9
|
%
|
|
116.9
|
%
|
Heating
degree
days
|
|
|
7,401
|
|
|
7,546
|
|
|
7,883
|
|
|
7,509
|
|
|
7,139
|
|
Heating
degree
days as a percent of normal
|
|
|
96.2
|
%
|
|
97.6
|
%
|
|
102.2
|
%
|
|
96.9
|
%
|
|
91.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM
7.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
|
WPS Resources
is a holding company. Our wholly owned subsidiaries include two regulated
utilities, WPSC and UPPCO. Another wholly owned subsidiary, WPS Resources
Capital Corporation, is a holding company for our nonregulated ESI
subsidiary.
Our
regulated and
nonregulated businesses have distinct competencies and business strategies,
offer differing energy and energy related products and services, experience
a
wide array of risks and challenges, and are viewed uniquely by management.
The
following summary provides a strategic overview and insight into the operations
of our subsidiaries.
Strategic
Overview
The
focal point of
WPS Resources' business plan is the creation of long-term value for our
shareholders through growth, operational excellence, asset management, and
risk
management and the continued emphasis on reliable, competitively priced,
and
environmentally sound energy and energy related services for our customers.
We
are seeking growth of our regulated and nonregulated portfolio and placing
an
emphasis on regulated growth.
A discussion of
the essential components of our business plan is set forth below:
Maintain
and Grow a Strong Regulated Utility Base
-
We
are focusing on
growth in our regulated operations. A strong regulated utility base is
important in order to maintain a strong balance sheet, more predictable cash
flows, a desired risk profile, attractive dividends, and quality credit ratings,
which are critical to our success. WPS Resources believes the following
recent developments have helped, or will help maintain and grow its regulated
utility base:
·
|
WPSC
is
expanding its regulated generation fleet in order to meet growing
electric
demand and ensure continued reliability. Construction of the 500-megawatt
coal-fired Weston 4 base-load power plant near Wausau, Wisconsin,
is
underway, in partnership with DPC. Commercial operation is expected
in
2008. WPSC continues to pursue plans to construct other electric
generating facilities and will determine the details relating to
fuel type
and in-service dates in the future.
|
·
|
In
September 2005, WPS Resources entered into a definitive
agreement with Aquila to acquire its natural gas distribution operations
in Michigan and Minnesota. The addition of regulated assets in
complementary vicinities to WPS Resources' existing regulated
electric and natural gas operations in Wisconsin and Michigan will
transition WPS Resources to a larger and stronger regional energy
company. MPSC approval has already been received for the acquisition
of
the gas distribution operations in Michigan, while the regulatory
process
required for approval of the acquisition of the Minnesota operations
is
progressing on schedule. We expect to complete both transactions
in the
first half of 2006.
|
·
|
At
December
31, 2005, WPS Resources owned 31.0% of ATC, which is a utility
operation that owns, builds, maintains, and operates high voltage
electric
transmission lines primarily in Wisconsin and Upper Michigan. We
continue
to increase our ownership interest in ATC through additional equity
interest received as consideration for funding a portion of the
Duluth,
Minnesota, to Wausau, Wisconsin, transmission line.
|
·
|
WPSC
continues to invest in environmental projects to improve air quality
and
meet the requirements set by environmental regulators. Capital
projects to
construct and upgrade equipment to meet or exceed required environmental
standards are planned each year. Throughout the 2006 to 2008 time
period,
WPSC expects to invest approximately $167 million in various
environmental projects.
|
·
|
In
2006, WPSC
entered into a natural gas transportation precedent agreement with
Guardian Pipeline, LLC. The agreement is subject to various approvals,
including approvals by WPS Resources' and Guardian's Boards of
Directors as well as approval by the PSCW and the FERC. The agreement
is
also contingent upon Guardian Pipeline obtaining financing. To
meet the
requirements of the agreement, Guardian Pipeline will expand its
current
pipeline approximately 106 miles in
Wisconsin.
|
Integrate
Resources to Provide Operational Excellence
-
WPS Resources
is committed to integrating resources of its regulated business units and
also
its nonregulated business units, while maintaining any and all applicable
regulatory restrictions, in order to leverage the individual capabilities
and
expertise of each unit to provide the best value to all customers.
·
|
This
strategy
is demonstrated by the integration of resources at our nonregulated
subsidiaries. We started the integration by first implementing
tolling
agreements to move the market management of our plants to our portfolio
management group, reducing our merchant generation market risk.
Then we
restructured the management teams of ESI and PDI so that one team
oversees
all the operations of our nonregulated businesses.
|
·
|
This
strategy
will also be demonstrated in our regulated business by optimally
sourcing
work and combining resources to achieve best practices of WPSC
and the
natural gas distribution operations in Michigan and Minnesota (expected
to
be acquired in the first half of 2006), operational excellence,
and
sustainable value for customers and
shareholders.
|
Strategically
Grow Nonregulated Businesses
-
ESI
will grow its
electric and natural gas business (through strategic acquisitions, market
penetration by existing businesses, and new product offerings) by targeting
growth in areas where it has the most market expertise and through "strategic
hiring" in other areas. ESI also focuses on optimizing the operational
efficiency of its existing portfolio of assets and pursues compatible
development projects that strategically fit with its customer base and market
expertise.
·
|
The
acquisition of Advantage Energy in July 2004 provided ESI with
enhanced
opportunities to compete in the New York market and had a positive
impact
on ESI's margin in 2005. In 2005, ESI expanded Advantage Energy's
customer
base, and began introducing natural gas products to these customers.
The
increase in Advantage Energy's customer base was aided by expanding
its
product offering, including offering both fixed and variable priced
products. Prior to ESI's acquisition of Advantage Energy, only
variable
priced products were offered.
|
·
|
In
the third
quarter of 2005, ESI began offering retail electric products primarily
to
large commercial and industrial customers in Illinois. Previously,
ESI was
only offering natural gas products and energy management services
to
customers in Illinois.
|
·
|
In
the fourth
quarter of 2005, ESI began developing a product offering in the
Texas
retail electric market. Due to the thriving Texas market structure
(unencumbered by a regulated offering that is not market based)
and having
been presented with a good opportunity and approach to enter the
Texas
retail market, ESI hired experienced personnel in that region and
expects
to be an approved competitive supplier before the end of the second
quarter of 2006. ESI previously had a market presence in Houston
with
natural gas producer services originators. While historically,
ESI limited
its retail activities to the northeastern quadrant of the United
States
and adjacent portion of Canada, the entry into the Texas market
offers an
opportunity to leverage the infrastructure and capability ESI developed
to
provide products and services that it believes customers will
value.
|
·
|
ESI
began
marketing electric products to customers in Massachusetts in 2005
and has
had initial success in signing up commercial and industrial
customers.
|
Place
Strong Emphasis on Asset and Risk Management
-
One aspect of our asset management strategy calls for the continuing acquisition
of assets that complement our existing business and strategy. The utilities
are
the backbone of our earnings. We expect ESI to provide between 20 and 30
percent
of our earnings in the future. Another aspect of this strategy calls for
the
disposition of assets, including plants and entire business units, which
are
either no longer strategic to ongoing operations or would
reduce
our risk
profile. The risk management portion of this strategy includes the management
of
market, credit and operational risk through the normal course of
business.
·
|
The
pending
acquisitions of Aquila's natural gas distribution operations in
Michigan
and Minnesota will transition WPS Resources to a larger and stronger
regional energy company.
|
·
|
The
sale of
Sunbury's allocated emission allowances was completed in May 2005
for
$109.9 million. The proceeds received from the sale enabled Sunbury
to eliminate its non-recourse debt obligation, which provides greater
flexibility as ESI evaluates its options related to Sunbury. These
options
range from closing the plant, operating the plant only during favorable
economic periods, to a future sale.
|
·
|
We
also sold
WPSC's 59% interest in the Kewaunee plant in July 2005. The major
benefits
of the Kewaunee sale include transferring financial risk from WPSC's
electric customers and WPS Resources' shareholders to Dominion,
greater certainty of future energy costs through a fixed price
power
purchase agreement, and being able to return the non-qualified
decommissioning funds to our customers.
|
·
|
In
the fourth
quarter of 2005, WPSC sold a 30% interest in the Weston 4 power
plant to
DPC. The sale of a portion of this plant reduces construction risk
associated with the project, considering its magnitude, and reduces
WPSC's
funding requirements. Jointly owned plants also reduce the risk
profile of
WPS Resources.
|
·
|
|
·
|
Forward
purchases and sales of electric capacity, energy, natural gas,
and other
commodities allow for opportunities to secure prices in a volatile
price
market.
|
·
|
An
initiative
we call "Competitive Excellence" is being deployed across our entire
company. Competitive Excellence strives to eliminate work that
does not
provide value for our customers. This creates more efficient processes,
improves the effectiveness of employees, and reduces
costs.
|
Regulated
Utilities
Our
regulated
utilities include WPSC and UPPCO. WPSC derives its revenues primarily from
the
purchase, production, distribution, and sale of electricity, and the purchase,
distribution, and sale of natural gas to retail customers in a service area
of
approximately 11,000 square miles in northeastern Wisconsin and an adjacent
portion of the Upper Peninsula of Michigan. The PSCW and the MPSC regulate
these
retail sales. UPPCO derives revenues from the purchase, production,
distribution, and sale of electricity in a service area of approximately
4,500
square miles in the Upper Peninsula of Michigan and is regulated by the MPSC.
WPSC and UPPCO both provide wholesale electric service to numerous utilities
and
cooperatives for resale. FERC regulates wholesale sales.
The
regulatory
commissions allow the utilities to earn a return on common stock equity that
is
commensurate with an investor's expected return, compensating for the risks
investors face when providing funds to the utility. The return on common
stock
equity approved by the PSCW, the FERC, and the MPSC was 11.5%, 11.0%, and
11.4%,
respectively, in 2005 and 12.0%, 11.0%, and 11.4%, respectively, in 2004.
The
utilities bear volume risk as rates are based upon normal sales volumes as
projected by the utility. Historically, consumers bear most of the price
risk
for fuel and purchased power costs as our regulators typically have allowed
the
utilities to recover most of these costs (to the extent they are prudently
incurred), through various cost recovery mechanisms. However, the electric
utility is exposed to the risk of not recovering increased fuel costs for
Wisconsin retail customers under the current electric fuel recovery rules.
Under
the Wisconsin fuel recovery mechanism, certain costs are only recoverable
on a
pro rata basis for the portion of the year after PSCW approval. As such,
the
ability of our regulated utilities to earn their approved return on equity
is
dependent upon accurate forecasting, the ability to obtain timely rate increases
to account for rising cost structures (while minimizing the required rate
increases in order to maintain the competitiveness of our core industrial
customer base and keep these customers in our service area), and certain
conditions that are outside of their control (such as macroeconomic factors
and
weather conditions). To mitigate the risk of unrecoverable fuel costs in
2006
due
to market price
volatility, WPSC is employing risk management techniques pursuant to its
risk
policy approved by the PSCW, including the use of derivative instruments
such as
futures and options.
On
April 1, 2005, MISO, of which WPSC and UPPCO are members, began operation
of its
"Day 2" energy market. Within the Day 2 market, MISO centrally dispatches
wholesale electricity and provides transmission service to an area mainly
in the
Midwest. MISO determines prices in the market based on a locational marginal
pricing system determined by accepted generation bids and offers and the
load to
be served by market participants. The introduction of the MISO Day 2 market
has
shown positive results in that the system allows a more efficient use of
the
transmission system. In addition to this, the MISO Day 2 market may provide
increased opportunities to reduce our generation costs and regulatory risks
due
to the changes in the regulatory environment explained above. See "Other
Future
Considerations"
in "Liquidity
and
Capital Resources"
below for more
information related to MISO.
Uncertainties
related to the restructuring of the regulated environment are a risk for
our
regulated utilities. The restructuring of natural gas service has begun in
Wisconsin. Currently, some of the largest natural gas customers are purchasing
natural gas from suppliers other than their local utility. Efforts are
underway to make it easier for smaller natural gas customers to do the same.
Restructuring of electric regulation inside Wisconsin is not currently being
pursued. The state is focused on improving reliability by building more
generation and transmission facilities and creating fair market rules.
Restructuring of electric regulation is present in Michigan. In the Upper
Peninsula of Michigan, no customers have chosen an alternative electric supplier
and few alternative electric suppliers have offered to serve any customers
in
Michigan's Upper Peninsula due to lack of transmission access and generating
capacity in the areas we serve, which represents a barrier to competitive
suppliers entering the market.
We
have little or no control over some construction risks associated with projects
that can negatively affect completion time and project costs. These risks
include, but are not limited to, the shortage of or inability to obtain labor
or
materials, unfavorable weather conditions, events in the economy, and changes
in
applicable laws or regulations.
ESI
ESI
offers
nonregulated natural gas, electric, and alternate fuel supplies, as well
as
energy management and consulting services, to retail and wholesale customers
primarily in the northeastern quadrant of the United States and adjacent
portions of Canada. As discussed above, ESI is also developing a product
offering in the Texas retail electric market. Although ESI has a wide array
of
products and services, revenues are primarily derived through sales of
electricity and natural gas to retail and wholesale customers.
ESI's
marketing and
trading operations manage power and natural gas procurement as an integrated
portfolio with its retail and wholesale sales commitments and sales of
generation from power plants. ESI strives to maintain a low risk portfolio,
balancing natural gas and electricity purchase commitments with corresponding
sales commitments. In 2005, ESI purchased electricity required to fulfill
these
sales commitments primarily from independent generators, energy marketers,
and
organized electric power markets. ESI purchased natural gas from a variety
of
producers and suppliers under daily, monthly, seasonal, and long-term contracts,
with pricing delivery and volume schedules to accommodate customer requirements.
ESI's customers include utilities, municipalities, cooperatives, commercial
and
industrial consumers, aggregators, and other marketing and retail entities.
ESI
uses derivative financial instruments to provide flexible pricing to customers
and suppliers, manage purchase and sales commitments, and reduce exposure
relative to volatile market prices.
ESI
also owns
several merchant electric generation plants, primarily in the Midwest and
northeastern United States and adjacent portions of Canada, which are listed
in
Item 2, "Properties."
ESI markets the
power from plants not under contract to third parties. ESI utilizes power
from
its New England and Canadian assets primarily to serve firm load commitments
in
northern Maine and certain other sales agreements with customers. For most
of
the remaining capacity available from these plants, ESI utilizes financial
tools, including forwards, options, and swaps, to mitigate exposure, as well
as
to maximize value
from
the merchant
generation fleet. Power purchase agreements are also in place with third-party
customers for approximately 90 megawatts of the total capacity, which includes
the Stoneman facility in Cassville, Wisconsin, and the Combined Locks facility
in Combined Locks, Wisconsin.
The
table below
discloses future natural gas and electric sales volumes under contract as
of
December 31, 2005. Contracts are generally one to three years in duration.
ESI expects that its ultimate sales volumes in 2006 and beyond will exceed
the
volumes shown in the table below as it continues to seek growth opportunities
and existing customers who do not have long-term contracts continue to buy
their
short-term requirements from ESI.
Forward
Contracted Volumes at 12/31/2005(1)
|
2006
|
2007
|
After
2007
|
|
|
|
|
Wholesale
sales volumes - billion cubic feet
|
107.3
|
13.2
|
4.3
|
Retail
sales
volumes - billion cubic feet
|
171.1
|
39.7
|
40.3
|
Total
natural
gas sales volumes
|
278.4
|
52.9
|
44.6
|
|
|
|
|
Wholesale
sales volumes - million kilowatt-hours
|
13,951
|
4,144
|
3,160
|
Retail
sales
volumes - million kilowatt-hours
|
1,962
|
391
|
126
|
Total
electric sales volumes
|
15,913
|
4,535
|
3,286
|
(1) |
These
tables
represent physical sales contracts for natural gas and electric power
for
delivery or settlement in future periods; however, there is a possibility
that some of the contracted volumes reflected in the above table
could be
net settled. Management has no reason to believe that gross margins
that
will be generated by these contracts will vary significantly from
those
experienced historically.
|
For
comparative
purposes, future natural gas and electric sales volumes under contract at
December 31, 2004 are shown below. Actual electric and natural gas sales
volumes for 2005 are disclosed within Results of Operations -
WPS Resources, ESI Segment Operations.
Forward
Contracted Volumes at 12/31/2004(1)
|
2005
|
2006
|
After
2006
|
|
|
|
|
Wholesale
sales volumes - billion cubic feet
|
98.1
|
8.0
|
2.2
|
Retail
sales
volumes - billion cubic feet
|
184.8
|
33.1
|
8.4
|
Total
natural
gas sales volumes
|
282.9
|
41.1
|
10.6
|
|
|
|
|
Wholesale
sales volumes - million kilowatt-hours
|
6,890
|
785
|
880
|
Retail
sales
volumes - million kilowatt-hours
|
3,413
|
1,308
|
339
|
Total
electric sales volumes
|
10,303
|
2,093
|
1,219
|
(1) |
These
tables
represent physical sales contracts for natural gas and electric power
for
delivery or settlement in future periods; however, there is a possibility
that some of the contracted volumes reflected in the above table
could be
net settled. Management has no reason to believe that gross margins
that
will be generated by these contracts will vary significantly from
those
experienced historically.
|
Wholesale
electric
and wholesale natural gas volumes under contract have increased at
December 31, 2005, compared to December 31, 2004. Natural gas
throughput volumes in Canada continue to increase and more volatile natural
gas
prices have provided increased structured wholesale natural gas opportunities.
The emphasis ESI is placing on its originated wholesale customer electric
business is also producing encouraging results, and in the fourth quarter
of
2005, ESI added contracts to provide approximately 7,300 million
kilowatt-hours of electricity to customers in the future. Despite a challenging
price environment, retail natural gas sales volumes under contract have
increased slightly, while retail electric volumes under contract have decreased
primarily due to a combination of industry restructuring and high energy
prices
in the Michigan and Ohio retail electric markets (see "Liquidity
and
Capital Resources - WPS Resources - Other Future
Considerations,"
for more
information). ESI continues to look for opportunities that fit within its
growth
strategy. In 2004, ESI grew its retail electric business through the acquisition
of retail operations in New York. As discussed above, ESI also began developing
a
product offering in the Texas retail electric market. ESI expects to continue
to
target acquisitions and increase its customer base in existing
markets.
As
a company that participates in energy commodity markets, ESI is exposed to
a
variety of risks, including market, operational, liquidity, and credit risks.
Market risk is measured as the potential gain or loss of a portfolio that
is
associated with a price movement within a given probability over a specific
period of time, known as Value-at-Risk. Through the use of derivative financial
instruments, ESI believes it manages its Value-at-Risk to acceptable levels
(see
Item 7A, Quantitative
and Qualitative Disclosures About Market Risk,
for more
information about Value-at-Risk). Operational risk is the risk related to
execution of transactions, forecasting, scheduling, or other operational
activities and is common to all companies participating in the energy marketing
industry. ESI's continued investment in system infrastructure, business process
improvement, employee training, and internal controls have helped mitigate
operational risk to date. Liquidity risk is risk that has historically been
less
applicable to ESI than many industry participants because of the financial
support provided by WPS Resources in the form of guarantees to
counterparties. A significant downgrade in WPS Resources' credit ratings,
however, could cause counterparties to demand additional assurances of payment.
WPS Resources' Board of Directors imposes restrictions on the amount of
guarantees WPS Resources is allowed to provide to these counterparties in
order to manage this risk. ESI believes it would have adequate capital to
continue core operations unless WPS Resources' credit ratings fall below
investment grade (Standard & Poor's rating of BBB- and Moody's rating of
Baa3).
The
other category
of risk mentioned above that ESI faces is credit risk from retail and wholesale
counterparties. In order to mitigate its exposure to credit risk, ESI developed
credit policies. As a result of these credit policies, ESI has not experienced
significant write-offs from its large wholesale counterparties to date.
Write-offs pertaining to retail customers were $0.7 million (0.0%) in 2005
and 2004, and $3.1 million (0.2%), in 2003. ESI believes its write-off
percentage is within the range experienced by similar energy companies. The
table below summarizes wholesale counterparty credit exposure, categorized
by
maturity date, as of December 31, 2005 (in millions). At December 31,
2005, ESI had net exposure with three investment grade counterparties that
were
more than 10% of total exposure. Total exposure with these counterparties
was
$89.3 million and is included in the table below.
Counterparty
Rating (Millions)(1)
|
|
Exposure(2)
|
|
Exposure
Less
Than
1
Year
|
|
Exposure
1
to 3
Years
|
|
Exposure
4
to
5
Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
grade - regulated utility
|
|
$
|
7.6
|
|
$
|
7.6
|
|
$
|
-
|
|
$
|
-
|
|
Investment
grade - other
|
|
|
244.5
|
|
|
171.9
|
|
|
65.5
|
|
|
7.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-investment
grade - regulated utility
|
|
|
0.1
|
|
|
0.1
|
|
|
-
|
|
|
-
|
|
Non-investment
grade - other
|
|
|
10.1
|
|
|
10.1
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-rated
-
regulated utility(3)
|
|
|
1.3
|
|
|
1.3
|
|
|
-
|
|
|
-
|
|
Non-rated
-
other(3)
|
|
|
96.5
|
|
|
82.5
|
|
|
12.4
|
|
|
1.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Exposure
|
|
$
|
360.1
|
|
$
|
273.5
|
|
$
|
77.9
|
|
$
|
8.7
|
|
(1) |
The
investment
and non-investment grade categories are determined by publicly available
credit ratings of the counterparty or the rating of any guarantor,
whichever is higher. Investment grade counterparties are those with
a
senior unsecured Moody's rating of Baa3 or above or a Standard &
Poor's rating of BBB- or above.
|
(2) |
Exposure
considers netting of accounts receivable and accounts payable where
netting agreements are in place as well as netting mark-to-market
exposure. Exposure is before consideration of collateral from
counterparties. Collateral, in the form of cash and letters of credit,
received from counterparties totaled $80.8 million at
December 31, 2005, $66.6 million from investment grade
counterparties and $14.2 million from non-rated
counterparties.
|
(3) |
Non-rated
counterparties include stand-alone companies, as well as unrated
subsidiaries of rated companies without parental credit support.
These
counterparties are subject to an internal credit review
process.
|
ESI,
through a
subsidiary ECO Coal Pelletization #12 LLC, also owns an interest in a synthetic
fuel producing facility. See "Other
Future
Considerations,"
within the
Liquidity section below for more information on the risks related to ESI's
investment in this synthetic fuel operation.
ESI
is subject to
clean air regulations enforced by the EPA and state and local governments.
New legislation could require significant capital outlays. See Note 17
"Commitments
and
Contingencies,"
in
WPS Resources' Notes to Consolidated Financial Statements for more
information on ESI's environmental exposure.
RESULTS
OF
OPERATIONS - WPS RESOURCES
2005
Compared with 2004
WPS Resources
Overview
WPS Resources'
2005 and 2004 results of operations are shown in the following
table:
WPS Resources'
Results
(Millions,
except share amounts)
|
|
2005
|
|
2004
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
operating revenues
|
|
$
|
6,962.7
|
|
$
|
4,950.8
|
|
|
40.6
|
%
|
Income
available for common shareholders
|
|
$
|
157.4
|
|
$
|
139.7
|
|
|
12.7
|
%
|
Basic
earnings per share
|
|
$
|
4.11
|
|
$
|
3.74
|
|
|
9.9
|
%
|
Diluted
earnings per share
|
|
$
|
4.07
|
|
$
|
3.72
|
|
|
9.4
|
%
|
The
$2.0 billion increase in consolidated operating revenue for the year ended
December 31, 2005, compared to the same period in 2004, was primarily
related to a $1.8 billion (48.4%) increase in revenue at ESI, driven by a
46%
increase in the average price of natural gas, higher natural gas throughput
volumes in Canada, and an increase in structured natural gas transactions
with
wholesale customers. Electric utility revenue increased approximately
$140 million (15.7%), largely due to an approved electric rate increase for
WPSC's Wisconsin retail customers and an increase in electric sales volumes.
Natural gas utility revenue increased approximately $101 million (24.0%),
primarily as a result of an increase in the per-unit cost of natural gas,
a
natural gas rate increase, and higher natural gas throughput
volumes.
Income
available
for common shareholders was $157.4 million ($4.11 basic earnings per share)
for the year ended December 31, 2005, compared to $139.7 million
($3.74 basic earnings per share) for the year ended December 31, 2004.
Significant factors impacting the change in earnings and earnings per share
are
as follows (and are discussed in more detail below):
·
|
ESI's
earnings increased $32.4 million (77.7%), for the year ended
December 31, 2005, compared to 2004. Higher earnings were driven by
an $85.6 million increase in margin, partially offset by a
$19.5 million increase in operating and maintenance expenses, a
$4.6 million decrease in miscellaneous income, a $1.7 million
decrease in Section 29 federal tax credits, and the negative impact
of a $1.6 million after-tax cumulative effect of change in accounting
principle recorded in 2005. ESI's earnings were also negatively
impacted
by an $80.6 million pre-tax impairment loss that was required to
write down Sunbury's long-lived assets to fair market value and
the
recognition of $9.1 million in interest expense related to the
termination of Sunbury's interest rate swap. However, these losses
were
substantially offset by an $87.1 million pre-tax gain recognized on
the sale of Sunbury's allocated emission allowances.
|
·
|
Earnings
at
the Holding Company and Other segment decreased $6 million in 2005,
compared to 2004, driven by lower gains from land sales, an income
tax
benefit recognized in 2004 from the donation of land to the WDNR,
and an
increase in interest expense. These items were partially offset
by higher
equity earnings from our investment in
ATC.
|
·
|
Electric
utility earnings decreased $4.6 million (6.7%) for the year ended
December 31, 2005, compared to 2004. Electric utility earnings were
negatively impacted by fuel and purchased power costs that were
$13.7 million in excess of what WPSC was allowed to recover from
customers due to inefficiencies in the fuel recovery process
($10 million related to retail customers and $3.7 million
related to wholesale customers). In addition, the PSCW's ruling
in the
2006 rate case, which disallowed recovery of costs that were deferred
related to the 2004 Kewaunee nuclear plant outage and a portion
of the
loss on the Kewaunee sale, resulted in the write-off of $13.7 million
of regulatory assets.
|
·
|
Gas
utility
earnings for the year ended December 31, 2005 decreased
$4.1 million, primarily due to an increase in operating and
maintenance expenses and depreciation expense incurred by the gas
utility.
|
·
|
The
change in
basic earnings per share was also impacted by an increase of
0.9 million shares in the weighted average number of outstanding
shares of WPS Resources' common stock for the year ended
December 31, 2005, compared to the same period in 2004. Additional
shares were issued in 2005 under the Stock Investment Plan and
certain
stock-based employee benefit plans. WPS Resources' issuance of
1.9 million additional shares of common stock through a public
offering in November 2005 also contributed to the increase in the
weighted
average number of shares
outstanding.
|
Overview
of
Utility Operations
Utility
operations
include the electric utility segment, consisting of the electric operations
of
WPSC and UPPCO, and the gas utility segment comprising the natural gas
operations of WPSC. Income available for common shareholders attributable
to the
electric utility segment was $64.2 million for the year ended
December 31, 2005, compared to $68.8 million for the year ended
December 31, 2004. Income available for common shareholders attributable to
the gas utility segment was $13.2 million for the year ended
December 31, 2005, compared to $17.3 million for the year ended
December 31, 2004.
Electric
Utility Segment Operations
WPS Resources'
Electric Utility
Segment
Results (Millions)
|
|
2005
|
|
2004
|
|
Change
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,037.1
|
|
$
|
896.6
|
|
|
15.7
|
%
|
Fuel
and
purchased power costs
|
|
|
444.2
|
|
|
295.5
|
|
|
50.3
|
%
|
Margins
|
|
$
|
592.9
|
|
$
|
601.1
|
|
|
(1.4
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
Sales
in
kilowatt-hours
|
|
|
15,660.1
|
|
|
14,465.7
|
|
|
8.3
|
%
|
Electric
utility
revenue increased $140.5 million (15.7%) for the year ended
December 31, 2005, compared to the same period in 2004. Electric utility
revenue increased largely due to an approved electric rate increase for WPSC's
Wisconsin retail customers and an increase in electric sales volumes. On
December 21, 2004, the PSCW approved a retail electric rate increase of
$60.7 million (8.6%), effective January 1, 2005. The rate increase was
required primarily to recover increased costs related to fuel and purchased
power, the construction of the Weston 4 power plant, and benefit costs. Electric
sales volumes increased 8.3%, primarily due to significantly warmer weather
during the 2005 cooling season, compared to the same period in 2004, and
new
power sales agreements that were entered into with wholesale customers. As
a
result of the warm weather, both WPSC and UPPCO set all-time records for
peak
electric demand in the second and third quarters of 2005.
The
electric
utility margin decreased $8.2 million (1.4%) for the year ended
December 31, 2005, compared to the year ended December 31, 2004.
The decrease in margin can be attributed to a $9.0 million (1.6%) decrease
in WPSC's electric margin, which was largely driven by the sale of Kewaunee
on
July 5, 2005, and the related power purchase agreement. Prior to the sale
of Kewaunee, only nuclear fuel expense was reported as a component of fuel
and
purchased power costs. Subsequent
to
the sale, all payments to Dominion for power purchased from Kewaunee are
reported as a component of fuel and purchased power costs. These include
both
variable payments for energy delivered and fixed payments. As a result of
the
sale, WPSC no longer incurs operating and maintenance expense, depreciation
and
decommissioning expense, or interest expense for Kewaunee. Excluding the
$43.2 million of fixed payments made to Dominion in 2005, WPSC's electric
utility margin increased $34.2 million compared to 2004.
Excluding
the fixed
payments, the increase in margin was primarily related to the approved 2005
retail electric rate increase discussed above and the warm summer weather
conditions, partially offset by higher fuel and purchased power costs associated
with high natural gas prices and the PSCW's disallowance of certain costs
in its
decision on the 2006 rate case for WPSC (these costs were previously approved
for deferral). Fuel and purchased power costs incurred in 2005 exceeded the
amount recovered from ratepayers by $13.7 million (of which
$10 million related to Wisconsin retail customers and $3.7 million
related to wholesale customers), negatively impacting margin. The increase
in
fuel and purchased power costs resulted primarily from the destruction of
certain natural gas production facilities in the Gulf of Mexico by hurricanes
in
the third quarter of 2005, driving up the per-unit cost of natural gas used
in
generation. The quantity of power generated from WPSC's natural gas-fired
units
was also up 162% over the prior year, driven by the warm summer weather
conditions experienced during 2005, increased dispatch by the MISO for
reliability purposes, and purchases through a purchase power agreement from
the
Fox Energy Center (which began operating in June 2005). Certain costs related
to
the MISO were approved for deferral. Authorization was requested from the
PSCW
to defer increased natural gas costs related to the hurricanes, but this
request
was denied, leaving the Wisconsin fuel recovery mechanism as the only option
for
recovery. However, because of the way the Wisconsin fuel recovery mechanism
works, the increase in fuel and purchased power costs (primarily related
to the
combination of rising natural gas prices caused by the hurricanes and the
increase in natural gas-fired generation) were essentially unrecoverable
since
they were incurred late in the year. To mitigate the risk of unrecoverable
fuel
costs in 2006 due to market price volatility, WPSC is employing risk management
techniques pursuant to its risk policy approved by the PSCW, including the
use
of derivative instruments such as futures and options. The PSCW also disallowed
recovery of $5.5 million of increased fuel and purchased power costs
related to an extended outage at Kewaunee in 2004, resulting in this deferral
being written off in the fourth quarter of 2005.
Electric
utility
earnings decreased $4.6 million (6.7%) for the year ended December 31,
2005, compared to 2004. The decrease in earnings resulted from the high fuel
and
purchased power costs that WPSC was unable to recover from its Wisconsin
retail
and wholesale customers, the PSCW's disallowance of previously deferred costs
related to Kewaunee, and an increase in operating and maintenance
expenses.
Gas
Utility
Segment Operations
WPS Resources'
Gas
Utility
Segment Results (Millions)
|
|
2005
|
|
2004
|
|
Change
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
522.0
|
|
$
|
420.9
|
|
|
24.0
|
%
|
Purchased
gas
costs
|
|
|
397.4
|
|
|
301.9
|
|
|
31.6
|
%
|
Margins
|
|
$
|
124.6
|
|
$
|
119.0
|
|
|
4.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Throughput
in
therms
|
|
|
827.2
|
|
|
801.3
|
|
|
3.2
|
%
|
Gas
utility revenue
increased $101.1 million (24.0%) for the year ended December 31, 2005,
compared to 2004. Gas utility revenue increased primarily as a result of
an
increase in the per-unit cost of natural gas, a natural gas rate increase,
and
higher natural gas throughput volumes. Natural gas costs increased 24.6%
(on a
per-unit basis) for the year ended December 31, 2005, compared to 2004.
Following regulatory practice, WPSC passes changes in the total cost of natural
gas on to customers through a purchased gas adjustment clause, as allowed
by the
PSCW and the MPSC. The PSCW issued an order authorizing a natural gas rate
increase of $5.6 million (1.1%), effective January 1, 2005. The
rate increase was primarily driven by higher benefit costs and the cost of
natural gas distribution system
improvements.
Natural gas throughput volumes increased 3.2%, driven by an increase in
interdepartmental sales from the natural gas utility to the electric utility
as
a result of increased generation from combustion turbines. Higher natural
gas
throughput volumes from interdepartmental sales to the electric utility were
partially offset by lower natural gas throughput volumes to residential
customers, driven by milder weather conditions in 2005, compared to 2004.
WPSC
also believes customers are taking measures to conserve energy as a result
of
the high natural gas prices.
The
natural gas
utility margin increased $5.6 million (4.7%) for the year ended
December 31, 2005, compared to 2004. The higher natural gas utility margin
was largely due to the rate increase mentioned above. The increase in
interdepartmental sales volumes to WPSC's electric utility also had a positive
impact on the natural gas margin.
Gas
utility
earnings for the year ended December 31, 2005, decreased $4.1 million,
primarily due to an increase in operating and maintenance expenses and
depreciation expense incurred by the gas utility.
Overview
of
ESI Operations
ESI
offers
nonregulated natural gas, electric, and alternative fuel supplies, as well
as
energy management and consulting services, to retail and wholesale customers.
ESI also owns several merchant electric generation plants, primarily in the
Midwest and Northeastern United States and adjacent portions of Canada.
Prior
to the fourth
quarter of 2005, WPS Resources reported two nonregulated segments, ESI and
PDI. In the fourth quarter of 2005, WPS Resources' Chief Executive Officer
and its Board of Directors decided to view ESI and PDI as one business, and
corresponding changes were made to the segment information reported to them.
The
change in reportable segments is the culmination of changes over the past
two
years that caused these businesses to become integrated. These changes included
combining the management teams, restructuring the ownership structure of
ESI and
PDI, and having ESI optimize the value of PDI's merchant generation fleet
and
reduce market price risk through the use of various financial and physical
instruments (such as futures, options, and swaps). Effective in the fourth
quarter of 2005, WPS Resources began reporting one nonregulated segment,
ESI. Segment information related to prior periods has been reclassified to
reflect this change.
Income
available
for common shareholders attributable to ESI was $74.1 million for the year
ended December 31, 2005, compared to $41.7 million for the year ended
December 31, 2004.
ESI's
Segment Operations
(Millions
except natural gas sales volumes)
|
|
2005
|
|
2004
|
|
Change
|
|
|
|
|
|
|
|
|
|
Nonregulated
revenues
|
|
$
|
5,452.1
|
|
$
|
3,674.2
|
|
|
48.4
|
%
|
Nonregulated
cost of fuel, natural gas, and purchased power
|
|
|
5,227.8
|
|
|
3,535.5
|
|
|
47.9
|
%
|
Margins
|
|
$
|
224.3
|
|
$
|
138.7
|
|
|
61.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
natural gas sales volumes in billion cubic feet *
|
|
|
274.0
|
|
|
235.4
|
|
|
16.4
|
%
|
Retail
natural gas sales volumes in billion cubic feet *
|
|
|
281.2
|
|
|
276.7
|
|
|
1.6
|
%
|
Wholesale
electric sales volumes in kilowatt-hours *
|
|
|
2,770.6
|
|
|
5,256.5
|
|
|
(47.3
|
%)
|
Retail
electric sales volumes in kilowatt-hours *
|
|
|
6,626.9
|
|
|
7,235.7
|
|
|
(8.4
|
%)
|
*
Represents gross physical volumes
Revenues
ESI's
revenue
increased $1.8 billion (48.4%) for the year ended December 31, 2005,
compared to 2004. Natural gas revenue increased $1.7 billion (54.8%),
driven by a 46% increase in the average price of natural gas, higher natural
gas
throughput volumes in Canada, and an increase in structured natural gas
transactions with wholesale customers. Electric revenue increased approximately
$118 million, largely due to an $88 million increase in revenue from
retail electric operations in New York, resulting from an increase in the
per-unit price of electricity sold and a 115% increase in sales volumes (the
New York business had its first full year of operation in 2005). Revenue at
ESI's Sunbury generation facility (Sunbury) increased $56 million, due to
improved opportunities to sell power into the market (made possible by the
expiration of a fixed price outtake contract on December 31, 2004, and
higher energy market prices). Revenue also increased due to an increase in
structured energy transactions. These items were partially offset by a
$78.2 million decrease in wholesale electric revenue related to ESI's prior
participation in the New Jersey Basic Generation Services Program, which
ended
on May 31, 2004, and a $31.1 million decrease in revenue from retail
electric operations in Michigan, driven by lower sales volumes in
2005.
Margins
ESI's
margins
increased $85.6 million (61.7%), from $138.7 million for the year
ended December 31, 2004, to $224.3 million for 2005. Many items contributed
to the year-over-year net increase in margin and, as a result, a table has
been
provided to summarize significant changes. Variances included under "Other
significant items" in the table below are related to the timing of gain and
loss
recognition on certain transactions pursuant to generally accepted accounting
principles and gains and losses that do not frequently occur in ESI's business.
All variances depicted in the table are discussed in more detail
below.
(Millions
except natural gas sales volumes)
|
|
Increase
(Decrease)
in Margin in 2005 Compared to 2004
|
|
|
|
|
|
Electric
and other margins
|
|
|
|
Sunbury
generation
|
|
$
|
43.7
|
|
Physical
asset management
|
|
|
7.5
|
|
New
York
retail
|
|
|
3.0
|
|
Michigan
retail
|
|
|
(15.7
|
)
|
All
other
electric operations
|
|
|
25.1
|
|
|
|
|
|
|
Other
significant items:
|
|
|
|
|
Oil
option
activity, net
|
|
|
8.7
|
|
Liquidation
of electric purchase contract
|
|
|
8.2
|
|
|
|
|
|
|
Net
increase
in electric and other margins
|
|
|
80.5
|
|
|
|
|
|
|
Natural
gas
margins
|
|
|
|
|
Gas
margins
(principally Canada, Michigan, and Wisconsin retail
markets)
|
|
|
6.1
|
|
|
|
|
|
|
Other
significant items:
|
|
|
|
|
Counterparty
settlement
|
|
|
3.3
|
|
Unrealized
gain on Ohio options
|
|
|
2.9
|
|
Spot
to
forward differential
|
|
|
(7.2
|
)
|
|
|
|
|
|
Net
increase
in natural gas margins
|
|
|
5.1
|
|
|
|
|
|
|
Net
increase
in ESI margin
|
|
$
|
85.6
|
|
ESI's
electric and
other margins increased $80.5 million (98.1%) for the year ended
December 31, 2005, compared to 2004. The following items were the most
significant contributors to the net change in ESI's electric and other
margins:
· |
Sunbury
generation - The margin at Sunbury increased $43.7 million,
primarily due to improved opportunities to sell power into the market
(as
discussed in "Revenues" above).
|
· |
Physical
asset management - Optimization strategies related to ESI's generation
facilities resulted in a $7.5 million increase in margin. The
profitability and volume of transactions related to ESI's optimization
strategies were higher due to increased variability in the price
of energy
in 2005 compared to 2004. In the first quarter of 2004, ESI first
implemented the portfolio optimization strategies to optimize the
value of
the merchant generation fleet to reduce market price risk and extract
additional value from these assets through the use of various financial
and physical instruments (such as forward contracts and options).
|
· |
New
York
retail - The first full year of retail electric operations in New York
(as discussed in "Revenues" above) contributed $3.0 million
to the overall margin increase.
|
· |
Michigan
retail - The margin contributed by retail electric operations in
Michigan decreased $15.7 million in 2005, compared to 2004. Higher
transmission-related charges resulting from the Seams Elimination
Charge
Adjustment, which was implemented on December 1, 2004, and continues
through March 2006, as ordered by the FERC, have negatively impacted
the
margin from retail electric operations in Michigan. In addition,
tariff
changes granted to the regulated utilities in Michigan in 2004, coupled
with high wholesale energy prices, have significantly lowered the
savings
customers can obtain from contracting with non-utility suppliers.
The
tariff changes enable Michigan utilities to charge a fee to electric
customers choosing non-utility suppliers in order to recover certain
stranded costs. ESI has experienced significant customer attrition
as a
result of the tariff changes and higher wholesale prices. Customer
attrition, high wholesale energy prices, and the tariff changes have
also
negatively impacted the margin from retail electric operations in
Michigan.
|
· |
All
other
electric operations - A $25.1 million increase in margin was
primarily related to realized and unrealized gains on structured
power
transactions in the latter half of 2005. These transactions included
the
execution of purchase and sales contracts with municipalities, merchant
generators, retail aggregators, and other power marketers made possible
by
changing market conditions. Additionally, ESI experienced increased
margins from its merchant generation fleet as a result of increased
dispatch levels due to improved market conditions. Period-by-period
variability in the margin contributed by structured transactions
and the
merchant generation fleet is expected due to constantly changing
market
conditions and the timing of gain and loss recognition on certain
transactions pursuant to generally accepted accounting
principles.
|
· |
Oil
option
activity, net - Mark-to-market gains recognized in 2005 on derivative
instruments utilized to protect the value of a portion of ESI's Section
29
federal tax credits in 2006 and 2007 contributed $8.4 million to the
increase in margin. The derivative contracts have not been designated
as
hedging instruments and, as a result, changes in the fair value are
recorded currently in earnings. This will result in mark-to-market
gains
being recognized in different periods, compared to any offsetting
tax
credit phase-outs that may occur. For the year ended December 31,
2005,
unrealized mark-to-market gains of $4.0 million and $4.4 million
were recognized for the 2006 and 2007 oil options, respectively,
while no
tax credit phase-out was recognized because 2006 and 2007 tax credits
will
not be recognized until fuel is produced and sold in those periods.
Hedges
of 2005 exposure contributed an additional $0.3 million increase in
margin ($1.9 million gain on settlement, net of $1.6 million of
premium amortization).
|
· |
Liquidation
of electric purchase contract - In 2005, an electricity supplier
exiting the wholesale market in Maine forced ESI to liquidate a firm
contract to buy power in 2006 and 2007. ESI recognized a gain of
$8.2 million related to the liquidation of this contract, and entered
into a new contract with another supplier for firm power in 2006
and 2007
to supply its customers in Maine. The cost to purchase power under
the new
contract will be more than the cost under the liquidated contract.
As a
result, purchased power costs will be $6.4 million higher in 2006 and
slightly higher than the original contracted amount in 2007, substantially
offsetting the 2005 gain.
|
The
natural gas
margin at ESI increased $5.1 million (9.0%) for the year ended
December 31, 2005, compared to 2004. The following items were the most
significant contributors to the change in ESI's electric margin:
· |
Gas
margins (principally Canada, Michigan and Wisconsin
retail)
-
Major
contributors to growth in ESI's gas margins include the continued
expansion of our Canadian retail and wholesale business, as well
as
increased margins from our retail operations in Michigan and Wisconsin.
|
· |
Counterparty
settlement -
The natural
gas margin increased $3.3 million as a result of a favorable
settlement with a counterparty.
|
· |
Unrealized
gain on Ohio options -
A
$2.9 million mark-to-market gain on options utilized to manage supply
costs for Ohio customers, which expire in varying months through
September
2006, also contributed to the margin increase. These contracts are
utilized to reduce the risk of price movements and changes in load
requirements during customer signup periods. Earnings volatility
results
from the application of derivative accounting rules to the options
(requiring that these derivative instruments be marked-to-market),
without
a corresponding offset related to the customer contracts. Full
requirements gas contracts with ESI's customers are not considered
derivatives and, therefore, no gain or loss is recognized on these
contracts until settlement.
|
· |
Spot
to
forward differential -
The natural
gas storage cycle (described in more detail below) accounted for
a
$7.2 million decrease in the wholesale natural gas margin (for the
year ended December 31, 2005, the natural gas storage cycle had a
$5.2 million negative impact on margin, compared with a
$2.0 million favorable impact on margin for the same period in 2004).
|
ESI
experiences
earnings volatility associated with the natural gas storage cycle, which
runs
annually from April through March of the next year. Generally, injections
of
natural gas into storage inventory take place in the summer months and natural
gas is withdrawn from storage in the winter months. ESI's policy is to hedge
the
value of natural gas storage with sales in the over-the-counter and futures
markets, effectively locking in a margin on the natural gas in storage. However,
fair market value hedge accounting rules require the natural gas in storage
to
be marked-to-market using spot prices, while the future sales contracts are
marked-to-market using forward prices. When the spot price of natural gas
changes disproportionately to the forward price of natural gas, ESI experiences
volatility in its earnings. Consequently, earnings volatility may occur within
the contract period for natural gas in storage. The accounting treatment
does
not impact the underlying cash flows or economics of these transactions.
At
December 31, 2005, there was a $5.8 million difference between the
market value of natural gas in storage and the market value of future sales
contracts (net unrealized loss), related to the 2005/2006 natural gas storage
cycle. This difference between the market value of natural gas in storage
and
the market value of future sales contracts related to the 2005/2006 storage
cycle is expected to vary with market conditions, but will reverse entirely
and
have a positive impact on earnings when all of the natural gas is withdrawn
from
storage.
Earnings
ESI's
earnings
increased $32.4 million (77.7%), for the year ended December 31, 2005,
compared to 2004. Higher earnings were driven by the $85.6 million increase
in margin, partially offset by a $19.5 million increase in operating and
maintenance expenses, a $4.6 million decrease in miscellaneous income, a
$1.7 million decrease in Section 29 federal tax credits, and the
negative impact of a $1.6 million after-tax cumulative effect of change in
accounting principle recorded in 2005. ESI's earnings were also negatively
impacted by an $80.6 million pre-tax impairment loss that was required to
write down Sunbury's long-lived assets to fair market value and the recognition
of $9.1 million in interest expense related to the termination of Sunbury's
interest rate swap. However, these losses were substantially offset by an
$87.1 million pre-tax gain recognized on the sale of Sunbury's allocated
emission allowances.
Overview
of
Holding Company and Other Segment Operations
Holding
Company and
Other operations include the operations of WPS Resources' and the
nonutility activities at WPSC and UPPCO. Holding Company and Other operations
recognized earnings of $5.9 million during the year ended December 31,
2005, compared to earnings of $11.9 million in 2004.
The
decrease in
earnings is primarily due to a $9.4 million decrease in pre-tax gains
related to land sales, an income tax benefit recognized in 2004 from the
donation of land to the WDNR, and a $5.5 million increase in interest
expense. Pre-tax land sale gains of $10.3 million were recognized in 2005,
compared to $19.7 million of pre-tax land sale gains in 2004. Interest
expense increased primarily as a result of restructuring Sunbury's debt to
a
WPS Resources' obligation in June 2005 and higher average short-term debt
in 2005, compared to 2004. Partially offsetting the items discussed above
was a
$9.1 million increase in pre-tax equity earnings from ATC and
$1.5 million of deferred financing costs that were written off in the first
quarter of 2004. Pre-tax equity earnings from ATC were $25.1 million in
2005, compared to $16.0 million in 2004. WPS Resources' ownership
interest in ATC increased from approximately 23% at December 31, 2004, to
approximately 31.0% at December 31, 2005. The higher ownership interest was
primarily the result of WPS Resources continued funding of a portion of the
Wausau, Wisconsin, to Duluth, Minnesota, transmission line.
Operating
Expenses
WPS Resources'
Operating Expenses (Millions)
|
|
2005
|
|
2004
|
|
Change
|
|
|
|
|
|
|
|
|
|
Operating
and
maintenance expense
|
|
$
|
568.1
|
|
$
|
537.6
|
|
|
5.7
|
%
|
Depreciation
and decommissioning expense
|
|
|
142.8
|
|
|
107.0
|
|
|
33.5
|
%
|
Gain
on sale
of emission allowances
|
|
|
(87.1
|
)
|
|
-
|
|
|
-
|
|
Impairment
loss
|
|
|
80.6
|
|
|
-
|
|
|
-
|
|
Taxes
other
than income
|
|
|
47.9
|
|
|
46.1
|
|
|
3.9
|
%
|
Operating
and
Maintenance Expense
Operating
and
maintenance expenses increased $30.5 million (5.7%) for the year ended
December 31, 2005, compared to 2004. Utility operating and maintenance
expenses increased $12.9 million, primarily as a result of a
$13.6 million increase in WPSC's operating and maintenance expenses. The
following items were the most significant contributors to the change in
operating and maintenance expenses at WPSC:
·
|
The
combined
increase in pension expense, active and postretirement medical
expense,
salaries, and customer service expense was approximately
$25 million.
|
·
|
Transmission-related
expenses increased $9.9 million.
|
·
|
In
WPSC's
2006 rate case, the PSCW concluded that only half of the loss related
to
the sale of Kewaunee could be collected from ratepayers. As a result,
WPSC
wrote off $6.1 million of the regulatory asset established for the
loss on the sale of Kewaunee.
|
·
|
In
WPSC's
2006 rate case, the PSCW also disallowed recovery of increased
operating
and maintenance expenses related to the 2004 extended outage at
Kewaunee,
resulting in a $2.1 million write-off of previously deferred
costs.
|
·
|
The
increases
discussed above were partially offset by a decrease in operating
and
maintenance expenses of approximately $28 million related to
Kewaunee, due to the sale of this facility on July 5,
2005.
|
Operating
and
maintenance expenses at ESI increased $19.5 million. Approximately
$11 million of the increase related to higher payroll and benefit costs
associated with recent business expansion. Commissions paid to brokers and
third-party agents increased $2.4 million and bad debt expense increased
$2.3 million, primarily as a result of higher energy prices. Operating and
maintenance expenses at Sunbury also increased $2.7 million. Maintenance
activities were performed in 2005 to better ensure the plant's ability to
capitalize on high market prices.
Depreciation
and Decommissioning Expense
Depreciation
and
decommissioning expense increased $35.8 million (33.5%) for the year ended
December 31, 2005, compared to 2004, largely due to an increase of
$35.0 million at WPSC. The increase at WPSC was driven by higher gains on
decommissioning trust assets prior to the sale of
Kewaunee
of
approximately $35 million. Realized gains on decommissioning trust assets
(included as a component of miscellaneous income) offset the increased
decommissioning expense pursuant to regulatory practice. Continued capital
investment at WPSC also resulted in an increase in depreciation expense.
These
items were partially offset by a $7.0 million decrease in depreciation
resulting from the sale of the Kewaunee assets in July 2005.
Gain
on Sale of
Emission Allowances
ESI
completed the
sale of Sunbury's allocated emission allowances in May 2005. The sales proceeds
were $109.9 million, resulting in a pre-tax gain of $85.9 million. ESI
also sold other emission allowances throughout the year, recognizing a gain
on
these additional sales of $1.2 million.
Impairment
Loss
The
sale of
Sunbury's allocated emission allowances in May 2005 provides ESI with more
time
to evaluate various options related to Sunbury. These options range from
closing
the plant, retaining the plant and operating it during favorable economic
periods, or a future sale. Because ESI is no longer committed to the sale
of
Sunbury as its only option, generally accepted accounting principles require
all
long-lived assets that were previously classified as "held for sale" to be
reclassified as "held and used" at the lower of their carrying value before
they
were classified as "held for sale," adjusted for depreciation that would
have
been recognized had the assets been continuously classified as "held and
used,"
or fair value at the date the "held for sale" criteria was no longer met.
Upon
reclassification of the Sunbury plant and related assets as "held and used"
in
the second quarter of 2005, ESI recorded a non-cash, pre-tax impairment charge
of $80.6 million. The impairment charge reflects the reduction in the fair
value of the Sunbury plant without the related emission allowances.
Other
Income (Expense)
WPS Resources'
Other Income (Expense) (Millions)
|
|
2005
|
|
2004
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
Miscellaneous
income
|
|
$
|
86.2
|
|
$
|
52.0
|
|
|
65.8
|
%
|
Interest
expense
|
|
|
(72.4
|
)
|
|
(59.9
|
)
|
|
20.9
|
%
|
Minority
interest
|
|
|
4.5
|
|
|
3.4
|
|
|
32.4
|
%
|
Other
(expense) income
|
|
$
|
18.3
|
|
$
|
(4.5
|
)
|
|
-
|
|
Miscellaneous
Income
Miscellaneous
income increased $34.2 million (65.8%) for the year ended December 31,
2005, compared to 2004. The following items were the largest contributors
to the
change in miscellaneous income:
·
|
Approximately
$35 million of the increase in miscellaneous income related to
realized gains on nuclear decommissioning trust assets. The nonqualified
decommissioning trust assets were placed in more conservative investments
in the second quarter of 2005 in anticipation of the sale of Kewaunee,
which was completed on July 5, 2005. Pursuant to regulatory practice,
the
increase in miscellaneous income related to the realized gains
was offset
by an increase in decommissioning expense. Overall, the change
in the
investment strategy for the nonqualified decommissioning trust
assets had
no impact on income available for common shareholders.
|
·
|
Pre-tax
equity earnings from WPS Resources' investment in ATC increased
$9.1 million. Pre-tax equity earnings from ATC were
$25.1 million in 2005, compared to $16.0 million in
2004.
|
·
|
WPSC
sold a
30% interest in the Weston 4 power plant to DPC in the fourth quarter
of
2005. Proceeds received from the sale included reimbursement for
approximately $8 million of carrying costs incurred by WPSC for
capital expenditures related to DPC's portion of the facility,
which were
funded by WPSC in 2004 and 2005. The $8 million reimbursement was
recorded as miscellaneous income in 2005.
|
·
|
Land
sale
gains of $10.3 million were recognized in 2005, compared to land sale
gains of $19.7 million in 2004, resulting in a $9.4 million
decrease in miscellaneous income.
|
·
|
Other
income
at ESI decreased $4.6 million, primarily related to a
$4.4 million termination payment received from Duquesne Power in
December 2004 as a result of Duquesne's termination of the former
asset purchase agreement for
Sunbury.
|
Interest
Expense
Interest
expense
increased $12.5 million (20.9%) for the year ended December 31, 2005,
compared to 2004. The increase in interest expense was primarily related
to
terminating the interest rate swap pertaining to Sunbury's non-recourse debt
obligation in the second quarter of 2005. The interest rate swap was previously
designated as a cash flow hedge and, as a result, the mark-to-market losses
had
been recorded as a component of other comprehensive income. WPS Resources
is required to recognize the amount accumulated within other comprehensive
income as a component of interest expense when the hedged transactions (future
interest payments on the Sunbury debt obligation) are no longer probable
of
occurring. As a result, the restructuring of the Sunbury non-recourse debt
to a
WPS Resources' obligation in June 2005 triggered the recognition of
$9.1 million of interest expense related to the mark-to-market value of the
swap at the date of restructuring. The remaining increase in interest expense
was primarily related to an increase in the average level of short-term debt
outstanding in 2005, compared to 2004.
Provision
for Income Taxes
The
effective tax
rate was 22.4% for the year ended December 31, 2005, compared to 13.2% for
the year ended December 31, 2004. The increase in the effective tax rate
was primarily driven by a 26.9% increase in income before taxes, while Section
29 federal tax credits recognized decreased $1.7 million. Other factors
contributing to the increase in the effective tax rate in 2005, compared
to
2004, were a tax benefit recorded in 2004 for land donated to the WDNR, and
a
$2.9 million increase in the year-over-year provision for income taxes
related to favorable settlements of certain tax audits and refund claims
in
2004.
Our
ownership
interest in the synthetic fuel operation resulted in recognizing the tax
benefit
of Section 29 federal tax credits totaling $26.1 million in 2005 and
$27.8 million in 2004.
Cumulative
Effect of Change in Accounting Principles
In
March 2005, the FASB issued Interpretation No. 47, Accounting for
Conditional Asset Retirement Obligations. This Interpretation clarifies
when companies are required to recognize conditional legal asset retirement
obligations that result from the acquisition, construction, and normal operation
of a long-lived asset. Because the accounting for conditional asset retirement
obligations has been interpreted differently between companies, SFAS No.
143,
Accounting for Asset Retirement Obligations, had been inconsistently
applied in practice.
The
adoption of
Interpretation No. 47 at ESI on December 31, 2005, resulted in a negative
$1.6 million after-tax cumulative effect of change in accounting principle,
related to recording a liability for asbestos remediation at certain of ESI's
generation plants. For the utility segments of WPS Resources, we concluded
it was probable that any differences between expenses under Interpretation
No. 47 and expenses currently recovered through customer rates will be
recoverable in future customer rates. Accordingly, the adoption of this
statement had no impact on the utility segments' income.
2004
Compared with 2003
WPS Resources
Overview
WPS Resources'
2004 and 2003 results of operations are shown in the following
table:
WPS Resources'
Results
(Millions,
except share amounts)
|
|
2004
|
|
2003
|
|
Change
|
|
|
|
|
|
|
|
|
|
Consolidated
operating revenues
|
|
$
|
4,950.8
|
|
$
|
4,402.5
|
|
|
12.5
|
%
|
Income
available for common shareholders
|
|
$
|
139.7
|
|
$
|
94.7
|
|
|
47.5
|
%
|
Basic
earnings per share
|
|
$
|
3.74
|
|
$
|
2.87
|
|
|
30.3
|
%
|
Diluted
earnings per share
|
|
$
|
3.72
|
|
$
|
2.85
|
|
|
30.5
|
%
|
The
$548.3 million increase in consolidated operating revenue for the year
ended December 31, 2004, compared to the same period in 2003, was largely
driven by a $449.6 million (13.9%), increase in revenue at ESI and an
$82.5 million (10.1%), increase in electric utility revenue. Higher natural
gas prices, portfolio optimization strategies (implemented in 2004), and
expansion of the Canadian retail natural gas business were the primary
contributors to increased revenue at ESI. Higher electric utility revenue
was
primarily the result of authorized retail electric rate increases for WPSC's
Wisconsin and Michigan customers. Revenue changes by reportable segment are
discussed in more detail below.
Income
available
for common shareholders was $139.7 million ($3.74 basic earnings per share)
for the year ended December 31, 2004, compared to $94.7 million ($2.87
basic earnings per share) for the year ended December 31, 2003. Significant
factors impacting the change in earnings and earnings per share are as follows
(and are discussed in more detail below).
·
|
Approved
rate
increases (including the impact of timely retail electric rate
relief in
2004, compared to the delay in receiving retail electric rate relief
in
2003) favorably impacted year-over-year margin at the
utilities.
|
·
|
Natural
gas
utility throughput volumes were 6.2% lower in 2004 due to weather
that was
4.3% warmer during the heating season, compared to
2003.
|
·
|
Higher
throughput volumes and improved supply management in Ohio favorably
impacted ESI's year-over-year retail natural gas
margin.
|
·
|
Portfolio
optimization strategies, better management of retail electric operations
in Ohio and positive operating results from Advantage Energy contributed
to improved year-over-year electric margins at ESI.
|
·
|
As
part of
our overall asset management strategy, WPS Resources realized
earnings of $15.0 million from the sale and donation of land in 2004,
compared to $6.5 million in 2003.
|
·
|
Earnings
from
equity method investments (primarily from ATC) increased in 2004,
compared
to 2003.
|
·
|
Earnings
were
negatively impacted by higher operating and maintenance expenses
in
2004.
|
·
|
Synthetic
fuel related tax credits recognized were higher in 2004 when compared
to
2003.
|
·
|
The
weighted
average number of shares of WPS Resources' common stock increased by
4.4 million shares for the year ended December 31, 2004,
compared to the same period in 2003. The increase was largely due
to
issuing 4,025,000 additional shares of common stock through a public
offering in November 2003. Additional shares were also issued under
the
Stock Investment Plan and certain stock-based employee benefit
plans.
|
Overview
of
Utility Operations
Income
available
for common shareholders attributable to the electric utility segment was
$68.8 million for the year ended December 31, 2004, compared to
$60.0 million for the year ended December 31, 2003. Income available
for common shareholders attributable to the gas utility segment was
$17.3 million for the year ended December 31, 2004, compared to
$15.7 million for the year ended December 31, 2003.
Electric
Utility Segment Operations
WPS Resources'
Electric Utility
Segment
Results (Millions)
|
|
2004
|
|
2003
|
|
Change
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
896.6
|
|
$
|
814.1
|
|
|
10.1
|
%
|
Fuel
and
purchased power costs
|
|
|
295.5
|
|
|
266.3
|
|
|
11.0
|
%
|
Margins
|
|
$
|
601.1
|
|
$
|
547.8
|
|
|
9.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Sales
in
kilowatt-hours
|
|
|
14,465.7
|
|
|
14,346.7
|
|
|
0.8
|
%
|
Electric
utility
revenue increased $82.5 million (10.1%), for the year ended
December 31, 2004, compared to the same period in 2003. Electric utility
revenue increased largely due to authorized retail and wholesale electric
rate
increases for WPSC's Wisconsin and Michigan customers (as summarized below)
to
recover higher fuel and purchased power costs, increased operating expenses,
and
expenditures incurred for infrastructure improvements.
·
|
Effective
March 21, 2003, the PSCW approved a retail electric rate increase
of
$21.4 million (3.5%).
|
·
|
Effective
May
11, 2003, the FERC approved a $4.1 million (21%), interim increase in
wholesale electric rates.
|
·
|
Effective
July 22, 2003, the MPSC approved a $0.3 million (2.2%), increase in
retail electric rates for WPSC's Michigan customers and authorized
recovery of $1.0 million of increased transmission costs through the
power supply cost recovery process.
|
·
|
Effective
January 1, 2004, the PSCW approved a retail electric rate increase
of
$59.4 million (9.3%).
|
Electric
utility
sales volumes were also slightly higher in 2004, increasing 0.8% over 2003
sales
volumes. A 1.6% increase in sales volumes to commercial and industrial customers
was partially offset by a 1.2% decrease in sales volumes to residential
customers. Higher sales volumes to our commercial and industrial customers
reflect an improving economy and growth within our service area, while the
decrease in sales volumes to residential customers reflects weather that
was
6.6% cooler during the 2004 cooling season, compared to 2003.
The
electric
utility margin increased $53.3 million (9.7%), for the year ended
December 31, 2004, compared to 2003. The majority of this increase can
be attributed to a $52.3 million (10.5%), increase in WPSC's electric
margin. The increase in WPSC's electric margin is primarily related to the
retail and wholesale electric rate increases, partially offset by a
$20.4 million increase in purchased power costs. The quantity of power
purchased in 2004 increased 9.3% over 2003 purchases, and purchased power
costs
were 17.4% higher (on a per-unit basis) in 2004, compared to 2003. The PSCW,
in
2004, allowed WPSC to adjust prospectively the amount billed to Wisconsin
retail
customers for fuel and purchased power if costs were in excess of plus or
minus
2% from approved levels. In response to a request for additional fuel cost
recovery filed early in 2004, WPSC was allowed to recover $3.2 million of
its increased fuel and purchased power costs during 2004. The PSCW also allowed
WPSC to defer $5.4 million of unanticipated fuel and purchased power costs
directly associated with the extension of the Kewaunee refueling outage in
the
fourth quarter of 2004. The Kewaunee outage was extended three weeks due
primarily to an unexpected problem encountered with equipment used for lifting
internal vessel components to perform a required ten-year in-service inspection.
It was anticipated that these costs would be recovered in 2006; however,
in the
PSCW's final decision allowing WPSC authority to increase retail electric
and
natural gas rates in 2006, the PSCW determined WPSC could not recover the
costs
for the 2004 extended outage. For more information on this determination,
see
Note 23, "Regulatory Environment," in WPS Resources' Notes to
Consolidated Financial Statements.
Electric
utility
earnings increased $8.8 million (14.7%), for the year ended
December 31, 2004, compared to 2003. The increased earnings were largely
driven by the higher margin at WPSC (including the effect
of
timely retail electric rate relief in 2004 compared to a delay in receiving
retail electric rate relief in 2003), partially offset by higher operating
and
maintenance expenses.
Gas
Utility
Segment Operations
WPS Resources'
Gas
Utility
Segment Results (Millions)
|
|
2004
|
|
2003
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
420.9
|
|
$
|
404.2
|
|
|
4.1
|
%
|
Purchased
gas
costs
|
|
|
301.9
|
|
|
291.0
|
|
|
3.7
|
%
|
Margins
|
|
$
|
119.0
|
|
$
|
113.2
|
|
|
5.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Throughput
in
therms
|
|
|
801.3
|
|
|
854.5
|
|
|
(6.2
|
%)
|
Gas
utility revenue
increased $16.7 million (4.1%), for the year ended December 31, 2004,
compared to 2003. Higher revenue was driven by an authorized rate increase
and
an increase in the per-unit cost of natural gas, partially offset by an overall
6.2% decrease in natural gas throughput volumes. The PSCW issued a final
order
authorizing a retail natural gas rate increase of $8.9 million (2.2%),
effective January 1, 2004. Natural gas prices increased 14.2% per unit
in 2004. Higher natural gas prices reflect higher marketplace natural gas
costs
in 2004. The PSCW and the MPSC allow WPSC to pass changes in the total cost
of
natural gas on to customers. As a result, changes in the price of the natural
gas commodity do not have a direct impact on WPSC's margin. The decrease
in
natural gas throughput volumes was driven by weather that was 4.3% warmer
during
the heating season for the year ended December 31, 2004, compared to 2003.
The
natural gas
utility margin increased $5.8 million (5.1%), for the year ended
December 31, 2004, compared to 2003. The higher natural gas utility margin
is largely due to the authorized rate increase mentioned above. The ability
of
WPSC to realize the full benefit of an authorized rate increase is dependent
upon normal throughput volumes; therefore, the decrease in natural gas
throughput volumes negatively impacted WPSC's ability to benefit from the
full
amount of the rate increase.
The
higher margin
drove a $1.6 million (10.2%), increase in natural gas utility earnings for
the year ended December 31, 2004.
Overview
of
ESI Operations
Income
available
for common shareholders attributable to ESI was $41.7 million for the year
ended December 31, 2004, compared to $21.1 million for the same period
in 2003. The increase in income available for common shareholders resulted
from
higher overall margins, an increase in the amount of tax credits recognized,
and
a $4.4 million termination payment received from Duquesne Power in
December 2004, as a result of Duquesne's termination of the asset sale
agreement with Sunbury. These items were offset by an increase in operating
and
maintenance expenses and a $3.2 million after-tax cumulative effect of
change in accounting principles that was recorded in 2003.
ESI's
Segment
Operations
(Millions
except natural gas sales volumes)
|
|
2004
|
|
2003
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonregulated
revenues
|
|
$
|
3,674.2
|
|
$
|
3,224.6
|
|
|
13.9
|
%
|
Nonregulated
cost of fuel, natural gas, and purchased power
|
|
|
3,535.5
|
|
|
3,100.7
|
|
|
14.0
|
%
|
Margins
|
|
$
|
138.7
|
|
$
|
123.9
|
|
|
11.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
natural gas sales volumes in billion cubic feet *
|
|
|
235.4
|
|
|
250.8
|
|
|
(6.1
|
%)
|
Retail
natural gas sales volumes in billion cubic feet *
|
|
|
276.7
|
|
|
240.6
|
|
|
15.0
|
%
|
Wholesale
electric sales volumes in kilowatt-hours *
|
|
|
5,256.5
|
|
|
6,460.8
|
|
|
(18.6
|
%)
|
Retail
electric sales volumes in kilowatt-hours *
|
|
|
7,235.7
|
|
|
6,468.9
|
|
|
11.9
|
%
|
*
Represents gross physical volumes
Natural
gas
revenues increased $343.2 million, driven by higher natural gas prices and
the expansion of the Canadian retail natural gas business (as a result of
obtaining new customers), partially offset by lower sales volumes from physical
wholesale transactions. Sales volumes from physical wholesale transactions
declined as a result of reduced price volatility of natural gas during the
first
half of 2004 (volatility provides more opportunity for profitable physical
wholesale transactions). Electric and other revenues increased
$106.4 million, largely due to higher volumes from portfolio optimization
strategies resulting in an $83.7 million increase in revenue. In the first
quarter of 2004, ESI first implemented the portfolio optimization strategies
to
optimize the value of its merchant generation fleet and its retail supply
portfolios to reduce market price risk and extract additional value from
these
assets through the use of various financial and physical instruments (such
as
forward contracts and options). Electric revenue also increased as a result
of
the July 1, 2004, acquisition of Advantage Energy and higher energy prices
compared to the prior year. These increases were partially offset by a
$21.5 million decrease in revenue recognized at Sunbury. The decrease in
revenue from Sunbury was driven by fewer opportunities to sell power into
the
spot market.
The
natural gas
margin at ESI increased $12.5 million for the year ended December 31,
2004, compared to 2003. The margin related to retail natural gas operations
increased $12.3 million, primarily driven by higher natural gas throughput
volumes in Ohio (driven by the addition of new customers), operational
improvements, and better management of supply for residential and small
commercial customers. Customer growth in Canada also contributed to the increase
in the retail natural gas margin. The margin attributed to wholesale natural
gas
operations increased $0.2 million. The increase in wholesale natural gas
margin was driven by a $4.6 million margin increase related to the natural
gas storage cycle, a $2.2 million increase in the Canadian wholesale
natural gas margin, and increased margins from other structured wholesale
natural gas transactions. Favorable settlements of liabilities with several
counterparties in 2003 (in the amount of $8.4 million) largely offset these
increases in the wholesale natural gas margin. For the year ended
December 31, 2004, the natural gas storage cycle had a $2.0 million
positive impact on margin, compared with a $2.6 million negative impact on
margin for the same period in 2003. At December 31, 2004, there was a
$0.6 million difference between the market value of natural gas in storage
and the market value of future sales contracts (net unrealized loss), related
to
the 2004/2005 natural gas storage cycle. This difference between the market
value of natural gas in storage and the market value of future sales contracts
related to the 2004/2005 storage cycle is expected to vary with market
conditions, but will reverse entirely and have a positive impact on earnings
when all of the natural gas is withdrawn from storage. The increase in the
Canadian wholesale natural gas margin is related to higher volumes (more
structured wholesale transactions) as ESI continued to increase its wholesale
natural gas operations in this region.
The
remaining
$2.3 million increase in margin at ESI was driven by an increase in the
electric and other margin. The higher margin was driven by a $10.3 million
increase from portfolio optimization strategies discussed above and a
$7.6 million increase in margin related to retail electric operations in
Ohio, which can be attributed to better management of retail operations and
improved supply procurement. These items were partially offset by an
$8.9 million decrease in the margin related to Sunbury and a
$5.7 million decrease in margin from ESI no longer participating in the New
Jersey Basic Generation Services Program (ESI participated in this program
from
August 2003 until May 2004, but higher margins were recognized in the summer
months). The lower margin at Sunbury was largely due to an increase in the
per-ton cost of coal utilized in the generation process and by fewer
opportunities to sell power into the spot market in 2004, compared to 2003.
Overview
of
Holding Company and Other Segment Operations
Holding
Company and
Other operations had income available for common shareholders of
$11.9 million for the year ended December 31, 2004, compared to a net
loss of $2.1 million for the year ended December 31, 2003. This
favorable variance can be attributed to an increase in earnings recognized
from
the sale of land located along the Peshtigo River in Wisconsin and an increase
in equity earnings from ATC and Wisconsin River Power Company. Equity earnings
from ATC were $16.0 million in 2004, compared to $10.1 million in
2003. WPSC nonutility operations recognized a $13.3 million pre-tax gain on
the sale of land located near the Peshtigo River in the fourth quarter of
2004,
compared to a $6.2 million pre-tax gain that was recognized on the sale of
land in the fourth quarter of 2003. WPSC also realized an income tax benefit
in
the fourth quarter of 2004 from the donation of land to the WDNR.
Operating
Expenses
WPS Resources'
Operating Expenses (Millions)
|
|
2004
|
|
2003
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
and
maintenance expense
|
|
$
|
537.6
|
|
$
|
486.2
|
|
|
10.6
|
%
|
Depreciation
and decommissioning expense
|
|
|
107.0
|
|
|
141.3
|
|
|
(24.3
|
%)
|
Taxes
other
than income
|
|
|
46.1
|
|
|
44.3
|
|
|
4.1
|
%
|
Operating
and
Maintenance Expense
Operating
and
maintenance expenses increased $51.4 million (10.6%), for the year ended
December 31, 2004, compared to 2003. Utility operating and maintenance
expenses increased $36.3 million. Electric transmission and distribution
costs were up $15.2 million at the utilities primarily due to an increase
in transmission rates. Pension and postretirement medical costs incurred
at the
utilities increased $11.0 million. Additionally, $6.8 million of the
increase was driven by amortization of costs incurred in conjunction with
the
implementation of the automated meter reading system and the purchase of
the
De Pere Energy Center (previously deferred as regulatory assets).
Maintenance expenses at WPSC's coal-fired generation facilities were
$4.2 million higher in 2004, compared to 2003, driven by an extension of
the annual planned outage at the Pulliam 6 generation facility in 2004. Higher
payroll and other benefit costs also contributed to the increase in operating
and maintenance expenses. The fall refueling outage at Kewaunee did not
significantly impact the year-over-year change in operating and maintenance
expenses as there was also a refueling outage at Kewaunee in spring 2003,
and
the PSCW approved the deferral of incremental operating and maintenance expenses
that were incurred as a direct result of the refueling outage extension
($1.8 million of operating and maintenance expenses were deferred in the
fourth quarter of 2004). It was anticipated that these costs would be recovered
in 2006; however, in the PSCW's final decision allowing WPSC authority to
increase retail electric and natural gas rates in 2006, the PSCW determined
WPSC
could not recover the costs for the 2004 extended outage. For more information
on this determination, see Note 23, "Regulatory Environment," in
WPS Resources' Notes to Consolidated Financial Statements."
Operating
expenses
at ESI increased $9.9 million mostly due to higher payroll, benefits, and
other costs associated with continued business expansion.
Depreciation
and Decommissioning Expense
Depreciation
and
decommissioning expense decreased $34.3 million (24.3%), for the year ended
December 31, 2004, compared to 2003, due primarily to a decrease of
$35.9 million resulting from lower realized gains on decommissioning trust
assets and because the decommissioning trust was not funded in 2004 in
anticipation of selling Kewaunee. Realized gains on decommissioning trust
assets
are substantially offset by depreciation expense pursuant to regulatory practice
(see detailed discussion in "Miscellaneous
Income"
below). An
increase in depreciation expense from plant asset additions at WPSC partially
offset the decrease in decommissioning expense.
Other
Income (Expense)
WPS Resources'
Other Income (Expense) (Millions)
|
|
2004
|
|
2003
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
Miscellaneous
income
|
|
$
|
52.0
|
|
$
|
63.6
|
|
|
(18.2
|
%)
|
Interest
expense and distributions of preferred securities
|
|
|
(59.9
|
)
|
|
(61.8
|
)
|
|
(3.1
|
%)
|
Minority
interest
|
|
|
3.4
|
|
|
5.6
|
|
|
(39.3
|
%)
|
Other
(expense) income
|
|
$
|
(4.5
|
)
|
$
|
7.4
|
|
|
|
|
Miscellaneous
Income
Miscellaneous
income decreased $11.6 million (18.2%), for the year ended
December 31, 2004, compared to 2003. The decrease in miscellaneous income
is largely due to a decrease in realized gains on decommissioning trust assets
of $33.5 million. There were significant realized gains recognized on
decommissioning trust assets in the fourth quarter of 2003, which were driven
by
a change in the investment strategy for WPSC's qualified nuclear decommissioning
trust assets. Qualified decommissioning trust assets were placed in more
conservative investments in anticipation of the sale of Kewaunee. Pursuant
to
regulatory practice, realized gains on decommissioning trust assets are
substantially offset by depreciation expense. A $1.5 million write-off of
previously deferred financing costs associated with the redemption of our
trust-preferred securities in the first quarter of 2004 also unfavorably
impacted miscellaneous income. Partially offsetting the decreases discussed
above were an $8.7 million increase in equity earnings from investments, a
$7.1 million increase in income recognized from the sale of land located
along the Peshtigo River in Wisconsin(discussed previously), a $4.4 million
termination payment received from Duquesne Power in December 2004 as a
result of Duquesne's termination of the asset sale agreement for Sunbury,
and a
combined $3.1 million increase related to higher royalties and a decrease
in operating losses realized from ESI's investment in a synthetic fuel producing
facility. The increase in equity earnings was primarily related to our
investments in ATC, Wisconsin River Power Company, and Wisconsin Valley
Improvement Company. Equity earnings from ATC were $16.0 million in 2004,
compared to $10.1 million in 2003. Royalty income recognized from the
synthetic fuel facility increased as a result of higher production levels
at
this facility.
Minority
Interest
The
decrease in
minority interest is related to the fact that ESI's partner in its subsidiary,
ECO Coal Pelletization #12 LLC, was allocated more production from the synthetic
fuel operation in 2003 compared to 2004. ESI's partner was not allocated
any
production from the synthetic fuel facility in the first quarter of 2004
as they
requested additional production in the fourth quarter of 2003.
Provision
for Income Taxes
The
effective tax
rate was 13.2% for the year ended December 31, 2004, compared to 22.2% for
the year ended December 31, 2003. The decrease in the effective tax rate
was driven by tax deductions pertaining to items that exceed the related
book
expense (including land donated to the WDNR in the fourth quarter of 2004),
resulting in a $5.7 million decrease in the 2004 provision for income taxes
compared to 2003, and a $9.6 million increase in the amount of tax credits
recognized in 2004 (related to an increase in synthetic fuel tax credits
produced in 2004 and the favorable settlement of several tax audits and refund
claims related to prior tax years).
Our
ownership
interest in the synthetic fuel operation resulted in the recognition of
$27.8 million of Section 29 federal tax credits for the year ended
December 31, 2004, and $18.2 million of tax credits for 2003. The
increase in synthetic fuel related tax credits was primarily due to an increase
in tax credits produced and allocable to ESI, an increase in the value of
the
credits produced resulting from the higher Btu content of coal and the annual
inflation adjustment allowed, and the favorable settlement of several tax
audits
and refund claims related to prior tax years.
Cumulative
Effect of Change in Accounting Principles
On
January 1, 2003, WPS Resources recorded a positive after-tax cumulative
effect of a change in accounting principle of $3.5 million (primarily
related to the operations of ESI) to income available for common shareholders
as
a net result of removing from its balance sheet the mark-to-market effects
of
contracts that do not meet the definition of a derivative. This change in
accounting resulted from the decision of the Emerging Issues Task Force to
preclude mark-to-market accounting for energy contracts that are not
derivatives. The required change in accounting had no impact on the underlying
economics or cash flows of the contracts.
In
addition, the adoption of SFAS No. 143, "Accounting for Asset Retirement
Obligations," at ESI resulted in a $0.3 million negative after-tax
cumulative effect of a change in accounting principle in the first quarter
of
2003, related to recording a liability for the closure of an ash basin at
Sunbury.
BALANCE
SHEET - WPS RESOURCES
2005
Compared with 2004
Accounts
receivable
increased $474.3 million (89.3%), from $531.3 million at
December 31, 2004, to $1,005.6 million at December 31, 2005.
Accounts receivable at ESI increased $396.5 million (96.0%), largely driven
by a 53% increase in the average price of natural gas experienced in the
fourth
quarter of 2005, compared to the fourth quarter of 2004. A 27.1 % increase
in
natural gas volumes at ESI in the fourth quarter of 2005, compared to the
fourth
quarter of 2004, also contributed to the increase in accounts receivable.
Accounts receivable at the regulated utilities increased $78.3 million
(67.3%), largely due to a 49.7% per-unit increase in natural gas costs in
the
fourth quarter of 2005, compared to the fourth quarter of 2004. An 8.6% increase
in retail electric rates combined with an 8.0% increase in electric sales
volumes in the fourth quarter of 2005, compared to the fourth quarter of
2004
also contributed to the increase in accounts receivable at the regulated
utilities.
Inventories
increased $115.3 million (58.8%), from $196.1 million at
December 31, 2004, to $311.4 million at December 31, 2005. The
increase in inventories was primarily related to an $89.4 million (80.6%)
increase in natural gas in storage at ESI and a $20.9 million (34.7%)
increase in natural gas in storage at WPSC. Higher natural gas prices and
a 22%
increase in natural gas volumes in storage at ESI drove the increase in
inventory at ESI. Volatility in the price of natural gas in the latter half
of
2005 resulted in more natural gas storage opportunities, which drove the
volume
increase at ESI.
The
average
per-unit price of natural gas purchased by WPSC increased 24.6% in 2005,
compared to 2004, driving the increase in natural gas in storage at WPSC.
Current
assets from
risk management activities increased $529.9 million (140.7%), at
December 31, 2005, compared to December 31, 2004, and current
liabilities from risk management activities increased $514.2 million
(151.9%). Long-term assets from risk management activities increased
$151.9 million (203.6%), at December 31, 2005, compared to
December 31, 2004, and long-term liabilities from risk management
activities increased $125.9 million (201.4%). The increase in short-term
and long-term risk management assets and liabilities was primarily related
to
increases in the forward price of natural gas and electricity. ESI also had
more
wholesale electric volumes under contract at December 31, 2005, compared to
December 31, 2004.
Property,
plant,
and equipment, net, decreased $27.1 million to $2,049.4 million at
December 31, 2005, compared to $2,076.5 million at December 31,
2004. The major contributors to the change in property, plant, and equipment
are
summarized below:
·
|
Kewaunee
was
sold in 2005, driving a $165.4 million decrease in property, plant,
and equipment.
|
·
|
Depreciation
expense of $142.8 million was recorded in 2005.
|
·
|
WPSC
sold a
30% interest in Weston 4, contributing an $83.9 million decrease to
property, plant, and equipment.
|
·
|
An
impairment
charge was recorded at Sunbury, contributing a $74.1 million decrease
to property, plant, and equipment.
|
·
|
Substantially
offsetting these decreases, capital expenditures recorded in 2005
were
$415.2 million, primarily related to the construction of Weston
4.
|
Nuclear
decommissioning trusts decreased from $344.5 million at December 31,
2004 to $0 at December 31, 2005. The qualified decommissioning trust assets
were sold along with the other Kewaunee assets (see Note 6,
"Acquisitions
and Sales of Assets," in
WPS Resources' Notes to Consolidated Financial Statements for more
information) and the nonqualified decommissioning trust assets were liquidated
in connection with the Kewaunee sale.
Regulatory
assets
increased $111.1 million (69.0%), from $160.9 million at
December 31, 2004, to $272.0 million at December 31, 2005,
largely due to $56.4 million of costs that were deferred related to the
unplanned outage at Kewaunee in 2005, a $26.2 million increase in the
regulatory asset related to the minimum pension liability, deferral of
$21.2 million of MISO charges, and a $6.3 million deferral of a
portion of the loss on the sale of Kewaunee.
Other
assets
increased $51.9 million (14.9%), from $347.6 million at
December 31, 2004, to $399.5 million at December 31, 2005. The
increase in other assets was driven by a $72.7 million increase in
WPS Resources' investment in ATC.
Accounts
payable
increased $489.5 million (83.1%), from $589.4 million at
December 31, 2004, to $1,078.9 million at December 31, 2005.
Accounts payable at ESI increased $403.0 million (91.8%), largely driven by
the 53% increase in the average price of natural gas experienced in the fourth
quarter of 2005, compared to the fourth quarter of 2004. Natural gas volumes
at
ESI also increased 27.1% in the fourth quarter of 2005, compared to the fourth
quarter of 2004. Accounts payable at the utilities increased $86.2 million
(57.6%), driven primarily by higher per-unit natural gas costs and higher
per-unit fuel and purchased power costs in 2005, compared to 2004.
Other
current
liabilities increased $44.6 million (60.9%), from $73.2 million at
December 31, 2004, to $117.8 million at December 31, 2005,
primarily due to an accrued pension contribution of $25.3 million recorded
at December 31, 2005. Accrued employee benefits and wages and customer
prepayments also increased at December 31, 2005, compared to
December 31, 2004.
Regulatory
liabilities increased $84.9 million (29.4%), from $288.3 million at
December 31, 2004, to $373.2 million at December 31, 2005, driven
by a $126.9 million regulatory liability related to proceeds received from
the liquidation of the nonqualified decommissioning trust in connection with
the
Kewaunee sale. The regulatory liability related to mark-to-market gains on
derivative instruments also increased $25.4 million, primarily related to
mark-to-market gains recorded on financial transmission rights related to
our
participation in MISO. These increases were partially offset by a
$46.6 million decrease in the regulatory liability pertaining to the asset
retirement obligation recorded related to the decommissioning of Kewaunee
(as
this plant was sold on July 5, 2005), and a $26.8 million reduction in
deferred unrealized gains on decommissioning trust assets as the decommissioning
trust assets were either liquidated or transferred in the sale of
Kewaunee.
Asset
retirement
obligations decreased from $366.6 million at December 31, 2004, to
$14.9 million at December 31, 2005, driven by the termination of our
obligation to decommission Kewaunee (as this plant was sold on July 5,
2005).
LIQUIDITY
AND CAPITAL RESOURCES - WPS RESOURCES
We
believe that our cash balances, liquid assets, operating cash flows, access
to
equity capital markets and borrowing capacity made available because of strong
credit ratings, when taken together, provide adequate resources to fund ongoing
operating requirements and future capital expenditures related to expansion
of
existing businesses and development of new projects. However, our operating
cash flow and access to capital markets can be impacted by macroeconomic
factors
outside of our control. In
addition,
our
borrowing costs can be impacted by short-term and long-term debt ratings
assigned by independent rating agencies. Currently, we believe our ratings
are
among the best in the energy industry (see "Financing
Cash
Flows - Credit Ratings"
below).
Operating
Cash Flows
During
2005, net
cash provided by operating activities was $62.4 million, compared to
$230.8 million in 2004. The decrease was driven by a $98.2 million
increase in cash required to fund working capital requirements, primarily
at
ESI. Net cash provided by operating activities also decreased due to various
expenditures incurred in 2005 at WPSC, which will not be collected from
ratepayers until future years. In 2005, expenditures incurred related to
the
unplanned Kewaunee outage were approximately $56 million, expenditures
incurred related to MISO were approximately $21 million, and increased
costs related to coal shortages were approximately $6 million (see Note 23,
"Regulatory
Environment,"
in
WPS Resources' Notes to Consolidated Financial Statements for more
information on these regulatory assets).
During
2004, net
cash provided by operating activities was $230.8 million, compared with
$59.2 million in 2003. The increase was driven by operating activities at
ESI and WPSC. In 2003, operating activities at ESI used cash due primarily
to
increasing working capital requirements resulting from business growth and
natural gas storage opportunities near the end of the year. ESI's natural
gas
operations did not experience the same level of growth in 2004 compared to
2003,
and storage opportunities were similar at the end of both years, which enabled
ESI to generate additional operating cash flow in 2004. The increase in net
cash
provided by operating activities at WPSC was driven by improved operating
results.
Investing
Cash Flows
Net
cash used in
investing activities decreased $241.1 million (76.5%), from
$315.0 million in 2004 to $73.9 million in 2005. The decrease was
driven by proceeds of $127.1 million received from the liquidation of the
non-qualified decommissioning trust in connection with the Kewaunee sale,
$112.5 million of proceeds received from the sale of Kewaunee,
$111.5 million of proceeds received from the sale of Sunbury's emission
allowances in 2005, and $95.1 million of proceeds received from DPC upon
closing of the sale of a 30% ownership interest in Weston 4. The decreases
were
partially offset by a $122.8 million increase in capital expenditures
(primarily related to the construction of Weston 4), purchases of emission
allowances of $35.3 million (primarily related to operations at Sunbury),
and a $30.3 million increase in the purchase of equity investments and
other acquisitions, driven by a $41.3 million increase in
WPS Resources' funding of ATC's Wausau, Wisconsin, to Duluth, Minnesota,
transmission line in 2005, compared to 2004.
Net
cash used for
investing activities was $315.0 million in 2004, compared to
$247.4 million in 2003. The increase was largely related to a
$114.0 million increase in utility capital expenditures (see "Capital
Expenditures"
below), partially
offset by a $50.4 million decrease in cash used for the purchase of equity
investments and other acquisitions. Purchase of equity investments and other
acquisitions consisted primarily of additional investments in ATC, capital
contributions to ECO Coal Pelletization #12 LLC, and the acquisition of
Advantage Energy in 2004. In 2003, purchase of equity investments and other
acquisitions consisted primarily of WPSC's final payment for the purchase
of the
De Pere Energy Center, WPSC's purchase of a one-third interest in Guardian
Pipeline, additional investments in ATC, and capital contributions to ECO
Coal
Pelletization. WPS Resources contributed capital of $15.7 million to
ECO Coal Pelletization in 2004 and $14.0 million in 2003. See Note 6,
"Acquisitions
and Sales of Assets,"
in
WPS Resources' Notes to Consolidated Financial Statements for more
information.
Capital
Expenditures
Capital
expenditures by business segment for the years ended December 31, 2005,
2004, and 2003 are as follows:
Millions
|
|
Years Ended December 31,
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
Electric
utility
|
|
$
|
373.9
|
|
$
|
223.0
|
|
$
|
131.0
|
|
Gas
utility
|
|
|
36.4
|
|
|
62.7
|
|
|
40.7
|
|
ESI
|
|
|
4.0
|
|
|
6.4
|
|
|
6.3
|
|
Other
|
|
|
0.9
|
|
|
0.3
|
|
|
(0.2
|
)
|
WPS Resources'
consolidated
|
|
$
|
415.2
|
|
$
|
292.4
|
|
$
|
177.8
|
|
The
increase in
capital expenditures at the electric utility in 2005 compared to 2004 is
mainly
due to higher capital expenditures associated with the construction of Weston
4.
Gas utility capital expenditures decreased primarily due to the completion
of
the automated meter reading project.
The
increase in
capital expenditures at the electric utility in 2004 as compared to 2003
was
mainly due to higher capital expenditures associated with the construction
of
Weston 4.
Financing
Cash Flows
Net
cash used for
financing activities was $0.8 million in 2005, compared to net cash
provided by financing activities of $73.5 million in 2004. Although cash
provided by operating activities decreased in 2005, compared to 2004, this
decrease was more than offset by a decrease in cash used for investing
activities, related to proceeds received from various asset sales in
2005.
Net
cash provided
by financing activities was $73.5 million in 2004, compared to
$195.6 million in 2003.
Less
cash was
required from financing activities as a result of the increase in cash generated
from operating activities in 2004, partially offset by higher capital
expenditures incurred in 2004.
Significant
Financing Activities
WPS Resources
had outstanding commercial paper borrowings of $254.8 million and
$279.7 million at December 31, 2005, and 2004, respectively.
WPS Resources had other outstanding short-term debt of $10.0 million
and $12.7 million as of December 31, 2005, and 2004, respectively.
In
2005, 2004, and 2003 WPS Resources issued new shares of common stock under
its Stock Investment Plan and under certain stock-based employee benefit
and
compensation plans. As a result of these plans, equity increased
$29.0 million, $28.3 million, and $31.0 million in 2005, 2004,
and 2003, respectively. WPS Resources did not repurchase any existing
common stock during 2005 or 2004.
In
November 2005, WPS Resources issued and sold 1.9 million shares of
common stock at a public offering price of $53.70 per share. The proceeds
to us
were $98.3 million, net of underwriting discounts and commissions. The
proceeds were used to reduce short-term debt, and fund equity contributions
to
subsidiary companies.
In
June 2005, $62.9 million of non-recourse debt at an ESI subsidiary
that was used to finance the purchase of Sunbury was restructured to a five-year
WPS Resources obligation in connection with the sale of Sunbury's allocated
emission allowances. An additional $2.7 million drawn on a line of credit
at ESI was rolled into the five-year WPS Resources obligation. The floating
interest rate on the total five-year WPS Resources' obligation of
$65.6 million was fixed at 4.595% through two interest rate
swaps.
In
January 2004, WPSC retired $49.9 million of its 7.125% series first
mortgage bonds. These bonds had an original maturity date of July 1,
2023.
In
January 2004, WPS Resources retired $50.0 million of its 7.0% trust
preferred securities. As a result of this transaction, WPSR Capital Trust
I, a
Delaware business trust, was dissolved.
WPSC
issued
$125.0 million of 4.80% 10-year senior notes in December 2003. The
senior notes are collateralized by a pledge of first mortgage bonds and may
become non-collateralized if WPSC retires all of its outstanding first mortgage
bonds. The net proceeds from the issuance of the senior notes were used to
call
$49.9 million of 7.125% first mortgage bonds in January 2004, fund
construction costs and capital additions, reduce short-term indebtedness,
and
for other corporate utility purposes.
In
November 2003, 4,025,000 shares of WPS Resources' common stock were sold in
a public offering at $43.00 per share, which resulted in a net increase in
equity of $166.8 million. Net proceeds from this offering were used to
retire the trust preferred securities in January 2004, reduce short-term
debt,
fund equity contributions to subsidiary companies, and for general corporate
purposes.
In
November 2003, ESI retired all of its notes payable under a revolving credit
note, in the amount of $12.5 million.
WPSC
called
$9.1 million of 6.125% tax-exempt bonds in May 2003.
In
March 2003, UPPCO retired $15.0 million of 7.94% first mortgage bonds that
had reached maturity.
WPSC
used
short-term debt to retire $50.0 million of 6.8% first mortgage bonds on
February 1, 2003, that had reached maturity.
Credit
Ratings
WPS Resources
and WPSC use internally generated funds and commercial paper borrowing to
satisfy most of their capital requirements. WPS Resources also periodically
issues long-term debt and common stock to reduce short-term debt, maintain
desired capitalization ratios, and fund future growth. WPS Resources may
seek nonrecourse financing for funding nonregulated acquisitions.
WPS Resources' commercial paper borrowing program provides for working
capital requirements of the nonregulated businesses and UPPCO. WPSC has its
own
commercial paper borrowing program. WPSC also periodically issues long-term
debt, receives equity contributions from WPS Resources, and makes payments
for return of capital to WPS Resources to reduce short-term debt, fund
future growth, and maintain capitalization ratios as authorized by the PSCW.
The
specific forms of long-term financing, amounts, and timing depend on the
availability of projects, market conditions, and other factors.
The
current credit ratings for WPS Resources and WPSC are listed in the table
below.
Credit
Ratings
|
Standard
& Poor's
|
Moody's
|
WPS Resources
Senior unsecured debt
Commercial paper
Credit facility
|
A
A-1
-
|
A1
P-1
A1
|
WPSC
Senior secured debt
Preferred stock
Commercial paper
Credit facility
|
A+
A-
A-1
-
|
Aa2
A2
P-1
Aa3
|
In
September 2005, Standard & Poor's had placed all of WPS Resources'
and WPSC's credit ratings on CreditWatch with negative implications as a
result
of WPS Resources' announcement that it entered into a definitive agreement
with Aquila to acquire its natural gas distribution operations in Michigan
and
Minnesota.
However,
in January 2006, Standard & Poor's removed WPS Resources and WPSC from
CreditWatch and affirmed WPS Resources' "A" corporate credit rating and "A"
senior unsecured debt rating. Also, the corporate credit ratings of WPSC
were
affirmed at "A+" and removed from CreditWatch. Standard & Poor's stated that
the consolidated ratings of WPS Resources reflected the strength and cash
flow stability of its utility subsidiaries and the two relatively low risk
natural gas utilities being acquired. The outlook continues to be negative
for
WPS Resources and WPSC as the companies have several events that must be
successfully completed before the companies' performance can be considered
stable. WPS Resources must successfully complete the integration of the
retail natural gas operations it is acquiring in Michigan and Minnesota and
WPSC
must complete the construction of Weston 4 on time and on budget.
In
September 2005, Moody's announced no change to the current ratings as a
result of WPS Resources' announcement that it entered into a definitive
agreement with Aquila to acquire its natural gas distribution operations
in
Michigan and Minnesota, but changed the rating outlook for WPS Resources
and WPSC from stable to negative, citing a potential risk that the company's
leverage may increase over the next several years.
In
January 2005, Standard & Poor's downgraded its ratings for WPSC one ratings
level and established a negative outlook. At the same time, Standard &
Poor's affirmed WPS Resources' ratings but changed the outlook from stable
to negative. In taking these actions, Standard & Poor's cited WPSC's
substantial capital spending program and the risk profile of WPS Resources'
nonregulated businesses.
In
November 2003, Moody's downgraded its long-term ratings for WPS Resources
and WPSC one ratings level, leaving only commercial paper ratings unchanged.
Moody's downgrade of WPS Resources was based principally on a gradual shift
in the company's financial and business risk profile attributable to the
growth
of nonregulated businesses, the impact of weaker wholesale power markets,
and a
relatively high dividend payout. Moody's downgrade of WPSC was based on the
expectation that the utility's substantial capital spending program will
exceed
its retained cash flow through 2007, which is likely to lead to a meaningful
increase in debt. Following the 2003 downgrade, Moody's set the ratings outlook
at stable for both WPS Resources and WPSC.
We
believe these ratings continue to be among the best in the energy industry
and
allow us to access commercial paper and long-term debt markets on favorable
terms. Credit ratings are not recommendations to buy, are subject to change,
and
each rating should be evaluated independently of any other rating.
Rating
agencies use
a number of both quantitative and qualitative measures in determining a
company's credit rating. These measures include business risk, liquidity
risk,
competitive position, capital mix, financial condition, predictability of
cash
flows, management strength, and future direction. Some of the quantitative
measures can be analyzed through a few key financial ratios, while the
qualitative ones are more subjective.
WPS Resources
and WPSC hold credit lines to back 100% of their commercial paper borrowing
and
letters of credit. These credit facilities are based on a credit rating of
A-1/P-1 for both WPS Resources and WPSC. A significant decrease in the
commercial paper credit ratings could adversely affect the companies by
increasing the interest rates at which they can borrow and potentially limiting
the availability of funds to the companies through the commercial paper market.
A restriction in the companies' ability to use commercial paper borrowing
to
meet their working capital needs would require them to secure funds through
alternate sources resulting in higher interest expense, higher credit line
fees,
and a potential delay in the availability of funds.
ESI
maintains
underlying agreements to support its electric and natural gas trading
operations. In the event of a deterioration of WPS Resources' credit
rating, many of these agreements allow the counterparty to demand additional
assurance of payment. This provision could pertain to existing business,
new
business, or both with the counterparty. The additional assurance requirements
could be met with letters of credit, surety bonds, or cash deposits and would
likely result in WPS Resources being
required
to
maintain increased bank lines of credit or incur additional expenses, and
could
restrict the amount of business ESI would be able to conduct.
ESI
uses the New
York Mercantile Exchange (NYMEX) and over-the-counter financial markets to
mitigate its exposure to physical customer obligations. These contracts are
closely correlated to the customer contracts, but price movements on the
contracts may require financial backing. Certain movements in price for
contracts through the NYMEX exchange require posting of cash deposits equal
to
the market move. For the over-the-counter market, the underlying contract
may
allow the counterparty to require additional collateral to cover the net
financial differential between the original contract price and the current
forward market. Increased requirements related to market price changes usually
only result in a temporary liquidity need that will unwind as the sales
contracts are fulfilled.
Future
Capital Requirements and Resources
Contractual
Obligations
The
following table
summarizes the contractual obligations of WPS Resources', including its
subsidiaries.
|
|
|
|
|
|
|
|
|
|
|
|
Contractual
Obligations
|
|
Total
|
|
Payments
Due
By Period
|
|
As
of
December 31, 2005
(Millions)
|
|
Amounts
Committed
|
|
2006
|
|
2007-2008
|
|
2009-2010
|
|
2011
and
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt principal and interest payments
|
|
$
|
1,276.2
|
|
$
|
28.1
|
|
$
|
111.0
|
|
$
|
262.0
|
|
$
|
875.1
|
|
Operating
leases
|
|
|
24.3
|
|
|
5.1
|
|
|
7.4
|
|
|
4.9
|
|
|
6.9
|
|
Commodity
purchase obligations
|
|
|
6,857.6
|
|
|
4,000.6
|
|
|
1,528.8
|
|
|
610.7
|
|
|
717.5
|
|
Purchase
orders
|
|
|
476.1
|
|
|
352.4
|
|
|
122.9
|
|
|
0.8
|
|
|
-
|
|
Capital
contributions to equity method investment
|
|
|
79.0
|
|
|
39.9
|
|
|
39.1
|
|
|
-
|
|
|
-
|
|
Other
|
|
|
384.1
|
|
|
45.1
|
|
|
72.5
|
|
|
38.9
|
|
|
227.6
|
|
Total
contractual cash obligations
|
|
$
|
9,097.3
|
|
$
|
4,471.2
|
|
$
|
1,881.7
|
|
$
|
917.3
|
|
$
|
1,827.1
|
|
Long-term
debt
principal and interest payments represent bonds issued, notes issued, and
loans
made to WPS Resources and its subsidiaries. We record all principal
obligations on the balance sheet. Commodity purchase obligations represent
mainly commodity purchase contracts of WPS Resources and its subsidiaries.
Energy supply contracts at ESI included as part of commodity purchase
obligations are generally entered into to meet obligations to deliver energy
to
customers. WPSC and UPPCO expect to recover the costs of their contracts
in
future customer rates. Purchase orders include obligations related to normal
business operations and large construction obligations, including 100% of
Weston
4 obligations. The sale of a 30% interest in Weston 4 to DPC was completed
in
November 2005, but WPSC retains the legal obligation to initially remit payment
to third parties for 100% of all construction costs incurred, 30% of which
will
subsequently be billed to DPC. Capital contributions to equity method investment
include our commitment to fund a portion of ATC's Wausau, Wisconsin, to Duluth,
Minnesota, transmission line together with ATC. The table above does not
reflect
obligations under the definitive agreement with Aquila to acquire its natural
gas distribution operations in Michigan and Minnesota, which are discussed
in
Note 6, "Acquisitions
and Sales of Assets,"
in
WPS Resources' Notes to Consolidated Financial Statements. Other mainly
represents expected pension and postretirement funding obligations.
Capital
Requirements
WPSC
makes large
investments in capital assets. Net construction expenditures are expected
to be
$856.5 million in the aggregate for the 2006 through 2008 period, not
including obligations under the definitive agreement with Aquila. The largest
of
these expenditures is for the construction of Weston 4. WPSC is expected
to
incur costs of approximately $278 million from 2006 through 2008 related to
its 70% ownership interest in this facility.
As
part of its regulated utility operations, on September 26, 2003, WPSC
submitted an application for a Certificate of Public Convenience and Necessity
to the PSCW seeking approval to construct Weston 4, a 500-megawatt coal-fired
generation facility near Wausau, Wisconsin. The facility is estimated to
cost
approximately $779 million (including the acquisition of coal trains), of
which WPSC is responsible for slightly more than 70% (approximately
$549 million) of the costs. In November 2005, DPC purchased a 30% ownership
interest in Weston 4, remitting proceeds of $95.1 million for its share of
the construction costs (including carrying charges) as of the closing date
of
the sale. WPSC is responsible for slightly more than 70% of the costs because
of
certain common facilities that will be installed as part of the project.
WPSC
will have a larger than 70% interest in these common facilities. DPC will
be
billed by WPSC for 30% of all remaining costs to complete the construction
of
the plant. As of December 31, 2005, WPSC has incurred a total cost of
$271.6 million related to its ownership interest in the project. In
addition to the costs discussed above, WPSC expects to incur additional
construction costs through the date the plant goes into service of approximately
$61 million to fund construction of the transmission facilities required to
support Weston 4. ATC will reimburse WPSC for the construction costs of
these transmission facilities and related carrying costs when Weston 4 becomes
commercially operational, which is expected to occur in June 2008.
Other
significant
anticipated construction expenditures for WPSC during the three-year period
2006
through 2008 include approximately $310 million of electric distribution
projects (including replacement of utility poles, transformers, meters, etc.),
environmental projects of approximately $167 million, other expenditures at
WPSC generation plants to ensure continued reliability of these facilities
of
approximately $63 million, and corporate services infrastructure projects
of approximately $33 million.
On
April 18, 2003, the PSCW approved WPSC's request to transfer its interest
in the
Wausau, Wisconsin, to Duluth, Minnesota, transmission line to ATC.
WPS Resources committed to fund 50% of total project costs incurred up to
$198 million. WPS Resources will receive additional equity in ATC in
exchange for the project funding. WPS Resources may terminate funding if
the project extends beyond January 1, 2010. The total cost of the project
is
estimated at $420.3 million and it is expected that the line will be
completed and placed in service in 2008. WPS Resources has the right, but
not the obligation, to provide additional funding in excess of $198 million
up to 50% of the revised cost estimate. However, WPS Resources' future
funding of the line will be reduced by the amount funded by Allete, Inc.
Allete
has exercised an option to fund a portion of WPS Resources' commitment and
is
expected to fund $60 million of the project cost in 2006. Considering this,
for the period 2006 through 2008, WPS Resources expects to fund up to
approximately $61 million for its portion of the Wausau to Duluth
transmission line.
WPS Resources
expects to provide additional capital contributions to ATC of approximately
$78 million for the period 2006 through 2008 for other projects.
UPPCO
is expected
to incur construction expenditures of about $48 million in the aggregate
for the period 2006 through 2008, primarily for electric distribution
improvements and repairs and safety measures at hydroelectric
facilities.
Capital
expenditures identified at ESI for 2006 through 2008 are expected to be
approximately $22 million, largely due to scheduled major maintenance
projects at ESI's generation facilities, and computer equipment related to
business expansion and normal technology upgrades.
All
projected
capital and investment expenditures are subject to periodic review and revision
and may vary significantly from the estimates depending on a number of factors,
including, but not limited to, industry restructuring, regulatory constraints,
acquisition opportunities, market volatility, and economic trends. Other
capital
expenditures for WPS Resources and its subsidiaries for 2006 through 2008
could be significant depending on its success in pursuing development and
acquisition opportunities. When appropriate, WPS Resources may seek
nonrecourse financing for a portion of the cost of these
acquisitions.
Capital
Resources
As
of December 31, 2005, both WPS Resources and WPSC were in compliance
with all of the covenants under their lines of credit and other debt
obligations.
For
the period 2006
through 2008, WPS Resources plans to use internally generated funds net of
forecasted dividend payments, cash proceeds from asset sales, and debt and
equity financings to fund capital requirements. WPS Resources plans to
maintain debt to equity ratios at appropriate levels to support current credit
ratings and corporate growth. Management believes WPS Resources has
adequate financial flexibility and resources to meet its future
needs.
WPS Resources
currently has the ability to issue up to $200 million of debt and/or equity
under its existing shelf registration statement. WPSC currently has the ability
to issue up to an additional $375 million of debt under its existing shelf
registration statements. The shelf registrations are subject to the ultimate
terms and conditions to be determined prior to the actual issuance of specific
securities.
In
November 2005, WPS Resources entered into two unsecured revolving credit
agreements of $557.5 million and $300 million with J.P. Morgan Chase
Bank and Banc of America Securities LLC. These credit facilities are bridge
facilities intended to backup commercial paper borrowings related to the
purchase of the Michigan and Minnesota natural gas distribution operations
from
Aquila and to support purchase price adjustments related to working capital
at
the time of the closing of the transactions. The capacity under the bridge
facilities will be reduced by the amount of proceeds from any long-term
financing we complete prior to closing, with the exception of proceeds from
the
November 2005 equity offering. The credit agreements will be further reduced
as
permanent or replacement financing is secured. Under the $300 million
credit agreement, loans cannot exceed the purchase price adjustments in
connection with the Aquila acquisitions and no more than $200 million can
be borrowed at the time of the first acquisition. Under the $300 million
facility, these loan commitments will be reduced by one-third 90 days after
the
consummation of the applicable acquisition with the remaining two-thirds
due 180
days after the consummation of the applicable acquisition (or earlier if
long-term financing or replacement credit agreements are executed). Both
of
these credit agreements mature on September 5, 2007. These credit agreements
have representations and covenants that are similar to those in our existing
credit facilities.
In
November 2005, WPS Resources entered into a forward equity sale agreement
with an affiliate of J.P. Morgan Securities, Inc., as forward purchaser,
relating to 2.7 million shares of WPS Resources' common stock. In
connection with the forward agreement, and at WPS Resources' request, J.P.
Morgan Securities borrowed an equal number of shares of WPS Resources'
common stock from stock lenders and sold the borrowed shares to the public.
Subject to certain exceptions, WPS Resources has the right to elect
physical or cash settlement of the forward sale agreement on a date or dates
to
be specified by WPS Resources within approximately one year of the date of
the public offering. WPS Resources expects to physically settle the forward
agreement and use the proceeds to partially finance the proposed acquisition
of
the Michigan and Minnesota natural gas distribution operations from Aquila
and
for general corporate purposes. If the forward agreement would have been
physically settled by delivery of shares at December 31, 2005,
WPS Resources would have received $139.3 million, based on the
December 31, 2005, forward share price of $51.58 per share for the
2.7 million shares, net of underwriting discounts and commissions.
See
Note
21,
"Common
Equity," in
WPS Resources' Notes to Consolidated Financial Statements for
more
information on settlement methods. The use of a forward agreement allowed
WPS Resources to avoid market uncertainty by pricing a stock offering under
then existing market conditions, while mitigating share dilution by postponing
the issuance of stock until funds are needed.
In
June 2005, WPS Resources entered into an unsecured $500 million 5-year
credit agreement. This revolving credit line replaces the former 364-day
credit
line facilities, which had a borrowing capacity of $400 million. WPSC also
entered into a new 5-year credit facility, for $115 million, to replace its
former 364-day credit line facility for the same amount. The credit lines
are
used to back 100% of WPS Resources' and WPSC's commercial paper borrowing
programs and the majority of letters of credit
for
WPS Resources and WPSC. As of December 31, 2005, there was a total of
$249.1 million and $36.2 million available under WPS Resources'
and WPSC's credit lines, respectively.
Other
Future Considerations
Agreement
to
Purchase Aquila's Michigan and Minnesota Natural Gas Distribution
Operations
On
September 21, 2005, WPS Resources, through wholly owned
subsidiaries, entered into two definitive agreements with Aquila to acquire
its
natural gas distribution operations in Michigan and Minnesota for approximately
$558 million, exclusive of direct costs of the acquisition. The purchase
price will increase for certain adjustments related to working capital,
including accounts receivable, unbilled revenue, inventory, and certain other
current assets. The purchase price is also subject to other closing and
post-closing adjustments, primarily net plant adjustments.
The
Michigan
natural gas assets provide natural gas distribution service to about 161,000
customers in 147 cities and communities throughout Otsego, Grand Haven, and
Monroe counties. Annual natural gas throughput for the Michigan natural gas
assets are approximately half those of the Minnesota natural gas assets.
The
assets operate under a cost-of-service environment and are currently allowed
an
11.4% return on equity on a 45% equity component of the regulatory capital
structure.
The
Minnesota
natural gas assets provide natural gas distribution service to about 200,000
customers throughout the state in 165 cities and communities including Grand
Rapids, Pine City, Rochester, and Dakota County. Annual natural gas throughput
volumes have historically been just slightly less than throughput volumes
experienced by WPSC's natural gas utility. Like Michigan, the assets also
operate under a cost-of-service environment and are currently allowed an
11.7%
return on equity on a 50% equity component of the regulatory capital
structure.
WPS Resources
anticipates permanent financing for the acquisition to be raised through
the
issuance of a combination of equity and long-term debt. See "Capital
Resources"
above and Note
21,
"Common
Equity"
in
WPS Resources' Notes to Consolidated Financial Statements, for a discussion
of the forward equity sale agreement entered into to fund a portion this
acquisition.
The
transaction is
subject to various state and other regulatory approvals, such as the MPSC
and
the Minnesota Public Utilities Commission, and is subject to compliance with
the
Hart-Scott-Rodino Act. MPSC approval was received in November 2005 and the
waiting period under the Hart-Scott-Rodino Act has expired. Assuming an approval
from the Minnesota Public Utilities Commission is obtained in a timely manner,
WPS Resources anticipates closing both transactions in the first half of
2006.
WPS Resources
anticipates maintaining its current dividend policy following the
closing.
Sunbury
WPS Resources
made capital contributions of $1.0 million to Sunbury in 2005. In 2004,
WPS Resources made capital contributions of $24.5 million to Sunbury.
Contributions made in 2005 were necessary to meet certain working capital
requirements. In 2004, the capital contributions were used to cover operating
losses, make principal and interest payments on debt, and purchase emission
allowances. In 2004, WPS Resources' Board of Directors granted
authorization to contribute up to $32.8 million of capital to Sunbury. At
December 31, 2005, $7.3 million of the originally authorized amount
remains available for contribution. Financial results for Sunbury have improved
in 2005, compared to 2004, primarily due to more opportunities to sell power
into the market as the result of the expiration of a fixed price out-take
contract on December 31, 2004. Current energy market prices are
significantly higher than the fixed price received under the expired contract.
The
sale of
Sunbury's allocated emission allowances was completed in May 2005. Total
sales
proceeds of $109.9 million were utilized by Sunbury to eliminate its
nonrecourse debt obligation, which was subsequently restructured as a
WPS Resources' obligation in 2005, which provides ESI with flexibility to
consider various alternatives for the plant. All available solid fuel units
at
the Sunbury plant were operated for most of 2005, as market conditions were
generally favorable. When market conditions are unfavorable, ESI plans to
place
the plant in a stand-by mode of operation, which serves to minimize future
operating expenses while maintaining several options for the plant (including
closing the plant, retaining the plant and operating it during favorable
economic periods, or a potential future sale of the plant). Dispatching Sunbury
in a stand-by mode of operation helps focus production on higher-priced periods,
generally in the winter and mid-summer months. The success of a stand-by
mode of
operation depends on Sunbury's ability to minimize costs during non-operating
periods.
Kewaunee
See
Note 6,
"Acquisitions
and Sale of Assets,"
in
WPS Resources' Notes to Consolidated Financial Statements for information
related to the Kewaunee sale.
See
Note 23,
"Regulatory
Environment,"
in
WPS Resources' Notes to Consolidated Financial Statements for an update on
deferrals related to Kewaunee.
Beaver
Falls
ESI's
Beaver Falls
generation facility in New York has been out of service since late
June 2005. The unplanned outage was caused by the failure of the first
stage turbine blades. Inclusive of estimated insurance recoveries, ESI
estimates, at this time, that it will cost between $3 and $5 million to
repair the turbine and replace the damaged blades. Depending on the amount
of
insurance recovery, ESI could incur significantly higher net out-of-pocket
costs
than originally estimated to repair the damage. In addition, ESI is attempting
to renegotiate an existing steam off-take agreement with a counterparty,
which
will significantly impact its ability to recover costs. If significant repair
costs are not recoverable through insurance or ESI is not able to renegotiate
the terms of the steam off-take agreement, then a possibility exists that
ESI
would not repair the plant, in which case the undiscounted cash flows related
to
future operations may be insufficient to recover the carrying value of the
plant, resulting in impairment. The carrying value of the Beaver Falls
generation facility at December 31, 2005 was
$18.1 million.
Asset
Management Strategy
As
a part of our asset management strategy, in December 2005, UPPCO sold a
portion of its real estate holdings that were no longer needed for operations.
See Note 6, "Acquisitions
and Sales of Assets,"
in
WPS Resources Footnotes to Consolidated Financial Statements for more
information. WPS Resources continues to evaluate alternatives for the sale
of the balance of our identified real estate holdings no longer needed for
operation.
Regulatory
Matters and Rate Trends
Under
the
prevailing Wisconsin fuel rules, WPSC's 2006 electric rates are subject to
adjustment when electric generation fuel and purchased power costs fall outside
of a pre-determined band. This band is set at +2.0% and -0.5%, for 2006 by
the
PSCW. Because a significant portion of WPSC's electric load is served by
natural
gas-fired generation, the volatile nature of natural gas prices, and the
relatively narrow tolerance band in Wisconsin, the likelihood for an electric
rate adjustment in 2006 in Wisconsin is strong. Any such rate adjustment
would
be on a prospective basis only and could impact WPSC's operating results.
To
mitigate the risk of the potential for unrecoverable fuel costs in 2006 due
to
market price volatility, WPSC is employing risk management techniques pursuant
to its PSCW approved Risk Policy, including the use of derivative instruments
such as futures and options.
The
price of
natural gas is currently high compared to historical levels. While the WPSC
gas
utility is authorized one-for-one recovery of prudently incurred natural
gas
costs in both the Wisconsin and
Michigan
jurisdictions, the currently high natural gas rates could impact the ability
of
retail customers to pay for natural gas service and, therefore, increase
WPSC's
write-offs during 2006.
In
WPSC's 2006 retail electric rate proceeding, the PSCW applied a "financial
harm"
test when considering the rate recovery of deferred costs previously authorized
for accounting purposes. While the application of a financial harm test is
authorized, it has not been applied in the past by the PSCW when considering
the
rate recovery of costs that were previously authorized for deferral. In WPSC's
2006 rate proceeding, after applying the financial harm test, the PSCW
disallowed rate recovery of the 2004 extended outage at Kewaunee. The PSCW
also
disallowed recovery of 50% of the pre-tax loss realized on the sale of Kewaunee.
None of these disallowed costs were found to be imprudent by the PSCW. In
light
of the PSCW's decision, WPSC still believes it is probable that all regulatory
assets recorded at December 31, 2005, will be able to be collected from
ratepayers.
For
a discussion of
regulatory filings and decisions, see Note 23, "Regulatory
Environment,"
in
WPS Resources' Notes to Consolidated Financial Statements.
See
Note 9,
"Regulatory
Assets and Liabilities,"
in
WPS Resources' Notes to Consolidated Financial Statements for a list of
regulatory assets recorded at December 31, 2005.
Industry
Restructuring
-Ohio-
In
May 1999, the Ohio Legislature passed Senate Bill 3, which introduced
market-based rates and instituted competitive retail electric services. The
bill
also established a market development period beginning January 1, 2001, and
extending no later than December 31, 2005, after which rates would be set
at market-based prices. During this market development period, ESI contracted
to
be the supplier for approximately 100,000 residential, small commercial,
and
government facilities in the FirstEnergy service areas under the State of
Ohio
provisions for Opt-out Electric Aggregation Programs.
The
Public
Utilities Commission of Ohio requested the Ohio electric distribution utilities
to file rate stabilization plans covering the 2006-2008 time period to avoid
rate shock at the end of the market development period. A plan submitted
by
FirstEnergy established electric rates for consumers beginning in 2006 if
a
competitive bid auction ordered by the Public Utilities Commission of Ohio
did
not produce better benefits. The price resulting from an auction conducted
on
December 8, 2004, was inadequate. Because the FirstEnergy plan is priced
lower than current market power prices, ESI took final meter readings and
discontinued service to customers of the existing aggregation programs with
the
expiration of those contracts in December 2005.
On
September 23, 2004, an Ohio House Bill was introduced, proposing a change
to the electric restructuring law. The bill proposes to give the Public
Utilities Commission of Ohio explicit authority to implement rate stabilization
plans in certain circumstances. The Ohio Senate held meetings during
March 2005 to hear from all parties involved as they develop a statewide
energy policy (natural gas and electric). The Senate heard and considered
such
issues as rolling back Senate Bill 3, pushing ahead with electric deregulation,
and the need for rate-based utility construction of new power plants in the
state. In addition to the electric issues, the Senate also heard about natural
gas issues. ESI participated and testified, urging the Senate to move forward
to
implement a competitive environment. ESI remains prepared to offer future
retail
electric service in Ohio as the regulatory climate and market conditions
allow.
-Michigan-
Under
the current
Electric Choice program in Michigan, ESI, through its subsidiary, established
itself as a significant supplier to the industrial and commercial markets.
However, recent high wholesale energy prices coupled with both approved and
pending tariff changes for the regulated utilities significantly lowered
the
savings customers can obtain from contracting with non-utility suppliers.
As a
result, many customers returned to the bundled tariff service of the incumbent
utility. The high wholesale energy prices and tariff changes caused a reduction
in new business and renewals for ESI. ESI's Michigan retail electric business
as
of the beginning of 2006 declined to approximately one-third the peak megawatts
it was at the start of 2005. The MPSC is expected to provide orders in two
significant proceedings by the end of 2006 that will clarify the outlook
for
Electric Choice.
The
status of
Michigan's electric markets has been the subject of hearings in both the
Senate
and House Energy Committees. If legislation rolling back the Electric Choice
market is enacted, it could diminish the benefits of competitive supply for
Michigan business customers. The impact on ESI could range from maintaining
Michigan business with little or no growth to an inability to re-contract
any
business, leading to a possible decision by ESI to exit Michigan's electric
market and redirect resources to more vibrant markets. It is not unreasonable
to
expect changes, either from the legislature or the MPSC, to have some level
of
negative impact on ESI, but it is unlikely that Michigan customers will lose
all
of the benefits of competition and revert back to a fully regulated monopoly
supply. ESI is actively participating in the legislative and regulatory process
in order to protect its interests in Michigan.
Expansion
of
Operations into Texas
In
the fourth quarter of 2005, ESI began developing a product offering in the
Texas
retail electric market. Due to the thriving Texas market structure (unencumbered
by a regulated offering that is not market based) and having been presented
with
a good opportunity and approach to enter the Texas retail market, ESI hired
experienced personnel in that region and expects to be an approved competitive
supplier before the end of the second quarter of 2006. ESI previously had
a
market presence in Houston with natural gas producer services originators.
While
historically, ESI limited its retail activities to the northeastern quadrant
of
the United States and the adjacent portion of Canada, the entry into the
Texas
market offers an opportunity to leverage the infrastructure and capability
ESI
developed to provide products and services that it believes customers will
value.
Seams
Elimination Charge Adjustment
Through
a series of
orders issued by the FERC, Regional Through and Out Rates for transmission
service between the MISO and the PJM Interconnection were eliminated effective
December 1, 2004. To compensate transmission owners for the revenue they
will no longer receive due to this elimination, the FERC ordered a transitional
pricing mechanism called the Seams Elimination Charge Adjustment (SECA) to
be
put into place. Load-serving entities will pay these SECA charges during
a
16-month transition period from December 1, 2004, through March 31,
2006. ESI is a load-serving entity and will be billed based on its power
imports
into MISO from PJM during 2002 and 2003. Total exposure for the 16-month
transitional period, taken from proposed compliance filings by the transmission
owners, is approximately $19 million for ESI, of which approximately
$17 million is for Michigan and approximately $2 million is for Ohio.
Through December 31, 2005, ESI has made payments totaling
$15.3 million for these charges, of which $11.1 million has been
expensed.
On
February 10, 2005, the FERC issued an order requesting compliance filings
from
transmission providers implementing the SECA effective December 1, 2004,
subject to refund and surcharge, as appropriate. The application and legality
of
the SECA is being challenged by many load-serving entities, including ESI.
On
February 28, 2005, ESI filed a motion for a Partial Stay of the February
10,
2005, FERC order, proposing that SECA charges on its Michigan load be postponed
until a FERC order approves a decision or settlement in the formal hearing
proceeding. The FERC denied this motion on May 4, 2005. On June 3, 2005,
ESI filed with the FERC a request for rehearing of the order denying stay.
ESI
also participated in a joint petition to the District of Columbia Circuit
Court in an attempt to obtain a
final
order from
the FERC on rehearing of the initial SECA order. This joint petition was
denied.
In the interim, the exposure will be managed through customer charges and
other
available avenues, where feasible. It is probable that ESI's total exposure
will
be reduced by at least $4.2 million because
of
inconsistencies between the FERC's SECA order and the transmission owners'
compliance filings (representing the difference between the amount ESI has
paid
for SECA charges and the amount that has been expensed as of December 31,
2005,
as discussed above). ESI anticipates settling a significant portion of its
SECA
matters through vendor negotiations in the first half of 2006 and reached
a
$1 million settlement agreement with one of its vendors in January 2006.
Resolution of issues to be raised in the SECA hearing offer the possibility
of
further reductions in ESI's exposure, but the extent is unknown at present.
Through existing contracts, ESI has the ability to pass a portion of the
SECA
charges on to customers and has been doing so. Since SECA is a transition
charge
ending on March 31, 2006, it does not directly impact ESI's long-term
competitiveness.
The
SECA is also an
issue for WPSC and UPPCO, who have intervened and protested a number of
proposals in this docket because those proposals could result in unjust,
unreasonable, and discriminatory charges for electric customers. It is
anticipated that most of the SECA charges and any refunds will be passed
to
customers through rates.
Coal
Supply
In
May 2005, WPSC received notification from its coal transportation suppliers
that
extensive maintenance was required on the railroad tracks that lead into
and out
of the Powder River Basin in Wyoming. The extensive maintenance ended on
November 23, 2005. During the maintenance efforts, WPSC received approximately
87% of its expected coal deliveries. WPSC took steps to conserve coal usage
and
secured alternative coal supplies at its affected generation facilities during
that time. On September 23, 2005, the PSCW approved WPSC's request for
deferred treatment of the incremental fuel costs resulting from the coal
supply
issues. As of December 31, 2005, $6.4 million was deferred related to
this matter. These costs are expected to be addressed in WPSC's next retail
electric rate case.
The
Union Pacific
Railroad experienced a number of force majeure events in December 2005 and
January 2006, including a software conversion problem and heavy snow falls.
WPSC
is closely monitoring the delivery of coal to its power plants and is analyzing
options to be prepared if future coal deliveries are constrained.
Income
Taxes
-American
Jobs
Creation Act of 2004-
On
October 22, 2004, the President of the United States signed into law the
American Jobs Creation Act of 2004 (2004 Jobs Act). The 2004 Jobs Act introduces
a new tax deduction, the "United States production activities deduction."
This domestic production provision allows as a deduction an amount equal
to a
specified percent of the lesser of the qualified production activities income
of
the taxpayer for the taxable year or taxable income for the taxable year.
The
deduction is phased in, providing a deduction of 3% of income through 2006,
6%
of income through 2009, and 9% of income after 2009. On December 8, 2004,
the PSCW issued an order authorizing WPSC to defer the revenue requirements
impacts resulting from the 2004 Jobs Act. WPSC has recorded the estimated
tax
impact of this deduction in its financial statements for the year ended
December 30, 2005. However, the majority of the tax benefits derived were
deferred and will be passed on to customers in future rates.
-Section
29 Federal
Tax Credits-
We
have significantly reduced our consolidated federal income tax liability
through
tax credits available to us under Section 29 of the Internal Revenue Code
for
the production and sale of solid synthetic fuel from coal. These tax credits
are
scheduled to expire at the end of 2007 and are provided as an incentive for
taxpayers to produce fuel from alternate sources and reduce domestic dependence
on imported oil. This incentive is not deemed necessary if the price of oil
increases sufficiently to provide a natural market for the fuel. Therefore,
the
tax credits in a given year are subject to phase out if the annual average
reference price of oil within that year exceeds a minimum threshold price
set by
the Internal Revenue Service (IRS) and are eliminated entirely if the average
annual reference price increases beyond a maximum threshold price set by
the
IRS. The reference price of a barrel of oil is an estimate of the annual
average
wellhead price per barrel for domestic crude oil, which has in recent history
been approximately $6 below the NYMEX price of a barrel of oil. The threshold
price at which the credit begins to phase out was set in 1980 and is adjusted
annually for inflation; the IRS releases the final numbers for a given year
in
the first part of the following year.
Numerous
events
have increased domestic crude oil prices, including concerns about terrorism,
storm-related supply disruptions, and worldwide demand. Therefore, in order
to
manage exposure to the risk of an increase in oil prices that could reduce
the
amount of Section 29 federal tax credits that could be recognized, ESI entered
into a series of derivative contracts, beginning in the first quarter of
2005,
covering a specified number of barrels of oil. While no apparent phase-out
of
Section 29 federal tax credits occurred in 2005, ESI had mitigated essentially
all of its 2005 phase-out risk at no net cost. Through optimization strategies,
ESI realized a $0.3 million gain on oil options entered into to mitigate
the 2005 phase-out risk, net of premium amortization. If no phase-out were
to
occur in 2006 and 2007, ESI would expect to recognize approximately
$24 million of Section 29 federal tax credits in each of the next two
years. Based upon forward oil prices, we are anticipating significant phase-outs
of 2006 and 2007 Section 29 federal tax credits. However, we cannot predict
with
certainty the future price of a barrel of oil and, therefore, have no way
of
knowing what portion of our tax credits will be phased out, or if any phase
out
will result. Based upon the average annual NYMEX price of a barrel of oil,
ESI
estimates that Section 29 federal tax credits will begin phasing out if the
annual average NYMEX price of a barrel of oil reaches approximately $60,
with a
total phase out if the annual average NYMEX price of a barrel of oil reaches
approximately $73.
At
December 31, 2005, ESI had derivative contracts that mitigate substantially
all of the Section 29 tax credit exposure in 2006 and 40% of the exposure
in
2007. The derivative contracts involve purchased and written call options
that
provide for net cash settlement at expiration based on the average NYMEX
trading
price of oil in relation to the strike price of each option. Premiums paid
for
options to mitigate exposure to Section 29 federal tax credit phase out in
2006
and 2007 totaled $15.3 million ($12.0 million for 2006 options and
$3.3 million for 2007 options), all of which are recorded as risk
management assets on the balance sheet. Essentially, ESI has paid
$12.0 million for options ($7.2 million after-tax) to protect the
value of approximately $24 million of tax credits in 2006 and
$3.3 million for options ($2.0 million after-tax) to protect the value
of approximately $10 million of tax credits in 2007. ESI has not hedged
$14 million of 2007 tax credits; however, ESI will continue to look for
opportunities to mitigate the exposure on the remaining 2007 tax credits.
As
annual average oil prices become more transparent and if opportunities arise,
ESI will also look for ways to lower its investment in derivative instruments
utilized to protect its Section 29 federal tax credits. The derivative contracts
have not been designated as hedging instruments and, as a result, changes
in the
fair value of the options are recorded currently in earnings. This could
result
in mark-to-market gains being recognized in earnings in different periods,
compared to the offsetting tax credit phase-outs. For example, as of
December 31, 2005, unrealized pre-tax mark-to-market gains of
$4.0 million and $4.4 million were recorded for the 2006 and 2007
options, respectively, while no tax credit phase-out was recognized because
2006
and 2007 tax credits are not recognized until fuel is produced and sold in
those
periods. In 2006, ESI will only record Section 29 federal tax credits expected
to be recognized, based upon the expected annual average price of a barrel
of
oil.
In
addition to exposure to federal tax credits, ESI has also historically received
royalties tied to the amount of synthetic fuel produced as well as variable
payments from a counterparty related to its 30% sell-down of ECO Coal
Pelletization #12 in 2002. Royalties and variable payments contributed
$7.1 million, $7.6 million, and $5.9 million to income before
taxes in 2005, 2004, and 2003, respectively. Royalties and variable payments
received in 2006 and 2007 could decrease if a phase-out occurs and synthetic
fuel production is reduced.
The
following table
shows the total impact ESI's investment in the synthetic fuel production
facility had on the Consolidated Statements of Income. See Note 6, "Acquisitions
and Sales of Assets,"
in
WPS Resources Notes to Consolidated Financial Statements for more
information on these items.
Amounts
are pre-tax, except tax credits
|
|
Income
(loss)
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
Provision
for
income taxes:
|
|
|
|
|
|
|
|
|
|
|
Section
29
federal tax credits recognized
|
|
$
|
26.1
|
|
$
|
27.8
|
|
$
|
18.2
|
|
|
|
|
|
|
|
|
|
|
|
|
Miscellaneous
income:
|
|
|
|
|
|
|
|
|
|
|
Operating
losses - synthetic fuel facility
|
|
|
(16.8
|
)
|
|
(14.1
|
)
|
|
(15.5
|
)
|
Variable
payments received
|
|
|
3.6
|
|
|
3.5
|
|
|
3.3
|
|
Royalty
income recognized
|
|
|
3.5
|
|
|
4.1
|
|
|
2.6
|
|
Deferred
gain
recognized
|
|
|
2.3
|
|
|
2.3
|
|
|
2.3
|
|
Interest
received on fixed note receivable
|
|
|
1.2
|
|
|
1.7
|
|
|
2.0
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
4.7
|
|
|
3.4
|
|
|
5.6
|
|
-Peshtigo
River
Land Donation-
In
2004, WPS Resources submitted a request to have the IRS conduct a
pre-filing review of a tax position related to its 2004 tax return. The tax
position related to the value of the Peshtigo River land donated to the WDNR
in
2004. A pre-filing review of the land donation deduction was initiated by
the
IRS in the first quarter of 2005; however, in the second quarter,
WPS Resources and the IRS mutually agreed to withdraw this issue from the
pre-filing review process, citing an inability to reach a consensus on the
tax
treatment and value of the land donated. In 2004, WPS Resources recorded a
$4.1 million income tax benefit related to the Peshtigo River land
donation. We believe our position is appropriate and will pursue this matter
if
challenged by the IRS upon examination of the tax return.
Environmental
See
Note 17,
"Commitments
and
Contingencies,"
in
WPS Resources' Notes to Consolidated Financial Statements for a detailed
discussion of environmental considerations.
Energy
and
Capacity Prices
Prices
for electric
energy and capacity have been extremely volatile over the past three years.
WPS Resources' nonregulated entities are impacted by this volatility, which
has been driven by the exit of many of the largest speculative traders,
equilibrium between natural gas supply and demand, changes in the economy,
and
significant overbuilding of generation capacity.
Increased
natural
gas prices for fuel used in electric generation have caused current electric
energy prices to increase significantly. Electric capacity prices, however,
are
expected to be depressed for several years. Pressure on capacity prices will
continue until existing reserve margins are depleted either by load growth
or
capacity retirements. Market structure changes could also significantly
influence capacity prices. ESI's generation facilities have been negatively
impacted by the depressed capacity prices; however, certain plants within
ESI
have been positively impacted by the high energy prices discussed above.
Midwest
Independent Transmission System Operator
WPSC,
UPPCO, and
ESI are members of the MISO, which introduced its "Day 2" energy markets
on
April 1, 2005, when it began centrally dispatching wholesale electricity
along with providing transmission service throughout much of the Midwest.
The
new market is based on a locational marginal pricing system, which is similar
to
that used by the PJM regional transmission organization. The pricing mechanism
expands the existing market from a physical market to also include financial
instruments and is intended to send price signals to stakeholders where
generation or transmission system expansion is needed. Based upon the early
results of the transition, it does not appear that the new market will have
a
material ongoing impact on the financial results of WPS Resources.
WPS Resources will continue to work closely with the MISO and the FERC to
ensure that any issues are dealt with such that any adverse financial impacts
continue to be minimal. WPSC has been granted approval by the PSCW to defer
most
costs and benefits related to the new market for inclusion in future rates
for
its Wisconsin retail electric customers. Most costs and benefits related
to
WPSC's and UPPCO's Michigan and wholesale electric customers will also flow
through fuel adjustment mechanisms.
Although
the market
is running well so far, there are still market issues that must be resolved.
MISO Day 2 has the potential to significantly impact the cost of
transmission for eastern Wisconsin and the Upper Peninsula of Michigan system,
including WPSC and UPPCO, as well as our marketing affiliates in the MISO
footprint, such as ESI. Under this market-based approach, where there is
abundant transmission capacity, overall costs should be less due to the ability
to access cheaper generation from across the MISO footprint. For areas with
narrowly constrained transmission capacity, such as Wisconsin and the
Upper Peninsula of Michigan, costs could be higher due to the congestion
and marginal loss pricing components. For the utilities in eastern Wisconsin
and
the Upper Peninsula of Michigan, mechanisms have been deployed to offset
these
potential increased costs in the first five years of the Day 2 market. If
the
market works appropriately, the costs to ESI, excluding the SECA (discussed
above), should be similar to the pre-Day 2 market costs. If there are
incremental costs or savings to WPSC and UPPCO, they will be passed through
to
our customers under existing tariffs. WPSC and UPPCO received approval from
their respective commissions to defer costs associated with implementation
of
the MISO Day 2 market ($21.2 million has been deferred through December 31,
2005); however, WPSC and UPPCO face regulatory risk associated with being
able
to collect these costs from customers in future periods.
WPSC
has
established an energy market risk policy and a risk management plan to
facilitate utilization of financial instruments for managing market risks
associated with the Day 2 energy market. The PSCW has approved this plan,
allowing WPSC to pass the costs and benefits of several specific risk management
strategies through the PSCW's fuel rules, deferral, or escrow processes.
As of
December 31, 2005, risk mitigation opportunities have been limited due to
the current high price of energy.
MISO
participants
offer their generation and bid their demand into the market on an hourly
basis.
This results in net receipts from or net obligations to MISO for each hour
of
each day. MISO aggregates these hourly transactions and currently provides
updated settlement statements to market participants 7, 14, 55, 105, and
155
days after each operating day. MISO also indicated that it may begin performing
a 365-day settlement run on April 1, 2006. The 365-day settlement statements
could continue until all operating day transactions from April 1, 2005 through
August 31, 2005 have been resettled. These updated settlement statements
may
reflect billing adjustments, resulting in an increase or decrease to the
net
receipt from or net obligation to MISO, which may or may not be recovered
through the rate recovery process. These updated settlement statements and
related charges may be disputed by market participants.
At
the end of each month, the amount due from or payable to MISO is estimated
for
those operating days where a 7-day settlement statement is not yet available,
thus significant changes in the estimates and new information provided by
MISO
in subsequent settlement statements could have a material impact on our results
of operations.
New Accounting
Pronouncements
See
Note 1(w),
"New
Accounting
Pronouncements,"
in
WPS Resources' Notes to Consolidated Financial Statements for a detailed
discussion of new accounting pronouncements.
GUARANTEES
AND OFF BALANCE SHEET ARRANGEMENTS - WPS RESOURCES
See
Note 18,
"Guarantees,"
in
WPS Resources' Notes to Consolidated Financial Statements for information
regarding guarantees.
See
Note 24,
"Variable
Interest Entities,"
in
WPS Resources' Notes to the Consolidated Financial Statements for
information on the implementation of FASB Interpretation No. 46R.
MARKET
PRICE RISK MANAGEMENT ACTIVITIES - WPS RESOURCES
Market
price risk
management activities include the electric and natural gas marketing and
related
risk management activities of ESI. ESI's marketing and trading operations
manage
power and natural gas procurement as an integrated portfolio with its retail
and
wholesale sales commitments. Derivative instruments are utilized in these
operations. ESI measures the fair value of derivative instruments (including
NYMEX exchange and over-the-counter contracts, options, natural gas and electric
power physical fixed price contracts, basis contracts, and related financial
instruments) on a mark-to-market basis. The fair value of derivatives are
shown
as assets or liabilities from risk management activities on WPS Resources'
Consolidated Balance Sheets.
The
offsetting
entry to assets or liabilities from risk management activities is to other
comprehensive income or earnings, depending on the use of the derivative,
how it
is designated, and if it qualifies for hedge accounting. The fair values
of
derivative instruments are adjusted each reporting period using various market
sources and risk management systems. The primary input for natural gas and
oil
pricing is the settled forward price curve of the NYMEX exchange, which includes
outright contracts and options. Basis pricing is derived from published indices
and documented broker quotes. ESI bases electric prices on published indices
and
documented broker quotes. The following table provides an assessment of the
factors impacting the change in the net value of ESI's assets and liabilities
from risk management activities for the year ended December 31,
2005.
ESI
Mark-to-Market
Roll Forward (Millions)
|
|
Oil
Options
|
|
Natural
Gas
|
|
Electric
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of
contracts at January 1, 2005
|
|
$
|
-
|
|
$
|
31.6
|
|
$
|
13.7
|
|
$
|
45.3
|
|
Less
contracts realized or settled during period
|
|
|
-
|
|
|
(26.6
|
)
|
|
(4.9
|
)
|
|
(31.5
|
)
|
Plus
changes
in fair value of contracts in existence at December 31,
2005
|
|
|
23.6
|
|
|
(50.0
|
)
|
|
11.211.9
|
|
|
(15.2
|
)
|
Fair
value of
contracts at December 31, 2005
|
|
$
|
23.6
|
|
$
|
8.2
|
|
$
|
29.8
|
|
$
|
61.6
|
|
The
fair value of
contracts at January 1, 2005, and December 31, 2005, reflects the
values reported on the balance sheet for net mark-to-market current and
long-term risk management assets and liabilities as of those dates. Contracts
realized or settled during the period includes the value of contracts in
existence at January 1, 2005, that were no longer included in the net
mark-to-market assets as of December 31, 2005, along with the amortization
of those derivatives later designated as normal purchases and sales under
SFAS
No. 133. Changes in fair value of existing contracts include unrealized gains
and losses on contracts that existed at January 1, 2005, and contracts that
were
entered into subsequent to January 1, 2005, which are included in ESI's
portfolio at December 31, 2005. There were, in many cases, offsetting
positions entered into and settled during the period resulting in gains or
losses being realized during the current period. The realized gains or losses
from these offsetting positions are not reflected in the table
above.
Market
quotes are
more readily available for short duration contracts. The table below shows
the
sources of fair value and maturity of ESI's risk management instruments.
ESI
Risk
Management Contract Aging at Fair Value
As
of
December 31, 2005
|
|
|
|
|
|
|
|
|
|
Source
of
Fair Value (Millions)
|
|
Maturity
Less
Than
1
Year
|
|
Maturity
1 to
3
Years
|
|
Maturity
4 to 5
Years
|
|
Maturity
in
Excess
of
5
Years
|
|
Total
Fair
Value
|
|
Prices
actively quoted
|
|
$
|
(6.6
|
)
|
$
|
9.0
|
|
$
|
1.1
|
|
$
|
-
|
|
$
|
3.5
|
|
Prices
provided by external sources
|
|
|
30.1
|
|
|
20.4
|
|
|
7.5
|
|
|
-
|
|
|
58.0
|
|
Prices
based
on models and other valuation methods
|
|
|
0.1
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
0.1
|
|
Total
fair
value
|
|
$
|
23.6
|
|
$
|
29.4
|
|
$
|
8.6
|
|
$
|
-
|
|
$
|
61.6
|
|
We
derive the pricing for most contracts in the above table from active quotes
or
external sources. "Prices actively quoted" includes exchange traded contracts
such as NYMEX contracts and basis swaps. "Prices provided by external sources"
includes electric and natural gas contract positions for which pricing
information, used by ESI to calculate fair value, is obtained primarily through
broker quotes and other publicly available sources. "Prices based on models
and
other valuation methods" includes electric contracts for which reliable external
pricing information does not exist.
ESI
employs a
variety of physical and financial instruments offered in the marketplace
to
limit risk exposure associated with fluctuating commodity prices and volumes,
enhance value, and minimize cash flow volatility. However, the application
of
SFAS No. 133 and its related hedge accounting rules causes ESI to experience
earnings volatility associated with electric and natural gas operations,
as well
as oil options utilized to protect the value of a portion of ESI's Section
29
federal tax credits. While risks associated with power generating capacity
and
power and natural gas sales are economically hedged, certain transactions
do not
meet the definition of a derivative or do not qualify for hedge accounting
under
generally accepted accounting principles. Consequently, gains and losses
from
these positions may not match with the related physical and financial hedging
instruments in some reporting periods. The result can cause volatility in
ESI's
reported period-by-period earnings; however, the financial impact of this
timing
difference will reverse at the time of physical delivery and/or settlement.
The
accounting treatment does not impact the underlying cash flows or economics
of
these transactions. See "Results
of
Operations -
WPS Resources" above
for
information regarding earnings volatility caused by the natural gas storage
cycle.
CRITICAL
ACCOUNTING POLICIES - WPS RESOURCES
We
have identified the following accounting policies to be critical to the
understanding of our financial statements because their application requires
significant judgment and reliance on estimations of matters that are inherently
uncertain. WPS Resources' management has discussed these critical
accounting policies with the Audit Committee of the Board of Directors.
Risk
Management Activities
WPS Resources
has entered into contracts that are accounted for as derivatives under the
provisions of SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended. At December 31, 2005, those derivatives not
designated as hedges are primarily commodity contracts used to manage price
risk
associated with natural gas and electricity purchase and sale activities,
as
well as oil options used to manage exposure to the risk of an increase in
oil
prices that could reduce the amount of Section 29 federal tax credits we
could
recognize from ESI's investment in a synthetic fuel production facility.
Cash
flow hedge accounting treatment may be used when WPS Resources contracts to
buy or sell a commodity at a fixed price for future delivery to protect future
cash flows corresponding with anticipated physical sales or purchases. Fair
value hedge accounting may be used when WPS Resources holds assets or firm
commitments and enters into transactions that hedge the risk that
the
price of a
commodity may change between the contract's inception and the physical delivery
date of the commodity. To the extent that the hedging instrument is fully
effective in offsetting the transaction being hedged, there is no impact
on
income available for common shareholders prior to settlement of the hedge.
In
addition, WPS Resources may apply the normal purchases and sales exception,
provided by SFAS No. 133, as amended, to certain contracts. The normal purchases
and sales exception provides that recognition of the contract's fair value
in
the Consolidated Financial Statements is not required until the settlement
of
the contract.
Derivative
contracts that are determined to fall within the scope of SFAS No. 133, as
amended, are recorded at fair value on the Consolidated Balance Sheets of
WPS Resources. Changes in fair value, except those related to derivative
instruments designated as cash flow hedges, are generally included in the
determination of income available for common shareholders at each financial
reporting date until the contracts are ultimately settled. When available,
quoted market prices are used to determine a contract's fair value. If no
active
trading market exists for a commodity or for a contract's duration, fair
value
is estimated through the use of internally developed valuation techniques
or
models using external information wherever possible. Such estimates require
significant judgment as to assumptions and valuation methodologies deemed
appropriate by WPS Resources' management. As a component of the fair value
determination, WPS Resources maintains operating reserves to account for
the estimated direct costs of servicing and holding certain of its contracts
based upon administrative costs, counterparty credit risk, and liquidity
risk.
The effect of changing the underlying assumptions for these operating reserves
is as follows:
Change
in
Assumption
|
Effect
on
Operating Reserve at December 31, 2005 (Millions)
|
100%
increase
|
$15.0
increase
|
50%
decrease
|
$
(7.5)
decrease
|
These
potential
changes to the operating reserve would be included in current and long-term
liabilities from risk management activities on the Consolidated Balance Sheets
and as part of the nonregulated cost of fuel, gas and purchased power on
the
Consolidated Statements of Income unless the related contracts are designated
as
cash flow hedges, in which case potential changes would be included in Other
Comprehensive Income - Cash Flow Hedges on the Consolidated Statements of
Common
Shareholders' Equity.
Asset
Impairment
WPS Resources
annually reviews its assets for impairment. SFAS No. 144, "Accounting for
the Impairment and Disposal of Long-Lived Assets," and SFAS No. 142,
"Goodwill and Other Intangible Assets," form the basis for these analyses.
The
review for
impairment of tangible assets is more critical to ESI than to our other segments
because of its significant investment in property, plant, and equipment and
lack
of access to regulatory relief that is available to our regulated segments.
At
December 31, 2005, the carrying value of ESI's property, plant, and
equipment totaled $141.6 million. We believe that the accounting estimate
related to asset impairment of power plants is a "critical accounting estimate"
because: (1) the estimate is susceptible to change from period to period
because it requires management to make assumptions about future market sales
pricing, production costs, capital expenditures, and generation volumes and
(2) the impact of recognizing an impairment could be material to our
financial position or results of operations. Management's assumptions about
future market sales prices and generation volumes require significant judgment
because actual market sales prices and generation volumes have fluctuated
in the
past as a result of changing fuel costs, environmental changes, and required
plant maintenance and are expected to continue to do so in the future.
The
primary
estimates used at ESI in the impairment analysis are future revenue streams
and
operating costs. A combination of inputs from both internal and external
sources
is used to project revenue streams. ESI forecasts future operating costs
with
input from external sources for fuel costs and forward
energy
prices.
These estimates are modeled over the projected remaining life of the power
plants using the methodology defined in SFAS No. 144. ESI evaluates
property, plant, and equipment for impairment whenever indicators of impairment
exist. These indicators include a significant underperformance of the assets
relative to historical or projected future operating results, a significant
change in the use of the assets or business strategy related to such assets,
and
significant negative industry or economic trends. SFAS No. 144 requires that
if
the sum of the undiscounted expected future cash flows from a company's asset
is
less than the carrying value of the asset, an asset impairment must be
recognized in the financial statements. For assets held for sale, impairment
charges are recorded if the carrying value of such assets exceeds the estimated
fair value less costs to sell. The amount of impairment recognized is calculated
by reducing the carrying value of the asset to its fair value.
Throughout
2005,
ESI tested its power plants for impairment whenever events or changes in
circumstances indicated that their carrying amount might not be recoverable.
There was an impairment charge recorded on the Sunbury plant in 2005 (see
Note
4, "Sunbury
Plant,"
in
WPS Resources' Notes to Consolidated Financial Statements for more
information). No other impairment charges were recorded in 2005 as a result
of
the recoverability tests. Results of past impairment tests may not necessarily
be an indicator of future tests given the criticality of the accounting
estimates involved, as discussed more fully above. Changes in actual results
or
assumptions could result in an impairment.
WPSC
recorded
goodwill of $36.4 million in its gas utility segment following the merger
of Wisconsin Fuel and Light into WPSC in 2001. The goodwill is tested for
impairment annually based on the guidance of SFAS No. 142. The test for
impairment includes assumptions about future profitability of the gas utility
segment and the correlation between our gas utility segment and published
projections for other similar gas utility segments. A significant change
in the
natural gas utility market and/or our projections of future profitability
could
result in a loss being recorded on the income statement related to a decrease
in
the goodwill asset as a result of the impairment test.
Receivables
and Reserves
Our
regulated
natural gas and electric utilities and ESI accrue estimated amounts of revenue
for services rendered but not yet billed. Estimated unbilled sales are
calculated using actual generation and throughput volumes, recorded sales,
and
weather factors. The estimated unbilled sales are assigned different rates
based
on historical customer class allocations. At December 31, 2005 and 2004,
the amount of unbilled revenues was $151.3 million and $113.2 million,
respectively. Any difference between actual sales and the estimates or weather
factors would cause a change in the estimated revenue.
WPS Resources
records reserves for potential uncollectible customer accounts as an expense
on
the income statement and an uncollectible reserve on the balance sheet. WPSC,
however, records a regulatory asset to offset its uncollectible reserve.
Because
the nonregulated energy marketing business involves higher credit risk, the
reserve is more critical to ESI than to our other segments. At ESI, the reserve
is based on historical uncollectible experience and specific customer
identification where practical. If the assumption that historical uncollectible
experience matches current customer default is incorrect, or if a specific
customer with a large account receivable that has not previously been identified
as a risk defaults, there could be significant changes to the expense and
uncollectible reserve balance.
Pension
and
Postretirement Benefits
The
costs of
providing non-contributory defined benefit pension benefits and other
postretirement benefits, described in Note 19, "Employee
Benefit Plans,"
in
WPS Resources' Notes to Consolidated Financial Statements, are dependent
upon numerous factors resulting from actual plan experience and assumptions
regarding future experience.
Pension
costs and
other postretirement benefit costs are impacted by actual employee demographics
(including age, compensation levels, and employment periods), the level of
contributions we make to the plan, and earnings on plan assets. Pension and
other postretirement benefit costs may be significantly affected by changes
in
key actuarial assumptions, including anticipated rates of return on plan
assets,
discount
rates used
in determining the projected benefit and other postretirement benefit obligation
and pension and other postretirement benefit costs, and health care cost
trends.
Changes made to the plan provisions may also impact current and future pension
and other postretirement benefit costs.
WPS Resources'
pension plan assets and other postretirement benefit plan assets are primarily
made up of equity and fixed income investments. Fluctuations in actual equity
market returns as well as changes in general interest rates may result in
increased or decreased pension costs in future periods. Management believes
that
such changes in costs would be recovered at our regulated segments through
the
ratemaking process.
The
following chart
shows how a given change in certain actuarial assumptions would impact the
projected benefit obligation, the net amount recognized on the balance sheet,
and the reported annual pension cost on the income statement as they relate
to
all of our defined benefit pension plans. Each factor below reflects an
evaluation of the change based on a change in that assumption only.
Actuarial
Assumption
(Millions,
except percentages)
|
|
Percent
Change
in
Assumption
|
|
Impact
on
Projected
Benefit
Obligation
|
|
Impact
on
Net
Amount
Recognized
|
|
Impact
on
Pension
Cost
|
|
Discount
rate
|
|
|
(0.5
|
)
|
$
|
45.0
|
|
$
|
(4.1
|
)
|
$
|
4.1
|
|
Discount
rate
|
|
|
0.5
|
|
|
(42.5
|
)
|
|
4.0
|
|
|
(4.0
|
)
|
Rate
of
return on plan assets
|
|
|
(0.5
|
)
|
|
N/A
|
|
|
(2.6
|
)
|
|
2.6
|
|
Rate
of
return on plan assets
|
|
|
0.5
|
|
|
N/A
|
|
|
2.6
|
|
|
(2.6
|
)
|
The
following chart
shows how a given change in certain actuarial assumptions would impact the
projected other postretirement benefit obligation, the reported other
postretirement benefit liability on the balance sheet, and the reported annual
other postretirement benefit cost on the income statement. Each factor below
reflects an evaluation of the change based on a change in that assumption
only.
Actuarial
Assumption
(Millions,
except percentages)
|
|
Percent
Change in Assumption
|
|
Impact
on
Postretirement Benefit Obligation
|
|
Impact
on
Postretirement Benefit Liability
|
|
Impact
on
Postretirement Benefit Cost
|
|
Discount
rate
|
|
|
(0.5
|
)
|
$
|
20.6
|
|
$
|
(2.2
|
)
|
$
|
2.2
|
|
Discount
rate
|
|
|
0.5
|
|
|
(18.2
|
)
|
|
1.9
|
|
|
(1.9
|
)
|
Health
care
cost trend rate
|
|
|
(1.0
|
)
|
|
(33.0
|
)
|
|
5.4
|
|
|
(5.4
|
)
|
Health
care
cost trend rate
|
|
|
1.0
|
|
|
37.0
|
|
|
(6.0
|
)
|
|
6.0
|
|
Rate
of
return on plan assets
|
|
|
(0.5
|
)
|
|
N/A
|
|
|
(0.7
|
)
|
|
0.7
|
|
Rate
of
return on plan assets
|
|
|
0.5
|
|
|
N/A
|
|
|
0.7
|
|
|
(0.7
|
)
|
In
selecting an assumed discount rate, we use the Mercer Pension Discount Yield
Curve, which considers bonds, rated by Moody's as "Aa" or better, selected
from
the Lehman Brothers database that are non-callable. Regression analysis is
applied to construct a best-fit curve that makes coupon yields to maturity
a
function of time to maturity. The pension or retiree medical cash flows are
then
matched to the appropriate spot rates and discounted back to the measurement
date.
To
select an assumed long-term rate of return on qualified plan assets, we consider
the historical returns and the future expectations for returns for each asset
class, as well as the target allocation of the benefit trust portfolios.
The
assumed long-term rate of return was 8.5% in 2005 and 8.75% in 2004 and 2003.
For 2005, the actual return on plan assets, net of fees, was a gain of
$39.7 million. The actual return on plan assets, net of fees, was a gain of
$54.5 million and $92.7 million in 2004 and 2003, respectively.
We
base our determination of the expected return on qualified plan assets on
a
market-related valuation of assets, which reduces year-to-year volatility.
Cumulative gains and losses in excess of 10% of the greater of the pension
benefit obligation or market-related value are amortized over the average
remaining future service to expected retirement ages. Realized and unrealized
gains and losses are
recognized
over a
five-year period. Because of this method, the future value of assets will
be
impacted as previously deferred gains or losses are recorded.
In
selecting assumed health care cost trend rates, we consider past performance
and
forecasts of health care costs. More information on health care cost trend
rates
can be found in Note 19, "Employee
Benefit Plans,"
in
WPS Resources' Notes to Consolidated Financial Statements.
For
a table showing
future payments that WPS Resources expects to make for pension and other
postretirement benefits, see Note 19, "Employee
Benefit Plans,"
in
WPS Resources' Notes to Consolidated Financial Statements.
Regulatory
Accounting
The
electric and
gas utility segments of WPS Resources follow SFAS No. 71, "Accounting for
the Effects of Certain Types of Regulation," and our financial statements
reflect the effects of the different ratemaking principles followed by the
various jurisdictions regulating these segments. We defer certain items that
would otherwise be immediately recognized as expenses and revenues because
our
regulators have authorized deferral as regulatory assets and regulatory
liabilities for future recovery or refund to customers. Future recovery of
regulatory assets is not assured, but is generally subject to review by
regulators in rate proceedings for matters such as prudence and reasonableness.
Management regularly assesses whether these regulatory assets and liabilities
are probable of future recovery or refund by considering factors such as
regulatory environment changes, earnings at the utility segments, and the
status
of any pending or potential deregulation legislation. Once approved, we amortize
the regulatory assets and liabilities into income over the rate recovery
period.
If recovery of costs is not approved or is no longer deemed probable, these
regulatory assets or liabilities are recognized in current period
income.
If
our regulated electric and gas utility segments no longer meet the criteria
for
application of SFAS No. 71, we would discontinue its application as defined
under SFAS No. 101, "Regulated Enterprises - Accounting for the
Discontinuation of Application of SFAS No. 71." Assets and liabilities
recognized solely due to the actions of rate regulation would no longer be
recognized on the balance sheet and would be classified as an extraordinary
item
in income for the period in which the discontinuation occurred. A write-off
of
all WPS Resources' regulatory assets and regulatory liabilities at
December 31, 2005, would result in a 5.0% decrease in total assets, a 9.1%
decrease in total liabilities, and a 48.5% increase in income before
taxes.
Tax
Provision
As
part of the process of preparing our Consolidated Financial Statements, we
are
required to estimate our income taxes for each of the jurisdictions in which
we
operate. This process involves estimating our actual current tax exposure
together with assessing temporary differences resulting from differing treatment
of items, such as depreciation, for tax and accounting purposes. These
differences result in deferred tax assets and liabilities, which are included
within our Consolidated Balance Sheet. We must also assess the likelihood
that
our deferred tax assets will be recovered from future taxable income and,
to the
extent we believe that recovery is not likely, we must establish a valuation
allowance, which is offset by an expense within the tax provisions in the
income
statement.
Significant
management judgment is required in determining our provision for income taxes,
our deferred tax assets and liabilities, and any valuation allowance recorded
against our deferred tax assets. The assumptions involved are supported by
historical data and reasonable projections. Significant changes in these
assumptions could have a material impact on WPS Resources' financial
condition and results of operations.
IMPACT
OF
INFLATION - WPS RESOURCES
Our
financial
statements are prepared in accordance with accounting principles generally
accepted in the United States of America and report operating results in
terms of historic cost. The statements provide a reasonable, objective, and
quantifiable statement of financial results; but they do not evaluate the
impact
of inflation. Under rate treatment prescribed by utility regulatory commissions,
WPSC's and UPPCO's projected operating costs are recoverable in revenues.
Because rate forecasting assumes inflation, most of the inflationary effects
on
normal operating costs are recoverable in rates. However, in these forecasts,
WPSC and UPPCO are only allowed to recover the historic cost of plant via
depreciation. Our nonregulated businesses include inflation in forecasted
costs.
However, any increase from inflation is offset with projected business growth.
Therefore, the estimated effect of inflation on our nonregulated businesses
is
minor.
WPSC
is a regulated
electric and natural gas utility as well as a holding company. Electric
operations accounted for approximately 64% of revenues in 2005, while natural
gas operations contributed 36% to 2005 revenues.
2005
Compared with 2004
WPSC
Overview
WPSC's
results of
operations for the years ended December 31 are shown in the following
table:
WPSC's
Results
(Millions)
|
|
2005
|
|
2004
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
|
$
|
1,454.9
|
|
$
|
1,222.1
|
|
|
19.0
|
%
|
Earnings
on
common stock
|
|
$
|
81.4
|
|
$
|
104.8
|
|
|
(22.3
|
%)
|
Electric
utility
revenue increased $131.7 million (16.4%), largely due to an approved
electric rate increase for WPSC's Wisconsin retail customers and an increase
in
electric sales volumes. Gas utility revenue increased $101.1 million
(24.0%) due to an increase in the per-unit cost of natural gas, higher natural
gas throughput volumes, and an approved rate increase. Revenue changes by
reportable segment are discussed in more detail below.
WPSC's
earnings on
common stock were $81.4 million for the year ended December 31, 2005,
compared to $104.8 million for the year ended December 31, 2004. As
discussed in more detail below, the following factors negatively impacted
earnings for the year ended December 31, 2005, compared to the same period
in 2004.
·
|
Electric
utility earnings decreased $5.1 million for the year ended
December 31, 2005, compared to 2004. Electric utility earnings were
negatively impacted by fuel and purchased power costs that were
$13.7 million in excess of what WPSC was allowed to recover from its
customers due to inefficiencies in the fuel recovery process
($10 million related to retail customers and $3.7 million
related to wholesale customers). In addition, the PSCW's ruling
in the
2006 rate case, which disallowed recovery of costs that were deferred
related to the 2004 Kewaunee outage and a portion of the loss on
the
Kewaunee sale, resulted in the write-off of $13.7 million of
regulatory assets.
|
·
|
Natural
gas
utility earnings decreased $4.1 million, driven by higher operating
and maintenance expenses and higher depreciation
expense.
|
·
|
Pre-tax
gains
on land sales at WPSC decreased $15.0 million in 2005, compared to
2004. WPSC recognized pre-tax land sale gains of $4.6 million in
2005, compared to pre-tax land sale gains of $19.6 million in
2004.
|
·
|
WPSC
recognized an income tax benefit in 2004 from the donation of land
to the
WDNR.
|
Electric
Utility Operations
Electric
Utility Results (Millions)
|
|
2005
|
|
2004
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
932.9
|
|
$
|
801.2
|
|
|
16.4
|
%
|
Fuel
and
purchased power
|
|
|
390.6
|
|
|
249.9
|
|
|
56.3
|
%
|
Margins
|
|
$
|
542.3
|
|
$
|
551.3
|
|
|
(1.6
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
Sales
in
kilowatt-hours
|
|
|
14,537.9
|
|
|
13,493.4
|
|
|
7.7
|
%
|
Electric
utility
revenue increased $131.7 million (16.4%) for the year ended
December 31, 2005, compared to the same period in 2004. Electric utility
revenue increased largely due to an approved
electric
rate
increase for WPSC's Wisconsin retail customers and an increase in electric
sales
volumes. On December 21, 2004, the PSCW approved a retail electric rate
increase of $60.7 million (8.6%), effective January 1, 2005. The rate
increase was required primarily to recover increased costs related to fuel
and
purchased power, the construction of the Weston 4 power plant, and benefit
costs. Electric sales volumes increased 7.7%, primarily due to significantly
warmer weather during the 2005 cooling season, compared to the same period
in
2004, and new power sales agreements that were entered into with wholesale
customers. As a result of the warm weather, WPSC set all-time records for
peak
electric demand in the second and third quarters of 2005.
The
electric
utility margin decreased $9.0 million (1.6%) for the year ended
December 31, 2005, compared to the year ended December 31, 2004,
largely driven by the sale of Kewaunee on July 5, 2005, and the related
power purchase agreement. Prior to the sale of Kewaunee, only nuclear fuel
expense was reported as a component of fuel and purchased power costs.
Subsequent to the sale, all payments to Dominion for power purchased from
Kewaunee are reported as a component of fuel and purchased power costs. These
include both variable payments for energy delivered and fixed payments. As
a
result of the sale, WPSC no longer incurs operating and maintenance expense,
depreciation and decommissioning expense, or interest expense for Kewaunee.
Excluding the $43.2 million of fixed payments made to Dominion in 2005,
WPSC's electric utility margin increased $34.2 million compared to 2004.
Excluding
the fixed
payments to Dominion, the increase in margin was primarily related to the
approved 2005 retail electric rate increase discussed above and the warm
summer
weather conditions, partially offset by higher fuel and purchased power costs
associated with high natural gas prices and the PSCW's disallowance of certain
costs in its decision on the 2006 rate case for WPSC (these costs were
previously approved for deferral). Fuel and purchased power costs incurred
in
2005 exceeded the amount recovered from ratepayers by $13.7 million (of
which $10 million related to Wisconsin retail customers and
$3.7 million related to wholesale customers), negatively impacting margin.
The increase in fuel and purchased power costs resulted primarily from the
destruction of certain natural gas production facilities in the Gulf of Mexico
by hurricanes in the third quarter of 2005, driving up the per-unit cost
of
natural gas used in generation. The quantity of power generated from WPSC's
natural gas-fired units was also up 162% over the prior year, driven by the
warm
summer weather conditions experienced during 2005, increased dispatch by
the
MISO for reliability purposes, and purchases through a power purchase agreement
from the Fox Energy Center (which began operating in June 2005). Certain
costs
related to the MISO were approved for deferral. Authorization was requested
from
the PSCW to defer increased natural gas costs related to the hurricanes,
but
this request was denied, leaving the Wisconsin fuel recovery mechanism as
the
only option for recovery. However, because of the way the Wisconsin fuel
recovery mechanism works, the $10 million increase in costs (primarily
related to the combination of rising natural gas prices caused by the hurricanes
and the increase in natural gas-fired generation) were essentially unrecoverable
since they were incurred late in the year. To mitigate the risk of unrecoverable
fuel costs in 2006 due to market price volatility, WPSC is employing risk
management techniques pursuant to its risk policy approved by the PSCW,
including the use of derivative instruments such as futures and options.
The
PSCW also disallowed recovery of $5.5 million of increased fuel and
purchased power costs related to an extended outage at Kewaunee in 2004,
resulting in this deferral being written off in the fourth quarter of 2005.
Electric
utility
earnings decreased $5.1 million (7.8%) for the year ended December 31,
2005, compared to 2004. The decrease in earnings resulted from the high fuel
and
purchased power costs that WPSC was unable to recover from its Wisconsin
retail
and wholesale customers, the PSCW's disallowance of previously deferred costs
related to Kewaunee, and an increase in operating and maintenance expenses.
Gas
Utility
Operations
Gas
Utility
Results (Millions)
|
|
2005
|
|
2004
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
522.0
|
|
$
|
420.9
|
|
|
24.0
|
%
|
Purchase
costs
|
|
|
397.4
|
|
|
301.9
|
|
|
31.6
|
%
|
Margins
|
|
$
|
124.6
|
|
$
|
119.0
|
|
|
4.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Throughput
in
therms
|
|
|
827.2
|
|
|
801.3
|
|
|
3.2
|
%
|
Gas
utility revenue
increased $101.1 million (24.0%) for the year ended December 31, 2005,
compared to 2004. Gas utility revenue increased primarily as a result of
an
increase in the per-unit cost of natural gas, a natural gas rate increase,
and
higher natural gas throughput volumes. Natural gas costs increased 24.6%
(on a
per-unit basis) for the year ended December 31, 2005, compared to 2004.
Following regulatory practice, WPSC passes changes in the total cost of natural
gas on to customers through a purchased gas adjustment clause, as allowed
by the
PSCW and the MPSC. The PSCW issued an order authorizing a natural gas rate
increase of $5.6 million (1.1%), effective January 1, 2005. The
rate increase was primarily driven by higher benefit costs and the cost of
natural gas distribution system improvements. Natural gas throughput volumes
increased 3.2%, driven by an increase in interdepartmental sales from the
natural gas utility to the electric utility as a result of increased generation
from combustion turbines. Higher natural gas throughput volumes from
interdepartmental sales to the electric utility were partially offset by
lower
natural gas throughput volumes to residential customers, driven by milder
weather conditions in 2005 compared to 2004. WPSC also believes customers
are
taking measures to conserve energy as a result of the high natural gas
prices.
The
natural gas
utility margin increased $5.6 million (4.7%) for the year ended
December 31, 2005, compared to 2004. The higher natural gas utility margin
was largely due to the rate increase mentioned above. The increase in
interdepartmental sales volumes to WPSC's electric utility also had a positive
impact on the natural gas margin.
Gas
utility
earnings for the year ended December 31, 2005, decreased $4.1 million,
primarily due to an increase in operating and maintenance expenses and
depreciation expense incurred by the gas utility.
Operating
Expenses
Operating
Expenses (Millions)
|
|
2005
|
|
2004
|
|
Change
|
|
Operating
and
maintenance expense
|
|
$
|
399.6
|
|
$
|
386.0
|
|
|
3.5
|
%
|
Depreciation
and decommissioning expense
|
|
|
126.0
|
|
|
91.0
|
|
|
38.5
|
%
|
Operating
and
Maintenance Expense
Operating
and
maintenance expenses increased $13.6 million (3.5%) for the year ended
December 31, 2005, compared to 2004. The following items were the most
significant contributors to the change in operating and maintenance expenses
at
WPSC:
·
|
The
combined
increase in pension expense, active and postretirement medical
expense,
salaries, and customer service expense was approximately
$25 million.
|
·
|
Transmission-related
expenses increased $9.9 million.
|
·
|
In
WPSC's
2006 rate case, the PSCW concluded that only half of the loss related
to
the sale of Kewaunee could be collected from ratepayers. As a result,
WPSC
wrote off $6.1 million of the regulatory asset established for the
loss on the sale of Kewaunee.
|
·
|
In
WPSC's
2006 rate case, the PSCW also disallowed recovery of increased
operating
and maintenance expenses related to the 2004 extended outage at
Kewaunee,
resulting in a $2.1 million write-off of previously deferred
costs.
|
·
|
The
increases
discussed above were partially offset by a decrease in operating
and
maintenance expenses of approximately $28 million related to
Kewaunee, due to the sale of this facility on July 5,
2005.
|
Depreciation
and Decommissioning Expense
Depreciation
and
decommissioning expense increased $35.0 million (38.5%) for the year ended
December 31, 2005, compared to 2004, driven by higher gains on
decommissioning trust assets prior to the sale of Kewaunee of approximately
$35 million. Realized gains on decommissioning trust assets (included as a
component of miscellaneous income) offset the increased decommissioning expense
pursuant to regulatory practice. Continued capital investment at WPSC also
resulted in an increase in depreciation expense. These items were partially
offset by a $7.0 million decrease in depreciation resulting from the sale
of the Kewaunee assets in July 2005.
Federal
Income
Taxes/State Income Taxes/Other Income
The
period-over-period change in these account balances was primarily related
to the
increase in realized gains recognized on the nonqualified decommissioning
trust
assets in 2005. Approximately $35 million of the increase in other income
related to the realized gains on the nonqualified decommissioning trust assets.
The nonqualified nuclear decommissioning trust assets were placed in more
conservative investments in the second quarter of 2005 in anticipation of
the
sale of Kewaunee, which closed on July 5, 2005. Pursuant to regulatory
practice, the increase in miscellaneous income related to the realized gains
was
offset by an increase in decommissioning expense. Income tax expense related
to
the realized gains was offset by a deferred tax benefit related to the
decommissioning expense. Overall, the change in the investment strategy for
the
nonqualified decommissioning trust assets had no impact on earnings, as
summarized in the table below.
(Millions)
|
|
Income/(Expense)
|
|
|
|
|
|
|
Depreciation
and decommissioning expense
|
|
$
|
(35
|
)
|
Federal
income taxes
|
|
|
13
|
|
State
income
taxes
|
|
|
2
|
|
Other,
net
|
|
|
35
|
|
Income
taxes
|
|
|
(15
|
)
|
Total
earnings impact
|
|
$
|
-
|
|
Other
income at
WPSC increased $9.6 million (29.1%) in 2005 compared to 2004. Excluding the
increase in other income related to higher realized gains on the nonqualified
decommissioning trust assets in 2005 and the decrease in other income related
to
higher income taxes related to these realized gains, miscellaneous income
decreased approximately $10 million. The remaining decrease was primarily
driven by a $15.0 million decrease in pre-tax gains on land sales. WPSC
recognized pre-tax land sale gains of $4.6 million in 2005, compared to
pre-tax land sale gains of $19.6 million in 2004. This decrease was
partially offset by DPC's reimbursement of $8 million of carrying costs
incurred by WPSC related to the Weston 4 power plant. The reimbursement was
recorded within miscellaneous income. WPSC sold a 30% interest in the Weston
4
power plant to DPC in the fourth quarter of 2005. Proceeds received from
the
sale included a reimbursement for approximately $8 million of carrying
costs incurred by WPSC for capital expenditures related to DPCs portion of
the
facility, which were funded by WPSC in 2004 and 2005.
2004
Compared with 2003
WPSC
Overview
WPSC's
results of
operations for the years ended December 31 are shown in the following
table:
WPSC's
Results
(Millions)
|
|
2004
|
|
2003
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
|
$
|
1,222.1
|
|
$
|
1,129.1
|
|
|
8.2
|
%
|
Earnings
on
common stock
|
|
$
|
104.8
|
|
$
|
78.9
|
|
|
32.8
|
%
|
Approved
retail and
wholesale electric rate increases drove a $76.3 million increase in WPSC's
electric revenue. The $16.7 million increase in WPSC's natural gas revenue
was driven by an increase in the per-unit cost of natural gas and an authorized
retail natural gas rate increase, partially offset by a 6.2% decrease in
natural
gas throughput volumes resulting from unfavorable weather conditions.
WPSC's
earnings on
common stock were $104.8 million for the year ended December 31, 2004,
compared with $78.9 million for the same period in 2003. As discussed in
more detail below, the following factors impacted earnings for the year ended
December 31, 2004, compared to the same period in 2003.
·
|
Approved
rate
increases (including the impact of timely retail electric rate
relief in
2004, compared to the delay in receiving retail electric rate relief
in
2003) favorably impacted the electric margin.
|
·
|
An
approved
retail natural gas rate increase favorably impacted the natural
gas margin
at WPSC, but a decrease in natural gas throughput volumes partially
offset
the favorable impact of this rate increase.
|
·
|
Land
sales,
land donations, and higher earnings from equity investments favorably
impacted earnings.
|
·
|
Higher
operating and maintenance expense negatively impacted
earnings.
|
Electric
Utility Operations
Electric
Utility Results (Millions)
|
|
2004
|
|
2003
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
801.2
|
|
$
|
724.9
|
|
|
10.5
|
%
|
Fuel
and
purchased power
|
|
|
249.9
|
|
|
225.0
|
|
|
11.1
|
%
|
Margins
|
|
$
|
551.3
|
|
$
|
499.9
|
|
|
10.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Sales
in
kilowatt-hours
|
|
|
13,493.4
|
|
|
13,411.4
|
|
|
0.6
|
%
|
Electric
utility
revenue increased $76.3 million (10.5%), for the year ended
December 31, 2004, compared to the same period in 2003. Electric utility
revenue increased largely due to authorized retail and wholesale electric
rate
increases for WPSC's Wisconsin and Michigan customers (see discussion within
"Results of Operations - WPS Resources") to recover higher fuel
and purchased power costs, increased operating expenses, and expenditures
incurred for infrastructure improvements. Electric utility sales volumes
were
also slightly higher in 2004, increasing 0.6% over 2003 sales volumes. A
1.5%
increase in sales volumes to commercial and industrial customers was partially
offset by a 1.2% decrease in sales volumes to residential customers. Higher
sales volumes to our commercial and industrial customers reflect an improving
economy and growth within our service area, while the decrease in sales volumes
to residential customers reflects weather that was 6.6% cooler during the
2004
cooling season, compared to 2003.
WPSC's
electric
margin increased $51.4 million (10.3%), for the year ended
December 31, 2004, compared to 2003. The increase in WPSC's electric
margin is primarily related to the retail and wholesale electric rate increases,
partially offset by a $20.4 million increase in purchased power costs. The
quantity of power purchased in 2004 increased 9.3% over 2003 purchases and
purchased power costs were 17.4% higher (on a per-unit basis) in 2004, compared
to 2003. The PSCW allowed WPSC to adjust prospectively the amount billed
to
Wisconsin retail customers for fuel and purchased power if costs were in
excess
of plus or minus 2% from approved levels. In response to a request for
additional fuel cost recovery filed early in 2004, WPSC was allowed to recover
$3.2 million of its increased fuel and purchased power costs during 2004.
The PSCW also allowed WPSC to defer $5.4 million of unanticipated fuel and
purchased power costs directly associated with the extension of the Kewaunee
refueling outage in the fourth quarter of 2004. The Kewaunee outage was extended
three weeks due primarily to difficulties encountered with lifting equipment
related to the reactor vessel and procedures to perform the lifts. It was
anticipated that these costs would be recovered in 2006; however, in the
PSCW's
final decision allowing WPSC authority to increase retail electric and natural
gas rates in 2006, the PSCW determined WPSC could not recover the costs for
the
2004 extended outage. For more information on this determination, see
Note 23, "Regulatory Environment," in WPS Resources' Notes to
Consolidated Financial Statements."
WPSC's
electric
earnings increased $12.2 million (22.8%), for the year ended
December 31, 2004, compared to 2003. The increased earnings were largely
driven by the higher margin (including the effect of timely retail electric
rate
relief in 2004 compared to a delay in receiving retail electric rate relief
in
2003), partially offset by higher operating and maintenance
expenses.
Gas
Utility
Operations
Gas
Utility
Results (Millions)
|
|
2004
|
|
2003
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
420.9
|
|
$
|
404.2
|
|
|
4.1
|
%
|
Purchase
costs
|
|
|
301.9
|
|
|
291.0
|
|
|
3.7
|
%
|
Margins
|
|
$
|
119.0
|
|
$
|
113.2
|
|
|
5.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Throughput
in
therms
|
|
|
801.3
|
|
|
854.5
|
|
|
(6.2
|
%)
|
Gas
utility revenue
increased $16.7 million (4.1%), for the year ended December 31, 2004,
compared to 2003. Higher revenue was driven by an authorized rate increase
and
an increase in the per-unit cost of natural gas, partially offset by an overall
6.2% decrease in natural gas throughput volumes. Natural gas prices increased
14.2% per unit in 2004. Higher natural gas prices reflect higher marketplace
natural gas costs in 2004. The PSCW and the MPSC allow WPSC to pass changes
in
the total cost of natural gas on to customers. As a result, changes in the
price
of the natural gas commodity do not have a direct impact on WPSC's margin.
The
decrease in natural gas throughput volumes was driven by weather that was
4.3%
warmer during the heating season for the year ended December 31, 2004,
compared to 2003.
The
natural gas
utility margin increased $5.8 million (5.1%), for the year ended
December 31, 2004, compared to 2003. The higher natural gas utility margin
was largely due to the authorized rate increase mentioned above. The ability
of
WPSC to realize the full benefit of an authorized rate increase is dependent
upon normal throughput volumes; therefore, the decrease in natural gas
throughput volumes negatively impacted WPSC's ability to benefit from the
full
amount of the rate increase.
The
higher margin
drove a $1.6 million (10.2%), increase in gas utility earnings for the year
ended December 31, 2004.
Operating
Expenses
Operating
Expenses (Millions)
|
|
2004
|
|
2003
|
|
Change
|
|
Operating
and
maintenance expense
|
|
$
|
386.0
|
|
$
|
355.1
|
|
|
8.7
|
%
|
Depreciation
and decommissioning expense
|
|
|
91.0
|
|
|
122.9
|
|
|
(26.0
|
%)
|
Operating
and
Maintenance Expense
Operating
and
maintenance expenses at WPSC increased $30.9 million (8.7%), for the year
ended December 31, 2004, compared to 2003. Electric transmission and
distribution costs were up $13.5 million due primarily to an increase in
transmission rates. Pension and postretirement medical costs incurred at
WPSC
increased $8.9 million. Additionally, $6.8 million of the increase was
driven by amortization of costs incurred in conjunction with the implementation
of the automated meter reading system and the purchase of the De Pere
Energy Center (previously deferred as regulatory assets). Maintenance expenses
at WPSC's coal-fired generation facilities were $4.2 million higher in
2004, compared to 2003, driven by an extension of the annual planned outage
at
the Pulliam 6 generation facility in 2004. Higher payroll and other benefit
costs also contributed to the increase in operating and maintenance expenses.
The fall refueling outage at Kewaunee did not significantly impact the
year-over-year change in operating and maintenance expenses as there was
also a
refueling outage at Kewaunee in the spring of 2003, and the PSCW approved
the
deferral of incremental operating and maintenance expenses that were incurred
as
a direct result of the refueling outage extension ($1.8 million of
operating and maintenance expenses were deferred in the fourth quarter of
2004).
It was anticipated that these costs would be recovered in 2006; however,
in the
PSCW's final decision allowing WPSC authority to increase retail electric
and
natural gas rates in 2006, the PSCW determined WPSC could not recover the
costs
for the 2004 extended outage. For more information on this determination,
see
Note 23, "Regulatory Environment," in WPS Resources' Notes to
Consolidated Financial Statements.
Depreciation
and Decommissioning Expense
Depreciation
and
decommissioning expense decreased $31.9 million (26.0%), for the year ended
December 31, 2004, compared to 2003, due primarily to a decrease of
$35.9 million resulting from lower realized gains on decommissioning trust
assets and because the decommissioning trust was not funded in 2004 in
anticipation of selling Kewaunee. Realized gains on decommissioning trust
assets
are substantially offset by depreciation expense pursuant to regulatory
practice. An increase in depreciation expense from plant asset additions
at WPSC
partially offset the decrease in decommissioning expense.
Other
Income
Other
income
decreased $22.3 million, from $55.3 million in 2003, to
$33.0 million in 2004, largely due to a decrease in realized gains on
decommissioning trust assets of $33.5 million. Lower realized gains were
substantially offset by lower decommissioning expense, as discussed above.
Partially offsetting the lower gains on decommissioning trust assets were
higher
earnings realized from equity investments and an increase in gains recognized
from land sales in 2004, compared to 2003.
BALANCE
SHEET - WPSC
2005
Compared with 2004
Net
utility plant
decreased $298.1 million (14.4%), from $2,066.8 million at
December 31, 2004, to $1,768.7 million at December 31, 2005. The
major contributors to the change in net utility plant are summarized
below:
·
|
Nuclear
decommissioning trusts decreased from $344.5 million at
December 31, 2004, to $0 at December 31, 2005. The qualified
decommissioning trust assets were included in the Kewaunee sale
and the
nonqualified decommissioning assets were liquidated.
|
·
|
The
Kewaunee
plant was sold in 2005, driving a $165.4 million decrease in net
utility plant.
|
·
|
Depreciation
expense of $126.0 million was recorded in 2005.
|
·
|
WPSC
sold a
30% interest in Weston 4, driving an $83.9 million decrease in net
utility plant.
|
·
|
Partially
offsetting the decreases above, capital expenditures recorded in
2005 were
$400.3 million, primarily related to the construction of Weston
4.
|
Customer
and other
receivables increased $64.6 million (60.8%), from $106.2 million at
December 31, 2004, to $170.8 million at December 31, 2005. The
increase was largely due to a 49.7% per-unit increase in natural gas costs
in
the fourth quarter of 2005, compared to the fourth quarter of 2004. An 8.6%
increase in retail electric rates combined with an 8.0% increase in electric
sales volumes in the fourth quarter of 2005, compared to the fourth quarter
of
2004 also contributed to the increase in customer and other receivables at
WPSC.
Natural
gas in
storage increased $20.9 million (34.7%), from $60.2 million at
December 31, 2004, to $81.1 million at December 31, 2005. Natural
gas in storage is built up throughout the year and, therefore, the 24.6%
increase in the average per-unit cost of natural gas purchased by WPSC in
2005,
compared to 2004 was the primary driver of the increase in natural gas in
storage.
Assets
from risk
management activities increased $23.6 million (414.0%), from
$5.7 million at December 31, 2004, to $29.3 million at
December 31, 2005, primarily related to mark-to-market gains recorded on
financial transmission rights related to our participation in MISO.
Mark-to-market gains on these derivative instruments are deferred as a
regulatory liability pursuant to regulatory approval.
Regulatory
assets
increased $109.9 million (70.2%), from $156.5 million at
December 31, 2004, to $266.4 million at December 31, 2005,
largely due to $56.4 million of costs that were deferred related to the
unplanned outage at Kewaunee in 2005, a $25.9 million increase in the
regulatory asset related to the minimum pension liability, deferral of
$21.2 million of MISO Day 2 charges, and a $6.3 million deferral of a
portion of the loss on the sale of Kewaunee.
Accounts
payable
increased $69.5 million (47.9%), from $145.1 million at
December 31, 2004, to $214.6 million at December 31, 2005. The
increase was driven by higher per-unit natural gas costs and higher per-unit
fuel and purchased power costs in 2005 compared to 2004.
Regulatory
liabilities increased $83.5 million (30.8%), from $271.1 million at
December 31, 2004, to $354.6 million at December 31, 2005, driven
by a $126.9 million regulatory liability related to proceeds received from
the liquidation of the nonqualified decommissioning trust in connection with
the
Kewaunee sale. The regulatory liability related to mark-to-market gains on
derivative instruments also increased $24.6 million, primarily related to
mark-to-market gains recorded on financial transmission rights related to
our
participation in MISO. These increases were partially offset by a
$46.6 million decrease in the regulatory liability pertaining to the asset
retirement obligation recorded related to the decommissioning of Kewaunee
(as
this plant was sold on July 5, 2005), and a $26.8 million reduction in
deferred unrealized gains on decommissioning trust assets as the trust assets
were either liquidated or transferred in the sale of Kewaunee.
Asset
retirement
obligations decreased from $364.4 million at December 31, 2004, to
$7.7 million at December 31, 2005, driven by the transfer of our
obligation to decommission Kewaunee (as this plant was sold on July 5,
2005).
LIQUIDITY
AND CAPITAL RESOURCES - WPSC
WPSC
believes that
its cash, operating cash flows, and borrowing ability because of strong credit
ratings, when taken together, provide adequate resources to fund ongoing
operating requirements and future capital expenditures related to expansion
of
existing businesses and development of new projects. However, WPSC's operating
cash flow and access to capital markets can be impacted by macroeconomic
factors
outside its control. In addition, WPSC's borrowing costs can be impacted
by its
short-term and long-term debt ratings assigned by independent rating agencies,
which in part are based on certain credit measures such as interest coverage
and
leverage ratios. Currently, WPSC believes
these
ratings
continue to be among the best in the energy industry (see "Liquidity
and
Capital Resources - WPS Resources"
for more
information).
Operating
Cash Flows
During
2005, net
cash provided by operating activities was $87.5 million, compared with
$213.9 million in 2004. The decrease in cash provided by operating
activities was driven by various expenditures incurred in 2005, which will
not
be collected from ratepayers until future years. In 2005, expenditures incurred
related to the unplanned Kewaunee outage were approximately $56 million,
expenditures incurred related to MISO were approximately $21 million, and
increased costs related to coal shortages were approximately $6 million
(see Note 23, "Regulatory
Environment,"
in
WPS Resources' Notes to Consolidated Financial Statements for more
information on these regulatory assets). A $26.8 million increase in cash
required to fund working capital requirements also contributed to the decrease
in cash provided by operating activities. An increase in the per-unit cost
of
natural gas drove the higher working capital requirements. Pension and
postretirement funding also increased $10.8 million in 2005, compared to
2004.
During
2004, net
cash provided by operating activities was $213.9 million, compared with
$152.6 million in 2003. The increase was driven by improved operating
results.
Investing
Cash Flows
Net
cash used for
investing activities was $64.5 million in 2005, compared to
$252.0 million in 2004. The $187.5 million decrease in cash used for
investing activities was driven by proceeds of $127.1 million received from
the liquidation of the non-qualified decommissioning trust in connection
with
the Kewaunee sale, $112.5 million of proceeds received from the sale of
Kewaunee, and $95.1 million of proceeds received from DPC upon closing of
the sale of a 30% ownership interest in Weston 4. The decrease was partially
offset by a $127.5 million increase in capital expenditures, primarily
related to the construction of Weston 4.
Net
cash used for
investing activities was $252.0 million in 2004 compared to
$182.2 million in 2003. The increase was largely related to a
$111.2 million increase in utility capital expenditures (see "Capital
Expenditures"
below), partially
offset by a $48.4 million decrease in cash used for the purchase of equity
investments and other acquisitions. The final payment in the amount of
$48.4 million related to the De Pere Energy Center was made in
December 2003.
Capital
Expenditures
Capital
expenditures by business segment for the years ended December 31, 2005,
2004, and 2003 are as follows:
|
|
Years
Ended
December 31,
|
|
(Millions)
|
|
2005
|
|
2004
|
|
2003
|
|
Electric
utility
|
|
$
|
363.9
|
|
$
|
210.1
|
|
$
|
120.6
|
|
Natural
gas
utility
|
|
|
36.4
|
|
|
62.7
|
|
|
40.7
|
|
Other
|
|
|
-
|
|
|
-
|
|
|
0.3
|
|
WPSC
Consolidated
|
|
$
|
400.3
|
|
$
|
272.8
|
|
$
|
161.6
|
|
The
increase in
capital expenditures at the electric utility in 2005, as compared to 2004,
is
mainly due to higher capital expenditures associated with the construction
of
Weston 4. Gas utility capital expenditures decreased primarily due to
completion of the automated meter reading project.
The
increase in
capital expenditures at the electric utility in 2004 as compared to 2003
is
mainly due to higher capital expenditures associated with the construction
of
Weston 4. Gas utility capital expenditures
increased
primarily
due to the installation of automated meter reading. See "Liquidity
and
Capital Resources - WPS Resources,"
for more
information regarding construction of Weston 4.
Financing
Cash Flows
Net
cash used for
financing activities was $24.0 million in 2005, compared to net cash
provided by financing activities of $36.9 million in 2004. Although cash
provided by operating activities decreased in 2005, compared to 2004, this
decrease was more than offset by a decrease in cash used for investing
activities, related to proceeds received from various asset sales in
2005.
Net
cash provided
by financing activities was $36.9 million in 2004 compared to
$30.9 million in 2003. Although cash provided by operating activities
increased significantly in 2004, additional borrowings were required to fund
WPSC's capital expenditures, primarily related to the construction of
Weston 4.
Under
a PSCW order,
WPSC may not pay normal common stock dividends of more than 109% of the previous
year's common stock dividend without the PSCW's approval. In addition, WPSC's
Restated Articles of Incorporation limit the amount of common stock dividends
that WPSC can pay to certain percentages of its prior 12-month net income,
if
its common stock and common stock surplus accounts constitute less than 25%
of
its total capitalization.
Significant
Financing Activities
See
"Liquidity
and
Capital Resources - WPS Resources"
for detailed
information on significant financing activities for WPSC.
Credit
Ratings
See
"Liquidity
and
Capital Resources - WPS Resources" for
detailed
information on WPSC's credit ratings.
Future
Capital Requirements and Resources
Contractual
Obligations
The
following table
summarizes the contractual obligations of WPSC, including its subsidiaries.
|
|
|
|
|
|
|
|
|
|
Payments
Due
By Period
|
|
Contractual
Obligations
As
of
December 31, 2005
(Millions)
|
|
Total
Amounts
Committed
|
|
2006
|
|
2007-2008
|
|
2009-2010
|
|
2011
and
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt principal and interest payments
|
|
$
|
746.2
|
|
$
|
13.5
|
|
$
|
54.1
|
|
$
|
54.1
|
|
$
|
624.5
|
|
Operating
lease obligations
|
|
|
14.3
|
|
|
3.4
|
|
|
4.6
|
|
|
2.7
|
|
|
3.6
|
|
Commodity
purchase obligations
|
|
|
1,976.1
|
|
|
314.7
|
|
|
518.1
|
|
|
446.6
|
|
|
696.7
|
|
Purchase
orders
|
|
|
462.0
|
|
|
338.3
|
|
|
122.9
|
|
|
0.8
|
|
|
-
|
|
Other
|
|
|
384.1
|
|
|
45.1
|
|
|
72.5
|
|
|
38.9
|
|
|
227.6
|
|
Total
contractual cash obligations
|
|
$
|
3,582.7
|
|
$
|
715.0
|
|
$
|
772.2
|
|
$
|
543.1
|
|
$
|
1,552.4
|
|
Long-term
debt
principal and interest payments represent bonds issued, notes issued, and
loans
made to WPSC. We record all principal obligations on the balance sheet.
Commodity purchase obligations represent mainly commodity purchase contracts.
WPSC expects to recover the costs of its contracts in future customer rates.
Purchase orders include obligations related to normal business operations
and
large construction obligations, including 100% of Weston 4 obligations. The
sale of a 30% interest in Weston 4 to DPC was completed in November 2005,
but
WPSC retains the legal obligation to initially remit payment to third parties
for 100% of all construction costs incurred, 30% of which will subsequently
be
billed to DPC. Capital contributions to equity method investment include
our
commitment to fund a portion of ATC's Wausau, Wisconsin, to Duluth, Minnesota,
transmission line.
Capital
Requirements
See
"Liquidity
and
Capital Resources - WPS Resources,"
for detailed
information on capital requirements for WPSC.
Capital
Resources
See
"Liquidity
and
Capital Resources - WPS Resources," for
detailed
information on capital resources for WPSC.
Other
Future Considerations
Kewaunee
See
Note 6,
"Acquisitions
and Sales of Assets,"
in WPS Resources'
Notes to Consolidated Financial Statements for detailed information on the
sale
of WPSC's interest in Kewaunee.
Asset
Management Strategy
See
"Liquidity
and
Capital Resources - WPS Resources,"
for detailed
information on WPS Resources' asset management strategy.
Regulatory
Matters and Significant Rate Trends
See
"Liquidity
and
Capital Resources - WPS Resources,"
for detailed
information on regulatory matters and significant rate trends.
Seams
Elimination Charge Adjustment
See
"Liquidity
and
Capital Resources - WPS Resources,"
for detailed
information on the Seams Elimination Charge Adjustment.
Coal
Supply
See
"Liquidity
and
Capital Resources - WPS Resources,"
for detailed
information on coal matters.
Income
Taxes
See
"Liquidity
and Capital Resources - WPS Resources," for detailed information on
income tax matters applicable to WPSC.
Environmental
See
Note 17,
"Commitments
and
Contingencies,"
in WPS Resources'
Notes to Consolidated Financial Statements for a detailed discussion of
environmental considerations.
Midwest
Independent Transmission System Operator
See
"Liquidity
and
Capital Resources - WPS Resources,"
for detailed
information on MISO.
New
Accounting
Pronouncements
See
Note 1(w),
"New
Accounting
Pronouncements,"
in WPS Resources
Notes to Consolidated Financial Statements for a detailed discussion of new
accounting pronouncements.
OFF
BALANCE
SHEET ARRANGEMENTS - WPSC
See
Note 18,
"Guarantees,"
in
WPS Resources' Notes to Consolidated Financial Statements for information
regarding WPSC's guarantees.
CRITICAL
ACCOUNTING POLICIES - WPSC
See
"Critical
Accounting Policies - WPS Resources," for
information
regarding WPSC's critical accounting policies.
IMPACT
OF
INFLATION - WPSC
See
"Impact
of
Inflation - WPS Resources," for
information
regarding the impact of inflation on WPSC.
Market
Risks and Other Significant Risks
WPS Resources
has potential market risk exposure related to commodity price risk (including
regulatory recovery risk), interest rate risk, equity return risk, and
principal
preservation risk. WPS Resources is also exposed to other significant risks
due to the nature of our subsidiaries' business and the environment from
which
we operate. WPS Resources has risk management policies in place to monitor
and assist in controlling these risks and may use derivative and other
instruments to manage some of these exposures, as further described below.
Commodity
Price Risk and Regulatory Recovery Risk
WPSC
burns natural
gas in several of its peaking power plants, as a supplemental fuel at several
coal-fired plants, and supplies natural gas as fuel to generate energy
as part
of a purchased power agreement with Fox Energy Center. Natural gas costs
typically impact the cost of fuel used in electric generation as well as
purchased power costs.
Regulatory
commissions allow utilities to earn a return on common stock equity that
is
commensurate with an investor's expected return, compensating for the risks
investors face when providing funds to the utility. The return on common
stock
equity approved by the PSCW, the FERC, and the MPSC was 11.5%, 11.0%, and
11.4%,
respectively, in 2005 and 12.0%, 11.0%, and 11.4%, respectively, in 2004.
The
utilities bear volume risk as rates are based upon normal sales volumes
as
projected by the utility. Historically, consumers bear most of the price
risk
for fuel and purchased power costs as our regulators typically have allowed
the
utilities to recover most of these costs (to the extent they are prudently
incurred), through various cost recovery mechanisms. However, WPSC is exposed
to
the risk of not recovering increased fuel costs for Wisconsin retail customers
under the current electric fuel recovery rules. Under the Wisconsin fuel
recovery mechanism, certain costs are only recoverable on a pro rata basis
for
the portion of the year after PSCW approval. As such, the ability of our
regulated utilities to earn their approved return on equity is dependent
upon
accurate forecasting, the ability to obtain timely rate increases to account
for
rising cost structures (while minimizing the required rate increases in
order to
maintain the competitiveness of our core industrial customer base and keep
these
customers in our service area), and certain conditions that are outside
of their
control (such as macroeconomic factors and weather conditions). To mitigate
the
risk of unrecoverable fuel costs in 2006 due to market price volatility,
WPSC is
employing risk management techniques pursuant to its risk policy approved
by the
PSCW, including the use of derivative instruments such as futures and options.
An
additional risk within the ratemaking process, regulatory lag risk, occurs
between the time we submit rate proceedings and the time we receive the
final
approval or denial from the PSCW, MPSC, or FERC. The regulatory lag risk
may
increase or decrease with any change in commodity prices, unplanned outages,
or
unscheduled maintenance during the approval period. Although the PSCW grants
WPSC the ability to defer costs related to fuel and purchased power, the
PSCW
does not guarantee us the ability to recover the deferred costs from the
ratepayers at a later point in time. To further manage commodity price
risk and
the associated regulatory lag risk, our regulated utilities enter into
contracts
of various durations for the purchase and/or sale of natural gas, fuel
for
electric generation, and electricity.
For
purposes of
risk management disclosure, ESI's activities are classified as non-trading.
ESI
has the ability to reduce market price risk and extract additional value
from
its merchant generation plants through the use of various financial and
physical
tools (including forward contracts and options). ESI also utilizes derivative
financial instruments to manage market risks related to its retail supply
portfolio.
Value-at-Risk
A
Value-at-Risk analysis is utilized in order to measure commodity price
risk
exposure at ESI. ESI's Value-at-Risk calculation is utilized to quantify
exposure to market risk associated with its marketing and trading portfolio
(primarily natural gas and power positions), which includes near term positions
managed
under
its asset
management strategy through tolling agreements with the merchant generating
fleet, but excludes the long-dated positions created by the merchant generating
fleet and associated coal, sulfur dioxide emission allowances, and other
ancillary fuels.
Value-at-Risk
is
used to describe a probabilistic approach to quantifying the exposure to
market
risk. The Value-at-Risk amount represents an estimate of the potential
change in
fair value that could occur from changes in market factors, within a given
confidence level, if an instrument or portfolio is held for a specified
time
period. Value-at-Risk models are relatively sophisticated. However, the
quantitative risk information is limited by the parameters established
in
creating the model. The instruments being used may have features that could
trigger a potential loss in excess of the calculated amount if the changes
in
the underlying commodity price exceed the confidence level of the model
used.
Value-at-Risk is not necessarily indicative of actual results that may
occur. In
addition to Value-at-Risk, ESI employs other risk measurements including
mark-to-market valuations and stress testing. In conjunction with the
Value-at-Risk, these other risk measurements provide the risk management
analysis for ESI's risk exposure.
ESI's
Value-at-Risk
is estimated using a delta-normal approximation based on a one-day holding
period and a 95% confidence level. The delta-normal approximation is based
on
the assumption that changes in the value of the portfolio over short time
periods, such as one day, are normally distributed. ESI's Value-at-Risk
calculation includes derivative financial and commodity instruments, such
as
forwards, futures, swaps, and options as well as commodities held in inventory,
such as natural gas held in storage to the extent such positions are
significant.
The
Value-at-Risk
for ESI's trading portfolio is presented in the following table:
Value-at-Risk
(VaR) Disclosure for ESI
Value-at-Risk
Calculations
|
|
|
|
|
|
Trading
VaR (in millions)
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
95%
confidence level, one-day holding period, one-tailed December
31
|
|
$
|
1.7
|
|
$
|
0.5
|
|
Average
for
twelve months ended December 31
|
|
|
1.0
|
|
|
0.6
|
|
High
for 12
months ended December 31
|
|
|
1.7
|
|
|
0.8
|
|
Low
for 12
months ended December 31
|
|
|
0.5
|
|
|
0.5
|
|
The
Value-at-Risk
amount for ESI increased $1.2 million from December 31, 2004, to December
31,
2005, due to extreme price volatility in the market, post hurricane production
shut-ins, and unusual fluctuations in the various portfolios. The average,
high,
and low amounts were computed using the Value-at-Risk amounts at the beginning
of the reporting period and the four quarter-end amounts.
Interest
Rate Risk
WPS Resources
and WPSC are exposed to interest rate risk resulting from their variable
rate
long-term debt and short-term commercial paper borrowing. Exposure to interest
rate risk is managed by limiting the amount of variable rate obligations
and
continually monitoring the effects of market changes in interest rates.
WPS Resources and WPSC enter into long-term fixed rate debt when it is
advantageous to do so. WPS Resources and WPSC may also enter into
derivative financial instruments, such as swaps, to mitigate interest rate
exposure. In the second quarter of 2005, a variable rate non-recourse debt
instrument used to finance the purchase of Sunbury was restructured to
a WPS
Resources obligation. An interest rate swap used to fix the interest rate
on the
Sunbury non-recourse debt was previously designated as a cash flow hedge.
Subsequent to the restructuring, the interest rate swap was re-designated
as a
cash flow hedge, along with an additional interest rate swap, to fix the
interest rate on the WPS Resources obligation.
Based
on the
variable rate debt of WPS Resources and WPSC outstanding at
December 31, 2005, a hypothetical increase in market interest rates of 100
basis points in 2005 would have increased annual
interest
expense in
2005 by approximately $2.9 million at WPS Resources and
$0.9 million at WPSC. Comparatively, based on the variable rate debt
outstanding at December 31, 2004, an increase in interest rates of
100 basis points would have increased interest expense in 2004 by
approximately $3.2 million at WPS Resources and $1.0 million at
WPSC. These amounts were determined by performing a sensitivity analysis
on the
impact of a hypothetical 100 basis points increase in interest rates on
the
variable rate debt of WPS Resources and WPSC outstanding as of
December 31, 2005 and 2004. The sensitivity analysis was performed assuming
a constant level of variable rate debt during the period and an immediate
increase in the levels of interest rates, with no other subsequent changes
for
the remainder of the period. In the event of a significant change in interest
rates, management would take action to mitigate WPS Resources’ and WPSC's
exposure to the change.
Equity
Return and Principal Preservation Risk
WPS Resources
and WPSC currently fund liabilities (accumulated benefit obligations) related
to
employee benefits through various external trust funds. The trust funds
are
managed by numerous investment managers and 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. WPS Resources
maintains a qualified pension plan for employees' retirement. The
liability (accumulated benefit obligation) of the qualified plan was less
than
the value of the qualified plan's assets by $35.8 million at
December 31, 2005, and WPS Resources was required to recognize a
minimum pension liability as prescribed by SFAS No. 87. Declines in
the equity markets or declines in interest rates may result in increased
future
pension costs for the plan and possible future required contributions.
Changes
in the market value of investments related to other employee benefits could
also
impact future contributions. WPS Resources monitors the trust fund
portfolio by benchmarking the performance of the investments against certain
security indices. Most of the employee benefit costs relate to
WPS Resources' regulated utilities. As such, the majority of these costs
are recovered in customers' rates, mitigating the equity return and principal
preservation risk on these exposures.
Foreign
Currency Exchange Rate Risk
WPS Resources
is exposed to foreign currency risk as a result of foreign operations owned
and
operated in Canada and transactions denominated in Canadian dollars for
the
purchase and sale of natural gas and electricity by our nonregulated
subsidiaries. Forward foreign exchange contracts are utilized to manage
the risk
associated with currency fluctuations on certain firm sales and sales
commitments denominated in Canadian dollars and certain Canadian dollar
denominated asset and liability positions. WPS Resources’ exposure to
foreign currency risk was not significant at December 31, 2005, or 2004.
Construction
Risk
Large
construction
projects, such as Weston 4, are subject to various construction risks,
which we
have little or no control over, and can negatively affect completion time
and
project costs. These risks include, but are not limited to, the shortage
of or
inability to obtain labor or materials, unfavorable weather conditions,
events
in the economy, and changes in applicable laws or regulations.
ITEM
8.
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
WPS RESOURCES
CORPORATION
The
management of
WPS Resources and its subsidiaries is responsible for establishing and
maintaining adequate internal control over financial reporting.
WPS Resources' control systems were designed to provide reasonable
assurance to WPS Resources' management and Board of Directors regarding the
preparation and fair presentation of published financial
statements.
All
internal
control systems, no matter how well designed, have inherent limitations.
Therefore, even those systems determined to be effective can provide only
reasonable assurance with respect to financial statement preparation and
presentation.
WPS Resources'
management assessed the effectiveness of its internal control over financial
reporting as of December 31, 2005. In making this assessment, it used the
criteria set forth by the Committee of Sponsoring Organizations of the
Treadway
Commission (COSO) in Internal
Control-Integrated Framework.
Based
on this
assessment, management believes that, as of December 31, 2005,
WPS Resources' internal control over financial reporting is effective based
on those criteria.
WPS Resources
Corporation's independent registered public accounting firm has issued
an audit
report on management's assessment of WPS Resources' internal control over
financial reporting.
ITEM
8.
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
WPS RESOURCES
CORPORATION
To
the Shareholders and Board of Directors of WPS Resources
Corporation
We
have audited management's assessment, included in the accompanying Management
Report on Internal Control over Financial Reporting, that WPS Resources
Corporation and subsidiaries (the "Company") maintained effective internal
control over financial reporting as of December 31, 2005, based on criteria
established in Internal
Control-Integrated Framework issued
by the
Committee of Sponsoring Organizations of the Treadway Commission. The
Company's management is responsible for maintaining effective internal
control
over financial reporting and for its assessment of the effectiveness of
internal
control over financial reporting. Our responsibility is to express an
opinion on management's assessment and an opinion on the effectiveness
of the
Company's internal control over financial reporting based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating management's assessment,
testing and evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we considered necessary
in the
circumstances. We believe that our audit provides a reasonable basis for
our opinions.
A
company's internal control over financial reporting is a process designed
by, or
under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected
by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and
the
preparation of financial statements for external purposes in accordance
with
generally accepted accounting principles. A company's internal control
over financial reporting includes those policies and procedures that (1)
pertain
to the maintenance of records that, in reasonable detail, accurately and
fairly
reflect the transactions and dispositions of the assets of the company;
(2)
provide reasonable assurance that transactions are recorded as necessary
to
permit preparation of financial statements in accordance with generally
accepted
accounting principles, and that receipts and expenditures of the company
are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention
or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
Because
of the
inherent limitations of internal control over financial reporting, including
the
possibility of collusion or improper management override of controls, material
misstatements due to error or fraud may not be prevented or detected on
a timely
basis. Also, projections of any evaluation of the effectiveness of the
internal control over financial reporting to future periods are subject
to the
risk that the controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.
In
our opinion, management's assessment that the Company maintained effective
internal control over financial reporting as of December 31, 2005, is fairly
stated, in all material respects, based on the criteria established in
Internal
Control-Integrated Framework issued
by the
Committee of Sponsoring Organizations of the Treadway Commission. Also in
our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2005, based
on the
criteria established in Internal
Control-Integrated Framework issued
by the
Committee of Sponsoring Organizations of the Treadway Commission.
We
have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated financial
statements and financial statement schedules as of and for the year ended
December 31, 2005 of the Company and our report dated February 28, 2006
expressed an unqualified opinion on those financial statements and financial
statement schedules and included an explanatory paragraph regarding the
Company's adoption of new accounting standards.
/s/
Deloitte &
Touche LLP
Milwaukee,
Wisconsin
February
28,
2006
|
|
|
|
|
|
|
|
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WPS
RESOURCES CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended
December 31
|
|
|
|
|
|
|
|
(Millions,
except per share data)
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonregulated
revenue
|
|
$
|
5,438.5
|
|
$
|
3,658.8
|
|
$
|
3,218.8
|
|
Utility
revenue
|
|
|
1,524.2
|
|
|
1,292.0
|
|
|
1,183.7
|
|
Total
revenues
|
|
|
6,962.7
|
|
|
4,950.8
|
|
|
4,402.5
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonregulated
cost of fuel, natural gas, and purchased power
|
|
|
5,218.7
|
|
|
3,514.9
|
|
|
3,084.2
|
|
Utility
cost
of fuel, natural gas, and purchased power
|
|
|
801.2
|
|
|
576.2
|
|
|
532.3
|
|
Operating
and
maintenance expense
|
|
|
568.1
|
|
|
537.6
|
|
|
486.2
|
|
Depreciation
and decommissioning expense
|
|
|
142.8
|
|
|
107.0
|
|
|
141.3
|
|
Gain
on sale
of emission allowances
|
|
|
(87.1
|
)
|
|
-
|
|
|
-
|
|
Impairment
loss
|
|
|
80.6
|
|
|
-
|
|
|
-
|
|
Taxes
other
than income
|
|
|
47.9
|
|
|
46.1
|
|
|
44.3
|
|
Operating
income
|
|
|
190.5
|
|
|
169.0
|
|
|
114.2
|
|
|
|
|
|
|
|
|
|
|
|
|
Miscellaneous
income
|
|
|
86.2
|
|
|
52.0
|
|
|
63.6
|
|
Interest
expense and distributions on trust preferred securities
|
|
|
(72.4
|
)
|
|
(59.9
|
)
|
|
(61.8
|
)
|
Minority
interest
|
|
|
4.5
|
|
|
3.4
|
|
|
5.6
|
|
Other
income (expense)
|
|
|
18.3
|
|
|
(4.5
|
)
|
|
7.4
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before
taxes
|
|
|
208.8
|
|
|
164.5
|
|
|
121.6
|
|
Provision
for
income taxes
|
|
|
46.7
|
|
|
21.7
|
|
|
27.0
|
|
Net
income before cumulative effect of change in
|
|
|
|
|
|
|
|
|
|
|
accounting
principles
|
|
|
162.1
|
|
|
142.8
|
|
|
94.6
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
effect of change in accounting principles, net of tax
|
|
|
(1.6
|
)
|
|
-
|
|
|
3.2
|
|
Net
income before preferred stock dividends of
subsidiary
|
|
|
160.5
|
|
|
142.8
|
|
|
97.8
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock dividends of subsidiary
|
|
|
3.1
|
|
|
3.1
|
|
|
3.1
|
|
Income
available for common shareholders
|
|
$
|
157.4
|
|
$
|
139.7
|
|
$
|
94.7
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
shares of common stock
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
38.3
|
|
|
37.4
|
|
|
33.0
|
|
Diluted
|
|
|
38.7
|
|
|
37.6
|
|
|
33.2
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per common share (basic)
|
|
|
|
|
|
|
|
|
|
|
Net
income
before cumulative effect of change in accounting
principles
|
|
$
|
4.15
|
|
$
|
3.74
|
|
$
|
2.77
|
|
Cumulative
effect of change in accounting principles
|
|
|
(0.04
|
)
|
|
-
|
|
|
0.10
|
|
Earnings
per
common share (basic)
|
|
$
|
4.11
|
|
$
|
3.74
|
|
$
|
2.87
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per common share (diluted)
|
|
|
|
|
|
|
|
|
|
|
Net
income
before cumulative effect of change in accounting
principles
|
|
$
|
4.11
|
|
$
|
3.72
|
|
$
|
2.75
|
|
Cumulative
effect of change in accounting principles
|
|
|
(0.04
|
)
|
|
-
|
|
|
0.10
|
|
Earnings
per
common share (diluted)
|
|
$
|
4.07
|
|
$
|
3.72
|
|
$
|
2.85
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
per common share
|
|
$
|
2.24
|
|
$
|
2.20
|
|
$
|
2.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes to WPS Resources' consolidated financial statements
are
an integral part of these statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|
|
|
|
|
|
|
|
|
|
|
|
WPS
RESOURCES CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
December
31
|
|
|
|
|
|
(Millions)
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
Cash
and cash
equivalents
|
|
$
|
27.7
|
|
$
|
40.0
|
|
Accounts
receivable - net of reserves of $12.7 and $8.0,
respectively
|
|
|
1,005.6
|
|
|
531.3
|
|
Accrued
unbilled revenues
|
|
|
151.3
|
|
|
113.2
|
|
Inventories
|
|
|
311.4
|
|
|
196.1
|
|
Current
assets
from risk management activities
|
|
|
906.4
|
|
|
376.5
|
|
Assets
held
for sale
|
|
|
-
|
|
|
24.1
|
|
Other
current
assets
|
|
|
105.4
|
|
|
91.5
|
|
Current
assets
|
|
|
2,507.8
|
|
|
1,372.7
|
|
|
|
|
|
|
|
|
|
Property,
plant, and equipment, net
|
|
|
2,049.4
|
|
|
2,076.5
|
|
Nuclear
decommissioning trusts
|
|
|
-
|
|
|
344.5
|
|
Regulatory
assets
|
|
|
272.0
|
|
|
160.9
|
|
Long-term
assets from risk management activities
|
|
|
226.5
|
|
|
74.6
|
|
Other
|
|
|
399.5
|
|
|
347.6
|
|
Total
assets
|
|
$
|
5,455.2
|
|
$
|
4,376.8
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders' Equity
|
|
|
|
|
|
|
|
Short-term
debt
|
|
$
|
264.8
|
|
$
|
292.4
|
|
Current
portion of long-term debt
|
|
|
4.0
|
|
|
6.7
|
|
Accounts
payable
|
|
|
1,078.9
|
|
|
589.4
|
|
Current
liabilities from risk management activities
|
|
|
852.8
|
|
|
338.6
|
|
Deferred
income taxes
|
|
|
13.5
|
|
|
9.1
|
|
Other
current
liabilities
|
|
|
117.8
|
|
|
73.2
|
|
Current
liabilities
|
|
|
2,331.8
|
|
|
1,309.4
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
867.1
|
|
|
865.7
|
|
Deferred
income taxes
|
|
|
58.8
|
|
|
71.0
|
|
Deferred
investment tax credits
|
|
|
14.5
|
|
|
16.2
|
|
Regulatory
liabilities
|
|
|
373.2
|
|
|
288.3
|
|
Environmental
remediation liabilities
|
|
|
67.4
|
|
|
68.4
|
|
Pension
and
postretirement benefit obligations
|
|
|
82.1
|
|
|
94.6
|
|
Long-term
liabilities from risk management activities
|
|
|
188.4
|
|
|
62.5
|
|
Asset
retirement obligations
|
|
|
14.9
|
|
|
366.6
|
|
Other
|
|
|
101.7
|
|
|
91.2
|
|
Long-term
liabilities
|
|
|
1,768.1
|
|
|
1,924.5
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock of subsidiary with no mandatory redemption
|
|
|
51.1
|
|
|
51.1
|
|
Common
stock
equity
|
|
|
1,304.2
|
|
|
1,091.8
|
|
Total
liabilities and shareholders' equity
|
|
$
|
5,455.2
|
|
$
|
4,376.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes to WPS Resources' consolidated financial statements
are
an integral part of these statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WPS
RESOURCES CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantees
and
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
Capital
in
|
|
|
|
|
|
Other
|
|
|
|
Comprehensive
|
|
|
|
Compensation
|
|
Common
|
|
Excess
of
|
|
Retained
|
|
Treasury
|
|
Comprehensive
|
|
(Millions)
|
|
Income
|
|
Total
|
|
Trust
|
|
Stock
|
|
Par
Value
|
|
Earnings
|
|
Stock
|
|
Income
(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2002
|
|
|
-
|
|
$
|
782.8
|
|
|
($5.4
|
)
|
$
|
32.0
|
|
$
|
351.8
|
|
$
|
415.9
|
|
|
($1.5
|
)
|
|
($10.0
|
)
|
Income
available for common shareholders
|
|
$
|
94.7
|
|
|
94.7
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
94.7
|
|
|
-
|
|
|
-
|
|
Other
comprehensive income - cash flow hedges (net of tax of
$4.8)
|
|
|
7.2
|
|
|
7.2
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
7.2
|
|
Other
comprehensive income - minimum pension liability (net of tax of
$8.2)
|
|
|
(12.3
|
)
|
|
(12.3
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(12.3
|
)
|
Other
comprehensive income - currency translation
|
|
|
0.1
|
|
|
0.1
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
0.1
|
|
Comprehensive
income
|
|
$
|
89.7
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Issuance
of
common stock
|
|
|
-
|
|
|
197.7
|
|
|
-
|
|
|
4.8
|
|
|
191.8
|
|
|
-
|
|
|
1.1
|
|
|
-
|
|
Purchase
of
common stock
|
|
|
-
|
|
|
(1.0
|
)
|
|
(1.0
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Dividends
on
common stock
|
|
|
-
|
|
|
(71.8
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(71.8
|
)
|
|
-
|
|
|
-
|
|
Other
|
|
|
-
|
|
|
5.8
|
|
|
(0.1
|
)
|
|
-
|
|
|
5.9
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2003
|
|
|
-
|
|
$
|
1,003.2
|
|
|
($6.5
|
)
|
$
|
36.8
|
|
$
|
549.5
|
|
$
|
438.8
|
|
|
($0.4
|
)
|
|
($15.0
|
)
|
Income
available for common shareholders
|
|
$
|
139.7
|
|
|
139.7
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
139.7
|
|
|
-
|
|
|
-
|
|
Other
comprehensive income - cash flow hedges (net of tax of
$3.1)
|
|
|
4.6
|
|
|
4.6
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
4.6
|
|
Other
comprehensive income - minimum pension liability (net of tax of
$4.0)
|
|
|
(6.0
|
)
|
|
(6.0
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(6.0
|
)
|
Other
comprehensive income - currency translation
|
|
|
0.3
|
|
|
0.3
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
0.3
|
|
Comprehensive
income
|
|
$
|
138.6
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Issuance
of
common stock
|
|
|
-
|
|
|
26.3
|
|
|
-
|
|
|
0.6
|
|
|
25.6
|
|
|
-
|
|
|
0.1
|
|
|
-
|
|
Dividends
on
common stock
|
|
|
-
|
|
|
(81.3
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(81.3
|
)
|
|
-
|
|
|
-
|
|
Other
|
|
|
-
|
|
|
5.0
|
|
|
(1.9
|
)
|
|
0.1
|
|
|
7.0
|
|
|
(0.2
|
)
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2004
|
|
|
-
|
|
$
|
1,091.8
|
|
|
($8.4
|
)
|
$
|
37.5
|
|
$
|
582.1
|
|
$
|
497.0
|
|
|
($0.3
|
)
|
|
($16.1
|
)
|
Income
available for common shareholders
|
|
$
|
157.4
|
|
|
157.4
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
157.4
|
|
|
-
|
|
|
-
|
|
Other
comprehensive income - cash flow hedges (net of tax of
$7.9)
|
|
|
(12.1
|
)
|
|
(12.1
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(12.1
|
)
|
Other
comprehensive income - minimum pension liability (net of taxes
of
$11.4)
|
|
|
17.1
|
|
|
17.1
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
17.1
|
|
Other
comprehensive income - available for sale securities (net of tax
of
$0.4)
|
|
|
0.6
|
|
|
0.6
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
0.6
|
|
Other
comprehensive income - currency translation (net of taxes of
$0.1)
|
|
|
0.1
|
|
|
0.1
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
0.1
|
|
Comprehensive
income
|
|
$
|
163.1
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Issuance
of
common stock
|
|
|
-
|
|
|
127.3
|
|
|
-
|
|
|
2.5
|
|
|
124.8
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Dividends
on
common stock
|
|
|
-
|
|
|
(85.4
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(85.4
|
)
|
|
-
|
|
|
-
|
|
Other
|
|
|
-
|
|
|
7.4
|
|
|
(2.5
|
)
|
|
0.1
|
|
|
10.1
|
|
|
(0.3
|
)
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2005
|
|
|
-
|
|
$
|
1,304.2
|
|
|
($10.9
|
)
|
$
|
40.1
|
|
$
|
717.0
|
|
$
|
568.7
|
|
|
($0.3
|
)
|
|
($10.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes to WPS Resources' consolidated financial statements
are
an integral part of these statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WPS
RESOURCES CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended
December 31
|
|
|
|
|
|
|
|
(Millions)
|
|
2005
|
|
2004
|
|
2003
|
|
Operating
Activities
|
|
|
|
|
|
|
|
|
|
|
Net
income
before preferred stock dividends of subsidiary
|
|
$
|
160.5
|
|
$
|
142.8
|
|
$
|
97.8
|
|
Adjustments
to
reconcile net income to net cash provided by operating
activities
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and decommissioning
|
|
|
142.8
|
|
|
107.0
|
|
|
141.3
|
|
Amortization
of nuclear fuel and other
|
|
|
62.7
|
|
|
49.0
|
|
|
47.2
|
|
Realized
gain
on investments held in trust, net of regulatory deferral
|
|
|
(15.7
|
)
|
|
(5.5
|
)
|
|
(38.7
|
)
|
Unrealized
(gains) loss on nonregulated energy contracts
|
|
|
(39.2
|
)
|
|
(10.3
|
)
|
|
10.4
|
|
Pension
and
postretirement expense
|
|
|
50.5
|
|
|
39.8
|
|
|
26.4
|
|
Pension
and
postretirement funding
|
|
|
(28.6
|
)
|
|
(17.8
|
)
|
|
(15.6
|
)
|
Deferred
income taxes and investment tax credit
|
|
|
(16.9
|
)
|
|
(1.8
|
)
|
|
1.3
|
|
Gain
on sales
of partial interest in synthetic fuel operation
|
|
|
(7.1
|
)
|
|
(7.5
|
)
|
|
(7.6
|
)
|
Gain
on sale
of property, plant, and equipment
|
|
|
(5.5
|
)
|
|
(16.2
|
)
|
|
(7.0
|
)
|
Gain
on sale
of emission allowances
|
|
|
(87.1
|
)
|
|
-
|
|
|
-
|
|
Impairment
loss
|
|
|
80.6
|
|
|
-
|
|
|
-
|
|
Deferral
of
Kewaunee outage expenses, net
|
|
|
(49.2
|
)
|
|
(7.2
|
)
|
|
-
|
|
Cumulative
effect of change in accounting principles, net of tax
|
|
|
1.6
|
|
|
-
|
|
|
(3.2
|
)
|
Other
|
|
|
(50.1
|
)
|
|
(2.8
|
)
|
|
(33.7
|
)
|
Changes
in
working capital, net of businesses acquired
|
|
|
|
|
|
|
|
|
|
|
Receivables,
net
|
|
|
(515.8
|
)
|
|
(67.7
|
)
|
|
(183.4
|
)
|
Inventories
|
|
|
(111.9
|
)
|
|
(14.7
|
)
|
|
(76.2
|
)
|
Other
current
assets
|
|
|
(19.5
|
)
|
|
(1.2
|
)
|
|
(19.3
|
)
|
Accounts
payable
|
|
|
485.1
|
|
|
48.2
|
|
|
106.8
|
|
Other
current
liabilities
|
|
|
25.2
|
|
|
(3.3
|
)
|
|
12.7
|
|
Net
cash provided by operating activities
|
|
|
62.4
|
|
|
230.8
|
|
|
59.2
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing
Activities
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(415.2
|
)
|
|
(292.4
|
)
|
|
(177.8
|
)
|
Sale
of
property, plant, and equipment
|
|
|
12.0
|
|
|
26.9
|
|
|
31.9
|
|
Purchase
of
emission allowances
|
|
|
(35.3
|
)
|
|
-
|
|
|
-
|
|
Proceeds
from
sale of emission allowances
|
|
|
111.5
|
|
|
-
|
|
|
-
|
|
Purchase
of
equity investments and other acquisitions
|
|
|
(82.6
|
)
|
|
(52.3
|
)
|
|
(102.7
|
)
|
Proceeds
from
sale of Kewaunee nuclear power plant
|
|
|
112.5
|
|
|
-
|
|
|
-
|
|
Proceeds
from
sale of partial interest in Weston 4 power plant
|
|
|
95.1
|
|
|
-
|
|
|
-
|
|
Proceeds
from
liquidation of non-qualified decommissioning trust
|
|
|
127.1
|
|
|
-
|
|
|
-
|
|
Purchases
of
nuclear decommissioning trust investments
|
|
|
(18.6
|
)
|
|
(213.3
|
)
|
|
(349.5
|
)
|
Sales
of
nuclear decommissioning trust investments
|
|
|
18.6
|
|
|
213.3
|
|
|
349.5
|
|
Decommissioning
funding
|
|
|
-
|
|
|
(0.3
|
)
|
|
(3.0
|
)
|
Other
|
|
|
1.0
|
|
|
3.1
|
|
|
4.2
|
|
Net
cash used for investing activities
|
|
|
(73.9
|
)
|
|
(315.0
|
)
|
|
(247.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Financing
Activities
|
|
|
|
|
|
|
|
|
|
|
Short-term
debt - net
|
|
|
(25.0
|
)
|
|
251.2
|
|
|
14.7
|
|
Issuance
of
long-term debt
|
|
|
-
|
|
|
-
|
|
|
125.0
|
|
Repayment
of
long-term debt, note to preferred stock trust and capital
lease
|
|
|
(4.2
|
)
|
|
(108.4
|
)
|
|
(90.7
|
)
|
Payment
of
dividends
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock
|
|
|
(3.1
|
)
|
|
(3.1
|
)
|
|
(3.1
|
)
|
Common
stock
|
|
|
(85.4
|
)
|
|
(81.3
|
)
|
|
(71.8
|
)
|
Issuance
of
common stock
|
|
|
127.3
|
|
|
26.3
|
|
|
197.7
|
|
Purchase
of
common stock
|
|
|
-
|
|
|
-
|
|
|
(1.0
|
)
|
Other
|
|
|
(10.4
|
)
|
|
(11.2
|
)
|
|
24.8
|
|
Net
cash (used for) provided by financing activities
|
|
|
(0.8
|
)
|
|
73.5
|
|
|
195.6
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in cash and cash equivalents
|
|
|
(12.3
|
)
|
|
(10.7
|
)
|
|
7.4
|
|
Cash
and cash
equivalents at beginning of year
|
|
|
40.0
|
|
|
50.7
|
|
|
43.3
|
|
Cash
and cash equivalents at end of year
|
|
$
|
27.7
|
|
$
|
40.0
|
|
$
|
50.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes to WPS Resources' consolidated financial statements
are
an integral part of these statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM
8.
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
WPS RESOURCES
The
Notes to the
Consolidated Financial Statements that follow include consolidated
WPS Resources footnotes and certain combined footnotes for both
WPS Resources and its wholly owned subsidiary registrant, WPSC. WPSC's
financial statements also include supplemental footnotes related to WPSC.
Refer
to Item 8, Section P for a listing of the combined footnotes included in
the
WPS Resources notes and the supplemental footnotes that are applicable to
the WPSC registrant.
NOTE 1--SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(a) Nature
of
Operations--WPS Resources
is a holding company. Our wholly owned subsidiary, WPSC, is an electric and
natural gas utility. WPSC supplies and distributes electric power and natural
gas in its franchised service territory in northeastern Wisconsin and an
adjacent portion of the Upper Peninsula of Michigan. Our other wholly owned
utility subsidiary, UPPCO, is an electric utility. UPPCO supplies and
distributes electric energy to a portion of the Upper Peninsula of
Michigan. Our wholly owned nonregulated subsidiary, ESI, offers nonregulated
natural gas, electric, and alternative fuel supplies, as well as energy
management and consulting services to retail and wholesale customers. ESI
also
owns several merchant electric generation plants, primarily in the Midwest
and
Northeastern United States and adjacent portions of Canada.
The
term "utility"
refers to the regulated activities of WPSC and UPPCO, while the term
"nonutility" refers to the activities of WPSC and UPPCO that are not regulated.
The term "nonregulated" refers to activities other than those of WPSC and
UPPCO.
(b) Consolidation
Basis of Presentation--The
Consolidated
Financial Statements include the accounts of WPS Resources and all majority
owned subsidiaries, after eliminating significant intercompany transactions
and
balances. If a minority owner's equity is reduced to zero, our policy is
to
record 100% of the subsidiary's losses until the minority owner makes capital
contributions or commitments to fund its share of the operating costs. The
cost
method of accounting is used for investments when WPS Resources owns less
than 20% of the voting equity of the company, unless other evidence indicates
we
have significant influence over the operating and financial policies of the
investee. Investments in businesses not controlled by WPS Resources, but
over which we have significant influence regarding the operating and financial
policies of the investee, are accounted for using the equity method. For
additional information on our equity method investments see Note 10,
"Investments
in
Affiliates, at Equity Method."
(c) Use
of
Estimates--We
prepare our
financial statements in conformity with accounting principles generally accepted
in the United States of America. We make estimates and assumptions that
affect reported amounts. These estimates and assumptions affect assets,
liabilities, the disclosure of contingent assets and liabilities at the date
of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results may differ from these
estimates.
(d)
Cash
and
Cash Equivalents--We
consider
short-term investments with an original maturity of three months or less to
be cash equivalents.
Cash
paid for taxes
during 2005, 2004, and 2003 was $50.4 million, $37.0 million, and
$21.9 million, respectively. During 2005, 2004, and 2003, cash paid for
interest totaled $59.6 million, $54.4 million, and $57.9 million,
respectively.
Non-cash
transactions were as follows:
(Millions)
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
Weston 4
construction costs funded through accounts payable
|
|
$
|
16.6
|
|
$
|
22.6
|
|
$
|
-
|
|
Minimum
pension liability equity adjustment
|
|
|
(17.1
|
)
|
|
6.0
|
|
|
12.3
|
|
Restricted
cash
|
|
|
-
|
|
|
3.2
|
|
|
1.0
|
|
Debt
assumed
in Advantage acquisition
|
|
|
-
|
|
|
3.2
|
|
|
-
|
|
Exchange
of
transmission assets for equity interest in ATC
|
|
|
-
|
|
|
-
|
|
|
5.9
|
|
(e) Revenue
and
Customer Receivables--Revenues
are
recognized on the accrual basis and include estimated amounts for electric
and
natural gas services rendered but not billed. Of WPS Resources’ total
revenue, 6.3%, 6.5%, and 5.7% was from companies in the paper products industry
in 2005, 2004, and 2003, respectively. Of WPSC’s total revenue, 11.2%, 10.1%,
and 8.6% was from companies in the paper products industry in 2005, 2004,
and
2003, respectively.
WPSC
and UPPCO use
automatic fuel and purchased power adjustment clauses for the MPSC retail
electric portions of their business. WPSC also uses automatic fuel and purchased
power adjustment clauses for its FERC wholesale electric business; however,
at
UPPCO, most wholesale electric contracts are special contracts and have no
automatic fuel and purchased power adjustment clauses. The Wisconsin retail
electric portion of WPSC's business uses a "cost variance range" approach,
based
on a specific estimated fuel and purchased power cost for the forecast year.
If
WPSC's actual fuel and purchased power costs fall outside this range, the
PSCW
can authorize an adjustment to future rates. Decreases to rates can be
implemented without a hearing, unless requested by WPSC, PSCW staff, or
interveners, while increases to rates are generally subject to a hearing.
Billings
to UPPCO's
customers under the MPSC's jurisdiction include base rate charges and a power
supply cost recovery factor. Power supply cost recovery factors are established
annually to recover projected power supply costs approved by the MPSC. The
MPSC
reconciles these factors to actual costs annually and permits 100% recovery
of
allowed power supply costs. UPPCO recognizes any over or under recovery
currently in its revenues, and the payable or receivable is recognized on
the
balance sheet until settlement. The deferrals are relieved with additional
billings or refunds.
The
PSCW approved a
modified one-for-one gas cost recovery plan for WPSC. This plan allows WPSC
to
pass changes in the cost of natural gas on to system natural gas customers,
subject to regulatory review by the PSCW for reasonableness.
The
MPSC has
approved one-for-one recovery of prudently incurred natural gas costs for
WPSC,
subject to regulatory review. The MPSC also approved a natural gas cost recovery
factor adjustment mechanism for WPSC for the period November 2005 through
October 2006. This adjustment mechanism allows WPSC to adjust the maximum
natural gas rates that can be charged to customers in Michigan based on upward
or downward changes to the NYMEX natural gas futures price without further
MPSC
action.
WPSC
and UPPCO are
required to provide service and grant credit to customers within their service
territories. The two companies continually review their customers'
credit-worthiness and obtain or refund deposits accordingly. Both utilities
are
precluded from discontinuing service to residential customers during winter
moratorium months. The regulated segments calculate a reserve for potential
uncollectible customer receivables using a four-year average of bad debts
net of
recoveries as a percentage of total accounts receivable. The historical
percentage is reviewed in light of the current year conditions, and an
appropriate percentage is applied to the current year-end accounts receivable
balance to determine the required reserve balance.
For
ESI's merchant
electric generation plants, electric power revenues related to fixed-price
contracts are recognized at the lower of amounts billable under the contract
or
an amount equal to the volume of the capacity made available or the energy
delivered during the period multiplied by the estimated average
revenue
per
kilowatt-hour per the terms of the contract. Under floating-price contracts,
electric power revenues are recognized when capacity is provided or energy
is
delivered.
For
its
nonregulated business of supplying energy, management, and consulting services
to retail and wholesale customers, ESI accrues revenues in the month that
energy
is delivered and/or services are rendered. With the January 1, 2003, adoption
of
Emerging Issues Task Force Issue No. 02-03, "Issues Involved in Accounting
for Derivative Contracts Held for Trading Purposes and Contracts Involved
in
Energy Trading and Risk Management Activities," revenues related to derivative
instruments classified as trading are reported net of related cost of sales
for
all periods presented. Most revenues in 2005, 2004, and 2003 continue to
be
reported on a gross basis. See Note 1(u), "Cumulative
Effect of Change in Accounting Principles,"
for more
information.
In
the fourth quarter of 2003, WPS Resources adopted Issue No. 03-11,
"Reporting Realized Gains and Losses on Derivative Instruments that are Subject
to SFAS No. 133 and Not 'Held for Trading Purposes' as Defined in Issue
No. 02-03," which resulted in recording nonregulated revenues net of cost
of fuel, natural gas, and purchased power for energy-related transactions
entered into after October 1, 2003, that settle financially and for which
the
commodity does not physically transfer. Had the provisions of Issue
No. 03-11 been applied to arrangements entered into prior to October 1,
2003, previously reported nonregulated revenue would have decreased
$62.9 million for the nine months ended September 30, 2003, with a
corresponding $62.9 million decrease to nonregulated cost of fuel, natural
gas, and purchased power. Previously reported wholesale natural gas sales
volumes for the nine months ended September 30, 2003 would have decreased
10.8 billion cubic feet. Neither margins, income, or cash flows were impacted
by
the adoption of Issue No. 03-11.
ESI
calculates the
reserve for potential uncollectible customer receivable balances by applying
an
estimated bad debt experience rate to each past due aging category and reserving
for 100% of specific customer receivable balances deemed to be uncollectible.
The basis for calculating the reserve for receivables from wholesale
counterparties considers netting agreements, collateral, and
guarantees.
(f) Inventories--Inventories
consist of natural gas in storage and fossil fuels, including coal. Average
cost
is used to value fossil fuels and natural gas in storage for our regulated
segments. Inventories at ESI are valued at the lower of cost or market unless
hedged pursuant to a fair value hedge, in which case it is marked to the
spot
rate.
(g)
Risk
Management Activities--As
part of our
regular operations, WPS Resources enters into contracts, including options,
swaps, futures, forwards, and other contractual commitments, to manage market
risks such as changes in commodity prices and interest rates.
WPS Resources
accounts for its derivative contracts in accordance with SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended
and
interpreted. SFAS No. 133 establishes accounting and financial reporting
standards for derivative instruments and requires, in part, that we recognize
certain derivative instruments on the balance sheet as assets or liabilities
at
their fair value. Subsequent changes in fair value of the derivatives are
recorded currently in earnings unless certain hedge accounting criteria are
met.
If the derivatives qualify for regulatory deferral subject to the provisions
of
SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation,"
the derivatives are marked to fair value pursuant to SFAS No. 133 and are
offset with a corresponding regulatory asset or liability.
WPS Resources
classifies mark-to-market gains and losses on derivative instruments not
qualifying for hedge accounting as a component of revenues.
(h) Emission
Allowances--ESI
accounts for
emission allowances using an intangible asset model, with cash inflows and
outflows related to purchases and sales of emission allowances recorded as
investing activities in the Consolidated Statements of Cash Flows. ESI uses
the
guidance in SFAS No. 144, "Accounting for the Impairment and Disposal of
Long-Lived Assets," to test for impairment. The utilities generally do not
purchase or sell emission allowances, but use the inventory accounting model
for
emission allowances granted at zero cost and utilized in operating the
utilities' generation plants.
(i) Property,
Plant, and Equipment--Utility
plant is
stated at the original cost of construction including an allowance for funds
used during construction. The cost of renewals and betterments of units of
property (as distinguished from minor items of property) is capitalized as
an
addition to the utility plant accounts. Except for land, no gain or loss
is
recognized in connection with ordinary retirements of utility property units.
Maintenance, repair, replacement, and renewal costs associated with items
not
qualifying as units of property are considered operating expenses. The utility
charges the cost of units of property retired, sold, or otherwise disposed
of,
less salvage, to the accumulated provision for depreciation. The cost of
removal
associated with the retirement is charged to a regulatory
liability.
We
record straight-line depreciation expense over the estimated useful life
of
utility property and include amounts for estimated removal and salvage. The
PSCW
approved new depreciation rates for WPSC effective January 1, 2005, which
have
not had a material impact on annual depreciation expense. Depreciation
rates
for UPPCO were approved by the MPSC effective January 1, 2002. Annual
utility composite depreciation rates are shown below.
Annual
Utility Composite Depreciation Rates
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric
|
|
|
3.59
|
%
|
|
3.59
|
%
|
|
3.63
|
%
|
Gas
|
|
|
3.61
|
%
|
|
3.65
|
%
|
|
3.63
|
%
|
Nonutility
property
interest capitalization takes place during construction, and gain and loss
recognition occurs in connection with retirements. Nonutility property is
depreciated using straight-line depreciation. Asset lives range from 3 to
20 years.
Nonregulated
plant
is stated at the original construction cost, which includes capitalized
interest, or estimated fair value at the time of acquisition pursuant to
a
business combination. The costs of renewals, betterments, and major overhauls
are capitalized as an addition to plant. The gains or losses associated with
ordinary retirements are recorded in the period of retirement. Maintenance,
repair, and minor replacement costs are expensed as incurred.
Most
of the
nonregulated subsidiaries compute depreciation using the straight-line method
over the following estimated useful lives:
Structures
and improvements
|
15
to 40
years
|
Office
and
plant equipment
|
5
to 35
years
|
Office
furniture and fixtures
|
3
to 10
years
|
Vehicles
|
5
years
|
Computer
equipment
|
3
years
|
Leasehold
improvements
|
Shorter
of:
life of the lease or life of the
asset
|
The
Combined Locks
Energy Center uses the units of production depreciation method for selected
pieces of equipment having defined lives stated in terms of hours of
production.
WPS Resources
capitalizes certain costs related to software developed or obtained for internal
use and amortizes those costs to operating expense over the estimated useful
life of the related software, which is usually three to seven
years.
(j) Capitalized
Interest and Allowance for Funds Used During Construction--Our
nonregulated
subsidiaries capitalize interest for construction projects, while our utilities
use an allowance for funds used during construction (AFUDC) calculation,
which
includes both a debt and an equity component as required by regulatory
accounting.
Approximately
50%
of WPSC's retail jurisdictional construction work-in-progress expenditures
are
subject to AFUDC, except on specific projects approved by the PSCW. For 2005,
WPSC's AFUDC retail rate was
9.0%.
A current
return for construction funds related to Weston 4 is being recovered from
ratepayers as incurred.
WPSC's
construction
work-in-progress AFUDC debt and equity percentage formula for the wholesale
jurisdiction is specified in the FERC's Uniform System of Accounts. The 2005
average AFUDC wholesale rate was 7.13%.
WPSC's
allowance
for equity funds used during construction for 2005, 2004, and 2003 was
$1.5 million, $2.0 million, and $2.4 million, respectively.
WPSC's allowance for borrowed funds used during construction for 2005, 2004,
and
2003 was $0.4 million, $0.7 million, and $1.0 million,
respectively. UPPCO did not record AFUDC for 2005, 2004, or 2003, as UPPCO
did
not have significant construction projects during these years.
Our
nonregulated
subsidiaries calculate capitalized interest on long-term construction projects
for periods during which financing is provided by WPS Resources through
interim debt. The interest rate capitalized is based upon the monthly short-term
borrowing rate WPS Resources incurs for such funds. The amount of interest
capitalized during 2005, 2004, and 2003 was not significant.
(k) Asset
Impairment--We
review the
recoverability of long-lived tangible and intangible assets, excluding goodwill,
other indefinite lived intangible assets, and regulatory assets, in accordance
with SFAS No. 144. This Statement requires review of assets when
circumstances indicate that the carrying amount may not be recoverable. The
carrying amount of assets held and used is not recoverable if it exceeds
the
undiscounted sum of cash flows expected to result from the use and eventual
disposition of the asset. If the carrying value is not recoverable, the
impairment loss is measured as the excess of the asset's carrying value over
its
fair value. The carrying value of assets held for sale is not recoverable
if it
exceeds the fair value less cost to sell the asset. An impairment charge
is
recorded for any excess of the carrying value over the fair value less cost
to
sell. If events or circumstances indicate the carrying value of investments
accounted for under the equity method of accounting may not be recoverable,
potential impairment is assessed by comparing the future anticipated cash
flows
from these investments to their carrying values. Impairment charges are recorded
if the carrying value of such assets exceeds the future anticipated cash
flows.
See Note 4, "Sunbury
Plant,"
for information
related to the impairment charge recorded at Sunbury in 2005.
(l) Regulatory
Assets and Liabilities--WPSC
and UPPCO
are subject to the provisions of SFAS No. 71. Regulatory assets represent
probable future revenue associated with certain incurred costs that will
be
recovered from customers through the ratemaking process. Regulatory liabilities
represent amounts that are refundable in future customer rates. Based on
a
current evaluation of the various factors and conditions that are expected
to
impact future cost recovery, we believe that future recovery of our regulatory
assets is probable.
(m) Goodwill
and Other Intangible Assets--In
accordance
with SFAS No. 142, "Goodwill and Other Intangible Assets," goodwill and
other assets with indefinite lives are not amortized, but are subject to
annual
impairment tests. WPSC performs its impairment test during the second quarter
of
each year, while ESI performs its impairment test annually during the third
quarter. The impairment tests are updated whenever events or changes in
circumstances indicate that the assets might be impaired. Based upon the
results
of testing, no impairments were noted in 2005, 2004, or 2003.
Other
intangible
assets with definite lives, consisting primarily of emission allowances and
customer related intangible assets, are amortized over periods from 1 to
30
years. For more information on WPS Resources' intangible assets, see
Note 11, "Goodwill
and
Other Intangible Assets."
(n) Retirement
of Debt--Premiums,
discounts, and expenses incurred with the issuance of outstanding long-term
debt
are amortized over the terms of the debt issues. Any call premiums or
unamortized expenses associated with refinancing higher-cost debt obligations
used to finance regulated assets and operations are amortized consistent
with
regulatory treatment of those items, where appropriate.
(o) Research
and Development--Electric
research
and development expenditures for WPSC totaled $0.7 million,
$0.7 million, and $0.6 million, in 2005, 2004, and 2003, respectively.
No other research and development expenditures were significant.
(p)
Asset
Retirement Obligations--Effective
January
1, 2003, WPS Resources adopted SFAS No. 143, "Accounting for Asset
Retirement Obligations." Under this accounting standard, WPS Resources
recognized, at fair value, legal obligations associated with the retirement
of
tangible long-lived assets that resulted from the acquisition, construction
or
development, and/or normal operation of the asset. The asset retirement
obligation is accreted using a credit-adjusted risk-free interest rate
commensurate with the expected settlement date of the asset retirement
obligation. The associated retirement costs were capitalized as part of the
related long-lived asset and depreciated over the useful life of the asset.
The total of the depreciation and accretion from the initial date of obligation
through the adoption date of SFAS No. 143 were recorded as a cumulative
effect of change in accounting principle for ESI and as a net regulatory
asset
for our regulated operations.
In
March 2005, the FASB issued Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations." SFAS No. 143 had been
inconsistently applied in practice because the accounting for conditional
asset
retirement obligations was interpreted differently among companies. An asset
retirement obligation is conditional when the timing and/or method of settling
the obligation is conditioned on a future event. Many companies, including
WPS Resources, did not record a liability for conditional asset retirement
obligations under the guidance of SFAS No. 143, concluding that either (1)
the conditional nature of the obligation did not create a liability until
the
retirement activity occurred or (2) the timing and/or method of settling
the
obligation was unknown.
Interpretation
No. 47 concludes that, if required legally, an obligation associated with
an asset's retirement is inevitable, even though uncertainties may exist
regarding the timing and/or method of settling the obligation. According
to the
Interpretation, these uncertainties affect the fair value of the liability,
rather than negate the need to record one at all. Additionally, the ability
of a
company to indefinitely postpone settlement of the obligation, or to sell
the
asset prior to its retirement, does not relieve a company of its present
duty to
settle the obligation. Therefore, the Interpretation concluded that conditional
asset retirement obligations are within the scope of SFAS No. 143.
WPS Resources adopted Interpretation No. 47 as of December 31,
2005. Asset retirement obligations included within the scope of Interpretation
No. 47 are calculated and recorded utilizing the methodology in SFAS
No. 143. See Note 1(u), "Cumulative
Effect of Change in Accounting Principles," and
Note 15,
"Asset
Retirement Obligations,"
for additional
information regarding SFAS No. 143 and Interpretation
No. 47.
(q) Income
Taxes--We
account for
income taxes using the liability method as prescribed by SFAS No. 109,
"Accounting for Income Taxes." Under this method, deferred income taxes have
been recorded using currently
enacted
tax rates for the differences between the tax basis of assets and liabilities
and the basis reported in the financial statements. Due to the effects of
regulation on WPSC and UPPCO, certain adjustments made to defer income taxes
are, in turn, recorded as regulatory assets or liabilities.
Investment
tax
credits, which have been used to reduce our federal income taxes payable,
have
been deferred for financial reporting purposes. These deferred investment
tax
credits are being amortized over the useful lives of the property to which
they
relate.
WPS Resources
is an indirect part owner of a facility that produces synthetic fuel that
qualifies for tax credits under Section 29 if certain requirements are
satisfied. Section 29 tax credits are currently scheduled to expire at the
end
of 2007. Tax credits that are not used to reduce tax expense as a result
of
alternative minimum tax rules relating to United States federal income
taxes are carried forward as alternative minimum tax credits to reduce current
tax expense in future years. Under current federal law, alternative minimum
tax
credits do not expire. In the fourth quarter of 2005, WPS Resources was
informed that partnership returns for the facility filed for the 2002 and
2003
tax years were under review by the IRS. It is our understanding that this
review
of the partnership returns is part of the examination the IRS is conducting
of
the consolidated corporate filings of one of the partners for the same
period.
WPS Resources
files a consolidated United States income tax return that includes domestic
subsidiaries of which its ownership is 80% or more. WPS Resources and its
consolidated subsidiaries are parties to a tax allocation arrangement under
which each entity determines its income tax provision on a stand-alone basis,
after
which the effects of federal consolidation are accounted for. In several
states,
combined or consolidated filing is required for certain members of the
WPS Resources group doing business in that state. The tax allocation
arrangement is used to equitably allocate the state taxes associated with
these
combined or consolidated filings.
WPS Resources
records a reserve for uncertain tax positions based upon management's assessment
of the probabilities that certain deductions or income tax positions may
not be
sustained when income tax returns are audited by taxing jurisdictions. Our
identified tax exposures are discussed below.
WPS Resources
and its subsidiaries have routinely been subject to examination by various
taxing jurisdictions, including the IRS, Wisconsin Department of Revenue,
and
other state and local taxing jurisdictions. At any given time there might
be
several of these audits open covering multiple tax years. Management has
not
been informed by any taxing jurisdictions of any material adjustment to any
filed or proposed tax position as a result of the on-going
examinations.
WPS Resources
had submitted a request to have the IRS conduct a pre-filing review of a
tax
position related to the 2004 tax return. The tax position related to the
value
of land located near the Peshtigo River that was donated to the WDNR. A
pre-filing review of the land donation deduction was initiated by the IRS
in the
first quarter of 2005; however, in the second quarter, WPS Resources and
the IRS mutually agreed to withdraw this issue from the pre-filing review
process, citing an inability to reach a consensus on the tax treatment and
value
of the land donated. WPS Resources believes the value placed on the donated
land was reasonable and will continue to pursue this matter if challenged
by the
IRS upon examination of the tax return.
The
combined
current benefit of Section 29 tax credits and the deferred benefit of
alternative minimum tax credits (arising from Section 29 tax credits) is
limited
to an amount equal to the WPS Resources regular consolidated federal tax
liability. In 2004, and in some previous years, this limitation has impacted
the
amount of the tax benefit recorded as compared to actual Section 29 tax credits
produced. For 2005, this limitation did not impact the tax benefit recorded.
Section
29 tax
credits are subject to phase out if the reference price of oil within that
year
exceeds a threshold price set by the IRS and is eliminated entirely if the
reference price increases beyond a phase-out price. WPS Resources does not
believe a phase-out will be applicable to 2005. WPS Resources records a tax
benefit with respect to Section 29 tax credits based upon its assessment
of the
probability of sustaining the filing position for federal tax returns and
its
judgment related to the potential for a phase-out of credits.
(r) Excise
Taxes--WPS Resources
presents revenue net of pass-through taxes on the Consolidated Statements
of
Income.
(s) Guarantees--FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements
for Guarantees Including Indirect Guarantees of Indebtedness of Others,"
requires that the guarantor recognize, at the inception of the guarantee,
a
liability for the fair value of the obligation undertaken in issuing the
guarantee. See Note 18, "Guarantees,"
for additional
information on Interpretation
No. 45.
(t) Stock-Based
Employee Compensation--WPS Resources
has stock-based employee compensation plans, which are described more fully
in
Note 22, "Stock-Based
Compensation."
WPS Resources accounts for these plans under the recognition and
measurement provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.
Upon
grant of stock options, no stock-based employee compensation cost is reflected
in net income, as all options granted under these plans had an exercise price
equal to the market value of
the
underlying
common stock on the date of grant. The following table illustrates the effect
on
income available for common shareholders and earnings per share if WPS Resources
had applied the fair value recognition provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," to stock-based employee
compensation:
(Millions,
except per share amounts)
|
|
2005
|
|
2004
|
|
2003
|
|
Income
available for common shareholders
|
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
157.4
|
|
$
|
139.7
|
|
$
|
94.7
|
|
Add:
Stock-based compensation expense using intrinsic value method -
net of
tax
|
|
|
2.0
|
|
|
1.4
|
|
|
2.0
|
|
Deduct:
Stock-based compensation expense using the fair value method -
net of tax
|
|
|
(1.9
|
)
|
|
(1.1
|
)
|
|
(1.1
|
)
|
Pro
forma
|
|
$
|
157.5
|
|
$
|
140.0
|
|
$
|
95.6
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per common share
|
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
4.11
|
|
$
|
3.74
|
|
$
|
2.87
|
|
Pro
forma
|
|
|
4.11
|
|
|
3.74
|
|
|
2.90
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per common share
|
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
4.07
|
|
$
|
3.72
|
|
$
|
2.85
|
|
Pro
forma
|
|
|
4.07
|
|
|
3.72
|
|
|
2.88
|
|
The
fair value of
each stock option grant is estimated on the date of grant using the
Black-Scholes stock option pricing model assuming:
|
|
2005
|
|
2004
|
|
2003
|
|
Expected
life
|
|
|
6
years
|
|
|
10
years
|
|
|
10
years
|
|
Risk-free
interest rate
|
|
|
4.38
|
%
|
|
4.40
|
%
|
|
4.40%
to 4.65
|
%
|
Expected
dividend yield
|
|
|
4.73
|
%
|
|
5.19
|
%
|
|
5.68%
to 6.23
|
%
|
Expected
volatility
|
|
|
11.77
|
%
|
|
15.44
|
%
|
|
18.25%
to 19.97
|
%
|
|
|
|
|
|
|
|
|
|
|
|
(u) Cumulative
Effect of Change in Accounting Principles--The
adoption of
Interpretation No. 47 on December 31, 2005, resulted in a
$1.6 million after-tax cumulative effect of change in accounting principle,
decreasing income available for common shareholders, related to recording
a
liability for asbestos remediation at certain ESI generating plants. The
adoption of SFAS No. 143 on January 1, 2003, resulted in a
$0.3 million after-tax cumulative effect of change in accounting principle,
decreasing income available for common shareholders, related to recording
a
liability for the closure of an ash basin at Sunbury. For the utility segments
of WPS Resources, we concluded it was probable that any differences between
expenses under Interpretation No. 47 and SFAS No. 143, and expenses
currently recovered through customer rates, will be recoverable or refundable
in
future customer rates. Accordingly, neither the adoption of Interpretation
No. 47 nor the adoption of SFAS No. 143 had any impact on the utility
segments' income, as its effect is offset by the establishment of regulatory
assets or liabilities pursuant to SFAS No. 71.
Prior
to its
rescission in 2002, ESI had been applying the accounting standards of Issue
No. 98-10. ESI was defined as a trading company under
Issue No. 98-10 and was required to mark all of its energy-related
contracts to market. On October 25, 2002, the Emerging Issues Task Force
rescinded Issue No. 98-10, thus precluding mark-to-market accounting for
energy trading contracts entered into after that date that are not derivatives
and requiring a cumulative effect of change in accounting principle to be
recorded effective January 1, 2003, for all nonderivative contracts entered
into
on or prior to October 25, 2002. On January 1, 2003,
WPS Resources recorded an after-tax cumulative effect of a change in
accounting principle of $3.5 million (related to ESI operations) to
increase income available for common shareholders as a result of removing
from
its balance sheet the mark-to-market effects of those contracts entered into
on
or prior to October 25, 2002, that do not meet the definition of a
derivative under SFAS
No. 133.
The
required change in accounting had no impact on the underlying economics or
cash
flows of the contracts.
(v)
Reclassifications--We
reclassified
certain prior year financial statement amounts to conform to the current
year
presentation.
(w)
New
Accounting Pronouncements--In
December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment,"
which addresses the accounting for share-based payment transactions. SFAS
No. 123R eliminates the ability to account for share-based compensation
transactions using Accounting Principles Board Opinion No. 25, and requires
companies to measure the cost of share-based awards at their grant date fair
value. That cost is recognized over the period during which an employee is
required to provide service in exchange for the award. SFAS No. 123R is
effective for WPS Resources beginning in the first quarter of 2006.
WPS Resources has chosen the modified prospective method of adopting the
Statement. Under this method, all share-based payment awards granted after
December 31, 2005, will be measured at fair value and recognized as a
component of income available for common shareholders over the requisite
service
period of the award. Additionally, compensation cost for the portion of awards
granted on or before December 31, 2005, for which the requisite service has
not been rendered, but which are outstanding as of the beginning of the first
quarter of 2006 will be recognized as the remaining requisite service is
rendered. The impact on WPS Resources' financial position and results of
operations will be dependent upon a number of factors, including share-based
awards granted in 2006. Because we do not know the number of share-based
awards
that will be granted in 2006, we cannot estimate the precise effect that
SFAS
No. 123R will have on our financial position and results of operations. However,
assuming the number of share-based awards granted in 2006 remains consistent
with prior years, we do not anticipate that the incremental impact to income
available for common shareholders of adopting SFAS No. 123R in 2006 will
differ significantly from the pro-forma amounts disclosed in
Note 1(t),
"Stock-Based
Compensation," for
prior years.
NOTE 2--FAIR
VALUE OF FINANCIAL INSTRUMENTS
The
following
methods and assumptions were used to estimate the fair value of each class
of
financial instrument for which it is practicable to estimate such
value:
Cash,
Short-Term
Investments, Energy Conservation Loans, Notes Payable, and Outstanding
Commercial Paper: The carrying amount approximates fair value due to the
short
maturity of these investments and obligations.
Nuclear
Decommissioning Trusts: Nuclear decommissioning trust investments were recorded
at fair value, net of taxes payable on unrealized gains and losses. In 2005,
the
qualified nuclear decommissioning trust assets were sold in conjunction with
the
sale of Kewaunee and the nonqualified nuclear decommissioning trust assets
were
liquidated. See Note 6, "Acquisitions
and Sales of Assets,"
for more
information.
Long-Term
Debt and
Preferred Stock: The fair values of long-term debt and preferred stock are
estimated based on the quoted market price for the same or similar issues
or on
the current rates offered to WPS Resources for debt of the same remaining
maturity.
Risk
Management
Activities: Assets and liabilities from risk management activities are recorded
at fair value pursuant to SFAS No. 133.
The
estimated fair
values of our financial instruments as of December 31 were:
(Millions)
|
|
2005
|
|
2004
|
|
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash
equivalents
|
|
$
|
27.7
|
|
$
|
27.7
|
|
$
|
40.0
|
|
$
|
40.0
|
|
Energy
conservation loans
|
|
|
1.5
|
|
|
1.5
|
|
|
1.6
|
|
|
1.6
|
|
Nuclear
decommissioning trusts
|
|
|
-
|
|
|
-
|
|
|
344.5
|
|
|
344.5
|
|
Nuclear
decommissioning trusts -
other
assets
|
|
|
-
|
|
|
-
|
|
|
26.8
|
|
|
26.8
|
|
Notes
payable
|
|
|
10.0
|
|
|
10.0
|
|
|
12.7
|
|
|
12.7
|
|
Commercial
paper
|
|
|
254.8
|
|
|
254.8
|
|
|
279.7
|
|
|
279.7
|
|
Long-term
debt
|
|
|
872.9
|
|
|
901.7
|
|
|
874.4
|
|
|
925.2
|
|
Preferred
stock
|
|
|
51.1
|
|
|
49.0
|
|
|
51.1
|
|
|
50.0
|
|
Risk
management activities -
net
|
|
|
91.7
|
|
|
91.7
|
|
|
50.0
|
|
|
50.0
|
|
NOTE 3--RISK
MANAGEMENT ACTIVITIES
The
following table
shows WPS Resources' assets and liabilities from risk management activities
as of December 31, 2005, and 2004:
|
|
Assets
|
|
Liabilities
|
|
(Millions)
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
Utility
Segments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric purchase contracts
|
|
$
|
22.0
|
|
$
|
11.0
|
|
$
|
-
|
|
$
|
-
|
|
Financial transmission rights
|
|
|
14.5
|
|
|
-
|
|
|
1.8
|
|
|
0.6
|
|
Nonregulated
Segments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity and foreign currency contracts
|
|
|
1,058.6
|
|
|
396.5
|
|
|
971.7
|
|
|
366.6
|
|
Fair
value hedges
|
|
|
4.2
|
|
|
3.8
|
|
|
12.9
|
|
|
2.3
|
|
Cash
flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
|
|
33.6
|
|
|
39.8
|
|
|
50.1
|
|
|
22.9
|
|
Interest rate swaps
|
|
|
-
|
|
|
-
|
|
|
4.7
|
|
|
8.7
|
|
Total
|
|
$
|
1,132.9
|
|
$
|
451.1
|
|
$
|
1,041.2
|
|
$
|
401.1
|
|
Balance
Sheet Presentation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
906.4
|
|
$
|
376.5
|
|
$
|
852.8
|
|
$
|
338.6
|
|
Long-term
|
|
|
226.5
|
|
|
74.6
|
|
|
188.4
|
|
|
62.5
|
|
Total
|
|
$
|
1,132.9
|
|
$
|
451.1
|
|
$
|
1,041.2
|
|
$
|
401.1
|
|
Assets
and
liabilities from risk management activities are classified as current or
long-term based upon the maturities of the underlying financial
instruments.
Utility
Segments
WPSC
has entered
into a limited number of electric purchase contracts that are accounted for
as
derivatives and are shown in the above table. Financial transmission rights
in
the above table include financial instruments used to manage the transmission
congestion costs of the electric utilities. In 2005, WPSC's portion of the
assets and liabilities related to financial transmission rights was
$13.6 million and $1.7 million, respectively. In 2004, all of the
utility segments' financial transmission rights belonged to WPSC. The PSCW
approved the recognition of a regulatory asset or liability for the fair
value
of derivative instruments. Thus, management believes any gains or losses
resulting from the eventual settlement of these derivative instruments will
be
collected from or refunded to customers.
Nonregulated
Segments
The
derivatives in
the nonregulated segments not designated as hedges under generally accepted
accounting principles are primarily commodity contracts used to manage price
risk associated with natural gas and electric energy purchase and sale
activities, and foreign currency contracts used to manage foreign currency
exposure related to ESI's Canadian operations. In addition, ESI entered into
a
series of derivative contracts (options) covering a specified number of barrels
of oil in order to manage exposure to the risk of an increase in oil prices
that
could result in a phase-out of Section 29 federal tax credits that can be
recognized from ESI's investment in a synthetic fuel production facility
for
2006 and 2007. See Note 1(q), "Income
Taxes,"
and Note 17,
"Commitments
and
Contingencies,"
for more
information. Changes in the fair value of non-hedge derivatives are recognized
currently in earnings.
Our
nonregulated
segments also enter into derivative contracts that are designated as either
fair
value or cash flow hedges. Fair value hedges are used to mitigate the risk
of
changes in the price of natural gas held in storage. The changes in the fair
value of these hedges are recognized currently in earnings, as are the changes
in fair value of the hedged items. Fair value hedge ineffectiveness recorded
in
nonregulated revenue on the Consolidated Statements of Income was a pre-tax
loss
of $2.5 million in 2005 and was not significant in 2004 or 2003. At
December 31, 2005, and 2004, pre-tax mark-to-market losses of
$5.8 million and $0.6 million, respectively, related to changes in the
difference between the spot and forward prices of natural gas were excluded
from
the assessment of hedge effectiveness. These losses were reported directly
in
earnings.
Commodity
contracts
that are designated as cash flow hedges extend through December 2007 and
are used to mitigate the risk of cash flow variability associated with the
future purchases and sales of natural gas and electricity. To the extent
they
are effective, the changes in the values of these contracts are included
in
other comprehensive income, net of taxes. Cash flow hedge ineffectiveness
recorded in nonregulated revenue on the Consolidated Statements of Income
was a
pre-tax loss of $2.6 million in 2005 and was not significant in 2004 or
2003. When testing for effectiveness, no portion of the derivative instruments
was excluded. Amounts recorded in other comprehensive income related to these
cash flow hedges will be recognized in earnings as the related contracts
are
settled, or if it is probable that the hedged transaction will not occur.
During
2005 and 2004, we reclassified after-tax gains of $3.1 million and
$1.9 million, respectively, from other comprehensive income into earnings
as a result of the discontinuance of cash flow hedge accounting for certain
hedge transactions. The amount reclassified in 2003 was not significant.
In the
next 12 months, subject to changes in market prices of natural gas and
electricity, we expect that an after-tax loss of $8.6 million will be
recognized in earnings as contracts are settled. We expect this amount to
be
substantially offset by settlement of the related nonderivative contracts
that
are being hedged.
In
the second quarter of 2005, a variable rate non-recourse debt instrument
used to
finance the purchase of Sunbury was restructured to a WPS Resources
obligation. An interest rate swap used to fix the interest rate on the Sunbury
non-recourse debt had been previously designated as a cash flow hedge. As
a
result of the debt restructuring, the hedged transaction will no longer occur.
This resulted in the recognition of a $9.1 million pre-tax loss (equivalent
to the mark-to-market value of the swap at the date of restructuring), which
was
recorded as a component of interest expense in the second quarter of 2005.
This
loss was previously deferred as a component of other comprehensive income
pursuant to hedge accounting rules. Subsequent to the restructuring, the
interest rate swap was re-designated as a cash flow hedge, along with an
additional interest rate swap, to fix the interest rate on the
WPS Resources obligation. The changes in the fair value of the effective
portion of these swaps are included in other comprehensive income, net of
deferred taxes, while the changes related to the ineffective portion are
recorded in earnings. During the year ended December 31, 2005, cash flow
hedge ineffectiveness recorded in earnings related to these swaps was not
significant. Amounts recorded in other comprehensive income related to these
swaps will be recognized as a component of interest expense as the interest
becomes due. In the next 12 months, we expect to recognize a $0.2 million
pre-tax reduction to interest expense related to these swaps, assuming interest
rates comparable to those at December 31, 2005. We did not
exclude
any
component of the derivative instruments' change in fair value from the
assessment of hedge effectiveness.
NOTE 4--SUNBURY
PLANT
In
the second quarter of 2005, ESI sold all of Sunbury's allocated emission
allowances. Prior to this decision, ESI had marketed for sale the Sunbury
plant
and certain other related assets (primarily inventory and unallocated emission
allowances) in combination with the allocated emission allowances. The Sunbury
facility sells power on a wholesale basis and is located in the PJM. Following
Duquesne Power, L.P.'s termination of the previously announced agreement to
sell Sunbury to Duquesne for approximately $120 million, ESI continued to
pursue the sale of Sunbury with the assistance of an investment banking firm,
but a suitable buyer was not found.
Total
sales
proceeds from the sale of Sunbury's emission allowances were
$109.9 million, resulting in a pre-tax gain of $85.9 million. The sale
of the emission allowances provides ESI with more time to consider various
alternatives for the Sunbury plant. All available solid fuel units at the
Sunbury plant were operated for most of 2005, as market conditions were
generally favorable. When market conditions are unfavorable, ESI plans to
place
the plant in a stand-by mode of operation, which serves to minimize future
operating expenses while maintaining several options for the plant (including
closing the plant, retaining the plant and operating it during favorable
economic periods, repowering the plant, or a potential future sale of the
plant). Dispatching Sunbury in a stand-by mode of operation helps focus
production on higher-priced periods, generally in the winter and mid-summer
months. The success of a stand-by mode of operation depends on Sunbury's
ability
to minimize costs during non-operating periods.
Prior
to the
decision to sell the emission allowances separately, the Sunbury plant,
allocated emission allowances, and other related assets had been classified
as
held for sale as a combined asset disposal group. However, because ESI is
no
longer committed to the sale of Sunbury as its only option, those assets
and
liabilities previously classified as held for sale that no longer meet the
held
for sale criteria outlined in SFAS No. 144, were required to be
reclassified to the appropriate held and used categories for all periods
presented. As a result, the allocated emission allowances that were sold
in May
2005 remain classified as held for sale at December 31, 2004, but the Sunbury
plant, unallocated emission allowances, and other related assets and liabilities
were reclassified as held and used.
All
long-lived
assets reclassified as held and used are required to be recorded individually
at
the lower of their carrying value before they were classified as assets held
for
sale (adjusted for any depreciation expense that would have been recognized
had
they been continuously classified as held and used) or fair value at the
date
the held for sale criteria were no longer met. Upon reclassification of the
Sunbury plant and related assets as held and used in 2005, ESI recorded a
non-cash, pre-tax impairment charge of $80.6 million. The impairment charge
substantially offsets the gain on the sale of the emission
allowances.
The
major classes
of assets held for sale at December 31, 2004, were as follows:
(Millions)
|
|
|
|
Property,
plant, and equipment, net
|
|
$
|
0.8
|
|
Other
assets:
|
|
|
|
|
Emission
allowances
|
|
|
23.3
|
|
Assets
held
for sale
|
|
$
|
24.1
|
|
NOTE 5--PROPERTY,
PLANT, AND EQUIPMENT
Property,
plant,
and equipment consist of the following utility, nonutility, and nonregulated
assets.
(Millions)
|
|
2005
|
|
2004
|
|
Electric
utility
|
|
$
|
2,108.3
|
|
$
|
2,409.4
|
|
Gas
utility
|
|
|
548.5
|
|
|
510.0
|
|
Total
utility
plant
|
|
|
2,656.8
|
|
|
2,919.4
|
|
Less:
Accumulated depreciation
|
|
|
1,054.7
|
|
|
1,260.9
|
|
Net
|
|
|
1,602.1
|
|
|
1,658.5
|
|
Construction
in progress
|
|
|
286.6
|
|
|
154.5
|
|
Nuclear
fuel,
less accumulated amortization
|
|
|
-
|
|
|
24.6
|
|
Net
utility
plant
|
|
|
1,888.7
|
|
|
1,837.6
|
|
|
|
|
|
|
|
|
|
Nonutility
plant
|
|
|
19.9
|
|
|
19.5
|
|
Less:
Accumulated depreciation
|
|
|
5.9
|
|
|
5.3
|
|
Net
nonutility plant
|
|
|
14.0
|
|
|
14.2
|
|
|
|
|
|
|
|
|
|
Electric
nonregulated
|
|
|
168.2
|
|
|
247.1
|
|
Gas
nonregulated
|
|
|
6.7
|
|
|
6.6
|
|
Other
nonregulated
|
|
|
20.1
|
|
|
20.1
|
|
Total
nonregulated property, plant, and equipment
|
|
|
195.0
|
|
|
273.8
|
|
Less:
Accumulated depreciation
|
|
|
48.3
|
|
|
49.1
|
|
Net
nonregulated property, plant, and equipment
|
|
|
146.7
|
|
|
224.7
|
|
Total
property, plant, and equipment
|
|
$
|
2,049.4
|
|
$
|
2,076.5
|
|
The
accumulated
provision for nuclear fuel, which represents nuclear fuel purchases and
amortization, totaled approximately $273 million at December 31,
2004.
NOTE 6--ACQUISITIONS
AND SALES OF ASSETS
Agreement
to Purchase Aquila's Michigan and Minnesota Natural Gas Distribution
Operations
On
September 21, 2005, WPS Resources, through wholly owned
subsidiaries, entered into two definitive agreements with Aquila to acquire
its
natural gas distribution operations in Michigan and Minnesota for approximately
$558 million, exclusive of direct costs of the acquisition. The purchase
price will increase for certain adjustments related to working capital,
including accounts receivable, unbilled revenue, inventory, and certain other
current assets. The purchase price is also subject to other closing and
post-closing adjustments, primarily net plant adjustments. The purchase price
will be paid in cash at the time of closing.
The
Michigan
natural gas assets provide natural gas distribution service in 147 cities
and
communities throughout Otsego, Grand Haven, and Monroe counties. The assets
operate under a cost-of-service environment and are currently allowed an
11.4%
return on equity on a 45% equity component of the regulatory capital
structure.
The
Minnesota
natural gas assets provide natural gas distribution service throughout the
state
in 165 cities and communities including Grand Rapids, Pine City, Rochester,
and
Dakota County. Like Michigan, the assets also operate under a cost-of-service
environment and are currently allowed an 11.7% return on equity on a 50%
equity
component of the regulatory capital structure.
WPS Resources
anticipates permanent financing for the acquisition to be raised through
the
issuance of a combination of equity and long-term debt. See
Note 21,
"Common
Equity,"
for a discussion
of the forward equity sale agreement entered into to fund a portion this
acquisition.
The
transaction is
subject to various state and other regulatory approvals, such as the MPSC
and
the Minnesota Public Utilities Commission, and is subject to compliance with
the
Hart-Scott-Rodino Act. MPSC approval was received in November 2005 and the
waiting period under the Hart-Scott-Rodino Act has expired. Assuming an approval
from the Minnesota Public Utilities Commission is obtained in a timely manner,
WPS Resources anticipates closing both transactions in the first half of
2006.
Sale
of
UPPCO Lands
DPC
In
November 2005, WPSC and DPC closed a transaction in which DPC acquired a
30%
ownership interest in Weston 4. Under terms of the agreement, WPSC received
$95.1 million in cash from DPC for its share of the costs through the date
of the closing. DPC will also remit payments to WPSC for its 30% share of
all
remaining costs to complete the construction of Weston 4 as well as
reimburse WPSC for its share of operating costs after the plant is completed
and
operational, which is anticipated in 2008.
Kewaunee
In
July 2005, Kewaunee returned to service following an unplanned outage that
began
in February 2005. On July 5, 2005, WPSC completed the sale of its 59% ownership
interest in Kewaunee to Dominion Energy Kewaunee, LLC, a subsidiary of Dominion
Resources, Inc. At the same time, Wisconsin Power and Light Company sold
its 41%
ownership interest in Kewaunee to Dominion.
WPSC's
share of the
cash proceeds from the sale was $112.5 million. Dominion received the
assets in WPSC's qualified decommissioning trust and assumed responsibility
for
the eventual decommissioning of Kewaunee. These trust assets had a pre-tax
fair
value of $243.6 million at closing. The sale of Kewaunee resulted in a loss
of $12.5 million, which includes the proceeds from the sale less the net
assets sold, adjusted by several additional items. The most significant of
these
adjustments is the fair value of an indemnity issued to cover certain costs
Dominion may incur related to the recent unplanned outage (see Note 18,
"Guarantees,"
for more
information). In addition, the adjustments include certain costs related
to the
termination of the plant operating agreement and withdrawal from
WPS Resources' investment in the Nuclear Management Company (NMC), which
served as the licensed operator of Kewaunee.
As
part of the sale, WPSC retained ownership of the assets contained in its
nonqualified decommissioning trust. Proceeds received from the liquidation
of
the nonqualified decommissioning trust were $127.1 million and will be
refunded to ratepayers. See Note 23, "Regulatory
Environment,"
for details
regarding regulatory treatment of the proceeds received from the nonqualified
decommissioning trust and the loss on the sale of Kewaunee.
At
the closing date, WPSC's share of the carrying value of the assets and
liabilities that were included within the sale agreement, or that were otherwise
eliminated pursuant to the sale, were as follows:
(Millions)
|
|
July
5, 2005
|
|
|
|
|
|
|
Qualified
decommissioning trust fund
|
|
$
|
243.6
|
|
Other
utility
plant, net
|
|
|
165.4
|
|
Other
current
assets
|
|
|
5.5
|
|
Total
assets
|
|
$
|
414.5
|
|
|
|
|
|
|
Regulatory
liabilities
|
|
$
|
(72.1
|
)
|
Accounts
payable
|
|
|
2.5
|
|
Asset
retirement obligations
|
|
|
376.4
|
|
Total
liabilities
|
|
$
|
306.8
|
|
Upon
the closing of
the sale, WPSC entered into a long-term power purchase agreement with Dominion
to purchase energy and capacity consistent with volumes available when WPSC
owned Kewaunee. The power purchase agreement extends through 2013 when the
plant's current operating license will expire. Fixed monthly payments under
the
power purchase agreement will approximate the expected costs of production
had
WPSC continued to own the plant. Therefore, management believes that the
sale of
Kewaunee and the related power purchase agreement provides more price certainty
for WPSC's customers and reduces WPSC's risk profile. In April 2004, WPSC
entered into an exclusivity agreement with Dominion. Under this agreement,
if
Dominion decides to extend the operating license of Kewaunee, Dominion can
negotiate only with WPSC during the exclusivity period for 59% of the plant
output under a new power purchase agreement that would extend beyond Kewaunee's
current operating license termination date. The exclusivity period started
on
the closing date of the sale, July 5, 2005, and extends through
December 21, 2011, after which Dominion can negotiate with other
parties.
Wausau,
Wisconsin, to Duluth, Minnesota, Transmission Line
On
April 18, 2003, the PSCW approved WPSC's request to transfer its interest
in the Wausau, Wisconsin, to Duluth, Minnesota, transmission line to ATC
in
exchange for an ownership interest in ATC. ATC is a for-profit transmission-only
company created by the transfer of transmission assets previously owned by
multiple electric utilities serving the upper Midwest. WPSC sold, at book
value,
$20.1 million of assets related to the Wausau to Duluth transmission line
to ATC in June 2003. No gain or loss was recognized on the transaction. In
December 2003, WPSC also transferred other transmission assets to ATC,
increasing its investment an additional $5.9 million. In 2005, 2004, and
2003, WPS Resources invested $57.0 million, $15.7 million, and
$14.0 million, respectively, in ATC, related to its agreement to fund
approximately half of the Wausau, Wisconsin, to Duluth, Minnesota, transmission
line. At December 31, 2005, WPS Resources' ownership interest in ATC
(held through its WPS Investments, LLC subsidiary) was 31.0%. Our
investment in ATC is described more fully in Note 10, "Investments
in
Affiliates, at Equity Method."
Sale
of
Peshtigo River Lands
On
October 5, 2004, WPSC sold at auction 279 acres of Peshtigo River
development lands located in Wisconsin for $12.2 million. Under terms of a
multi-phase agreement reached with the WDNR in 2001 related to lands near
the
Peshtigo River, the WDNR bought more than 5,000 acres of land for
$13.5 million in 2001. In December 2003, WPSC sold an additional 542
acres of land to the WDNR for $6.5 million. WPSC completed the multi-phase
agreement with the sale of 179 acres for $5.0 million to the WDNR on
December 9, 2004. Following the close of this final phase of the WDNR
agreement, WPSC donated an additional 5,176 acres to the state of Wisconsin.
Advantage
Energy Inc.
On
July 1, 2004, ESI acquired all of the outstanding stock of Advantage Energy
Inc., a New York based energy-marketing company founded in 1997. On the date
of
acquisition, Advantage served approximately 8,200 residential and commercial
customers with a peak load of approximately 275 megawatts. Consideration
for the
purchase consisted of an initial cash payment for the tangible and intangible
net worth of the company and an earn-out with a maximum cap and a declining
percentage to the seller.
Guardian
Pipeline
On
May 30, 2003, WPS Resources purchased a one-third interest in Guardian
Pipeline, LLC from CMS Gas Transmission Company for approximately
$26 million. Guardian Pipeline owns a natural gas pipeline, which began
operating in 2002, that stretches about 140 miles from near Joliet, Illinois,
into southern Wisconsin. The pipeline can transport up to 750 million cubic
feet of natural gas daily. Our interest in Guardian Pipeline is accounted
for as
an equity method investment and is described more fully in Note 10,
"Investments
in
Affiliates, at Equity Method."
De
Pere
Energy Center
On
December 16, 2002, WPSC completed the purchase of the 180-megawatt De Pere
Energy Center from Calpine Corporation, a California-based independent power
producer. Prior to this purchase, the power from the De Pere Energy Center
was
under long-term contract to WPSC and was accounted for as a capital lease.
This
power purchase agreement required Calpine to expand the facility in the future.
The contract was terminated concurrent with the purchase of the De Pere Energy
Center. The $120.4 million purchase included a $72.0 million payment
upon closing and a $48.4 million payment in December 2003. As a result
of the purchase, the capital lease obligation was reversed and the difference
between the capital lease asset and the $120.4 million purchase price was
recorded as a regulatory asset. Of the $47.8 million regulatory asset
initially recorded, $45.6 million is under the jurisdiction of the PSCW and
is being amortized over a 20-year period beginning on January 1, 2004.
Amortization of the remaining regulatory asset, which is under the jurisdiction
of the FERC and the MPSC, began in 2003 and will also occur over 20 years.
ECO
Coal
Pelletization #12
At
December 31, 2005, ESI holds a 70% ownership interest in ECO Coal Pelletization
#12, LLC, which holds an investment in an entity that produces synthetic
fuel
for tax credits under Section 29 of the Internal Revenue Code.
As
a result of prior transactions in which ECO #12 sold synthetic fuel producing
machinery to a third party, ESI held $3.5 million in escrow at December 31,
2002. As a result of the expiration of contingencies in the sale agreement
and
related matters, ESI recognized this as a gain in 2003.
On
December 19, 2002, ESI sold approximately 30% interest in ECO #12 to a
third party. The buyer purchased the Class A interest in ECO #12, giving
the
buyer a preferential allocation of tons of synthetic fuel produced and sold
annually. The buyer may be allocated additional tons of synthetic fuel if
ESI
makes them available, but neither party is obligated beyond the required
annual
allocation of tons. The buyer's share of operating losses generated from
the
synthetic fuel operation, $4.7 million, $3.4 million, and
$5.6 million, in 2005, 2004, and 2003, respectively, are recorded as
minority interest in the Consolidated Statements of Income.
ESI
received
consideration of $3.0 million cash, as well as a fixed and variable
note for this sale transaction. Payments under the variable Note are
contingent upon the achievement of specified levels of synthetic fuel production
by the facility. In conjunction with the sale, ESI agreed to make certain
payments to a third-party broker, consisting of an up-front payment of
$1.5 million (which was paid at the time of closing), $1.4 million in
2003, $1.9 million in 2004, and $0.5 million in 2005. A deferred gain
of $4.6 million and $6.9 million was reflected on ESI's balance sheet
at December 31, 2005, and 2004, respectively.
This
deferred gain
represents the present value of future payments under the fixed Note and
the up-front cash payments net of transaction costs. It does not include
an
amount for the variable note, which is contingent upon the synthetic fuel
production. Payments on the variable note are a function of fuel production
and recognized as a component of the gain when received. Pre-tax gains of
$7.1 million, $7.5 million, and 7.6 million were recognized as a
component of miscellaneous income in 2005, 2004, and 2003, respectively,
related
to the 2002 transaction.
NOTE 7--JOINTLY
OWNED UTILITY FACILITIES
Information
regarding WPSC's share of significant jointly owned electric-generating
facilities in service at December 31, 2005, is set forth
below:
(Millions,
except for percentages)
|
|
West
Marinette
Unit
No. 33
|
|
Columbia
Energy
Center
|
|
Edgewater
Unit
No. 4
|
|
Ownership
|
|
|
68.0
|
%
|
|
31.8
|
%
|
|
31.8
|
%
|
WPSC's
share of plant nameplate capacity (megawatts)
|
|
|
56.8
|
|
|
335.2
|
|
|
105.0
|
|
Utility
plant in service
|
|
$
|
18.5
|
|
$
|
146.8
|
|
$
|
31.7
|
|
Accumulated
depreciation
|
|
$
|
8.4
|
|
$
|
90.1
|
|
$
|
18.7
|
|
In-service
date
|
|
|
1993
|
|
|
1975
and 1978
|
|
|
1969
|
|
WPSC's
share of
direct expenses for these plants is included in the corresponding operating
expenses in the Consolidated Statements of Income. WPSC has supplied its
own
financing for all jointly-owned projects.
NOTE 8--NUCLEAR
DECOMMISSIONING TRUST
In
conjunction with the sale of Kewaunee in July 2005 (see Note 6,
"Acquisitions
and Sales of Assets,"
for details
regarding the sale of Kewaunee), the qualified decommissioning trust assets
were
transferred to Dominion and WPSC liquidated the assets contained in the
nonqualified decommissioning trust. Proceeds received from the liquidation
of
the nonqualified decommissioning trust will be refunded to ratepayers. See
Note 23, "Regulatory
Environment,"
for details
regarding regulatory treatment of the proceeds received from the nonqualified
decommissioning trust. As of December 31, 2004, the market value of the
external nuclear decommissioning trusts totaled $344.5 million, net of tax.
Investments
in the
nuclear decommissioning trusts were recorded at fair value at December 31,
2004.
The investments were presented net of related income tax effects on unrealized
gains, and represented the amount of assets that were available to accomplish
decommissioning. The nonqualified trust investments designated to pay income
taxes when unrealized gains became realized were classified as other assets.
At
December 31, 2004, the amount classified as other assets was
$26.8 million with an offsetting regulatory liability of the same amount
reflecting the expected reduction in future rates as unrealized gains in
the
nonqualified trust would have been realized. Information regarding the cost
and
fair value of the nuclear decommissioning trusts at December 31, 2004, net
of
tax, is set forth below:
Security
Type
(Millions)
|
|
Fair
Value
|
|
Cost
|
|
Unrealized
Gain
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash
equivalents
|
|
$
|
243.9
|
|
$
|
243.9
|
|
$
|
-
|
|
Equity
|
|
|
100.6
|
|
|
60.6
|
|
|
40.0
|
|
Balance
at
December 31
|
|
$
|
344.5
|
|
$
|
304.5
|
|
$
|
40.0
|
|
Decommissioning
costs collected in customer rates and charges for realized earnings from
the
trusts were included in depreciation expense. Realized after-tax trust earnings
totaled $41.0 million in 2005 as the trust assets were liquidated due to
the sale of Kewaunee. Realized after-tax trust earnings totaled
$5.5 million in 2004 and $38.7 million in 2003.
NOTE 9--REGULATORY
ASSETS AND LIABILITIES
The
following
regulatory assets and liabilities are reflected in our Consolidated Balance
Sheets as of December 31:
WPS Resources'
Regulatory Assets/Liabilities (Millions)
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Regulatory
assets
|
|
|
|
|
|
|
|
Environmental
remediation costs (net of insurance recoveries)
|
|
$
|
73.6
|
|
$
|
72.7
|
|
Deferred
nuclear costs
|
|
|
63.8
|
|
|
10.9
|
|
De
Pere
Energy Center
|
|
|
42.9
|
|
|
45.3
|
|
Minimum
pension liability
|
|
|
32.6
|
|
|
6.4
|
|
Deferred
MISO
costs
|
|
|
21.2
|
|
|
-
|
|
Reserve
for
uncollectible accounts
|
|
|
8.5
|
|
|
5.5
|
|
Income
tax
related items
|
|
|
6.8
|
|
|
1.6
|
|
Reduced
coal
deliveries
|
|
|
6.4
|
|
|
-
|
|
Asset
retirement obligations
|
|
|
3.8
|
|
|
-
|
|
Plant
related
costs
|
|
|
2.7
|
|
|
6.5
|
|
Unamortized
loss on debt
|
|
|
1.2
|
|
|
2.4
|
|
Funding
for
enrichment facilities
|
|
|
1.2
|
|
|
1.8
|
|
Other
|
|
|
7.3
|
|
|
7.8
|
|
Total
|
|
$
|
272.0
|
|
$
|
160.9
|
|
|
|
|
|
|
|
|
|
Regulatory
liabilities
|
|
|
|
|
|
|
|
Cost
of
removal reserve
|
|
$
|
190.7
|
|
$
|
186.2
|
|
Non-qualified
decommissioning trust
|
|
|
126.9
|
|
|
-
|
|
Derivatives
|
|
|
36.4
|
|
|
11.0
|
|
Income
tax
related items
|
|
|
8.8
|
|
|
11.2
|
|
Deferred
ATC
and MISO costs
|
|
|
3.8
|
|
|
1.6
|
|
Deferred
gain
on emission allowance sales
|
|
|
2.4
|
|
|
3.7
|
|
Weston 4
costs
|
|
|
2.3
|
|
|
-
|
|
Demand-side
management expenditures
|
|
|
1.4
|
|
|
1.1
|
|
Asset
retirement obligations
|
|
|
-
|
|
|
46.6
|
|
Unrealized
gain on decommissioning trust
|
|
|
-
|
|
|
26.8
|
|
Other
|
|
|
0.5
|
|
|
0.1
|
|
Total
|
|
$
|
373.2
|
|
$
|
288.3
|
|
Our
utility
subsidiaries expect to recover their regulatory assets and return their
regulatory liabilities through rates charged to customers based on specific
ratemaking decisions or precedent for each item over periods specified by
the
regulators or over the normal operating period of the assets and liabilities
to
which they relate. Except for amounts expended for manufactured gas plant
remediation, WPSC is recovering carrying costs for all regulatory assets.
Historically, WPSC has recognized carrying costs at its weighted average
cost of
capital; however, pursuant to PSCW order, carrying costs related to some
regulatory assets such as the 2005 Kewaunee outage and MISO costs are being
recovered based on the composite short-term debt rate. UPPCO may recover
carrying costs on environmental regulatory assets. Based on prior and current
rate treatment for such costs, we believe it is probable that WPSC and UPPCO
will continue to recover from customers the regulatory assets described
above.
See
Note 3,
"Risk
Management Activities";
Note 6,
"Acquisitions
and Sales of Assets";
Note 15,
"Asset
Retirement Obligations";
Note 17,
"Commitments
and Contingencies";
Note 19,
"Employee
Benefit Plans,"
and Note 23,
"Regulatory
Environment,"
for more
information on some of the more significant regulatory assets and liabilities
listed in the above table.
NOTE 10--INVESTMENTS
IN AFFILIATES, AT EQUITY METHOD
Investments
in
corporate joint ventures and other companies accounted for under the equity
method at December 31, 2005, and 2004 follow.
(Millions)
|
|
2005
|
|
2004
|
|
ATC
|
|
$
|
186.1
|
|
$
|
113.4
|
|
Guardian
Pipeline
|
|
|
30.8
|
|
|
29.0
|
|
Wisconsin
River Power Company
|
|
|
10.1
|
|
|
12.8
|
|
Other
|
|
|
3.0
|
|
|
6.8
|
|
Investments
in affiliates, at equity method
|
|
$
|
230.0
|
|
$
|
162.0
|
|
Investments
in
affiliates under the equity method are a component of other assets on the
Consolidated Balance Sheets, and the equity income is recorded in miscellaneous
income on the Consolidated Statements of Income. Most of the equity income
is
taxable to the investor, rather than the investees, due to the flow through
nature of several of the investees' business structures. Accordingly, the
provision for income taxes includes our taxes on this equity
income.
ATC
WPS Investments,
LLC, a consolidated subsidiary of WPS Resources, had a 31.0% ownership
interest in ATC at December 31, 2005. ATC is a for-profit,
transmission-only company. It owns, maintains, monitors, and operates, electric
transmission assets in portions of Wisconsin, Michigan, and Illinois. Its
assets
previously were owned and operated by multiple electric utilities serving
the
upper Midwest, all of which transferred their transmission assets to ATC
in
exchange for an ownership interest. A Wisconsin law encouraged utilities
in the
state to transfer ownership and control of their transmission assets to a
state-wide transmission company. The MISO directs ATC's operation of the
transmission system.
During
2003, WPSC
transferred its interest in the Wausau, Wisconsin, to Duluth, Minnesota,
transmission line to ATC. WPS Resources has funded 50% of the construction
expenditures for this line through 2005, resulting in an increased investment
in
ATC. See Note 6, "Acquisitions
and Sales of Assets,"
for more
information on these transactions.
WPSC
and UPPCO
record related-party transactions for services provided to and network
transmission services received from ATC. The charges to ATC for services
provided by WPSC were $8.7 million, $9.3 million, and
$14.4 million in 2005, 2004, and 2003, respectively. UPPCO charged
$2.6 million, $6.7 million, and $4.8 million in 2005, 2004, and
2003, respectively for services provided. Network transmission service costs
paid to ATC by WPSC were $50.8 million, $42.6 million, and
$33.6 million in 2005, 2004, and 2003, respectively. UPPCO recorded network
transmission service costs of $3.4 million, $4.0 million, and
$4.2 million in 2005, 2004, and 2003, respectively.
WPS Resources
recorded dividends received of $17.8 million, $11.7 million, and
$7.5 million from ATC in 2005, 2004, and 2003 respectively.
Guardian
Pipeline
WPS Investments,
LLC, a consolidated subsidiary of WPS Resources, purchased a 33% ownership
interest in Guardian Pipeline, LLC on May 30, 2003. Guardian Pipeline owns
a natural gas pipeline, which began operating in 2002, that stretches about
140
miles from near Joliet, Illinois, into southern Wisconsin. It can transport
up
to 750 million cubic feet of natural gas daily.
ESI
records related
party transactions for purchases from Guardian Pipeline. These purchases
amounted to $0.6 million, $0.4 million, and $0.1 million in 2005,
2004, and 2003, respectively.
Wisconsin
River Power Company
WPSC
owns 50% of
the voting stock of Wisconsin River Power Company, which operates two
hydroelectric plants on the Wisconsin River and
an oil-fired combustion turbine. Two-thirds of the energy output of
the hydroelectric plants is sold to WPSC, and the remaining one-third is
sold to
Wisconsin Power and Light. The electric power from the combustion turbine
is
sold in equal parts to WPSC and Wisconsin Power and Light.
WPSC
records
related party transactions for sales to and purchases from Wisconsin River
Power. Revenues from services provided to Wisconsin River Power were
$1.8 million, $1.1 million, and $1.4 million for 2005, 2004, and
2003, respectively. Purchases from Wisconsin River Power by WPSC were
$4.3 million, $3.2 million, and $2.3 million for 2005, 2004, and
2003, respectively.
WPSC
recorded
dividends received of $7.8 million, $6.0 million, and
$1.5 million from Wisconsin River Power in 2005, 2004, and 2003
respectively.
Other
Investments
Other
investments
accounted for under the equity method include various investments, including
a
20% investment in the NMC at December 31, 2004. After the sale of Kewaunee,
WPS Resources' investment in the NMC was liquidated. The NMC operates
nuclear power plants in the upper Midwest. WPSC recorded related party
transactions for services provided by the NMC for the management and operation
of Kewaunee prior to its sale to Dominion in July 2005. Management service
fees
paid to the NMC by WPSC were $15.1 million, $26.7 million, and
$25.6 million in 2005, 2004, and 2003, respectively.
Other
investments
accounted for under the equity method are not significant at December 31,
2005.
Financial
Data
Combined
financial
data of ATC, Wisconsin River Power, and Guardian Pipeline follows.
(Millions)
|
|
2005
|
|
2004
|
|
2003
|
|
Income
statement data
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
339.8
|
|
$
|
305.2
|
|
$
|
252.9
|
|
Operating
expenses
|
|
|
(189.4
|
)
|
|
(180.6
|
)
|
|
(147.6
|
)
|
Other
expense
|
|
|
(37.8
|
)
|
|
(29.8
|
)
|
|
(29.5
|
)
|
Net
income
|
|
$
|
112.6
|
|
$
|
94.8
|
|
$
|
75.8
|
|
|
|
|
|
|
|
|
|
|
|
|
WPS Resources'
equity in net income
|
|
$
|
31.8
|
|
$
|
23.9
|
|
$
|
16.0
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
sheet data
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
$
|
40.3
|
|
$
|
44.2
|
|
$
|
48.8
|
|
Non-current
assets
|
|
|
1,791.8
|
|
|
1,444.5
|
|
|
1,219.5
|
|
Total
assets
|
|
$
|
1,832.1
|
|
$
|
1,488.7
|
|
$
|
1,268.3
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
$
|
158.5
|
|
$
|
209.1
|
|
$
|
89.3
|
|
Long-term
debt
|
|
|
796.9
|
|
|
610.8
|
|
|
613.8
|
|
Other
non-current liabilities
|
|
|
102.4
|
|
|
9.2
|
|
|
14.6
|
|
Shareholders'
equity
|
|
|
774.3
|
|
|
659.6
|
|
|
550.6
|
|
Total
liabilities and shareholders' equity
|
|
$
|
1,832.1
|
|
$
|
1,488.7
|
|
$
|
1,268.3
|
|
Of
WPS Resources' equity in net income disclosed above, $4.9 million,
$6.2 million,
and
$4.7 million relates to WPSC's investment in Wisconsin River Power in 2005,
2004, and 2003 respectively.
NOTE 11--GOODWILL
AND OTHER INTANGIBLE ASSETS
Goodwill
recorded
by WPS Resources was $36.8 million at December 31, 2005, 2004,
and 2003. Of this amount, $36.4 million is recorded in WPSC's natural gas
segment relating to its merger with Wisconsin Fuel and Light. The remaining
$0.4 million of goodwill relates to ESI.
Goodwill
and
purchased intangible assets are included in other assets on the Consolidated
Balance Sheets. Information in the tables below relates to total purchased
identifiable intangible assets for the years indicated (excluding assets
held
for sale).
(Millions)
|
|
December 31,
2005
|
|
Asset
Class
|
|
|
Average
Life
(Years
|
)
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
Emission
allowances
|
|
|
1
to 30
|
|
$
|
41.2
|
|
$
|
(22.2
|
)
|
$
|
19.0
|
|
Customer
related
|
|
|
1
to 8
|
|
|
10.2
|
|
|
(5.6
|
)
|
|
4.6
|
|
Other
|
|
|
1
to 30
|
|
|
4.2
|
|
|
(0.9
|
)
|
|
3.3
|
|
Total
|
|
|
|
|
$
|
55.6
|
|
$
|
(28.7
|
)
|
$
|
26.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions)
|
|
December 31,
2004
|
Asset
Class
|
|
|
Average
Life
(Years
|
)
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
Emission
allowances
|
|
|
1
to 30
|
|
$
|
15.8
|
|
$
|
(0.9
|
)
|
$
|
14.9
|
|
Customer
related
|
|
|
1
to 8
|
|
|
11.2
|
|
|
(4.6
|
)
|
|
6.6
|
|
Other
|
|
|
1
to 30
|
|
|
4.2
|
|
|
(0.7
|
)
|
|
3.5
|
|
Total
|
|
|
|
|
$
|
31.2
|
|
$
|
(6.2
|
)
|
$
|
25.0
|
|
An
impairment charge related to Sunbury, which was recorded in the second quarter
of 2005, included the write-down of $6.6 million of unallocated emission
allowances. These emission allowances were reflected in the above table at
December 31, 2004 (see Note 4, "Sunbury
Plant,"
for more
information). Because ESI sold all of Sunbury's allocated emission allowances
in
the first half of 2005, emission allowances are currently purchased in the
market as needed for the operation of this plant, which resulted in the increase
in emission allowances at December 31, 2005, compared to December 31,
2004.
A
customer related intangible asset in the amount of $7.3 million was
recorded in conjunction with a 2004 acquisition. This intangible asset was
adjusted to $7.0 million in 2005 as a result of certain purchase price
adjustments. The asset is being amortized over a period of eight
years.
Intangible
asset
amortization expense, in the aggregate, for the years ended
December 31, 2005, 2004, and 2003, was $24.1 million,
$2.4 million, and $1.7 million, respectively. Amortization expense
increased in 2005 due to Sunbury's current policy of purchasing emission
allowances as required to operate the plant. The purchased emission allowances
are amortized to expense as they are used in the production of power.
Amortization
expense for the next five fiscal years is estimated as follows:
Estimated
Amortization Expense:
|
|
|
|
For
year
ending December 31, 2006
|
$17.8 million
|
For
year
ending December 31, 2007
|
1.4 million
|
For
year
ending December 31, 2008
|
1.5 million
|
For
year
ending December 31, 2009
|
1.2 million
|
For
year
ending December 31, 2010
|
1.0 million
|
NOTE 12--LEASES
WPS Resources
leases various property, plant, and equipment. Terms of the leases vary,
but
generally require WPS Resources to pay property taxes, insurance premiums,
and maintenance costs associated with the leased property. Rental expense
attributable to operating leases was $6.6 million, $5.7 million, and
$5.2 million in 2005, 2004, and 2003 respectively. Future minimum rental
obligations under non-cancelable operating leases, are payable as
follows:
Year
ending December 31
(Millions)
|
|
|
|
|
|
|
|
2006
|
|
$
|
5.1
|
|
2007
|
|
|
4.0
|
|
2008
|
|
|
3.4
|
|
2009
|
|
|
2.5
|
|
2010
|
|
|
2.4
|
|
Later
years
|
|
|
6.9
|
|
Total
payments
|
|
$
|
24.3
|
|
NOTE 13--SHORT-TERM
DEBT AND LINES OF CREDIT
WPS Resources
has a syndicated $500 million five-year revolving credit facility which
expires in June 2010. WPSC has a syndicated $115 million five-year
revolving credit facility containing annual trigger date provisions to provide
short-term borrowing flexibility and security for commercial paper
outstanding.
In
November 2005, WPS Resources entered into two unsecured revolving credit
agreements of $557.5 million and $300 million with J.P. Morgan Chase
Bank and Banc of America Securities LLC. These credit facilities are bridge
facilities intended to backup commercial paper borrowings related to the
purchase of the Michigan and Minnesota natural gas distribution operations
from
Aquila and to support purchase price adjustments related to working capital
at
the time of the closing of the transactions. The capacity under the bridge
facilities will be reduced by the amount of proceeds from any long-term
financing we complete prior to closing, with the exception of proceeds from
the
November 2005 equity offering. The credit agreements will be further reduced
as
permanent or replacement financing is secured. Under the $300 million
credit agreement, loans cannot exceed the purchase price adjustments in
connection with the Aquila acquisitions and no more than $200 million can
be borrowed at the time of the first acquisition. Under the $300 million
facility, these loan commitments will be reduced by one-third 90 days after
the
consummation of the applicable acquisition with the remaining two-thirds
due 180
days after the consummation of the applicable acquisition (or earlier if
long-term financing or replacement credit agreements are executed). Both
of
these credit agreements mature on September 5, 2007. These credit agreements
have representations and covenants that are similar to those in our existing
credit facilities.
The
information in
the table below relates to short-term debt and lines of credit for the years
indicated.
(Millions,
except for percentages)
|
|
2005
|
|
2004
|
|
2003
|
|
As
of
end of year
|
|
|
|
|
|
|
|
|
|
|
Commercial
paper outstanding
|
|
$
|
254.8
|
|
$
|
279.7
|
|
$
|
28.0
|
|
Average
discount rate on outstanding commercial paper
|
|
|
4.54
|
%
|
|
2.46
|
%
|
|
1.15
|
%
|
Short-term
notes payable outstanding
|
|
$
|
10.0
|
|
$
|
12.7
|
|
$
|
10.0
|
|
Average
interest rate on short-term notes payable
|
|
|
4.32
|
%
|
|
2.52
|
%
|
|
1.12
|
%
|
Available
(unused) lines of credit1
|
|
$
|
249.1
|
|
$
|
161.9
|
|
$
|
288.9
|
|
For
the year
|
|
|
|
|
|
|
|
|
|
|
Maximum
amount of short-term debt
|
|
$
|
310.7
|
|
$
|
312.5
|
|
$
|
194.2
|
|
Average
amount of short-term debt
|
|
$
|
174.4
|
|
$
|
75.3
|
|
$
|
104.3
|
|
Average
interest rate on short-term debt
|
|
|
3.21
|
%
|
|
1.82
|
%
|
|
1.38
|
%
|
1Amount
does not
include bridge credit facilities of $857.5 million
The
commercial
paper has varying maturity dates ranging from January 5, 2006 through January
20, 2006.
NOTE 14--LONG-TERM
DEBT
At
December 31 (Millions)
|
|
2005
|
|
2004
|
|
First
mortgage bonds -
WPSC
|
|
|
|
|
|
|
|
|
|
Series |
|
|
Year
Due
|
|
|
|
|
|
|
|
|
|
|
6.90
|
%
|
|
2013
|
|
$
|
22.0
|
|
$
|
22.0
|
|
|
|
|
7.125
|
%
|
|
2023
|
|
|
0.1
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
notes
- WPSC
|
|
|
|
|
|
|
|
|
|
Series |
|
|
Year
Due
|
|
|
|
|
|
|
|
|
|
|
6.125
|
%
|
|
2011
|
|
|
150.0
|
|
|
150.0
|
|
|
|
|
4.875
|
%
|
|
2012
|
|
|
150.0
|
|
|
150.0
|
|
|
|
|
4.80
|
%
|
|
2013
|
|
|
125.0
|
|
|
125.0
|
|
|
|
|
6.08
|
%
|
|
2028
|
|
|
50.0
|
|
|
50.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
mortgage bonds - UPPCO
|
|
|
|
|
|
|
|
|
|
Series |
|
|
Year
Due
|
|
|
|
|
|
|
|
|
|
|
9.32
|
%
|
|
2021
|
|
|
14.4
|
|
|
15.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured
senior notes - WPS Resources
|
|
|
|
|
|
|
|
|
|
Series |
|
|
Year
Due
|
|
|
|
|
|
|
|
|
|
|
7.00
|
%
|
|
2009
|
|
|
150.0
|
|
|
150.0
|
|
|
|
|
5.375
|
%
|
|
2012
|
|
|
100.0
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured
term loan due 2010 - WPS Resources
|
|
65.6
|
|
|
-
|
|
Term
loans
-
nonrecourse,
collateralized by nonregulated assets
|
|
16.4
|
|
|
82.3
|
|
Tax
exempt
bonds
|
|
27.0
|
|
|
27.0
|
|
Senior
secured note
|
|
2.4
|
|
|
2.7
|
|
Total
|
|
872.9
|
|
|
874.4
|
|
Unamortized
discount and premium on bonds and debt
|
|
(1.8
|
)
|
|
(2.0
|
)
|
Total
long-term debt
|
|
871.1
|
|
|
872.4
|
|
Less
current
portion
|
|
(4.0
|
)
|
|
(6.7
|
)
|
Total
long-term debt
|
$
|
867.1
|
|
$
|
865.7
|
|
On
June 17, 2005, $62.9 million of non-recourse debt at ESI collateralized by
nonregulated assets was restructured to a five-year WPS Resources
obligation as a result of the sale of Sunbury's allocated
emission
allowances. In addition, $2.7 million drawn on a line of credit at ESI was
rolled into the five-year WPS Resources obligation. The floating interest
rate on the total five-year WPS Resources' obligation of $65.6 million
has been fixed at 4.595% through two interest rate swaps.
All
of WPSC's debt
securities are subject to the terms and conditions of WPSC's First Mortgage
Indenture. Under the terms of the indenture, substantially all property owned
by
WPSC is pledged as collateral for these outstanding debt securities. All
these
debt securities require semiannual payments of interest. All principal payments
are due on the maturity date of each series. All WPSC senior notes become
non-collateralized if WPSC retires all of its outstanding first mortgage
bonds.
Under
the terms of
UPPCO's First Mortgage Indenture, substantially all property owned by UPPCO
is
pledged as collateral for this outstanding debt series. Interest payments
are
due semiannually on May 1 and November 1 with a sinking fund payment of $900,000
due each November 1. The final sinking fund payment due November 1, 2021,
will
completely retire the series.
Borrowings
by ESI
under term loans and collateralized by nonregulated assets totaled
$16.4 million at December 31, 2005. The assets of
WPS New England Generation, Inc. and WPS Canada Generation, Inc.,
subsidiaries of ESI, collateralize $4.7 million and $11.7 million,
respectively, of the total outstanding amount. Both have semiannual installment
payments, an interest rate of 8.75%, and mature in May 2010.
In
April 2001, the Schuylkill County Industrial Development Authority issued
$27.0 million of refunding tax-exempt bonds. At the time of issuance of the
refunding bonds, WPS Westwood Generation, LLC, a subsidiary of ESI, owned
the original bonds, the proceeds of which were used in substantial part to
purchase facilities. Upon issuance of the refunding bonds, the original bonds
were paid off. WPS Westwood Generation was paid $27.0 million from the
proceeds of the refunding bonds for the retirement of the original bonds
plus
accrued interest. WPS Westwood Generation is now obligated to pay the
refunding bonds with monthly payments that have a floating interest rate
that is
reset weekly. At December 31, 2005, the interest rate was 3.5%. The bonds
mature in April 2021. WPS Resources agreed to guarantee WPS Westwood
Generation's obligation to provide sufficient funds to pay the refunding
bonds
and the related obligations and indemnities.
Upper
Peninsula
Building Development Corporation has a senior secured Note of
$2.4 million as of December 31, 2005, which requires semiannual
payments at an interest rate of 9.25%, and matures in 2011. The Note is
secured by a first mortgage lien on the building they own, which is also
leased
to UPPCO for use as their corporate headquarters.
At
December 31, 2005, WPS Resources and its subsidiaries were in
compliance with all covenants relating to outstanding debt. A schedule of
all
principal debt payment amounts, including bond maturities and early retirements,
for WPS Resources is as follows:
Year
ending
December 31
(Millions)
|
|
|
|
|
|
|
|
|
2006
|
|
$
|
4.0
|
|
2007
|
|
|
4.5
|
|
2008
|
|
|
5.2
|
|
2009
|
|
|
155.6
|
|
2010
|
|
|
69.2
|
|
Later
years
|
|
|
634.4
|
|
Total
payments
|
|
$
|
872.9
|
|
NOTE 15--ASSET
RETIREMENT OBLIGATIONS
Adoption
of
SFAS No. 143
Legal
retirement
obligations previously identified at WPSC under the provisions of SFAS
No. 143, "Accounting for Asset Retirement Obligations," related primarily
to the final decommissioning of Kewaunee. As discussed in Note 6,
"Acquisitions
and Sales of Assets,"
the sale of
Kewaunee to Dominion was completed on July 5, 2005. As a result of the sale,
Dominion assumed the asset retirement obligation related to Kewaunee. Upon
adoption of SFAS No. 143, other legal obligations were also identified
related to WPSC, but these obligations were not significant.
In
connection with the implementation of SFAS No. 143, ESI identified a legal
retirement obligation related to the closure of an ash basin located at Sunbury.
The asset retirement obligation associated with Sunbury is recorded as a
liability on the Consolidated Balance Sheet. The adoption of SFAS No. 143
at ESI resulted in a $0.3 million negative after-tax cumulative effect of
change in accounting principle in the first quarter of 2003 related to recording
a liability for the closure of this ash basin.
Adoption
of
Interpretation No. 47
WPS Resources
adopted the provisions of Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations," as of December 31, 2005. Upon
adoption of this interpretation, WPS Resources recorded liabilities for
conditional asset retirement obligations, which previously we believed to
be
outside the scope of SFAS No. 143.
The
utility
segments identified conditional asset retirement obligations related to asbestos
abatement at certain generation facilities, office buildings, and service
centers; disposal of PCB-contaminated transformers; and closure of fly-ash
landfills at certain generation facilities. Upon implementation of
Interpretation No. 47 on December 31, 2005, the utility segments
recorded a net asset retirement cost of $1.5 million and an asset
retirement obligation of $8.2 million. This resulted in a $6.7 million
cumulative effect of change in accounting principle before taxes. This amount
was deferred as a regulatory asset as we obtained approval to defer the
cumulative effect of adopting the Interpretation and believe it is probable
that
the actual cost to dispose of the assets will be recoverable in future rates.
At
December 31, 2005, the utilities had already recorded a $3.1 million
regulatory liability related to the conditional asset retirement obligations
discussed above, pertaining to amounts previously recovered in customer rates
for the disposal of these assets. This $3.1 million regulatory liability
was netted against the regulatory assets recorded upon adoption of the
Interpretation.
Conditional
asset
retirement obligations identified at ESI relate to asbestos abatement at
certain
generation facilities. Upon implementation of Interpretation No. 47 on
December 31, 2005, ESI recorded a net asset retirement cost of
$1.3 million and an asset retirement obligation of $3.9 million,
resulting in an after-tax cumulative effect of change in accounting principles
of $1.6 million ($2.6 million before taxes).
If
WPS Resources and WPSC had applied the provisions of Interpretation No.47
as of January 1, 2003, the pro forma impacts on prior periods' Consolidated
Balance Sheets would not differ materially from the conditional asset retirement
obligations recorded as of December 31, 2005, and the pro forma impacts on
income available for common shareholders, as well as basic and diluted earnings
per common share, would not be material.
Changes
to
Asset Retirement Obligation Liabilities
The
following table
describes all changes to the asset retirement obligations of WPS Resources
through December 31, 2005, including the adoption of Interpretation
No. 47.
|
|
|
|
|
|
|
|
|
|
Regulated
Utilities
|
|
|
|
|
|
(Millions)
|
|
WPSC
|
|
UPPCO
|
|
ESI
|
|
Total
|
|
Asset
retirement obligations at January 1, 2003
|
|
$
|
324.8
|
|
$
|
-
|
|
$
|
2.0
|
|
$
|
326.8
|
|
Accretion
expense
|
|
|
19.2
|
|
|
-
|
|
|
0.1
|
|
|
19.3
|
|
Asset
retirement obligations at December 31, 2003
|
|
|
344.0
|
|
|
-
|
|
|
2.1
|
|
|
346.1
|
|
Accretion
expense
|
|
|
20.4
|
|
|
-
|
|
|
0.1
|
|
|
20.5
|
|
Asset
retirement obligations at December 31, 2004
|
|
|
364.4
|
|
|
-
|
|
|
2.2
|
|
|
366.6
|
|
Accretion
expense
|
|
|
12.4
|
|
|
-
|
|
|
0.2
|
|
|
12.6
|
|
Asset
retirement obligation transferred to Dominion
|
|
|
(376.4
|
)
|
|
-
|
|
|
-
|
|
|
(376.4
|
)
|
Adoption
of
Interpretation No. 47
|
|
|
7.3
|
|
|
0.9
|
|
|
3.9
|
|
|
12.1
|
|
Asset
retirement obligations at December 31, 2005
|
|
$
|
7.7
|
|
$
|
0.9
|
|
$
|
6.3
|
|
$
|
14.9
|
|
NOTE 16--INCOME
TAXES
The
principal
components of our deferred tax assets and liabilities recognized in the balance
sheets as of December 31 are as follows:
(Millions)
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
|
Plant
related
|
|
$
|
77.8
|
|
$
|
59.0
|
|
Deferred
tax
credit carryforwards
|
|
|
65.6
|
|
|
74.0
|
|
Employee
benefits
|
|
|
32.1
|
|
|
31.5
|
|
Regulatory
deferrals
|
|
|
31.3
|
|
|
1.8
|
|
Deferred
income and deductions
|
|
|
21.2
|
|
|
17.5
|
|
State
capital
and operating loss carryforwards
|
|
|
13.1
|
|
|
11.3
|
|
Other
comprehensive income
|
|
|
8.0
|
|
|
16.4
|
|
Other
|
|
|
2.5
|
|
|
7.5
|
|
Total
deferred tax assets
|
|
|
251.6
|
|
|
219.0
|
|
|
|
|
|
|
|
|
|
Valuation
allowance
|
|
|
(2.5
|
)
|
|
(1.5
|
)
|
Net
deferred
tax assets
|
|
$
|
249.1
|
|
$
|
217.5
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
Risk
management activities, net
|
|
$
|
20.2
|
|
$
|
8.0
|
|
Plant
related
|
|
|
273.2
|
|
|
252.5
|
|
Regulatory
deferrals
|
|
|
17.2
|
|
|
13.2
|
|
Deferred
income and deductions
|
|
|
3.5
|
|
|
3.5
|
|
Employee
benefits
|
|
|
3.2
|
|
|
11.0
|
|
Other
comprehensive income
|
|
|
1.3
|
|
|
5.8
|
|
Other
|
|
|
2.8
|
|
|
3.6
|
|
Total
deferred tax liabilities
|
|
$
|
321.4
|
|
$
|
297.6
|
|
|
|
|
|
|
|
|
|
Consolidated
Balance Sheet Presentation:
|
|
|
|
|
|
|
|
Current
deferred tax liabilities
|
|
$
|
13.5
|
|
$
|
9.1
|
|
Long-term
deferred tax liabilities
|
|
|
58.8
|
|
|
71.0
|
|
Net
deferred
tax liabilities
|
|
$
|
72.3
|
|
$
|
80.1
|
|
Deferred
tax credit
carryforwards include $63.7 million of alternative minimum tax credits
related to tax credits available under Section 29 of the Internal Revenue
Code.
These alternative minimum tax credit carryforwards can be carried forward
indefinitely. Carryforward periods for state capital and operating loss
carryforwards vary, but in the majority of states in which we do business,
the
period is 15 years or more. The balance of the carryforwards of state net
operating losses is $235.0 million for all states. Valuation
allowances
have
been established for certain state operating and capital loss carryforwards
due
to the uncertainty of the ability to realize the benefit of these losses
in the
future.
The
following table
presents a reconciliation of federal income taxes (which are calculated by
multiplying the statutory federal income tax rate by book income before federal
income tax) to the provision for income taxes reported in the Consolidated
Statements of Income.
(Millions,
except for percentages)
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
Rate
|
|
Amount
|
|
Rate
|
|
Amount
|
|
Rate
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory
federal income tax
|
|
|
35.0
|
%
|
$
|
73.1
|
|
|
35.0
|
%
|
$
|
57.6
|
|
|
35.0
|
%
|
$
|
42.5
|
|
State
income
taxes, net
|
|
|
4.2
|
|
|
8.8
|
|
|
3.5
|
|
|
5.8
|
|
|
8.0
|
|
|
9.8
|
|
Plant
related
|
|
|
0.3
|
|
|
0.6
|
|
|
0.1
|
|
|
0.1
|
|
|
(0.9
|
)
|
|
(1.1
|
)
|
Benefits
and
compensation
|
|
|
(2.3
|
)
|
|
(4.8
|
)
|
|
(2.3
|
)
|
|
(3.7
|
)
|
|
(1.8
|
)
|
|
(2.2
|
)
|
Investment
tax credit
|
|
|
(0.8
|
)
|
|
(1.7
|
)
|
|
(0.9
|
)
|
|
(1.5
|
)
|
|
(1.4
|
)
|
|
(1.7
|
)
|
Federal
tax
credits
|
|
|
(14.5
|
)
|
|
(30.3
|
)
|
|
(19.9
|
)
|
|
(32.8
|
)
|
|
(15.5
|
)
|
|
(18.9
|
)
|
Other
differences, net
|
|
|
0.5
|
|
|
1.0
|
|
|
(2.3
|
)
|
|
(3.8
|
)
|
|
(1.2
|
)
|
|
(1.4
|
)
|
Effective
income tax
|
|
|
22.4
|
%
|
$
|
46.7
|
|
|
13.2
|
%
|
$
|
21.7
|
|
|
22.2
|
%
|
$
|
27.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
|
|
$
|
43.2
|
|
|
|
|
$
|
11.4
|
|
|
|
|
$
|
9.9
|
|
State
|
|
|
|
|
|
17.2
|
|
|
|
|
|
11.7
|
|
|
|
|
|
14.0
|
|
Foreign
|
|
|
|
|
|
3.2
|
|
|
|
|
|
0.4
|
|
|
|
|
|
1.8
|
|
Total
current provision
|
|
|
|
|
|
63.6
|
|
|
|
|
|
23.5
|
|
|
|
|
|
25.7
|
|
Deferred
provision (benefit)
|
|
|
|
|
|
(12.6
|
)
|
|
|
|
|
2.4
|
|
|
|
|
|
3.2
|
|
Net
operating
loss carryforwards
|
|
|
|
|
|
(2.6
|
)
|
|
|
|
|
(2.7
|
)
|
|
|
|
|
(0.2
|
)
|
Investment
tax credit
|
|
|
|
|
|
(1.7
|
)
|
|
|
|
|
(1.5
|
)
|
|
|
|
|
(1.7
|
)
|
Total
income tax expense
|
|
|
|
|
$
|
46.7
|
|
|
|
|
$
|
21.7
|
|
|
|
|
$
|
27.0
|
|
Foreign
income
before taxes was $10.2 million in 2005, $8.3 million in 2004, and
$4.3 million in 2003.
As
the related temporary differences reverse, WPSC and UPPCO are prospectively
refunding taxes to customers for which deferred taxes were recorded in prior
years at rates different than current rates. The regulatory liability for
these
refunds and other regulatory tax effects totaled $8.8 million as of
December 31, 2005, and $11.2 million as of December 31,
2004.
NOTE 17--COMMITMENTS
AND CONTINGENCIES
Commodity
and Purchase Order Commitments
WPS Resources
routinely enters into long-term purchase and sale commitments that have various
quantity requirements and durations. The commitments described below are
as of
December 31, 2005.
ESI
has
unconditional purchase obligations related to energy supply contracts that
total
$4.8 billion.
Substantially all of these obligations end by 2008, with obligations totaling
$154.6 million extending from 2009 through 2016. The majority of the energy
supply contracts are to meet ESI's obligations to deliver energy to its
customers.
WPSC
has
obligations related to coal, purchased power, and natural gas. Obligations
related to coal supply and transportation extend through 2016 and total
$413.9 million. Through 2016, WPSC has obligations totaling
$1.4 billion for either capacity or energy related to purchased power,
including the obligation under the power purchase agreement with Dominion.
Also,
there are natural gas supply and transportation contracts with total estimated
demand payments of $128.5 million through 2017. WPSC expects to recover
these costs in future customer rates. Additionally, WPSC has contracts to
sell
electricity and natural gas to customers.
UPPCO
has made
commitments for the purchase of commodities, mainly capacity or energy related
to purchased power, which total $42.3 million and extend through
2010.
WPS Resources
also has commitments in the form of purchase orders issued to various vendors.
At December 31, 2005, these purchase orders totaled $476.1 million and
$462.0 million for WPS Resources and WPSC, respectively. The majority
of these commitments relate to large construction projects, including
construction of the 500-megawatt Weston 4 coal-fired generation facility
near Wausau, Wisconsin.
Environmental
EPA
Section
114 Request
In
December 2000, WPSC received from the EPA a request for information under
Section 114 of the Clean Air Act. The EPA sought information and documents
relating to work performed on the coal-fired boilers located at WPSC's Pulliam
and Weston electric generation stations. WPSC filed a response with the EPA
in early 2001.
On
May 22, 2002, WPSC received a follow-up request from the EPA seeking additional
information regarding specific boiler-related work performed on Pulliam Units
3,
5, and 7, as well as information on WPSC's life extension program for Pulliam
Units 3 through 8 and Weston Units 1 and 2. WPSC made an initial response
to the EPA's follow-up information request on June 12, 2002, and filed a
final response on June 27, 2002.
In
2000 and 2002, Wisconsin Power and Light Company received a similar series
of
EPA information requests relating to work performed on certain coal-fired
boilers and related equipment at the Columbia generation station (a facility
located in Portage, Wisconsin, jointly owned by Wisconsin Power and Light
Company, Madison Gas and Electric Company, and WPSC). Wisconsin Power and
Light
Company is the operator of the plant and is responsible for responding to
governmental inquiries relating to the operation of the facility. Wisconsin
Power and Light Company filed its most recent response for the Columbia facility
on July 12, 2002.
Depending
upon the
results of the EPA's review of the information provided by WPSC and Wisconsin
Power and Light Company, the EPA may issue "notices of violation" or "findings
of violation" asserting that a violation of the Clean Air Act occurred and/or
seek additional information from WPSC and/or third parties who have information
relating to the boilers or close out the investigation. To date, the EPA
has not
responded to the filings made by WPSC and Wisconsin Power and Light. In
addition, under the federal Clean Air Act, citizen groups may pursue a claim.
WPSC has no notice of such a claim based on the information submitted to
the
EPA.
In
response to the EPA's Clean Air Act enforcement initiative, several utilities
have elected to settle with the EPA, while others are in litigation. In general,
those utilities that have settled have entered into consent decrees which
require the companies to pay fines and penalties, undertake supplemental
environmental projects, and either upgrade or replace pollution controls
at
existing generating units or shut down existing units and replace these units
with new electric generating facilities. Several of the settlements involve
multiple facilities. The fines and penalties (including the capital costs
of
supplemental environmental projects) associated with these settlements range
between $7 million and $30 million. The regulatory interpretations
upon which the lawsuits or settlements are based may change based on future
court decisions that may be rendered in the pending litigations.
In
May 2003, WPSC initiated discussions with the EPA Region
V aimed at
negotiating a settlement. The discussions were preliminary and did not progress.
No further action has been taken by the EPA.
If
the federal government decided to bring a claim against WPSC and if it were
determined by a court that historic projects at WPSC's Pulliam and
Weston plants required either a state or federal Clean Air Act permit, WPSC
may, under the applicable statutes, be required to:
·
|
shut
down any
unit found to be operating in non-compliance,
|
·
|
install
additional pollution control equipment,
|
·
|
pay
a fine,
and/or
|
·
|
pay
a fine
and conduct a supplemental environmental project in order to resolve
any
such claim.
|
Pulliam
Air
Permit Violation Lawsuit
The
Sierra Club and
Clean Wisconsin filed a complaint in the Eastern District of Wisconsin on
October 19, 2005. The lawsuit was filed pursuant to the citizen suit provisions
of the Clean Air Act. The complaint references opacity exceedances reported
by
the Pulliam facility located in Green Bay, Wisconsin, from 1999 through the
first quarter of 2005. The notice also alleges monitoring violations from
1999
through 2004, exceedances of the Clean Air Act operating permit in 2002,
exceedances of the permit issued for eight diesel generators in 2001, and
exceedances of the permit for the combustion turbine, P32. The lawsuit seeks
penalties, injunctive relief, and the costs of litigation. The Sierra Club
and
Clean Wisconsin have stated a willingness to discuss the alleged violations
and
the parties have engaged in settlement negotiations.
Weston 4
Air Permit
On
November 15, 2004, the Sierra Club filed a petition with the WDNR under Section
285.61, Wis. Stats., seeking a contested case hearing on the air permit issued
for the Weston 4 generation station. On December 2, 2004, the WDNR
granted the petition and forwarded the matter to the Division of Hearings
and
Appeals. In its petition, Sierra Club raised legal and factual issues with
the
permit and with the process used by the WDNR to develop the air emission
limits
and conditions. In addition, both WPSC and the Sierra Club filed motions
for
summary judgment on certain of the issues. A decision regarding summary judgment
was issued. In the ruling, the Administrative Law Judge denied the motion
of
Sierra Club and granted summary judgment to WPSC with respect to certain
claims
of Sierra Club consistent with the rulings rendered in Wisconsin Energy's
Elm
Road proceeding. The contested case hearing in the matter was held during
the
last week of September 2005. The hearing addressed the remaining issues,
which are generally related to the emission limits specified in the permit
and
the pollution controls to be used to achieve these limits. In February 2006,
the
Administrative Law Judge affirmed the Weston 4 air permit with
modifications to the emission limits for sulfur dioxide and nitrogen oxide
from
the coal-fired boiler and particulate from the cooling tower. The modifications
set limits that are more stringent than those set by the WDNR.
WPS Resources is currently evaluating the impact this decision may have on
future operating costs.
Weston Site
Operating Permit
On
April 18 and April 26, 2005, WPS Resources notified the WDNR that the
existing Weston facility was not in compliance with certain provisions of
the "Title V" air operating permit that was issued to the facility in October
2004. These provisions include: (1) the particulate emission limits applicable
to the coal handling equipment; (2) the carbon monoxide (CO) limit for
Weston combustion turbines; and (3) the limitation on the sulfur content of
the fuel oil stored at the Weston facility. On July 25, 2005, WPSC received
a notice of violation (NOV) from the WDNR asserting that the existing
Weston facility is not in compliance with certain provisions of the permit.
In response to the NOV, a compliance plan was submitted to the WDNR.
Subsequently, stack testing was performed, which indicated continuing
exceedances of the particulate limits from the coal handling equipment. On
January 19, 2006, WPSC received from the WDNR a Notice of Noncompliance (NON)
seeking further information about the alleged non-compliance event. WPSC
provided a response to the WDNR and is in the process of seeking to have
the
permit revised. On February 20, 2005, the WDNR issued an NOV which incorporated
most of the alleged noncompliance events described above (the alleged
exceedances of the CO limit was not included) and added issues relating to
opacity monitoring and the operation of a particulate source for
three
days without
a functioning baghouse. Under the WDNR's stepped enforcement process, an
NOV is
the first step in the WDNR's enforcement procedure. If the WDNR decides to
continue the enforcement process, the next step is a "referral" of the matter
to
the Wisconsin Attorney General's Office. In addition, citizen groups may
seek to
initiate enforcement or may seek to initiate enforcement prior to the filing
of
any lawsuit by the Wisconsin Attorney General's Office or may seek to intervene
in the Title V operating permit revision process. WPSC is seeking to amend
the
applicable permit limits and is taking corrective action. At this time, we
believe that our exposure to fines or penalties related to this noncompliance
would not have a material impact on our financial results.
Mercury
and
Interstate Air Quality Rules
On
October 1, 2004, the mercury emission control rule became effective in
Wisconsin. The rule requires WPSC to control annual system mercury emissions
in
phases. The first phase will occur in 2008 and 2009. In this phase, the annual
mercury emissions are capped at the average annual system mercury emissions
for
the period 2002 through 2004. The next phase will run from 2010 through 2014
and
requires a 40% reduction from average annual 2002 through 2004 mercury input
amounts. After 2015, a 75% reduction is required with a goal of an 80% reduction
by 2018. Because federal regulations were promulgated in March 2005, we believe
the State of Wisconsin will revise the Wisconsin rule to be consistent with
the
federal rule. However, the State of Wisconsin has filed suit against the
federal
government along with other states in opposition to the rule. WPSC estimates
capital costs of approximately $14 million to achieve the proposed 75%
reductions. The capital costs are expected to be recovered in a future rate
case.
In
December 2003, the EPA proposed mercury "maximum achievable control
technology" standards and an alternative mercury "cap and trade" program
substantially modeled on the Clear Skies legislation initiative. The EPA
also
proposed the Clean Air Interstate Rule (formerly known as the Interstate
Air
Quality Rule), which would reduce sulfur dioxide and nitrogen oxide emissions
from utility boilers located in 29 states, including Wisconsin, Michigan,
Pennsylvania, and New York. In March 2005, the EPA finalized both the mercury
rule and the Clean Air Interstate Rule.
The
final mercury
rule establishes New Source Performance Standards for new units based upon
the
type of coal burned. Weston 4 will install and operate mercury control
technology with the aim of achieving a mercury emission rate less than that
in
the final EPA mercury rule.
The
final mercury
rule also establishes a mercury cap and trade program, which requires a 21%
reduction in national mercury emissions in 2010 and a 70% reduction in national
mercury emissions beginning in 2018. Based on the final rule and current
projections, WPSC anticipates meeting the mercury rule cap and trade
requirements at a cost similar to the cost to comply with the Wisconsin
rule.
ESI's
current
analysis indicates that additional emission control equipment on its existing
units may be required. Excluding Sunbury, ESI estimates the capital cost
for the
remaining units to be approximately $1 million to achieve a 70% reduction.
Including Sunbury, the total ESI mercury control costs could approximate
$33 million, depending upon how this facility is operated.
The
final Clean Air
Interstate Rule requires reduction of sulfur dioxide and nitrogen oxide
emissions in two phases. The first phase requires about a 50% reduction
beginning in 2009 for nitrogen oxide and beginning in 2010 for sulfur dioxide.
The second phase begins in 2015 for both pollutants and requires about a
65%
reduction in emissions. The rule allows the affected states (including
Wisconsin, Michigan, Pennsylvania, and New York) to either require utilities
located in the state to participate in the EPA's interstate cap and trade
program or meet the state's emission budget for sulfur dioxide and nitrogen
oxide through measures to be determined by the state. The states have not
adopted a preference as to which option they would select, but the states
are
investigating the cap and trade program, as well as alternatives or additional
requirements. Consequently, the effect of the rule on WPSC's and ESI's
facilities is uncertain, since it depends upon how the states choose to
implement the final Clean Air Interstate Rule.
Currently,
WPSC is
evaluating a number of options that include using the cap and trade program
and/or installing controls. For planning purposes, it is assumed that additional
sulfur dioxide and nitrogen oxide controls will be needed on existing units
or
the existing units will need to be converted to natural gas by 2015. The
installation of any controls and/or any conversion to natural gas will need
to
be scheduled as part of WPSC's long-term maintenance plan for its existing
units. As such, controls or conversions may need to take place before 2015.
On a
preliminary basis and assuming controls or conversion are required, WPSC
estimates capital costs of $257 million in order to meet an assumed 2015
compliance date. This estimate is based on costs of current control technology
and current information regarding the final EPA rule. The costs may change
based
on the requirements of the final state rules.
ESI
is evaluating
the compliance options for the Clean Air Interstate Rule. Additional nitrogen
oxide controls on some of ESI's facilities may be necessary, and would cost
approximately $40 million. The cost estimate is largely dependent upon how
Sunbury will be operated going forward. See Note 4, "Sunbury
Plant,"
for additional
information on Sunbury. Additional sulfur dioxide reductions are unlikely.
Also,
ESI will evaluate a number of options including using the cap and trade program,
fuel switching, and/or installing controls.
Clean
Air
Regulations
Most
of the
generation facilities owned by ESI are located in an ozone transport region.
As
a result, these generation facilities are subject to additional restrictions
on
emissions of nitrogen oxide and sulfur dioxide. ESI began 2005 with 17,000
sulfur dioxide emission allowances for its generation facilities that are
required to participate in the sulfur dioxide emission program. However,
a
majority of these allowances were sold in the second quarter of 2005, requiring
a higher level of purchases for the remainder of the year. In future years,
ESI
expects to purchase sulfur dioxide and nitrogen oxide emission allowances
at
market rates, as needed, to meet its requirements for the Sunbury generation
facility.
Spent
Nuclear Fuel Disposal
The
federal
government is responsible for the disposal or permanent storage of spent
nuclear
fuel. The DOE is currently preparing an application to license a permanent
spent
nuclear fuel storage facility in the Yucca Mountain area of Nevada.
Spent
nuclear fuel
is currently being stored at the Kewaunee plant. At current production levels,
the plant has sufficient storage for all fuel assemblies until 2009 with
full
core offload. Additional capacity will be needed by 2010 to maintain full
core
offload capability.
The
United States
government through the DOE was under contract with WPSC for the pick up and
long-term storage of Kewaunee's spent nuclear fuel. Because the DOE has failed
to begin scheduled pickup of the spent nuclear fuel, WPSC incurred costs
for the
storage of the spent nuclear fuel. WPSC is a participant in a suit filed
against
the federal government for breach of contract and failure to pick up and
store
the spent nuclear fuel. The case was filed on January 22, 2004, in the United
States Court of Federal Claims. The case has been temporarily stayed until
June
30, 2006.
In
July 2005, WPSC sold Kewaunee to a subsidiary of Dominion Resources, Inc.
Pursuant to the terms of the sale, Dominion has the right to pursue the spent
nuclear fuel claim and WPSC will retain the contractual right to an equitable
share of any future settlement or verdict. The total amount of damages sought
are unknown at this time.
Other
Environmental Issues
Groundwater
testing
at a former ash disposal site of UPPCO indicated elevated levels of boron
and
lithium. Supplemental remedial investigations were performed, and a revised
remedial action plan was developed. The Michigan Department of Environmental
Quality approved the plan in January 2003. UPPCO received an order from the
MPSC
permitting deferral and future recovery of these costs. A liability of
$1.3 million and an associated regulatory asset of $1.3 million were
recorded at December 31,
2005,
for estimated
future expenditures associated with remediation of the site. UPPCO has an
informal agreement, with the owner of another landfill, under which UPPCO
has
agreed to pay 17% of the investigation and remedial costs. It is estimated
that
the cost of addressing the site over the next year will be $1.8 million.
UPPCO has recorded $0.3 million of this amount as its share of the
liability as of December 31, 2005.
There
is increasing
concern over the issue of climate change and the effect of emissions of
greenhouse gases. WPS Resources is evaluating both the technical and cost
implications, which may result from a future greenhouse gas regulatory program.
This evaluation indicates that it is probable that any regulatory program
that
caps emissions or imposes a carbon tax will increase costs for
WPS Resources and its customers. At this time, there is no commercially
available technology for removing carbon dioxide from a pulverized coal-fired
plant, but significant research is in progress. Efforts are underway within
the
utility industry to develop cleaner ways to burn coal. The use of alternate
fuels is also being explored by the industry, but there are many cost and
availability issues. Based on the complexity and uncertainty of the climate
issues, a risk exists that future carbon regulation will increase the cost
of
electricity produced at coal-fired generation units. However, we believe
the
capital expenditures we are making at our generation units are appropriate
under
any reasonable mandatory greenhouse gas program. WPS Resources will
continue to monitor and manage potential risks and opportunities associated
with
future greenhouse gas regulatory actions.
Manufactured
Gas Plant Remediation
WPSC
continues to
investigate the environmental cleanup of ten manufactured gas plant sites.
Cleanup of the land portion of the Oshkosh, Stevens Point, Green Bay, Manitowoc,
and two Sheboygan sites in Wisconsin is completed. Groundwater treatment
and
monitoring at these sites will continue into the future. Cleanup of the land
portion of four sites will be addressed in the future. River sediment remains
to
be addressed at sites with sediment contamination, and priorities will be
determined in consultation with the EPA. The additional work at the sites
remains to be scheduled.
WPSC
is currently
in the process of transferring sites with sediment contamination formally
under
WDNR jurisdiction to the EPA Superfund Alternatives Program. WPSC received
special notice letters that initiated the transfer process. Under the EPA's
program, the remedy decision will be based on risk-based criteria typically
used
at Superfund sites. WPSC estimated the future undiscounted investigation
and
cleanup costs as of December 31, 2005, to be $66 million. WPSC may
adjust these estimates in the future contingent upon remedial technology,
regulatory requirements, remedy determinations, and the assessment of natural
resource damages. WPSC has received $12.7 million to date in insurance
recoveries. WPSC expects to recover actual cleanup costs, net of insurance
recoveries, in future customer rates. Under current PSCW policies, WPSC will
not
recover carrying costs associated with the cleanup expenditures.
Flood
Damage
On
May 14, 2003, a fuse plug at the Silver Lake reservoir owned by UPPCO was
breached. This breach resulted in subsequent flooding downstream on the Dead
River, which is located in Michigan's Upper Peninsula near Marquette, Michigan.
A
dam owned by Marquette Board of Light and Power, which is located downstream
from the Silver Lake reservoir near the mouth of the Dead River, also failed
during this event. In addition, high water conditions and siltation resulted
in
damage at the Presque Isle Power Plant owned by Wisconsin Electric Power
Company. Presque Isle, which is located downstream from the Marquette Board
of
Light and Power dam, was ultimately forced into a temporary shutdown.
The
FERC's
Independent Board of Review issued its report in December 2003 and
concluded that the root cause of the incident was the failure of the design
of
the fuse plug to take into account the highly erodible nature of the fuse
plug's
foundation materials and spillway channel, resulting in the complete loss
of the
fuse plug, foundation, and spillway channel, which caused the release of
Silver
Lake far beyond the
intended
design of
the fuse plug. The fuse plug for the Silver Lake reservoir was designed by
an outside engineering firm.
UPPCO
has worked
with federal and state agencies in their investigations. UPPCO is still in
the
process of investigating the incident. WPS Resources maintains a
comprehensive insurance program that includes UPPCO and which provides both
property insurance for its facilities and liability insurance for liability
to
third parties. WPS Resources is insured in amounts that it believes are
sufficient to cover its responsibilities in connection with this event.
Deductibles and self-insured retentions on these policies are not material
to
WPS Resources.
As
of May 13, 2005, several lawsuits were filed by the claimants and putative
defendants relating to this incident. The suits that have been filed against
UPPCO, WPS Resources, and WPSC include the following claimants: WE
Energies, Cleveland Cliffs, Inc., Board of Light and Power of the City of
Marquette, the City of Marquette, the County of Marquette, Dead River Campers,
Inc., Marquette County Road Commission, SBC, ATC, and various land and
homeowners along the Silver Lake reservoir and Dead River system. UPPCO
filed a suit against the engineering company that designed the fuse plug
(MWH
Americas, Inc.) and the contractor who built it (Moyle Construction, Inc.).
UPPCO has reached a confidential settlement with WE Energies resolving WE
Energies' claims. The settlement payment will be reimbursed by
WPS Resource's insurer and, therefore, did not have a material impact on
the Consolidated Financial Statements. WPS Resources is defending the remaining
lawsuits filed against it and is seeking resolution of all claims and litigation
where possible.
In
November 2003, UPPCO received approval from the MPSC and the FERC for deferral
of costs that are not reimbursable through insurance or recoverable through
the
power supply cost recovery mechanism. Recovery of costs deferred will be
addressed in future rate proceedings.
In
November 2005, UPPCO announced it had not made a final decision whether to
restore Silver Lake as a reservoir for power generation or to forego refilling
the reservoir and that more time is needed to study the ramifications of
design
changes recommended by consultants and FERC. UPPCO will undertake additional
studies of the new design recommendations to see if there are alternatives
that
would make restoring the Silver Lake Dam and refilling the reservoir
economically beneficial for its customers. UPPCO expects to make its final
decision on Silver Lake in the first half of 2006.
Stray
Voltage Claims
From
time to time,
WPSC has been sued by dairy farmers who allege that they have suffered loss
of
milk production and other damages supposedly due to "stray voltage" from
the
operation of WPSC's electrical system. One case, Allen
v.
WPSC,
has been remanded
from the court of appeals to the trial court for a determination of whether
a
post-verdict injunction is warranted. A second case, Pollack
v.
WPSC,
was tried and
ended in a defense verdict on May 5, 2005, and that case is concluded. A
third
case, Seidl
v.
WPSC,
was dismissed on
June 21, 2005, when the trial judge granted WPSC's motion for a directed
verdict. The Seidl plaintiffs have filed a notice of appeal of that dismissal.
WPSC believes it has meritorious arguments supporting the dismissal and WPSC
plans to vigorously contest the appeal.
On
February 15, 2005, the Court of Appeals affirmed the jury verdict in
Allen
v.
WPSC,
which awarded the
plaintiff $0.8 million for economic damages and $1 million for
nuisance. All appeals have been exhausted and the judgment has been paid
to the
plaintiff, but the plaintiff is still seeking an injunction. The injunction
issues are scheduled to be tried in September 2006. The expert witnesses
retained by WPSC do not believe that there is any scientific basis for
concluding that electricity from the utility system is currently creating
any
problem on the plaintiff's land. Accordingly, WPSC does not believe there
is any
basis for issuing an injunction, and intends to contest the plaintiff's
claim.
Three
cases,
Theuerkauf
v.
WPSC,
Wojciehowski
Brothers Farms v. WPSC,
and Schmoker
v.
WPSC
were filed in the
fourth quarter of 2005 and are still in the pleadings stage and it is too
early
to predict their outcomes. The Theuerkauf
case was brought
by Michigan farmers and is being heard in federal court in Green Bay. We
believe
Michigan law will govern this action. The Wojciehowski
case was brought
in state
court
in Wisconsin
in Marinette County. The Schmoker
case was brought
in Wisconsin state court in Winnebago County. WPSC believes it has meritorious
defenses to the plaintiffs' claims in these cases, and intends to vigorously
defend them.
The
PSCW has
established certain requirements regarding stray voltage for all utilities
subject to its jurisdiction. The PSCW has defined what constitutes "stray
voltage," established a level of concern at which some utility corrective
action
is required, and set forth test protocols to be employed in evaluating whether
a
stray voltage problem exists. However, in 2003, the Supreme Court of Wisconsin
ruled in the case Hoffmann
v.
WEPCO
that a utility
could be liable in tort to a farmer for damage from stray voltage even though
the utility had complied with the PSCW's established level of concern. Thus,
despite the fact that WPSC believes it abides by the applicable PSCW
requirements, it is not immune from the tort suits such as these under Wisconsin
law.
WPSC
has insurance
coverage for the pending claims, but the policies have customary self-insured
retentions per occurrence. Based upon the information known at this time
and the
availability of insurance, WPSC believes that the total cost to it of resolving
these five actions will not be material.
Wausau,
Wisconsin, to Duluth, Minnesota, Transmission Line
Construction
of the
220-mile, 345-kilovolt Wausau, Wisconsin, to Duluth, Minnesota, transmission
line began in the first quarter of 2004 with the Minnesota portion completed
in
early 2005. Construction in Wisconsin began on August 8, 2005.
ATC
has assumed
primary responsibility for the overall management of the project and will
own
and operate the completed line. WPSC received approval from the PSCW and
the
FERC to transfer ownership of the project to ATC. WPSC will continue to manage
obtaining the private property rights, design, and construction of the Wisconsin
portion of the project.
The
Certificate of
Public Convenience and Necessity and other permits needed for construction
have
been received and are final. In addition, on August 5, 2005, the new law
allowing condemnation of county land for transmission lines approved by the
PSCW
became effective. In light of this legislation, Douglas County negotiated
an
easement agreement with ATC that allows the project to be constructed across
county land on the route originally selected by the PSCW. On September 15,
2005, the Douglas County Board approved that agreement. Accordingly, the
lawsuit
against Douglas County to force it to provide easements for the project is
being
dismissed as moot, and ATC has asked the PSCW to close the docket, which
was
opened to examine alternative routes in Douglas County.
WPS Resources
committed to fund 50% of total project costs incurred up to $198 million
and will receive additional equity in ATC in exchange for the project funding.
Under its agreement, WPS Resources invested $57.0 million in ATC in
2005, bringing WPS Resources' investment in ATC related to the project to
$86.7 million since inception. WPS Resources may terminate funding if
the project extends beyond January 1, 2010. On December 19, 2003, WPSC
and ATC received approval from the PSCW to continue the project at a revised
cost estimate of $420.3 million to reflect additional costs for the project
resulting from time delays, added regulatory requirements, changes and additions
to the scope of the project, and ATC overhead costs. The final portion of
the
line is expected to be placed in service in 2008. WPS Resources has the
right, but not the obligation, to provide additional funding in excess of
$198 million for up to 50% of the revised cost estimate. Allete has
exercised its option to fund a portion of the Wausau to Duluth transmission
line. WPSC and Allete agreed that Allete will fund up to $60 million of the
2006 capital calls for the line in 2006. Considering this, for the period
January 2006 through November 2008, WPS Resources expects to fund up to
approximately $61 million for its portion of the Wausau to Duluth
transmission line.
Beaver
Falls
ESI's
Beaver Falls
generation facility in New York has been out of service since late
June 2005. The unplanned outage was caused by the failure of the first
stage turbine blades. Inclusive of estimated
insurance
recoveries, ESI estimates at this time that it will cost between $3 and
$5 million to repair the turbine and replace the damaged blades. Depending
on the amount of insurance recovery, ESI could incur significantly higher
net
out-of-pocket costs than originally estimated to repair the damage. In addition,
ESI is attempting to renegotiate an existing steam off-take agreement with
a
counterparty, which will significantly impact its ability to recover costs.
If
significant repair costs are not recoverable through insurance or ESI is
not
able to renegotiate the terms of the steam off-take agreement, then a
possibility exists that ESI would not repair the plant, in which case
undiscounted cash flows related to future operations may be insufficient
to
recover the carrying value of the plant, resulting in impairment. The carrying
value of the Beaver Falls generation facility at December 31, 2005, was
$18.1 million.
Synthetic
Fuel Production Facility
We
have significantly reduced our consolidated federal income tax liability
over
past years through tax credits available to us under Section 29 of the Internal
Revenue Code for the production and sale of solid synthetic fuel from coal.
These tax credits are scheduled to expire at the end of 2007 and are provided
as
an incentive for taxpayers to produce fuel from alternate sources and reduce
domestic dependence on imported oil. This incentive is not deemed necessary
if
the price of oil increases sufficiently to provide a natural market for the
fuel. Therefore, the tax credits in a given year are subject to phase out
if the
annual average reference price of oil within that year exceeds a minimum
threshold price set by the IRS and are eliminated entirely if the average
annual
reference price increases beyond a maximum threshold price set by the IRS.
The
reference price of a barrel of oil is an estimate of the annual average wellhead
price per barrel for domestic crude oil, which has in recent history been
approximately $6 below the NYMEX price of a barrel of oil. The threshold
price
at which the credit begins to phase out was set in 1980 and is adjusted annually
for inflation; the IRS releases the final numbers for a given year in the
first
part of the following year.
Numerous
events
have increased domestic crude oil prices, including concerns about terrorism,
storm-related supply disruptions, and worldwide demand. Therefore, in order
to
manage exposure to the risk of an increase in oil prices that could reduce
the
amount of Section 29 federal tax credits that could be recognized, ESI entered
into a series of derivative contracts, beginning in the first quarter of
2005,
covering a specified number of barrels of oil. While no apparent phase-out
of
Section 29 federal tax credits occurred in 2005, ESI had mitigated essentially
all of its 2005 phase-out risk at no net cost. Through optimization strategies,
ESI realized a $0.3 million gain on oil options entered into to mitigate
the 2005 phase-out risk, net of premium amortization. If no phase-out were
to
occur in 2006 and 2007, ESI would expect to recognize approximately
$24 million of Section 29 federal tax credits in each of the next two
years. Based upon forward oil prices, we are anticipating significant phase-outs
of 2006 and 2007 Section 29 federal tax credits. However, we cannot predict
with
certainty the future price of a barrel of oil and, therefore, have no way
of
knowing what portion of our tax credits will be phased out, or if any phase-out
will result. Based upon the average annual NYMEX price of a barrel of oil,
ESI
estimates that Section 29 federal tax credits will begin phasing out if the
annual average NYMEX price of a barrel of oil reaches approximately $60,
with a
total phase-out if the annual average NYMEX price of a barrel of oil reaches
approximately $73.
At
December 31, 2005, ESI had derivative contracts that mitigate substantially
all of the Section 29 tax credit exposure in 2006 and 40% of the exposure
in
2007. The derivative contracts involve purchased and written call options
that
provide for net cash settlement at expiration based on the average NYMEX
trading
price of oil in relation to the strike price of each option. Premiums paid
for
options to mitigate exposure to Section 29 federal tax credit phase-out in
2006
and 2007 totaled $15.3 million ($12.0 million for 2006 options and
$3.3 million for 2007 options), all of which are recorded as risk
management assets on the balance sheet. Essentially, ESI has paid
$12.0 million for options ($7.2 million after-tax) to protect the
value of approximately $24 million of tax credits in 2006 and
$3.3 million for options ($2.0 million after-tax) to protect the value
of approximately $10 million of tax credits in 2007. ESI has not hedged
$14 million of 2007 tax credits. The derivative contracts have not been
designated as hedging instruments and, as a result, changes in the fair value
of
the options are recorded currently in earnings. This could result in
mark-to-market gains being recognized in earnings in different periods, compared
to the offsetting tax credit phase-outs. For example, as of December 31,
2005, unrealized pre-tax
mark-to-market
gains of $4.0 million and $4.4 million were recorded for the 2006 and
2007 options, respectively, while no tax credit phase-out was recognized
because
2006 and 2007 tax credits are not recognized until fuel is produced and sold
in
those periods. In 2006, ESI will only record Section 29 federal tax credits
expected to be recognized, based upon the expected annual average price of
a
barrel of oil.
In
addition to exposure to federal tax credits, ESI has also historically received
royalties tied to the amount of synthetic fuel produced as well as variable
payments from a counterparty related to its 30% sell-down of ECO Coal
Pelletization #12 in 2002. Royalties and variable payments contributed
$7.1 million, $7.6 million, and $5.9 million to income before
taxes in 2005, 2004, and 2003, respectively. Royalties and variable payments
received in 2006 and 2007 could decrease if a phase-out occurs and synthetic
fuel production is reduced.
NOTE 18--GUARANTEES
As
part of normal business, WPS Resources and its subsidiaries enter into
various guarantees providing financial or performance assurance to third
parties
on behalf of certain subsidiaries. These guarantees are entered into primarily
to support or enhance the creditworthiness otherwise attributed to a subsidiary
on a stand-alone basis, thereby facilitating the extension of sufficient
credit
to accomplish the subsidiaries' intended commercial purposes.
Most
of the
guarantees issued by WPS Resources include inter-company guarantees between
parents and their subsidiaries, which are eliminated in consolidation, and
guarantees of the subsidiaries' own performance. As such, these guarantees
are
excluded from the recognition and measurement requirements of FASB
Interpretation No. 45, "Guarantors' Accounting and Disclosure Requirements
for Guarantees, including Indirect Guarantees of Indebtedness of Others."
At
December 31, 2005, 2004, and 2003, outstanding guarantees totaled
$1,310.6 million, $977.9 million, and $981.8 million,
respectively, as follows:
|
|
|
|
|
|
|
|
WPS Resources'
Outstanding Guarantees
(Millions)
|
|
December 31,
2005
|
|
December 31,
2004
|
|
December 31,
2003
|
|
Guarantees
of
subsidiary debt
|
|
$
|
27.2
|
|
$
|
27.2
|
|
$
|
39.7
|
|
Guarantees
supporting commodity transactions of subsidiaries
|
|
|
1,154.7
|
|
|
863.9
|
|
|
874.4
|
|
Standby
letters of credit
|
|
|
114.3
|
|
|
80.9
|
|
|
61.1
|
|
Surety
bonds
|
|
|
0.8
|
|
|
0.6
|
|
|
1.1
|
|
Other
guarantees
|
|
|
13.6
|
|
|
5.3
|
|
|
5.5
|
|
Total
guarantees
|
|
$
|
1,310.6
|
|
$
|
977.9
|
|
$
|
981.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WPS Resources'
Outstanding Guarantees
(Millions)
Commitments
Expiring
|
|
Total
Amounts
Committed
At
December 31, 2005
|
|
Less
Than
1
Year
|
|
1
to
3
Years
|
|
4
to
5
Years
|
|
Over
5
Years
|
|
Guarantees
of
subsidiary debt
|
|
$
|
27.2
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
27.2
|
|
Guarantees
supporting commodity transactions of subsidiaries
|
|
|
1,154.7
|
|
|
1,063.0
|
|
|
33.1
|
|
|
15.0
|
|
|
43.6
|
|
Standby
letters of credit
|
|
|
114.3
|
|
|
109.4
|
|
|
4.9
|
|
|
-
|
|
|
-
|
|
Surety
bonds
|
|
|
0.8
|
|
|
0.8
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Other
guarantees
|
|
|
13.6
|
|
|
-
|
|
|
-
|
|
|
13.6
|
|
|
-
|
|
Total
guarantees
|
|
$
|
1,310.6
|
|
$
|
1,173.2
|
|
$
|
38.0
|
|
$
|
28.6
|
|
$
|
70.8
|
|
At
December 31, 2005, WPS Resources had outstanding $27.2 million in
corporate guarantees supporting indebtedness. Of that total, $27.0 million
supports outstanding debt at one of ESI's subsidiaries. The underlying debt
related to these guarantees is reflected on WPS Resources' Consolidated
Balance Sheet.
WPS Resources'
Board of Directors has authorized management to issue corporate guarantees
in
the aggregate amount of up to $1.35 billion to support the business
operations of ESI. WPS Resources primarily issues the guarantees to
counterparties in the wholesale electric and natural gas marketplace to provide
them assurance that ESI will perform on its obligations and permit ESI to
operate within these markets. At December 31, 2005, WPS Resources
provided parental guarantees in the amount of $1,150.0 million, reflected
in the above table, for ESI's indemnification obligations for business
operations, including $8.1 million of guarantees that received specific
authorization from WPS Resources' Board of Directors and are not included
in the $1.35 billion general authorized amount. Of the parental guarantees
provided by WPS Resources, the outstanding balance at December 31,
2005, which WPS Resources would be obligated to support, is approximately
$299 million.
Another
$4.7 million of corporate guarantees support energy and transmission supply
at UPPCO and are not reflected on WPS Resources' Consolidated Balance
Sheet. In February 2005, WPS Resources' Board of Directors authorized
management to issue corporate guarantees in the aggregate amount of up to
$15.0 million to support the business operations of UPPCO. Corporate
guarantees issued in the future under the Board authorized limit may or may
not
be reflected on WPS Resources' Consolidated Balance Sheet, depending on the
nature of the guarantee.
At
WPS Resources' request, financial institutions have issued
$114.3 million in standby letters of credit for the benefit of third
parties that have extended credit to certain subsidiaries. If a subsidiary
does
not pay amounts when due under a covered contract, the counterparty may present
its claim for payment to the financial institution, which will request payment
from WPS Resources. Any amounts owed by our subsidiaries are reflected in
WPS Resources' Consolidated Balance Sheet.
At
December 31, 2005, WPS Resources furnished $0.8 million of surety
bonds for various reasons including worker compensation coverage and obtaining
various licenses, permits, and rights-of-way. Liabilities incurred as a result
of activities covered by surety bonds are included in the WPS Resources'
Consolidated Balance Sheet.
A
guarantee of $4.7 million listed in the above table under other guarantees
was issued by WPSC to indemnify a third party for exposures related to the
construction of utility assets. This amount is not reflected on the
WPS Resources' Consolidated Balance Sheet, as this agreement was entered
into prior to the effective date of FASB Interpretation No. 45.
In
conjunction with the sale of Kewaunee, WPSC and WP&L agreed to indemnify
Dominion for 70% of any and all reasonable costs asserted or initiated against,
suffered, or otherwise existing, incurred or accrued, resulting from or arising
from the resolution of any design bases documentation issues that are
incurred
prior to
completion of Kewaunee's scheduled maintenance period for 2009 up to a maximum
combined exposure of $15 million for WPSC and WP&L. WPSC believes that
it will expend its share of costs related to this indemnification and, as
a
result, recorded the fair value of the liability, or $8.9 million, as a
component of the loss on the sale of Kewaunee.
WPSC
also agreed to
indemnify Dominion for losses resulting from potential breaches of WPSC's
representations and warranties under the sale agreement. The indemnification
is
limited to approximately $18 million and expires in July 2006. WPSC
believes the likelihood of having to make any material cash payments under
the
sale agreement as a result of breaches of representations and warranties
is
remote.
NOTE 19--EMPLOYEE
BENEFIT PLANS
WPS Resources
has a non-contributory-qualified retirement plan covering substantially all
employees. WPS Resources also sponsors several nonqualified retirement
plans, which are not funded.
WPS Resources
also currently offers medical, dental, and life insurance benefits to employees
and their dependents. We expense these items for active employees as incurred.
We fund benefits for retirees through irrevocable trusts as allowed for income
tax purposes.
WPSC
serves as plan
sponsor and administrator for the qualified retirement plan and the
postretirement plans. Accordingly, WPSC's Consolidated Balance Sheets reflect
the assets and liabilities associated with these plans. With the exception
of
UPPCO's Supplemental Employee Retirement Plan, the assets and liabilities
related to the non-qualified pension plans are also recorded on WPSC's
Consolidated Balance Sheets. The net periodic benefit cost associated with
the
plans is allocated among WPS Resources' subsidiaries. Actuarial
calculations are performed (based upon specific employees and their related
years of service) in order to determine the appropriate benefit cost
allocation.
The
costs of
pension and postretirement benefits are expensed over the period in which
the
employee renders service. The transition obligation for postretirement benefits
of current and future retirees is being recognized over a 20-year period
beginning in 1993. WPS Resources uses a December 31 measurement date
for the majority of its plans.
The
Medicare
Prescription Drug, Improvement and Modernization Act of 2003 (the Act) provides
a prescription drug benefit under Medicare Part D as well as a federal subsidy
to sponsors of certain retiree health care benefit plans. In May 2004, the
FASB
staff issued FSP 106-2, "Accounting and Disclosure Requirements Related to
the
Medicare Prescription Drug, Improvement and Modernization Act of 2003."
WPS Resources
and its actuarial advisors determined that benefits provided by the plan
as of
the date of enactment were at least actuarially equivalent to Medicare Part
D,
and, accordingly, WPS Resources will be entitled to the federal subsidy.
WPS Resources performed a measurement of the effects of the Act on its
accumulated postretirement benefit obligation as of July 1, 2004 (the date
FSP
106-2 was adopted). As of July 1, 2004, WPS Resources' and WPSC's
accumulated postretirement benefit obligation decreased $40.3 million and
$33.5 million, respectively, as a result of the Act. The change in the
accumulated postretirement benefit obligation due to the Act is considered
an
actuarial gain that will be recognized in future periods and, therefore,
had no
cumulative effect on WPS Resources or WPSC's retained earnings as of July
1, 2004. The effect of the subsidy served to reduce the net postretirement
benefit cost by $6.5 million and $2.6 million for WPS Resources
for the years ended December 31, 2005, and 2004, respectively.
The
following
tables provide a reconciliation of the changes in the plan's benefit obligations
and fair value of assets during 2005, 2004, and 2003, as well as a statement
of
the funded status as of December 31 for each year.
|
|
Pension
Benefits
|
|
Other
Benefits
|
|
(Millions)
|
|
2005
|
|
2004
|
|
2003
|
|
2005
|
|
2004
|
|
2003
|
|
Reconciliation
of benefit obligation
(qualified
and non-qualified plans)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligation
at
January 1
|
|
$
|
720.7
|
|
$
|
637.2
|
|
$
|
553.8
|
|
$
|
294.7
|
|
$
|
281.6
|
|
$
|
234.3
|
|
Service
cost
|
|
|
23.9
|
|
|
20.5
|
|
|
15.2
|
|
|
8.0
|
|
|
7.5
|
|
|
7.1
|
|
Interest
cost
|
|
|
40.3
|
|
|
39.8
|
|
|
36.9
|
|
|
16.5
|
|
|
16.9
|
|
|
15.3
|
|
Plan
amendments
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(15.3
|
)
|
Plan
spin off
- Kewaunee sale
|
|
|
(25.7
|
)
|
|
-
|
|
|
-
|
|
|
(13.3
|
)
|
|
-
|
|
|
-
|
|
Actuarial
(gain) loss -
net
|
|
|
8.2
|
|
|
62.0
|
|
|
67.0
|
|
|
(9.6
|
)
|
|
(3.4
|
)
|
|
49.5
|
|
Benefit
payments
|
|
|
(39.6
|
)
|
|
(38.8
|
)
|
|
(35.7
|
)
|
|
(9.4
|
)
|
|
(7.9
|
)
|
|
(9.3
|
)
|
Obligation
at
December 31
|
|
$
|
727.8
|
|
$
|
720.7
|
|
$
|
637.2
|
|
$
|
286.9
|
|
$
|
294.7
|
|
$
|
281.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
of fair value of plan assets (qualified plans)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of
plan assets at January 1
|
|
$
|
588.9
|
|
$
|
569.9
|
|
$
|
511.6
|
|
$
|
170.9
|
|
$
|
149.7
|
|
$
|
119.7
|
|
Actual
return
on plan assets
|
|
|
39.7
|
|
|
54.5
|
|
|
92.7
|
|
|
11.3
|
|
|
12.9
|
|
|
23.7
|
|
Employer
contributions
|
|
|
8.2
|
|
|
1.6
|
|
|
-
|
|
|
20.4
|
|
|
16.2
|
|
|
15.6
|
|
Plan
spin off
- Kewaunee sale
|
|
|
(15.5
|
)
|
|
-
|
|
|
-
|
|
|
(10.4
|
)
|
|
-
|
|
|
-
|
|
Benefit
payments
|
|
|
(38.3
|
)
|
|
(37.1
|
)
|
|
(34.4
|
)
|
|
(9.2
|
)
|
|
(7.9
|
)
|
|
(9.3
|
)
|
Fair
value of
plan assets at
December 31
|
|
$
|
583.0
|
|
$
|
588.9
|
|
$
|
569.9
|
|
$
|
183.0
|
|
$
|
170.9
|
|
$
|
149.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded
status of plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded
status
at December 31
|
|
$
|
(144.8
|
)
|
$
|
(131.8
|
)
|
$
|
(67.3
|
)
|
$
|
(103.9
|
)
|
$
|
(123.8
|
)
|
$
|
(131.9
|
)
|
Unrecognized
transition obligation
|
|
|
0.2
|
|
|
0.4
|
|
|
0.6
|
|
|
2.9
|
|
|
3.4
|
|
|
3.8
|
|
Unrecognized
prior-service cost
|
|
|
39.4
|
|
|
44.8
|
|
|
50.5
|
|
|
(17.1
|
)
|
|
(19.4
|
)
|
|
(21.5
|
)
|
Unrecognized
loss
|
|
|
120.3
|
|
|
127.0
|
|
|
78.0
|
|
|
74.2
|
|
|
91.1
|
|
|
99.7
|
|
Net
asset
(liability) recognized
|
|
$
|
15.1
|
|
$
|
40.4
|
|
$
|
61.8
|
|
$
|
(43.9
|
)
|
$
|
(48.7
|
)
|
$
|
(49.9
|
)
|
Amounts
recognized
in the Consolidated Balance Sheets related to the benefit plans consist
of:
|
|
Pension
Benefits
|
|
Other
Benefits
|
|
(Millions)
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
Accrued
benefit cost
|
|
$
|
(63.6
|
)
|
$
|
(45.9
|
)
|
$
|
(43.9
|
)
|
$
|
(48.7
|
)
|
Intangible
assets
|
|
|
39.7
|
|
|
45.0
|
|
|
-
|
|
|
-
|
|
Regulatory
asset
|
|
|
32.6
|
|
|
6.4
|
|
|
-
|
|
|
-
|
|
Accumulated
other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(before
tax
effect of $2.6 million and $14.0 million,
respectively)
|
|
|
6.4
|
|
|
34.9
|
|
|
-
|
|
|
-
|
|
Net
asset
(liability) recognized
|
|
$
|
15.1
|
|
$
|
40.4
|
|
$
|
(43.9
|
)
|
$
|
(48.7
|
)
|
We
record a minimum pension liability to reflect the funded status of our pension
plans. Substantially all of the minimum pension liability relates to
unrecognized pension costs of the utilities. Regulatory assets are recorded
for
costs that are probable of recovery when recognized.
Included
in the
above table is an accrued benefit cost of $1.6 million at December 31,
2005, and $1.7 million at December 31, 2004, related to UPPCO's
Supplemental Employee Retirement Plan.
The
accumulated
benefit obligation for all defined benefit pension plans was $646.5 million
and $634.8 million at December 31, 2005, and 2004, respectively.
Information for pension plans with an accumulated benefit obligation in excess
of plan assets is presented in the following table.
|
|
December 31,
|
|
(Millions)
|
|
2005
|
|
2004
|
|
Projected
benefit obligation
|
|
$
|
727.8
|
|
$
|
720.7
|
|
Accumulated
benefit obligation
|
|
|
646.5
|
|
|
634.8
|
|
Fair
value of
plan assets
|
|
|
583.0
|
|
|
588.9
|
|
The
following table
presents the components of the consolidated net periodic benefit cost
(credit) for the plans for 2005, 2004, and 2003:
|
|
Pension
Benefits
|
|
Other
Benefits
|
|
(Millions)
|
|
2005
|
|
2004
|
|
2003
|
|
2005
|
|
2004
|
|
2003
|
|
Net
periodic benefit cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
23.9
|
|
$
|
20.5
|
|
$
|
15.2
|
|
$
|
8.0
|
|
$
|
7.5
|
|
$
|
7.1
|
|
Interest
cost
|
|
|
40.3
|
|
|
39.8
|
|
|
36.9
|
|
|
16.5
|
|
|
16.9
|
|
|
15.3
|
|
Expected
return on plan assets
|
|
|
(43.6
|
)
|
|
(45.9
|
)
|
|
(46.7
|
)
|
|
(12.5
|
)
|
|
(11.6
|
)
|
|
(10.6
|
)
|
Amortization
of transition asset
|
|
|
0.2
|
|
|
0.2
|
|
|
-
|
|
|
0.4
|
|
|
0.4
|
|
|
1.0
|
|
Amortization
of prior-service cost (credit)
|
|
|
5.3
|
|
|
5.7
|
|
|
5.8
|
|
|
(2.2
|
)
|
|
(2.2
|
)
|
|
(1.8
|
)
|
Amortization
of net loss
|
|
|
8.7
|
|
|
4.5
|
|
|
0.7
|
|
|
5.5
|
|
|
4.1
|
|
|
2.6
|
|
Special
termination benefits
|
|
|
-
|
|
|
-
|
|
|
0.8
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Net
periodic
benefit cost
|
|
$
|
34.8
|
|
$
|
24.8
|
|
$
|
12.7
|
|
$
|
15.7
|
|
$
|
15.1
|
|
$
|
13.6
|
|
Net
periodic
benefit cost recorded by WPSC related to pension benefits was $25.2 million
in 2005, $16.3 million in 2004, and $6.7 million in 2003. Net periodic
benefit cost recorded by WPSC related to other benefits was $13.6 million
in 2005, $12.4 million in 2004, and $12.0 million in
2003.
Assumptions
The
weighted
average assumptions used at December 31 in accounting for the plans are as
follows:
|
|
Pension
Benefits
|
|
Other
Benefits
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
2005
|
|
2004
|
|
2003
|
|
Discount
rate
for benefit obligations
|
|
|
5.65
|
%
|
|
5.75
|
%
|
|
6.25
|
%
|
|
5.65
|
%
|
|
5.75
|
%
|
|
6.25
|
%
|
Discount
rate
for net periodic benefit cost
|
|
|
5.75
|
%
|
|
6.25
|
%
|
|
6.75
|
%
|
|
5.75
|
%
|
|
6.25
|
%
|
|
6.75
|
%
|
Expected
return on assets
|
|
|
8.50
|
%
|
|
8.75
|
%
|
|
8.75
|
%
|
|
8.50
|
%
|
|
8.75
|
%
|
|
8.75
|
%
|
Rate
of
compensation increase
|
|
|
5.50
|
%
|
|
5.50
|
%
|
|
5.50
|
%
|
|
-
|
|
|
-
|
|
|
-
|
|
The
assumptions
used for WPS Resources' medical and dental cost trend rates are shown in
the following table:
|
|
2005
|
|
2004
|
|
2003
|
|
Assumed
medical cost trend rate (under age 65)
|
|
|
9.0
|
%
|
|
10.0
|
%
|
|
11.0
|
%
|
Ultimate
trend rate
|
|
|
5.0
|
%
|
|
5.0
|
%
|
|
5.0
|
%
|
Ultimate
trend rate reached in
|
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed
medical cost trend rate (over age 65)
|
|
|
11.0
|
%
|
|
12.0
|
%
|
|
13.0
|
%
|
Ultimate
trend rate
|
|
|
6.5
|
%
|
|
6.5
|
%
|
|
6.5
|
%
|
Ultimate
trend rate reached in
|
|
|
2011
|
|
|
2011
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed
dental cost trend rate
|
|
|
5.0
|
%
|
|
5.0
|
%
|
|
5.0
|
%
|
Ultimate
trend rate
|
|
|
5.0
|
%
|
|
5.0
|
%
|
|
5.0
|
%
|
Ultimate
trend rate reached in
|
|
|
2004
|
|
|
2004
|
|
|
2004
|
|
Assumed
health care
cost trend rates have a significant effect on the amounts reported for the
health care plans. A 1% change in assumed health care cost trend rates would
have the following effects:
(Millions)
|
|
1%
Increase
|
|
1%
Decrease
|
|
|
|
|
|
|
|
|
|
Effects
on
total of service and interest cost components of net periodic
postretirement health care benefit cost
|
|
$
|
3.5
|
|
$
|
(3.2
|
)
|
Effect
on the
health care component of the accumulated
postretirement benefit obligation
|
|
$
|
37.0
|
|
$
|
(33.0
|
)
|
Plan
Assets
Weighted-average
asset allocations of the plans at December 31, 2005, and 2004, are as
follows:
|
|
|
|
|
|
|
|
Pension
Plan Assets at December 31,
|
|
Postretirement
Plan Assets at December 31,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
Asset
category
|
|
|
|
|
|
|
|
|
|
Equity
securities
|
|
|
63
|
%
|
|
63
|
%
|
|
62
|
%
|
|
63
|
%
|
Debt
securities
|
|
|
32
|
%
|
|
33
|
%
|
|
38
|
%
|
|
37
|
%
|
Real
estate
|
|
|
5
|
%
|
|
4
|
%
|
|
0
|
%
|
|
0
|
%
|
Total
|
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
The
Board of
Directors has established the Employee Benefits Administrator Committee to
manage the operations and administration of all benefit plans and related
trusts. The Committee has investment policies for the plan assets that establish
target asset allocations for the above listed asset classes as follows: pension
plan - equity securities 60%, debt securities 35%, and real estate 5%;
postretirement plan - equity securities 65%, and debt securities 35%. Because
of
market volatility, the Committee periodically reviews the asset allocation
and
the portfolio is rebalanced when considered appropriate.
Cash
Flows
WPS Resources'
funding policy is to contribute at least the minimum amounts that are required
to be funded under the Employee Retirement Income Security Act, but not more
than the maximum amounts that are currently deductible for income tax purposes.
We expect to contribute $25.3 million to our pension plans and
$19.8 million to our other postretirement benefit plans in
2006.
The
following table
shows the payments, reflecting expected future service, which WPS Resources
expects to make for pension and other postretirement benefits. In addition,
the
table shows the expected
federal
subsidies
under Medicare Part D, which will partially offset other postretirement
benefits, as discussed earlier.
|
|
|
|
|
|
|
|
(Millions)
|
|
Pension
Benefits
|
|
Other
Benefits
|
|
Federal
Subsidies
|
|
2006
|
|
$
|
40.9
|
|
$
|
11.7
|
|
$
|
(1.4
|
)
|
2007
|
|
|
42.7
|
|
|
12.7
|
|
|
(1.5
|
)
|
2008
|
|
|
42.8
|
|
|
13.7
|
|
|
(1.7
|
)
|
2009
|
|
|
44.1
|
|
|
14.8
|
|
|
(1.8
|
)
|
2010
|
|
|
45.2
|
|
|
15.6
|
|
|
(2.0
|
)
|
2011-2015
|
|
|
235.3
|
|
|
89.5
|
|
|
(11.7
|
)
|
Defined
Contribution Benefit Plans
WPS Resources
maintains a 401(k) Savings Plan for substantially all full-time employees.
Employees generally may contribute from 1% to 30% of their base compensation
to
individual accounts within the 401(k) Savings Plan. Participation in this
plan
automatically qualifies eligible non-union employees for participation in
the
ESOP. The company match, in the form of shares of WPS Resources' common
stock, is contributed to an employee's ESOP account. The plan requires a
match
equivalent to 100% of the first 4% and 50% of the next 2% contributed by
non-union employees. Certain union employees receive a contribution to their
ESOP account regardless of their participation in the 401(k) Savings Plan.
The
ESOP held 2.2 million shares of WPS Resources' common stock (market
value of $120.8 million) at December 31, 2005. Total costs incurred
under these plans were $8.2 million in 2005, $7.7 million in 2004, and
$5.7 million in 2003. WPSC's share of the total costs was $6.8 million
in 2005, $6.5 million in 2004, and $4.6 million in 2003.
WPS Resources
maintains a deferred compensation plan that enables certain key employees
and
non-employee directors to defer a portion of their compensation or fees on
a
pre-tax basis. Non-employee directors can defer up to 100% of their director
fees. There are essentially two separate investment programs available to
plan
participants. The first program (Program 1) offers WPS Resources' common
stock as a hypothetical investment option for participants; deemed dividends
paid on the common stock are automatically reinvested; and all distributions
must be made in WPS Resources' common stock. The second program (Program 2)
offers a variety of hypothetical investment options indexed to mutual funds,
WPS Resources' return on equity, and WPS Resources' common stock.
Participants may not redirect investments between the two programs. All employee
deferrals are remitted to WPSC and, therefore, the liabilities and costs
associated with the deferred compensation plans are included on WPSC's
Consolidated Balance Sheets and Consolidated Statements of Income,
respectively.
Program
1 is
accounted for as a plan that does not permit diversification. As a result,
the
deferred compensation arrangement is classified as an equity instrument and
changes in the fair value of the deferred compensation obligation are not
recognized. The deferred compensation obligation associated with Program
1 was
$16.1 million at December 31, 2005, and $13.0 million at
December 31, 2004.
Program
2 is
accounted for as a plan that permits diversification. As a result, the deferred
compensation obligation associated with this program is classified as a
liability in the Consolidated Balance Sheets and adjusted, with a charge
or
credit to expense, to reflect changes in the fair value of the deferred
compensation obligation. The obligation, classified within other long-term
liabilities, was $23.6 million at December 31, 2005, and
$21.0 million at December 31, 2004. The costs incurred under Program 2
were $2.6 million in 2005, $2.1 million in 2004, and $2.4 million
in 2003.
The
deferred
compensation programs are partially funded through shares of WPS Resources'
common stock that is held in a rabbi trust. The common stock held in the
rabbi
trust is classified in equity in a manner similar to accounting for treasury
stock. The total cost of WPS Resources' common stock held in the rabbi
trust was $10.9 million at December 31, 2005, and $8.4 million at
December 31, 2004.
NOTE 20--PREFERRED
STOCK OF SUBSIDIARY
WPSC
has 1,000,000
authorized shares of preferred stock with no mandatory redemption and a $100
par
value. Outstanding shares are as follows at December 31:
|
|
|
|
2005
|
|
2004
|
|
(Millions,
except share amounts)
|
|
Series
|
|
Shares
Outstanding
|
|
Carrying
Value
|
|
Shares
Outstanding
|
|
Carrying
Value
|
|
|
|
|
5.00
|
%
|
|
130,778
|
|
$
|
13.1
|
|
|
130,799
|
|
$
|
13.1
|
|
|
|
|
5.04
|
%
|
|
29,920
|
|
|
3.0
|
|
|
29,920
|
|
|
3.0
|
|
|
|
|
5.08
|
%
|
|
49,928
|
|
|
5.0
|
|
|
49,928
|
|
|
5.0
|
|
|
|
|
6.76
|
%
|
|
150,000
|
|
|
15.0
|
|
|
150,000
|
|
|
15.0
|
|
|
|
|
6.88
|
%
|
|
150,000
|
|
|
15.0
|
|
|
150,000
|
|
|
15.0
|
|
Total
|
|
|
|
|
|
510,626
|
|
$
|
51.1
|
|
|
510,647
|
|
$
|
51.1
|
|
All
shares of
preferred stock of all series are of equal rank except as to dividend rates
and
redemption terms. Payment of dividends from any earned surplus or other
available surplus is not restricted by the terms of any indenture or other
undertaking by WPSC. Each series of outstanding preferred stock is redeemable
in
whole or in part at WPSC's option at any time on 30 days' notice at the
respective redemption prices. WPSC may not redeem less than all, nor purchase
any, of its preferred stock during the existence of any dividend
default.
In
the event of WPSC's dissolution or liquidation, the holders of preferred
stock
are entitled to receive (a) the par value of their preferred stock out of
the corporate assets other than profits before any of such assets are paid
or
distributed to the holders of common stock and (b) the amount of dividends
accumulated and unpaid on their preferred stock out of the surplus or net
profits before any of such surplus or net profits are paid to the holders
of
common stock. Thereafter, the remainder of the corporate assets, surplus,
and
net profits shall be paid to the holders of common stock.
The
preferred stock
has no pre-emptive, subscription, or conversion rights, and has no sinking
fund
provisions.
NOTE 21--COMMON
EQUITY
Shares
outstanding at December 31
|
|
2005
|
|
2004
|
|
Common
stock,
$1 par value, 200,000,000 shares authorized
|
|
|
40,089,898
|
|
|
37,500,791
|
|
Treasury
stock
|
|
|
12,000
|
|
|
12,000
|
|
Average
cost
of treasury shares
|
|
$
|
25.19
|
|
$
|
25.19
|
|
Shares
in
deferred compensation rabbi trust
|
|
|
270,491
|
|
|
229,238
|
|
Average
cost
of deferred compensation rabbi trust shares
|
|
$
|
40.29
|
|
$
|
36.84
|
|
Treasury
shares at
December 31, 2005, relate to our Non-Employee Directors Stock Option Plan.
The number of stock options granted under this plan may not exceed 100,000
shares. All options under this plan have a ten-year life, but may not be
exercised until one year after the date of grant.
Effective
January 2001, we began issuing new stock under our Stock Investment Plan
and under certain of our stock-based employee benefit plans. These stock
issuances increased equity $29.0 million, $28.3 million, and
$31.0 million in 2005, 2004, and 2003, respectively.
In
November 2005, 1,900,000 shares of WPS Resources' common stock were issued
at $53.70 per share and resulted in a net increase in equity of
$98.3 million, inclusive of underwriting commissions and other expenses
directly related to the issuance.
In
November 2003, 4,025,000 shares of WPS Resources' common stock were issued
at $43.00 per share and resulted in a net increase in equity of
$166.8 million, inclusive of underwriting commissions and other expenses
directly related to the issuance.
Reconciliation
of Common Shares
|
|
Common
Stock Shares
Outstanding
|
|
Balance
at
December 31, 2002
|
|
|
31,808,779
|
|
Common
stock
offering
|
|
|
4,025,000
|
|
Stock
Investment Plan and other stock-based employee benefit
plans
|
|
|
764,681
|
|
Stock
issued
from treasury stock
|
|
|
49,950
|
|
Increase
in
deferred compensation rabbi trust shares
|
|
|
(26,434
|
)
|
|
|
|
|
|
Balance
at
December 31, 2003
|
|
|
36,621,976
|
|
Stock
Investment Plan and other stock-based employee benefit
plans
|
|
|
670,235
|
|
Stock
issued
from treasury stock
|
|
|
3,700
|
|
Increase
in
deferred compensation rabbi trust shares
|
|
|
(36,358
|
)
|
|
|
|
|
|
Balance
at
December 31, 2004
|
|
|
37,259,553
|
|
Common
stock
offering
|
|
|
1,900,000
|
|
Stock
Investment Plan and other stock-based employee benefit
plans
|
|
|
689,107
|
|
Increase
in
deferred compensation rabbi trust shares
|
|
|
(41,253
|
)
|
|
|
|
|
|
Balance
at December 31, 2005
|
|
|
39,807,407
|
|
Shareholder
Rights Plan
In
December 1996, we adopted a Shareholder Rights Plan. The plan is designed
to enhance the ability of the Board of Directors to protect shareholders
of
WPS Resources if efforts are made to gain control of our company in a
manner that the Board of Directors determines is not in the best interests
of
our shareholders. The plan gives our existing shareholders, under certain
circumstances, the right to purchase stock at a discounted price. The rights
expire on December 11, 2006.
Dividends
WPS Resources
is a holding company and our ability to pay dividends is largely dependent
upon
the ability of our subsidiaries to pay dividends to us. The PSCW has by order
restricted our principal subsidiary, WPSC, to paying normal dividends on
its
common stock of no more than 109% of the previous year's common stock dividend.
The PSCW also requires WPSC to maintain a capital structure (i.e., the
percentages by which each of common stock, preferred stock and debt constitute
the total capital invested in a utility), which has a common equity range
of 50%
to 55%. Each of these limitations may be modified by a future order of the
PSCW. Our right to receive dividends on the common stock of WPSC is also
subject
to the prior rights of WPSC's preferred shareholders and to provisions in
WPSC's
restated articles of incorporation which limit the amount of common stock
dividends which WPSC may pay if its common stock and common stock surplus
accounts constitute less than 25% of its total capitalization. These limitations
are not expected to limit any dividend payments in the foreseeable
future.
UPPCO's
indentures
relating to its first mortgage bonds contain certain limitations on the payment
of cash dividends on its common stock, which is held solely by
WPS Resources. Under the most restrictive of these provisions,
$27.7 million of retained earnings were available at December 31,
2005, for the payment of common stock cash dividends by UPPCO.
At
December 31, 2005, WPS Resources had $551.4 million of retained
earnings available for dividends.
Forward
Equity Transaction
In
November 2005, WPS Resources entered into a forward equity sale agreement
with an affiliate of J.P. Morgan Securities, Inc., as forward purchaser,
relating to 2.7 million shares of WPS Resources' common stock. In
connection with the forward agreement, J.P. Morgan Securities borrowed an
equal number of shares of WPS Resources' common stock from stock lenders
and, at WPS Resources' request, sold the borrowed shares to the public.
WPS Resources will not receive any proceeds from J.P. Morgan
Securities' sale of the common shares until the forward agreement is settled,
which may occur any time prior to November 21, 2006. Except in specified
circumstances or events that would require physical share settlement,
WPS Resources may elect to settle the forward agreement by means of
physical shares or through cash settlement. Under a physical share settlement,
the maximum number of shares deliverable by WPS Resources is
2.7 million shares. Depending upon the share price at the date of
settlement, we could either owe or be owed funds if we elect the cash settlement
option. If the cash settlement option was elected, the forward purchaser
would
purchase shares in the market and return those shares to the lenders. The
amount
we would receive or be required to pay would be dependent upon the price
at
which the forward purchaser acquired the shares in the open market in relation
to the contracted forward price. Generally, if the forward purchase price
is
lower than the price at which the forward purchaser is able to acquire the
shares, then we would owe cash; and if the price at which the forward purchaser
is able to acquire shares is less than the forward share price, we would
receive
cash. At December 31, 2005, the forward price was $51.58 per share,
representing the initial public offering price of $53.70 per share, net of
underwriting discounts and commissions. The forward sale price is increased
daily based on a floating interest factor equal to the federal funds rate,
less
a 75 basis point fixed spread. The federal funds rate was 4.25% at
December 31, 2005. The forward sales price will also be subject to decrease
by $0.565 on February 28, 2006, $0.565 on May 31, 2006, and $0.575 on
August 31, 2006. If the forward agreement had been settled by delivery of
shares at December 31, 2005, WPS Resources would have received
$139.3 million, based on the December 31, 2005, forward share price of
$51.58 for the 2.7 million shares.
The
forward equity
agreement had no initial fair value. At settlement, the forward equity sale
agreement will be recorded within equity. The use of a forward agreement
allows
WPS Resources to avoid market uncertainty by pricing a stock offering under
then existing market conditions, while mitigating share dilution by postponing
the issuance of stock until funds are needed. WPS Resources currently
anticipates settling the forward equity transaction through physical share
settlement and expects to use proceeds received under the forward equity
agreement to partially finance the proposed acquisition of the Minnesota
and
Michigan natural gas distribution operations of Aquila and for general corporate
purposes.
Earnings
Per Share
Earnings
per share
is computed by dividing income available for common shareholders by the weighted
average number of shares of common stock outstanding during the period. Diluted
earnings per share is computed by dividing income available for common
shareholders by the weighted average number of shares of common stock
outstanding during the period adjusted for the exercise and/or conversion
of all
potentially dilutive securities. Such dilutive items include in-the-money
stock
options, restricted shares, performance share grants, and shares related
to the
forward equity transaction discussed above. The calculation of diluted earnings
per share for the years shown excludes some stock option plan shares that
had an
anti-dilutive effect. The shares having an anti-dilutive effect are not
significant for any of the years shown. The following table reconciles the
computation of basic and diluted earnings per share:
Reconciliation
of Earnings Per Share
(Millions
except per share amounts)
|
|
2005
|
|
2004
|
|
2003
|
|
Income
available for common shareholders
|
|
$
|
157.4
|
|
$
|
139.7
|
|
$
|
94.7
|
|
Basic
weighted average shares
|
|
|
38.3
|
|
|
37.4
|
|
|
33.0
|
|
Incremental
issuable shares
|
|
|
0.4
|
|
|
0.2
|
|
|
0.2
|
|
Diluted
weighted average shares
|
|
|
38.7
|
|
|
37.6
|
|
|
33.2
|
|
Basic
earnings per common share
|
|
$
|
4.11
|
|
$
|
3.74
|
|
$
|
2.87
|
|
Diluted
earnings per common share
|
|
$
|
4.07
|
|
$
|
3.72
|
|
$
|
2.85
|
|
NOTE 22--STOCK-BASED
COMPENSATION
WPS Resources
has four stock-based compensation plans: the 2005 Omnibus Incentive Compensation
Plan (2005 Omnibus Plan), the 2001 Omnibus Incentive Compensation Plan (2001
Omnibus Plan), the 1999 Stock Option Plan (Employee Plan), and the 1999
Non-Employee Directors Stock Option Plan (Director Plan). No additional stock
options will be issued under the 2001 Omnibus Plan or the Employee Plan,
although the plans will continue to exist for purposes of the existing
outstanding stock-based compensation. The number of shares issuable under
each
of the aforementioned stock-based compensation plans, each outstanding award,
and stock option exercise prices are subject to adjustment in the event of
any
stock split, stock dividend, or other similar transaction.
Stock
Options
Under
the
provisions of the 2005 Omnibus Plan, the number of shares for which stock
options may be granted may not exceed 2 million, and no single employee
that is the chief executive officer of WPS Resources or any of the other
four highest compensated officers of WPS Resources and its subsidiaries can
be
granted options for more than 150,000 shares during any calendar year. Stock
options are granted by the Compensation Committee of the Board of Directors
and
may be granted at any time. No stock options will have a term longer than
ten
years. The exercise price of each stock option is equal to the fair market
value
of the stock on the date the stock option was granted. One-fourth of the
stock
options granted under the 2005 and 2001 Omnibus Plans and the Employee Plan
will
become vested and exercisable each year on the anniversary date of the grant.
The
number of stock
options granted under the Director Plan may not exceed 100,000, and the shares
to be delivered will consist solely of treasury shares. Stock options are
granted at the discretion of the Board of Directors. No options may be granted
under this plan after December 31, 2008. All options have a ten-year
life, but they may not be exercised until one year after the date of grant.
Options granted under this plan are immediately vested. The exercise price
of
each option is equal to the fair market value of the stock on the date the
stock
options were granted.
A
summary of the activity of the stock option plans for 2005 is presented
below:
Stock
Options
|
|
Shares
|
|
Weighted-Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
Options
outstanding at beginning of year
|
|
|
|
|
|
|
|
2001
Omnibus
Plan
|
|
|
1,279,684
|
|
$
|
41.35
|
|
Employee
Plan
|
|
|
245,320
|
|
|
33.51
|
|
Director
Plan
|
|
|
12,000
|
|
|
25.50
|
|
Granted
during 2005
|
|
|
|
|
|
|
|
2005
Omnibus
Plan
|
|
|
325,347
|
|
|
54.85
|
|
Exercised
during 2005
|
|
|
|
|
|
|
|
2001
Omnibus
Plan
|
|
|
83,306
|
|
|
35.99
|
|
Employee
Plan
|
|
|
88,347
|
|
|
32.65
|
|
Forfeited
during 2005
|
|
|
|
|
|
|
|
2001
Omnibus
Plan
|
|
|
1,937
|
|
|
42.30
|
|
Outstanding
at end of year
|
|
|
|
|
|
|
|
2001
Omnibus
Plan
|
|
|
1,194,441
|
|
|
41.72
|
|
2005
Omnibus
Plan
|
|
|
325,347
|
|
|
54.85
|
|
Employee
Plan
|
|
|
156,973
|
|
|
33.99
|
|
Director
Plan
|
|
|
12,000
|
|
|
25.50
|
|
Options
exercisable at year-end
|
|
|
|
|
|
|
|
2001
Omnibus
Plan
|
|
|
703,491
|
|
|
39.31
|
|
Employee
Plan
|
|
|
156,973
|
|
|
33.99
|
|
Director
Plan
|
|
|
12,000
|
|
|
25.50
|
|
Weighted-average
fair value of options granted during 2005
2005
Omnibus
Plan
|
|
$
|
4.40
|
|
|
|
|
A
summary of the activity of the stock option plans for 2004 is presented
below:
Stock
Options
|
|
Shares
|
|
Weighted-Average
Exercise Price
|
|
|
|
|
|
|
|
|
|
Options
outstanding at beginning of year
|
|
|
|
|
|
|
|
2001
Omnibus
Plan
|
|
|
993,677
|
|
$
|
38.97
|
|
Employee
Plan
|
|
|
283,621
|
|
|
33.11
|
|
Director
Plan
|
|
|
15,700
|
|
|
25.49
|
|
Granted
during 2004
|
|
|
|
|
|
|
|
2001
Omnibus
Plan
|
|
|
321,313
|
|
|
48.11
|
|
Exercised
during 2004
|
|
|
|
|
|
|
|
2001
Omnibus
Plan
|
|
|
30,431
|
|
|
35.17
|
|
Employee
Plan
|
|
|
38,301
|
|
|
30.53
|
|
Director
Plan
|
|
|
3,700
|
|
|
25.44
|
|
Forfeited
during 2004
|
|
|
|
|
|
|
|
2001
Omnibus
Plan
|
|
|
4,875
|
|
|
41.23
|
|
Outstanding
at end of year
|
|
|
|
|
|
|
|
2001
Omnibus
Plan
|
|
|
1,279,684
|
|
|
41.35
|
|
Employee
Plan
|
|
|
245,320
|
|
|
33.51
|
|
Director
Plan
|
|
|
12,000
|
|
|
25.50
|
|
Options
exercisable at year-end
|
|
|
|
|
|
|
|
2001
Omnibus
Plan
|
|
|
459,425
|
|
|
37.37
|
|
Employee
Plan
|
|
|
245,320
|
|
|
33.51
|
|
Director
Plan
|
|
|
12,000
|
|
|
25.50
|
|
Weighted-average
fair value of options granted during 2004
2001
Omnibus
Plan
|
|
$
|
4.75
|
|
|
|
|
A
summary of the activity of the stock option plans for 2003 is presented
below:
Stock
Options
|
|
Shares
|
|
Weighted-Average
Exercise Price
|
|
|
|
|
|
|
|
|
|
Options
outstanding at beginning of year
|
|
|
|
|
|
|
|
2001
Omnibus
Plan
|
|
|
663,548
|
|
$
|
36.11
|
|
Employee
Plan
|
|
|
492,021
|
|
|
31.56
|
|
Director
Plan
|
|
|
19,400
|
|
|
25.48
|
|
Granted
during 2003
|
|
|
|
|
|
|
|
2001
Omnibus
Plan
|
|
|
335,424
|
|
|
44.56
|
|
Exercised
during 2003
|
|
|
|
|
|
|
|
2001
Omnibus
Plan
|
|
|
4,420
|
|
|
34.65
|
|
Employee
Plan
|
|
|
207,150
|
|
|
29.49
|
|
Director
Plan
|
|
|
3,700
|
|
|
25.44
|
|
Forfeited
during 2003
|
|
|
|
|
|
|
|
2001
Omnibus
Plan
|
|
|
875
|
|
|
36.30
|
|
Employee
Plan
|
|
|
1,250
|
|
|
23.19
|
|
Outstanding
at end of year
|
|
|
|
|
|
|
|
2001
Omnibus
Plan
|
|
|
993,677
|
|
|
38.97
|
|
Employee
Plan
|
|
|
283,621
|
|
|
33.11
|
|
Director
Plan
|
|
|
15,700
|
|
|
25.49
|
|
Options
exercisable at year-end
|
|
|
|
|
|
|
|
2001
Omnibus
Plan
|
|
|
241,076
|
|
|
35.47
|
|
Employee
Plan
|
|
|
225,116
|
|
|
33.09
|
|
Director
Plan
|
|
|
15,700
|
|
|
25.49
|
|
Weighted-average
fair value of options granted during 2003
2001
Omnibus
Plan
|
|
$
|
4.88
|
|
|
|
|
The
following table
summarizes the status of the stock options outstanding and exercisable at
December 31, 2005, under the 2005 Omnibus Plan.
Stock
Options
Outstanding
|
|
Stock
Options
Exercisable
|
|
Exercise
Price
|
|
|
Shares
|
|
|
Weighted-Average
Remaining Contractual Life
(in
Years
|
)
|
|
Weighted-Average
Exercise Price
Per
Share
|
|
|
Shares
|
|
|
Weighted-Average
Exercise Price
Per
Share
|
|
$54.85
|
|
|
325,347
|
|
|
10.0
|
|
$
|
54.85
|
|
|
-
|
|
|
N/A
|
|
The
following table
summarizes the status of the stock options outstanding and exercisable at
December 31, 2005, under the 2001 Omnibus Plan.
Stock
Options
Outstanding
|
|
Stock
Options
Exercisable
|
|
Exercise
Price
|
|
Shares
|
|
Weighted-Average
Remaining Contractual Life
(in
Years)
|
|
Weighted-Average
Exercise Price
Per
Share
|
|
Shares
|
|
Weighted-Average
Exercise Price
Per
Share
|
|
$34.09
-
38.25
|
|
|
552,495
|
|
|
6.5
|
|
$
|
36.29
|
|
|
464,836
|
|
$
|
35.97
|
|
41.29
-
48.11
|
|
|
641,946
|
|
|
8.5
|
|
|
46.40
|
|
|
238,655
|
|
|
45.81
|
|
|
|
|
1,194,441
|
|
|
|
|
$
|
41.72
|
|
|
703,491
|
|
$
|
39.31
|
|
The
following table
summarizes the status of the stock options outstanding and exercisable at
December 31, 2005, under the Employee Plan.
Stock
Options
Outstanding
|
|
Stock
Options
Exercisable
|
|
Exercise
Price
|
|
Shares
|
|
Weighted-Average
Remaining Contractual Life
(in
Years)
|
|
Weighted-Average
Exercise Price
Per
Share
|
|
Shares
|
|
Weighted-Average
Exercise Price
Per
Share
|
|
$23.19
-
34.75
|
|
|
156,973
|
|
|
4.7
|
|
$
|
33.99
|
|
|
156,973
|
|
$
|
33.99
|
|
The
following table
summarizes the status of the stock options outstanding and exercisable at
December 31, 2005, under the Director Plan.
Stock
Options
Outstanding
|
|
Stock
Options
Exercisable
|
|
Exercise
Price
|
|
Shares
|
|
Weighted-Average
Remaining Contractual Life
(in
Years)
|
|
Weighted-Average
Exercise Price
Per
Share
|
|
Shares
|
|
Weighted-Average
Exercise Price
Per
Share
|
|
$25.44
-
25.69
|
|
|
12,000
|
|
|
4.0
|
|
$
|
25.50
|
|
|
12,000
|
|
$
|
25.50
|
|
Other
Stock-Based Compensation Awards
A
portion of the long-term incentive is awarded in the form of performance
stock
rights. These stock rights vest over a three-year performance period and
are
paid out in shares of WPS Resources' common stock. The number of shares
paid out is calculated by multiplying a performance percentage by a target
number of shares. The performance multiplier is based on the performance
of
WPS Resources' common stock relative to the stock performance of a specific
peer group of companies. The payout may range from 0% to 200% of target.
Based
upon these criteria, 177,426 shares are included in the denominator of the
diluted earnings per share computation at December 31, 2005. In accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," WPS Resources accrues the plan expense over the
three-year period in which the services are performed. Pre-tax compensation
cost
recorded was $3.4 million in 2005, $2.3 million in 2004, and
$3.3 million in 2003.
The
following table
summarizes the performance stock rights granted in 2005, 2004, and
2003.
Performance
Stock Rights Granted
|
|
Year
|
|
Shares
|
|
Grant-Date
Fair Value
|
|
2005
|
|
|
82,874
|
|
$
|
48.37
|
|
2004
|
|
|
57,201
|
|
|
41.62
|
|
2003
|
|
|
35,640
|
|
|
38.27
|
|
Restricted
stock
shares granted on April 18, 2002, totaled 12,186 shares and had a one-year
vesting period. Beginning April 18, 2003, 15% of the shares became unrestricted,
with an additional 15% release of restriction at each six-month interval
thereafter until fully unrestricted. Restricted shares have a value equal
to the
fair market value of the shares on the grant date. Compensation cost was
recorded for these shares over their one-year vesting period.
NOTE 23--REGULATORY
ENVIRONMENT
Wisconsin
On
December 22, 2005, the PSCW issued a final written order authorizing a
retail electric rate increase of $79.9 million (10.1%) and a retail natural
gas rate increase of $7.2 million (1.1%), effective January 1, 2006. The
2006 rates reflect an 11.0% return on common equity. The PSCW also approved
a
common equity ratio of 59.7%. The retail electric rate increase was required
because of higher fuel and purchased power costs (including costs associated
with the Fox Energy Center power purchase agreement), costs related to the
construction of Weston 4, increased transmission costs, and costs related
to the 2005 Kewaunee outage and 50% of the loss on the Kewaunee sale. The
rates
also reflect the refund of a portion of the proceeds received from the
liquidation of the nonqualified decommissioning trust fund. The retail natural
gas rate increase was driven by infrastructure improvements necessary to
ensure
the reliability of the natural gas distribution system.
On
June 7, 2005, WPSC filed with the PSCW and the FERC a request for establishment
of a cooperative joint proceeding for approval of the Kewaunee wind-up plan.
The
wind-up plan proposed that the refunds due to both retail and wholesale
customers related to proceeds received from the liquidation of the nonqualified
decommissioning trust fund be offset by the net loss on the sale of the plant
and also by certain costs related to the 2004 and 2005 Kewaunee outages.
The
wind-up plan proposed to begin the amortization of the net regulatory liability
as a credit to customer rates as of the effective date of the PSCW's order
(expected to be January 1, 2006). The FERC subsequently denied the request
for
joint proceeding with the PSCW. The wind-up plan was addressed by the PSCW
in
WPSC's 2006 rate case (discussed above). The PSCW ruled in the 2006 rate
case
that the deferred assets and liabilities related to the Kewaunee matters
should
be treated separately and not netted as WPSC initially proposed in its wind-up
plan. In the 2006 rate case, the PSCW determined that Wisconsin retail customers
were entitled to be refunded approximately 85% of the proceeds received from
the
liquidation of the nonqualified decommissioning trust fund based on a historical
allocation methodology, or approximately $108 million of
the
total
$127.1 million of proceeds received, over a two-year period beginning on
January 1, 2006 (including the refund of carrying costs on the unamortized
balance at the authorized pre-tax weighted average cost of capital). In 2005,
the MPSC ruled that WPSC's Michigan customers were entitled to be refunded
approximately 2% of the proceeds received from the liquidation of the
nonqualified decommissioning fund and refunding to Michigan customers began
in
2005. The $126.9 million regulatory liability recorded at December 31,
2005, related to the required refunding of proceeds received from the
liquidation of the nonqualified decommissioning trust fund to both retail
and
wholesale customers. The proposal to refund the nonqualified decommissioning
trust fund to wholesale customers was also approved by the FERC with no
specification of the details for distribution. On August 8, 2005, the FERC
accepted the proposed refund plan for filing and implemented the plan effective
January 1, 2006, subject to refund upon final resolution. A preliminary
settlement discussion between WPSC and parties contesting WPSC's refund plan
was
held in the fourth quarter of 2005, but a final resolution has not been
determined on this matter. The PSCW's treatment of costs related to the 2004
and
2005 Kewaunee outages, as well as the loss on the sale of Kewaunee are discussed
below.
The
PSCW disallowed
recovery of 50% of the loss on the sale of Kewaunee. The entire loss had
previously been approved for deferral, resulting in WPSC writing off
$6.1 million of the regulatory asset previously recorded. WPSC petitioned
the PSCW for rehearing on this matter; however, the request for rehearing
was
denied and this decision is now final.
On
February 20, 2005, Kewaunee was temporarily removed from service after a
potential design weakness was identified in its auxiliary feedwater system.
On
March 17, 2005, the PSCW authorized WPSC to defer replacement fuel costs
related
to the outage. On April 8, 2005, the PSCW approved deferral of the operating
and
maintenance costs, including carrying costs at the most recently authorized
pre-tax weighted average cost of capital. In the order granted for WPSC's
2006
rate case, which was finalized on December 22, 2005 (discussed above), the
PSCW determined that it was reasonable for WPSC to recover all deferred costs
related to the 2005 Kewaunee forced outage over a five-year period, beginning
on
January 1, 2006, including carrying costs on the unamortized balance at the
composite short-term debt rate. Because the PSCW had initially approved deferral
of carrying costs based upon the weighted average cost of capital, WPSC was
required to write-off $2.2 million of carrying costs in the fourth quarter
of 2005. WPSC also filed with the FERC for approval to defer these costs
in the
wholesale jurisdiction. The FERC is in the process of investigating the justness
and reasonableness of the recovery of the costs and will subsequently rule
on
the filing. WPSC believes recovery of the FERC portion of these costs is
probable. For WPSC's Michigan retail customers, fuel costs are recovered
through
a pass through fuel adjustment clause and no deferral request is needed.
Through
December 31, 2005, WPSC had deferred $56.4 million of replacement
power costs and operating and maintenance expenses related to this outage.
On
July 5, 2005, WPSC sold its 59% share of Kewaunee to Dominion. See Note 6,
"Acquisitions
and Sales of Assets,"
for further
information on the sale of Kewaunee.
In
WPSC's 2006 rate case, the PSCW determined that it was reasonable for WPSC
to
continue to defer the MISO Day 2 charges associated with net congestion and
financial transmission rights costs and revenues, and the cost differences
between marginal losses and average losses. At December 31, 2005, WPSC had
deferred $21.2 million of costs related to these matters.
In
May 2005, WPSC received notification from its coal transportation suppliers
that
extensive maintenance was required on the railroad tracks that lead into
and out
of the Powder River Basin. The extensive maintenance ended on November 23,
2005.
During the maintenance efforts, WPSC received approximately 87% of the expected
coal deliveries. WPSC took steps to conserve coal usage and secured alternative
coal supplies at its affected generation facilities during that time. On
September 23, 2005, the PSCW approved WPSC's request for deferred treatment
of the incremental fuel costs resulting from the coal supply issues. As of
December 31, 2005, $6.4 million was deferred related to this matter.
These costs are expected to be addressed in WPSC's next retail electric rate
case.
On
November 5, 2004, WPSC filed an application with the PSCW to defer all
incremental costs, including carrying costs, resulting from unexpected problems
encountered in the 2004 refueling outage at Kewaunee. During the refueling
outage, an unexpected problem was encountered with equipment used
for
lifting the
reactor vessel internal components to perform a required 10-year inspection.
These equipment problems caused the outage to be extended by approximately
three
weeks. On November 11, 2004, the PSCW authorized WPSC to defer the replacement
fuel costs related to the extended outage. On November 23, 2004, the PSCW
authorized WPSC to defer purchased power costs and operating and maintenance
expenses related to the extended outage, effective from when the problems
were
discovered, including carrying costs at WPSC's authorized weighted average
cost
of capital. Kewaunee returned to service on December 4, 2004. In the order
granted for WPSC's 2006 rate case, which was finalized on December 22, 2005
(discussed above), the PSCW disallowed recovery of these costs, resulting
in the
write-off of the $7.6 million regulatory asset WPSC had previously
recorded. WPSC petitioned the PSCW for rehearing on this matter; however,
the
request for rehearing was denied and this decision is now final.
On
December 21, 2004, the PSCW issued a final written order authorizing a
retail electric rate increase of $60.7 million (8.6%) and a retail natural
gas rate increase of $5.6 million (1.1%), effective January 1, 2005. The
2005 rates reflected an 11.5% return on equity. The PSCW also approved a
common
equity ratio of 57.35% in the utility's regulatory capital structure. The
retail
electric rate increase was related to increased costs pertaining to fuel
and
purchased power, construction of Weston 4, benefit costs, and the MISO
costs. The natural gas rate increase was primarily related to increases in
benefit costs and the cost of distribution system improvements.
Michigan
On
January 3, 2006, UPPCO filed a request to increase its retail electric rates
by
$6.6 million (8.1%), with an 11.5% return on equity, and a 55% common
equity ratio. It is anticipated that the MPSC will act on this request in
the
third quarter of 2006. UPPCO asked for the new rates to go into effect in
the
second quarter, subject to refund, while the MPSC reviews the entire request.
The retail electric rate increase is required in order to improve service
quality and reliability, upgrade technology, and manage rising employee and
retiree benefit costs. UPPCO's last retail electric rate increase was in
December 2002.
On
December 8, 2004, UPPCO submitted a request to the MPSC to approve UPPCO's
proposed treatment of the pre-tax gains from certain sales of undeveloped
and
partially developed land located in the Upper Peninsula of Michigan as
appropriate for ratemaking purposes. On February 4, 2005, UPPCO submitted
an
application to the MPSC for a 7.6% increase in retail electric rates
($5.7 million in revenues). UPPCO also requested interim rate recovery of
6.0% ($4.5 million in revenues) to allow UPPCO to recover costs during the
time the MPSC was reviewing the full case. On April 28, 2005, the MPSC issued
an
order authorizing UPPCO to retain 100% of the pre-tax gains on certain lands
owned up to $18.5 million and 73% of any pre-tax gains over that amount, so
UPPCO withdrew the rate increase request.
Federal
Through
a series of
orders issued by the FERC, Regional Through and Out Rates for transmission
service between the MISO and the PJM Interconnection were eliminated effective
December 1, 2004. To compensate transmission owners for the revenue they
will no longer receive due to this elimination, the FERC ordered a transitional
pricing mechanism called SECA to be put into place. Load serving entities
will
pay these SECA charges during a 16-month transition period from December 1,
2004, through March 31, 2006. Total exposure for the 16-month transitional
period, taken from proposed compliance filings by the transmission owners,
is
approximately $19 million for ESI, of which approximately $17 million
relates to its Michigan operations and $2 million relates to its Ohio
operations. Through December 31, 2005, ESI has received billings totaling
$15.3 million, of which $11.1 million have been expensed.
The
application and
legality of the SECA is being challenged by many load-serving entities,
including ESI. ESI has been and will continue pursuing all avenues to appeal
and/or reduce the SECA obligations. It is probable that ESI's total exposure
will be reduced by at least $4.2 million because
of
inconsistencies between the FERC's SECA order and the transmission owners'
compliance filings (representing the difference between the amount ESI has
paid
for SECA charges and the amount that has been expensed
as
of December 31, 2005, as discussed above). ESI anticipates settling a
significant portion of its SECA matters through vendor negotiations in the
first
half of 2006 and reached a $1 million settlement agreement with one of its
vendors in January 2006. Resolution of issues to be raised in an upcoming
SECA
hearing offer the possibility of further reductions in ESI's exposure, but
the
extent is unknown at present. Through existing contracts, ESI has the ability
to
pass a portion of the SECA charges on to customers and has been doing so.
Since
SECA is a transition charge ending on March 31, 2006, it does not directly
impact ESI's long-term competitiveness.
The
SECA is also an
issue for WPSC and UPPCO, who have intervened and protested a number of
proposals in this docket because those proposals could result in unjust,
unreasonable, and discriminatory charges for customers. It is anticipated
that
most of the SECA charges incurred by WPSC and UPPCO and any refunds will
be
passed on to customers through rates.
Other
On
September 21, 2005, WPS Resources announced the acquisition of the
Michigan and Minnesota natural gas distribution operations of Aquila. See
Note 6, "Acquisitions
and Sales of Assets,"
for further
information on the acquisition of these assets. In relation to the acquisition,
WPS Michigan Utilities, Inc. (which subsequently changed its name to
Michigan Gas Utilities Corporation) and Aquila jointly filed with the MPSC
on
October 10, 2005, for approval of the termination of Aquila's duty to provide
natural gas service in Michigan and for WPS Michigan Utilities to provide
natural gas service in the Michigan service territory of Aquila pursuant
to the
rates, terms, and conditions in Aquila's current tariff book. Also in relation
to the acquisition, on October 17, 2005, WPS Minnesota Utilities, Inc.
(which subsequently changed its name to Minnesota Energy Resources Corporation)
and Aquila jointly filed with the Minnesota Public Utilities Commission to
approve the sale of the Minnesota assets of Aquila's two divisions, Aquila
Networks-PNG and Aquila Networks-NMU, to WPS Minnesota Utilities pursuant
to the Asset Purchase Agreement dated September 21, 2005. On November 10,
2005, approval was obtained from the MPSC for the Michigan transaction. The
Minnesota Public Utilities Commission has not yet ruled on this
matter.
NOTE 24--VARIABLE
INTEREST ENTITIES
The
FASB has issued
Interpretation No. 46R (as revised), "Consolidation of Variable Interest
Entities, an Interpretation of Accounting Research Bulletin No. 51," in
order to improve financial reporting by companies involved with variable
interest entities. Interpretation No. 46R requires certain variable
interest entities to be consolidated by the primary beneficiary of the entity
if
the equity investors in the entity do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for
the
entity to finance its activities without additional financial support from
other
parties. The primary beneficiary is the party that absorbs the majority of
the
expected losses and/or receives the majority of the expected residual returns
of
the variable interest entity's activities.
The
application of
Interpretation No. 46R was required for financial statements of public
entities that have interests in special-purpose entities for periods ending
after December 15, 2003. WPS Resources identified WPSR Capital Trust I
as a special purpose entity that is within the scope of Interpretation
No. 46R. Refer to Note 25, "Company-Obligated
Mandatorily Redeemable Trust Preferred Securities of Preferred Stock
Trust,"
for further
discussion of the impacts of implementing this portion of Interpretation
No. 46R on the financial statement of WPS Resources.
WPS Resources
adopted the provisions of Interpretation No. 46R for variable interest
entities not defined as special purpose entities effective March 31, 2004.
The required adoption had no impact on our Consolidated Financial Statements,
as
we did not identify significant variable interests in any unconsolidated
variable interest entities where we were determined to be the primary
beneficiary. We have identified our equity ownership in a synthetic fuel
producing facility as a variable interest in a variable interest entity.
Through
an affiliate of ESI, WPS Resources owns a partial interest in a synthetic
fuel facility located in Kentucky and receives tax credits pursuant to Section
29 of the Internal Revenue Code based on sales to unaffiliated third-party
purchasers of synthetic fuel produced from coal. At December 31, 2005,
WPS Resources had a 23% ownership interest in the synthetic fuel facility.
No other variable interests were identified. WPS Resources' maximum
exposure to loss as a result of our
involvement
with
this variable interest entity is limited to our investment in this entity,
which
was not significant at December 31, 2005. We were not identified as the
primary beneficiary of this entity and, therefore, were not required to
consolidate the synthetic fuel facility into our financial statements at
December 31, 2005. The adoption of Interpretation No. 46R also
included an analysis of our power purchase and sale agreements. We do not
believe that any of our power purchase or sale agreements constitute significant
variable interests that would lead us to consolidate entities not currently
consolidated or deconsolidate any entities currently consolidated.
NOTE 25--COMPANY-OBLIGATED
MANDATORILY REDEEMABLE TRUST PREFERRED SECURITIES OF PREFERRED STOCK TRUST
On
July 30, 1998, WPSR Capital Trust I, a Delaware business trust, issued
$50.0 million of trust preferred securities to the public.
WPS Resources owned all of the outstanding trust common securities of the
Trust, and the only asset of the Trust was $51.5 million of subordinated
debentures issued by WPS Resources. The debentures were due on
June 30, 2038, and bore interest at 7% per year. The terms and interest
payments on the debentures corresponded to the terms and distributions on
the
trust preferred securities.
As
discussed in Note 24, "Variable
Interest Entities,"
it was
determined that WPSR Capital Trust I qualified as a special purpose entity
and,
therefore, the provisions of Interpretation No. 46R were applied to the
Trust at December 31, 2003. Prior to this date, we consolidated the
preferred securities of the Trust into our financial statements as we held
all
of the voting securities. Per the provisions of Interpretation No. 46R,
however, it was determined that the preferred security holders held the majority
of the residual economic risks associated with WPSR Capital Trust I and,
therefore, the Trust was deconsolidated effective December 31, 2003. As a
result of the deconsolidation, WPS Resources recorded a $1.5 million
investment in trust within other current assets and a $51.5 million
Note payable to preferred stock trust, respectively, within the
Consolidated Balance Sheet at December 31, 2003.
On
January 8, 2004, WPS Resources redeemed all of the subordinated debentures
that were initially issued to the Trust for $51.5 million and paid accrued
interest of $0.1 million. This action required the Trust to redeem an equal
amount of trust securities at face value plus any accrued interest and unpaid
distributions. As a result of these transactions, the Trust was dissolved
effective January 8, 2004.
NOTE 26--SEGMENTS
OF BUSINESS
SFAS
No. 131,
"Disclosures About Segments of an Enterprise and Related Information," requires
that companies disclose segment information based on how management makes
decisions about allocating resources to segments and measuring their
performance.
Prior
to the fourth
quarter of 2005, WPS Resources reported two nonregulated segments, ESI and
PDI. In the fourth quarter of 2005, WPS Resources' Chief Executive Officer
and its Board of Directors decided to view ESI and PDI as one business, and
corresponding changes were made to the segment information reported to them.
The
change in reportable segments is the culmination of changes over the past
two
years that caused these businesses to become integrated. These changes included
combining the management teams, restructuring the ownership structure of
ESI and
PDI, and having ESI optimize the value of PDI's merchant generation fleet
and
reduce market price risk through the use of various financial and physical
instruments (such as futures, options, and swaps) in order to provide more
predictable revenues and margins. Effective in the fourth quarter of 2005,
WPS Resources began reporting to the Chief Executive Officer and Board of
Directors one nonregulated segment, ESI. Segment information related to prior
periods has been reclassified to reflect this change. Currently,
WPS Resources reports four segments, which are described
below.
Our
two regulated
segments include the regulated electric utility operations of WPSC and UPPCO,
and the regulated natural gas utility operations of WPSC. WPSC's revenues
are
primarily derived from the service of electric and natural gas retail customers
in northeastern and central Wisconsin and an adjacent portion of Upper Michigan.
WPSC also provides wholesale electric service to various customers, including
municipal
utilities, electric cooperatives, energy marketers, other investor-owned
utilities, and a municipal joint action agency. Portions of WPSC's electric
and
natural gas operations cannot be specifically identified as electric or natural
gas and instead are allocated using either actual labor hours, revenues,
number
of customers, or number of meters. UPPCO derives revenues from the sale of
electric energy in the Upper Peninsula of Michigan.
ESI
is our primary
nonregulated segment. ESI offers nonregulated natural gas, electric, and
alternate fuel supplies as well as energy management and consulting services
to
retail and wholesale customers and competes in the wholesale merchant electric
power generation industry, primarily in the northeastern quadrant of the
United States, adjacent portions of Canada, and now Texas. Although ESI has
a widening array of products and services, revenues are primarily derived
through sales of electricity and natural gas to retail and wholesale customers.
ESI's marketing and trading operations manage power and natural gas procurement
as an integrated portfolio with its retail and wholesale sales commitments.
Electricity required to fulfill these sales commitments is procured from
both
ESI merchant electric power generation and from independent generators, energy
marketers, and organized electric power markets. Natural gas is purchased
from a
variety of suppliers under daily, monthly, seasonal and long-term contracts
with
pricing delivery and volume schedules to accommodate customer requirements.
ESI's customers include utilities, municipalities, cooperatives, commercial
and
industrial consumers, aggregators, and other marketing and retail entities.
ESI
also owns
several merchant electric generation plants, primarily in the Midwest and
northeastern United States and adjacent portions of Canada. ESI markets power
from these plants that is not under contract to third parties. ESI utilizes
power from its New England and Canadian assets primarily to serve firm load
commitments in northern Maine and certain other sales agreements with customers.
For most of the remaining capacity available from these plants, ESI utilizes
financial tools, including forwards, options, and swaps to mitigate exposure,
as
well as to maximize value from the merchant generation fleet. Power purchase
agreements are also in place with third-party customers for approximately
95
megawatts of capacity, which includes the Stoneman facility in Cassville,
Wisconsin, and the Combined Locks facility in Combined Locks,
Wisconsin.
The
Holding Company
and Other segment, another nonregulated segment, includes the operations
of
WPS Resources and WPS Resources Capital Corporation as holding
companies and the nonutility activities at WPSC and UPPCO. Equity earnings
from
our investments in ATC, Wisconsin River Power Company, and Guardian Pipeline,
LLC are included in the Holding Company and Other Segment.
The
tables below
present information for the respective years pertaining to our operations
segmented by lines of business.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulated
Utilities
|
|
Nonutility
and
Nonregulated
Operations
|
|
|
|
|
|
2005
(millions)
|
|
Electric
Utility(1)
|
|
Gas
Utility(1)
|
|
Total
Utility(1)
|
|
ESI
|
|
Other
|
|
Reconciling
Eliminations
|
|
WPS Resources
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
Statement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External
revenues
|
|
$
|
1,003.6
|
|
$
|
520.6
|
|
$
|
1,524.2
|
|
$
|
5,438.5
|
|
$
|
-
|
|
$
|
-
|
|
$
|
6,962.7
|
|
Internal
revenues
|
|
|
33.5
|
|
|
1.4
|
|
|
34.9
|
|
|
13.6
|
|
|
1.1
|
|
|
(49.6
|
)
|
|
-
|
|
Depreciation
and decommissioning
|
|
|
113.4
|
|
|
17.4
|
|
|
130.8
|
|
|
11.7
|
|
|
0.3
|
|
|
-
|
|
|
142.8
|
|
Miscellaneous
income
|
|
|
51.6
|
|
|
0.5
|
|
|
52.1
|
|
|
(0.8
|
)
|
|
39.4
|
|
|
(4.5
|
)
|
|
86.2
|
|
Interest
expense
|
|
|
27.1
|
|
|
8.7
|
|
|
35.8
|
|
|
14.8
|
|
|
26.3
|
|
|
(4.5
|
)
|
|
72.4
|
|
Provision
for
income taxes
|
|
|
37.0
|
|
|
7.3
|
|
|
44.3
|
|
|
4.7
|
|
|
(2.3
|
)
|
|
-
|
|
|
46.7
|
|
Cumulative
effect of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
change
in
accounting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
principle
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1.6
|
|
|
-
|
|
|
-
|
|
|
1.6
|
|
Income
available for common shareholders
|
|
|
64.2
|
|
|
13.2
|
|
|
77.4
|
|
|
74.1
|
|
|
5.9
|
|
|
-
|
|
|
157.4
|
|
Total
assets
|
|
|
2,082.3
|
|
|
660.8
|
|
|
2,743.1
|
|
|
2,435.6
|
|
|
455.4
|
|
|
(178.9
|
)
|
|
5,455.2
|
|
Cash
expenditures for long-lived assets
|
|
|
373.9
|
|
|
36.4
|
|
|
410.3
|
|
|
4.0
|
|
|
0.9
|
|
|
-
|
|
|
415.2
|
|
(1)
Includes only utility operations. Nonutility operations are included in the
Other column.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulated
Utilities
|
|
Nonutility
and
Nonregulated
Operations
|
|
|
|
|
|
2004
(millions)
|
|
Electric
Utility(1)
|
|
Gas
Utility(1)
|
|
Total
Utility(1)
|
|
ESI
|
|
Other
|
|
Reconciling
Eliminations
|
|
WPS Resources
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
Statement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External
revenues
|
|
$
|
875.6
|
|
$
|
416.4
|
|
$
|
1,292.0
|
|
$
|
3,658.8
|
|
$
|
-
|
|
$
|
-
|
|
$
|
4,950.8
|
|
Internal
revenues
|
|
|
21.0
|
|
|
4.5
|
|
|
25.5
|
|
|
15.4
|
|
|
1.1
|
|
|
(42.0
|
)
|
|
-
|
|
Depreciation
and decommissioning
|
|
|
79.5
|
|
|
16.0
|
|
|
95.5
|
|
|
11.0
|
|
|
0.5
|
|
|
-
|
|
|
107.0
|
|
Miscellaneous
income
|
|
|
10.4
|
|
|
0.4
|
|
|
10.8
|
|
|
3.8
|
|
|
40.6
|
|
|
(3.2
|
)
|
|
52.0
|
|
Interest
expense
|
|
|
25.6
|
|
|
7.7
|
|
|
33.3
|
|
|
9.0
|
|
|
20.8
|
|
|
(3.2
|
)
|
|
59.9
|
|
Provision
for
income taxes
|
|
|
39.2
|
|
|
10.2
|
|
|
49.4
|
|
|
(23.9
|
)
|
|
(3.8
|
)
|
|
-
|
|
|
21.7
|
|
Income
available for common shareholders
|
|
|
68.8
|
|
|
17.3
|
|
|
86.1
|
|
|
41.7
|
|
|
11.9
|
|
|
-
|
|
|
139.7
|
|
Total
assets
|
|
|
2,225.2
|
|
|
577.9
|
|
|
2,803.1
|
|
|
1,390.9
|
|
|
329.8
|
|
|
(147.0
|
)
|
|
4,376.8
|
|
Cash
expenditures for long-lived assets
|
|
|
223.0
|
|
|
62.7
|
|
|
285.7
|
|
|
6.4
|
|
|
0.3
|
|
|
-
|
|
|
292.4
|
|
(1) |
Includes
only
utility operations. Nonutility operations are included in the Other
column.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulated
Utilities
|
|
Nonutility
and
Nonregulated
Operations
|
|
|
|
|
|
2003
(millions)
|
|
Electric
Utility(1)
|
|
Gas
Utility(1)
|
|
Total
Utility(1)
|
|
ESI
|
|
Other
|
|
Reconciling
Eliminations
|
|
WPS Resources
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
Statement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External
revenues
|
|
$
|
785.6
|
|
$
|
398.1
|
|
$
|
1,183.7
|
|
$
|
3,218.7
|
|
$
|
0.1
|
|
$
|
-
|
|
$
|
4,402.5
|
|
Internal
revenues
|
|
|
28.5
|
|
|
6.1
|
|
|
34.6
|
|
|
5.9
|
|
|
1.1
|
|
|
(41.6
|
)
|
|
-
|
|
Depreciation
and decommissioning
|
|
|
112.8
|
|
|
14.3
|
|
|
127.1
|
|
|
13.6
|
|
|
0.6
|
|
|
-
|
|
|
141.3
|
|
Miscellaneous
income
|
|
|
43.6
|
|
|
1.3
|
|
|
44.9
|
|
|
(3.8
|
)
|
|
30.7
|
|
|
(8.2
|
)
|
|
63.6
|
|
Interest
expense
|
|
|
24.9
|
|
|
6.7
|
|
|
31.6
|
|
|
9.5
|
|
|
27.3
|
|
|
(6.6
|
)
|
|
61.8
|
|
Provision
for
income taxes
|
|
|
33.9
|
|
|
9.2
|
|
|
43.1
|
|
|
(13.5
|
)
|
|
(2.6
|
)
|
|
-
|
|
|
27.0
|
|
Cumulative
effect of change in accounting principle
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3.2
|
|
|
-
|
|
|
.
|
|
|
3.2
|
|
Income
available for common shareholders
|
|
|
60.0
|
|
|
15.7
|
|
|
75.7
|
|
|
21.1
|
|
|
(2.1
|
)
|
|
-
|
|
|
94.7
|
|
Cash
expenditures for long-lived assets
|
|
|
131.0
|
|
|
40.7
|
|
|
171.7
|
|
|
6.3
|
|
|
(0.2
|
)
|
|
-
|
|
|
177.8
|
|
(1) |
Includes
only
utility operations. Nonutility operations are included in the Other
column.
|
Geographic
Information
(Millions)
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
Revenues
|
|
Long-Lived
Assets
|
|
Revenues
|
|
Long-Lived
Assets
|
|
Revenues
|
|
United States
|
|
$
|
4,797.0
|
|
$
|
2,679.6
|
|
$
|
3,823.8
|
|
$
|
2,906.6
|
|
$
|
3,830.8
|
|
Canada(1)
|
|
|
2,165.7
|
|
|
21.7
|
|
|
1,127.0
|
|
|
22.9
|
|
|
571.7
|
|
Total
|
|
$
|
6,962.7
|
|
$
|
2,701.3
|
|
$
|
4,950.8
|
|
$
|
2,929.5
|
|
$
|
4,402.5
|
|
(1) |
Revenues
and
assets of Canadian subsidiaries.
|
NOTE 27--QUARTERLY
FINANCIAL INFORMATION (Unaudited)
(Millions,
except for share amounts)
|
|
Three
Months
Ended
|
|
|
|
2005
|
|
|
|
March
|
|
June
|
|
September
|
|
December
|
|
Total
|
|
Operating
revenues
|
|
$
|
1,486.9
|
|
$
|
1,327.5
|
|
$
|
1,757.3
|
|
$
|
2,391.0
|
|
$
|
6,962.7
|
|
Operating
Income
|
|
|
92.9
|
|
|
7.3
|
|
|
72.0
|
|
|
18.3
|
|
|
190.5
|
|
Income
available for common shareholders
|
|
|
65.9
|
|
|
23.9
|
|
|
48.2
|
|
|
19.4
|
|
|
157.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
number of shares of common stock (basic)
|
|
|
37.8
|
|
|
38.0
|
|
|
38.2
|
|
|
39.1
|
|
|
38.3
|
|
Average
number of shares of common stock (diluted)
|
|
|
38.1
|
|
|
38.4
|
|
|
38.6
|
|
|
39.6
|
|
|
38.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per
common share (basic) (1)
|
|
$
|
1.74
|
|
$
|
0.63
|
|
$
|
1.26
|
|
$
|
0.50
|
|
$
|
4.11
|
|
Earnings
per
common share (diluted) (1)
|
|
|
1.73
|
|
|
0.62
|
|
|
1.25
|
|
|
0.49
|
|
|
4.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
March |
|
|
June
|
|
|
September
|
|
|
December
|
|
|
Total
|
|
Operating
revenues
|
|
$
|
1,387.0
|
|
$
|
1,059.5
|
|
$
|
1,091.9
|
|
$
|
1,412.4
|
|
$
|
4,950.8
|
|
Operating
Income
|
|
|
67.6
|
|
|
10.1
|
|
|
48.7
|
|
|
42.6
|
|
|
169.0
|
|
Income
available for common shareholders
|
|
|
42.6
|
|
|
4.6
|
|
|
34.8
|
|
|
57.7
|
|
|
139.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
number of shares of common stock (basic)
|
|
|
37.1
|
|
|
37.3
|
|
|
37.4
|
|
|
37.5
|
|
|
37.4
|
|
Average
number of shares of common stock (diluted)
|
|
|
37.3
|
|
|
37.5
|
|
|
37.6
|
|
|
37.8
|
|
|
37.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per
common share (basic) (1)
|
|
$
|
1.15
|
|
$
|
0.12
|
|
$
|
0.93
|
|
$
|
1.54
|
|
$
|
3.74
|
|
Earnings
per
common share (diluted) (1)
|
|
|
1.14
|
|
|
0.12
|
|
|
0.93
|
|
|
1.53
|
|
|
3.72
|
|
(1)
Earnings per share
for the individual quarters do not total the year ended earnings per share
amount because of changes to the average number of shares outstanding and
changes in incremental issuable shares throughout the year.
Because
of various
factors, the quarterly results of operations are not necessarily comparable.
ITEM
8.
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
WPS RESOURCES
CORPORATION
To
the Shareholders and Board of Directors of WPS Resources
Corporation
We
have audited the accompanying consolidated balance sheets of WPS Resources
Corporation and subsidiaries (the "Company") as of December 31, 2005 and
2004,
and the related consolidated statements of income, shareholders' equity,
and
cash flows for each of the three years in the period ended December 31,
2005. Our audits also included the financial statement schedules listed in
the Index at Item 15. These financial statements and financial statement
schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements and
financial statement schedules based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In
our opinion, such consolidated financial statements present fairly, in
all
material respects, the financial position of WPS Resources Corporation
and
subsidiaries as of December 31, 2005 and 2004, and the results of their
operations and their cash flows for each of the three years in the period
ended
December 31, 2005, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, such financial
statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly, in all material
respects,
the information set forth therein.
As
discussed in Note 1 to the consolidated financial statements, effective
January
1, 2003 the Company changed its method of accounting for certain energy
trading
contracts to adopt EITF 02-3, "Issues Involved in Accounting for Derivatives
Contracts Held for Trading Purposes and Contracts Involved in Energy Trading
and
Risk Management Activities." As discussed in Notes 1 and 15 to the consolidated
financial statements, effective January 1, 2003, the Company changed its
method
of accounting for asset retirement obligations to adopt Statement of Financial
Accounting Standards No. 143, "Accounting for Asset Retirement Obligations."
As
discussed in Notes 1 and 15 to the consolidated financial statements, effective
December 31, 2005, the Company changed its method of accounting for conditional
asset retirement obligations to adopt FASB Interpretation No. 47, "Conditional
Asset Retirement Obligations."
We
have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of December 31, 2005, based on
the criteria established in Internal
Control-Integrated Framework
issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our
report
dated February 28, 2006 expressed an unqualified opinion on management's
assessment of the effectiveness of the Company's internal control over
financial
reporting and an unqualified opinion on the effectiveness of the Company's
internal control over financial reporting.
/s/
Deloitte &
Touche LLP
Milwaukee,
Wisconsin
February
28,
2006
ITEM
8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
WISCONSIN
PUBLIC SERVICE CORPORATION
The
management of
WPSC and its subsidiary is responsible for establishing and maintaining
adequate
internal control over financial reporting. WPSC's control systems were
designed
to provide reasonable assurance to WPSC's management and Board of Directors
regarding the preparation and fair presentation of published financial
statements.
All
internal
control systems, no matter how well designed, have inherent limitations.
Therefore, even those systems determined to be effective can provide only
reasonable assurance with respect to financial statement preparation and
presentation.
WPSC's
management
assessed the effectiveness of its internal control over financial reporting
as
of December 31, 2005. In making this assessment, it used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal
Control-Integrated Framework.
Based
on this
assessment, management believes that, as of December 31, 2005, WPSC's internal
control over financial reporting is effective based on those
criteria.
WPSC's
independent
registered public accounting firm has issued an audit report on management's
assessment of WPSC's internal control over financial reporting.
ITEM
8.
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
WISCONSIN
PUBLIC SERVICE CORPORATION
To
the Board of Directors of Wisconsin Public Service Corporation
We
have audited management's assessment, included in the accompanying Management
Report on Internal Control over Financial Reporting, that Wisconsin Public
Service Corporation and subsidiary (the "Company") maintained effective
internal
control over financial reporting as of December 31, 2005, based on criteria
established in Internal
Control-Integrated Framework issued
by the
Committee of Sponsoring Organizations of the Treadway Commission. The
Company's management is responsible for maintaining effective internal
control
over financial reporting and for its assessment of the effectiveness of
internal
control over financial reporting. Our responsibility is to express an
opinion on management's assessment and an opinion on the effectiveness
of the
Company's internal control over financial reporting based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating management's assessment,
testing and evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we considered necessary
in the
circumstances. We believe that our audit provides a reasonable basis for
our opinions.
A
company's internal control over financial reporting is a process designed
by, or
under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected
by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and
the
preparation of financial statements for external purposes in accordance
with
generally accepted accounting principles. A company's internal control
over financial reporting includes those policies and procedures that (1)
pertain
to the maintenance of records that, in reasonable detail, accurately and
fairly
reflect the transactions and dispositions of the assets of the company;
(2)
provide reasonable assurance that transactions are recorded as necessary
to
permit preparation of financial statements in accordance with generally
accepted
accounting principles, and that receipts and expenditures of the company
are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention
or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
Because
of the
inherent limitations of internal control over financial reporting, including
the
possibility of collusion or improper management override of controls, material
misstatements due to error or fraud may not be prevented or detected on
a timely
basis. Also, projections of any evaluation of the effectiveness of the
internal control over financial reporting to future periods are subject
to the
risk that the controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.
In
our opinion, management's assessment that the Company maintained effective
internal control over financial reporting as of December 31, 2005, is fairly
stated, in all material respects, based on the criteria established in
Internal
Control-Integrated Framework issued
by the
Committee of Sponsoring Organizations of the Treadway Commission. Also in
our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2005, based
on the
criteria established in Internal
Control-Integrated Framework issued
by the
Committee of Sponsoring Organizations of the Treadway Commission.
We
have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated financial
statements and financial statement schedules as of and for the year ended
December 31, 2005 of the Company and our report dated February 28, 2006
expressed an unqualified opinion on those financial statements and financial
statement schedules and included an explanatory paragraph regarding the
Company's adoption of new accounting standards.
/s/
Deloitte &
Touche LLP
Milwaukee,
Wisconsin
February
28,
2006
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WISCONSIN
PUBLIC SERVICE CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended
December 31
|
|
|
|
|
|
|
|
(Millions)
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
|
|
|
|
|
|
|
|
|
|
Electric
|
|
$
|
932.9
|
|
$
|
801.2
|
|
$
|
724.9
|
|
Gas
|
|
|
522.0
|
|
|
420.9
|
|
|
404.2
|
|
Total
operating revenues
|
|
|
1,454.9
|
|
|
1,222.1
|
|
|
1,129.1
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
Electric
production fuels
|
|
|
188.0
|
|
|
137.7
|
|
|
134.1
|
|
Purchased
power
|
|
|
201.7
|
|
|
111.3
|
|
|
90.9
|
|
Gas
purchased
for resale
|
|
|
397.4
|
|
|
301.9
|
|
|
291.0
|
|
Other
operating expenses
|
|
|
333.2
|
|
|
306.9
|
|
|
283.1
|
|
Maintenance
|
|
|
66.4
|
|
|
79.1
|
|
|
72.0
|
|
Depreciation
and decommissioning
|
|
|
126.0
|
|
|
91.0
|
|
|
122.9
|
|
Federal
income
taxes
|
|
|
19.3
|
|
|
37.8
|
|
|
30.9
|
|
Investment
tax
credit restored
|
|
|
(1.3
|
)
|
|
(1.3
|
)
|
|
(1.5
|
)
|
State
income
taxes
|
|
|
6.6
|
|
|
10.6
|
|
|
8.9
|
|
Gross
receipts
tax and other
|
|
|
39.8
|
|
|
38.5
|
|
|
36.8
|
|
Total
operating expense
|
|
|
1,377.1
|
|
|
1,113.5
|
|
|
1,069.1
|
|
Operating
income
|
|
|
77.8
|
|
|
108.6
|
|
|
60.0
|
|
Other
income and (deductions)
|
|
|
|
|
|
|
|
|
|
|
Allowance
for
equity funds used during construction
|
|
|
1.5
|
|
|
2.0
|
|
|
2.4
|
|
Other,
net
|
|
|
60.6
|
|
|
35.2
|
|
|
60.3
|
|
Income
taxes
|
|
|
(19.5
|
)
|
|
(4.2
|
)
|
|
(7.4
|
)
|
Total
other income
|
|
|
42.6
|
|
|
33.0
|
|
|
55.3
|
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
Interest
on
long-term debt
|
|
|
29.8
|
|
|
29.9
|
|
|
27.8
|
|
Other
interest
|
|
|
6.5
|
|
|
4.5
|
|
|
4.9
|
|
Allowance
for
borrowed funds used during construction
|
|
|
(0.4
|
)
|
|
(0.7
|
)
|
|
(1.0
|
)
|
Total
interest expense
|
|
|
35.9
|
|
|
33.7
|
|
|
31.7
|
|
Minority
interest
|
|
|
-
|
|
|
-
|
|
|
(1.6
|
)
|
Net
income
|
|
|
84.5
|
|
|
107.9
|
|
|
82.0
|
|
Preferred
stock dividend requirements
|
|
|
3.1
|
|
|
3.1
|
|
|
3.1
|
|
Earnings
on common stock
|
|
$
|
81.4
|
|
$
|
104.8
|
|
$
|
78.9
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying WPS Resources' and Wisconsin Public Service Corporation's
notes
|
|
|
|
|
|
|
|
|
|
|
are
an
integral part of these statements.
|
|
|
|
|
|
|
|
|
|
|
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|
|
|
|
|
|
|
|
|
|
|
|
WISCONSIN
PUBLIC SERVICE CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
December
31
|
|
|
|
|
|
(Millions)
|
|
2005
|
|
2004
|
|
Assets
|
|
|
|
|
|
Utility
plant
|
|
|
|
|
|
|
|
Electric
|
|
$
|
1,915.1
|
|
$
|
2,223.9
|
|
Gas
|
|
|
548.5
|
|
|
510.0
|
|
Total
|
|
|
2,463.6
|
|
|
2,733.9
|
|
Less
-
Accumulated depreciation
|
|
|
979.9
|
|
|
1,189.3
|
|
Total
|
|
|
1,483.7
|
|
|
1,544.6
|
|
Nuclear
decommissioning trusts
|
|
|
-
|
|
|
344.5
|
|
Construction
in progress
|
|
|
285.0
|
|
|
153.1
|
|
Nuclear
fuel,
less accumulated amortization
|
|
|
-
|
|
|
24.6
|
|
Net
utility plant
|
|
|
1,768.7
|
|
|
2,066.8
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
Cash
and cash
equivalents
|
|
|
2.5
|
|
|
3.5
|
|
Customer
and
other receivables, net of reserves of $8.5
|
|
|
|
|
|
|
|
at
December
31, 2005 and $5.5 at December 31, 2004
|
|
|
170.8
|
|
|
106.2
|
|
Receivables
from related parties
|
|
|
3.9
|
|
|
9.1
|
|
Accrued
unbilled revenues
|
|
|
78.1
|
|
|
68.4
|
|
Fossil
fuel,
at average cost
|
|
|
18.2
|
|
|
15.2
|
|
Gas
in
storage, at average cost
|
|
|
81.1
|
|
|
60.2
|
|
Materials
and
supplies, at average cost
|
|
|
23.8
|
|
|
28.3
|
|
Assets
from
risk management activities
|
|
|
29.3
|
|
|
5.7
|
|
Prepaid
gross
receipts tax
|
|
|
29.8
|
|
|
27.6
|
|
Prepayments
and other
|
|
|
30.3
|
|
|
11.7
|
|
Total
current assets
|
|
|
467.8
|
|
|
335.9
|
|
Regulatory
assets
|
|
|
266.4
|
|
|
156.5
|
|
Goodwill
|
|
|
36.4
|
|
|
36.4
|
|
Investments
and other assets
|
|
|
147.2
|
|
|
173.0
|
|
Total
assets
|
|
$
|
2,686.5
|
|
$
|
2,768.6
|
|
|
|
|
|
|
|
|
|
Capitalization
and Liabilities
|
|
|
|
|
|
|
|
Capitalization
|
|
|
|
|
|
|
|
Common
stock
equity
|
|
$
|
996.5
|
|
$
|
899.7
|
|
Preferred
stock with no mandatory redemption
|
|
|
51.2
|
|
|
51.2
|
|
Long-term
debt
to parent
|
|
|
11.5
|
|
|
12.0
|
|
Long-term
debt
|
|
|
496.1
|
|
|
496.0
|
|
Total
capitalization
|
|
|
1,555.3
|
|
|
1,458.9
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
Short-term
debt
|
|
|
85.0
|
|
|
101.0
|
|
Accounts
payable
|
|
|
214.6
|
|
|
145.1
|
|
Payables
to
related parties
|
|
|
15.6
|
|
|
8.9
|
|
Accrued
interest and taxes
|
|
|
8.1
|
|
|
8.1
|
|
Accrued
pension contribution
|
|
|
25.3
|
|
|
-
|
|
Other
|
|
|
25.7
|
|
|
20.5
|
|
Total
current liabilities
|
|
|
374.3
|
|
|
283.6
|
|
|
|
|
|
|
|
|
|
Long-term
liabilities and deferred credits
|
|
|
|
|
|
|
|
Deferred
income taxes
|
|
|
132.5
|
|
|
130.1
|
|
Accumulated
deferred investment tax credits
|
|
|
13.6
|
|
|
15.2
|
|
Regulatory
liabilities
|
|
|
354.6
|
|
|
271.1
|
|
Environmental
remediation liability
|
|
|
65.8
|
|
|
66.7
|
|
Pension
and
postretirement benefit obligations
|
|
|
80.5
|
|
|
92.9
|
|
Asset
retirement obligations
|
|
|
7.7
|
|
|
364.4
|
|
Payables
to
related parties
|
|
|
17.0
|
|
|
18.6
|
|
Other
long-term liabilities
|
|
|
85.2
|
|
|
67.1
|
|
Total
long-term liabilities and deferred credits
|
|
|
756.9
|
|
|
1,026.1
|
|
Commitments
and contingencies
|
|
|
-
|
|
|
-
|
|
Total
capitalization and liabilities
|
|
$
|
2,686.5
|
|
$
|
2,768.6
|
|
|
|
|
|
|
|
|
|
The
accompanying WPS Resources' and Wisconsin Public Service
Corporation's
|
|
|
|
|
|
|
|
notes
are an
integral part of these statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|
|
|
|
|
|
|
|
|
|
|
|
WISCONSIN
PUBLIC SERVICE CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
December
31
|
|
|
|
|
|
(Millions,
except share amounts)
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Common
stock equity
|
|
|
|
|
|
|
|
Common
stock
|
|
$
|
95.6
|
|
$
|
95.6
|
|
Premium
on
capital stock
|
|
|
595.8
|
|
|
516.0
|
|
Accumulated
other comprehensive loss
|
|
|
(3.8
|
)
|
|
(20.7
|
)
|
Retained
earnings
|
|
|
308.9
|
|
|
308.8
|
|
Total
common stock equity
|
|
|
996.5
|
|
|
899.7
|
|
|
|
|
|
|
|
|
|
Preferred
stock
|
|
|
|
|
|
|
|
Cumulative,
$100 par value, 1,000,000 shares authorized
|
|
|
|
|
|
|
|
with
no
mandatory redemption -
|
|
|
|
|
|
|
|
Shares
|
|
|
|
|
|
|
|
Series
Outstanding
|
|
|
|
|
|
|
|
5.00%
131,916
|
|
|
13.2
|
|
|
13.2
|
|
5.04%
29,983
|
|
|
3.0
|
|
|
3.0
|
|
5.08%
49,983
|
|
|
5.0
|
|
|
5.0
|
|
6.76%
150,000
|
|
|
15.0
|
|
|
15.0
|
|
6.88%
150,000
|
|
|
15.0
|
|
|
15.0
|
|
Total
preferred stock
|
|
|
51.2
|
|
|
51.2
|
|
|
|
|
|
|
|
|
|
Long-term
debt to parent
|
|
|
|
|
|
|
|
Series
Year
Due
|
|
|
|
|
|
|
|
8.76% 2015
|
|
|
4.7
|
|
|
5.0
|
|
7.35% 2016
|
|
|
6.8
|
|
|
7.0
|
|
Total
long-term debt to parent
|
|
|
11.5
|
|
|
12.0
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
|
|
|
|
|
First
mortgage bonds
|
|
|
|
|
|
|
|
Series
Year
Due
|
|
|
|
|
|
|
|
6.90% 2013
|
|
|
22.0
|
|
|
22.0
|
|
7.125% 2023
|
|
|
0.1
|
|
|
0.1
|
|
Senior
notes
|
|
|
|
|
|
|
|
Series
Year
Due
|
|
|
|
|
|
|
|
6.08% 2028
|
|
|
50.0
|
|
|
50.0
|
|
6.125% 2011
|
|
|
150.0
|
|
|
150.0
|
|
4.875% 2012
|
|
|
150.0
|
|
|
150.0
|
|
4.8% 2013
|
|
|
125.0
|
|
|
125.0
|
|
Total
|
|
|
497.1
|
|
|
497.1
|
|
Unamortized
discount and premium on bonds, net
|
|
|
(1.0
|
)
|
|
(1.1
|
)
|
Total
first
mortgage bonds
|
|
|
496.1
|
|
|
496.0
|
|
Current
portion
|
|
|
-
|
|
|
-
|
|
Total
long-term debt
|
|
|
496.1
|
|
|
496.0
|
|
Total
capitalization
|
|
$
|
1,555.3
|
|
$
|
1,458.9
|
|
|
|
|
|
|
|
|
|
The
accompanying WPS Resources' and Wisconsin Public Service Corporation's
notes
|
|
|
|
|
|
|
|
are
an
integral part of these statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WISCONSIN
PUBLIC SERVICE CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Capital
in
|
|
|
|
Other
|
|
|
|
Comprehensive
|
|
|
|
Common
|
|
Excess
of
|
|
Retained
|
|
Comprehensive
|
|
(Millions)
|
|
Income
|
|
Total
|
|
Stock
|
|
Par
Value
|
|
Earnings
|
|
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2002
|
|
|
-
|
|
$
|
745.9
|
|
$
|
95.6
|
|
$
|
383.8
|
|
$
|
269.2
|
|
|
($2.7
|
)
|
Earnings
on
common stock
|
|
$
|
78.9
|
|
|
78.9
|
|
|
-
|
|
|
-
|
|
|
78.9
|
|
|
-
|
|
Other
comprehensive loss - minimum pension liability (net of taxes
of
$8.2)
|
|
|
(12.2
|
)
|
|
(12.2
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(12.2
|
)
|
Comprehensive
income
|
|
$
|
66.7
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Net
equity
infusions from parent
|
|
|
-
|
|
|
50.0
|
|
|
-
|
|
|
50.0
|
|
|
-
|
|
|
-
|
|
Dividends
to
parent
|
|
|
-
|
|
|
(69.0
|
)
|
|
-
|
|
|
-
|
|
|
(69.0
|
)
|
|
-
|
|
Other
|
|
|
-
|
|
|
4.6
|
|
|
-
|
|
|
4.5
|
|
|
0.1
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2003
|
|
|
-
|
|
$
|
798.2
|
|
$
|
95.6
|
|
$
|
438.3
|
|
$
|
279.2
|
|
|
($14.9
|
)
|
Earnings
on
common stock
|
|
$
|
104.8
|
|
|
104.8
|
|
|
-
|
|
|
-
|
|
|
104.8
|
|
|
-
|
|
Other
comprehensive loss - minimum pension liability (net of taxes
of
$3.8)
|
|
|
(5.8
|
)
|
|
(5.8
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(5.8
|
)
|
Comprehensive
income
|
|
$
|
99.0
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Net
equity
infusions from parent
|
|
|
-
|
|
|
75.0
|
|
|
-
|
|
|
75.0
|
|
|
-
|
|
|
-
|
|
Dividends
to
parent
|
|
|
-
|
|
|
(75.0
|
)
|
|
-
|
|
|
-
|
|
|
(75.0
|
)
|
|
-
|
|
Other
|
|
|
-
|
|
|
2.5
|
|
|
-
|
|
|
2.7
|
|
|
(0.2
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2004
|
|
|
-
|
|
$
|
899.7
|
|
$
|
95.6
|
|
$
|
516.0
|
|
$
|
308.8
|
|
|
($20.7
|
)
|
Earnings
on
common stock
|
|
$
|
81.4
|
|
|
81.4
|
|
|
-
|
|
|
-
|
|
|
81.4
|
|
|
-
|
|
Other
comprehensive income - minimum pension liability (net of taxes
of
$11.3)
|
|
|
16.9
|
|
|
16.9
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
16.9
|
|
Comprehensive
income
|
|
$
|
98.3
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Net
equity
infusions from parent
|
|
|
-
|
|
|
75.0
|
|
|
-
|
|
|
75.0
|
|
|
-
|
|
|
-
|
|
Dividends
to
parent
|
|
|
-
|
|
|
(81.0
|
)
|
|
-
|
|
|
-
|
|
|
(81.0
|
)
|
|
-
|
|
Other
|
|
|
-
|
|
|
4.5
|
|
|
-
|
|
|
4.8
|
|
|
(0.3
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2005
|
|
|
-
|
|
$
|
996.5
|
|
$
|
95.6
|
|
$
|
595.8
|
|
$
|
308.9
|
|
|
($3.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying WPS Resources' and Wisconsin Public Service Corporation's
notes are an integral part of these statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WISCONSIN
PUBLIC SERVICE CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended
December 31
|
|
|
|
|
|
|
|
(Millions)
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
84.5
|
|
$
|
107.9
|
|
$
|
82.0
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
to reconcile net income to net cash from
|
|
|
|
|
|
|
|
|
|
|
operating
activities -
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and decommissioning
|
|
|
126.0
|
|
|
91.0
|
|
|
122.9
|
|
Gain
on
nuclear decommissioning trust
|
|
|
(15.7
|
)
|
|
(5.5
|
)
|
|
(38.7
|
)
|
Amortization
|
|
|
39.8
|
|
|
42.8
|
|
|
41.4
|
|
Deferred
income taxes
|
|
|
(18.0
|
)
|
|
1.0
|
|
|
12.1
|
|
Allowance
for
equity funds used during construction
|
|
|
(1.5
|
)
|
|
(2.0
|
)
|
|
(2.4
|
)
|
Equity
income,
net of minority interest
|
|
|
(12.5
|
)
|
|
(14.6
|
)
|
|
(9.3
|
)
|
Gain
on sale
of property
|
|
|
-
|
|
|
(13.7
|
)
|
|
(7.3
|
)
|
Pension
expense
|
|
|
25.2
|
|
|
16.3
|
|
|
6.7
|
|
Postretirement
expense
|
|
|
13.6
|
|
|
12.4
|
|
|
12.0
|
|
Pension
and
postretirement funding
|
|
|
(28.6
|
)
|
|
(17.8
|
)
|
|
(15.6
|
)
|
Net
deferral
of Kewaunee outage expenses
|
|
|
(49.2
|
)
|
|
(7.2
|
)
|
|
-
|
|
Other,
net
|
|
|
(31.1
|
)
|
|
21.5
|
|
|
(13.3
|
)
|
Changes
in -
|
|
|
|
|
|
|
|
|
|
|
Customer
and
other receivables
|
|
|
(66.9
|
)
|
|
1.0
|
|
|
(4.0
|
)
|
Accrued
utility revenues
|
|
|
(9.7
|
)
|
|
(17.1
|
)
|
|
(4.0
|
)
|
Fossil
fuel
inventory
|
|
|
(2.2
|
)
|
|
(0.3
|
)
|
|
1.5
|
|
Gas
in storage
|
|
|
(20.9
|
)
|
|
(9.3
|
)
|
|
(19.9
|
)
|
Miscellaneous
assets
|
|
|
(19.2
|
)
|
|
(3.3
|
)
|
|
(10.4
|
)
|
Accounts
payable
|
|
|
68.7
|
|
|
9.0
|
|
|
0.4
|
|
Accrued
taxes
and interest
|
|
|
0.8
|
|
|
(1.2
|
)
|
|
(1.4
|
)
|
Miscellaneous
current and accrued liabilities
|
|
|
4.4
|
|
|
3.0
|
|
|
(0.1
|
)
|
Net
cash provided by operating activities
|
|
|
87.5
|
|
|
213.9
|
|
|
152.6
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(400.3
|
)
|
|
(272.8
|
)
|
|
(161.6
|
)
|
Purchase
of
equity investments and other acquisitions
|
|
|
-
|
|
|
-
|
|
|
(48.4
|
)
|
Sale
of
property, plant, and equipment
|
|
|
-
|
|
|
19.5
|
|
|
27.7
|
|
Proceeds
from
the sale of Kewaunee power plant
|
|
|
112.5
|
|
|
-
|
|
|
-
|
|
Proceeds
from
the sale of partial interest in Weston 4 power plant
|
|
|
95.1
|
|
|
-
|
|
|
-
|
|
Proceeds
from
the liquidation of non-qualified decommissioning trust
|
|
|
127.1
|
|
|
-
|
|
|
-
|
|
Purchases
of
nuclear decommissioning trust investments
|
|
|
(18.6
|
)
|
|
(213.3
|
)
|
|
(349.5
|
)
|
Sales
of
nuclear decommissioning trust investments
|
|
|
18.6
|
|
|
213.3
|
|
|
349.5
|
|
Decommissioning
funding
|
|
|
-
|
|
|
(0.3
|
)
|
|
(3.0
|
)
|
Other
|
|
|
1.1
|
|
|
1.6
|
|
|
3.1
|
|
Net
cash used for investing activities
|
|
|
(64.5
|
)
|
|
(252.0
|
)
|
|
(182.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Short-term
debt - net
|
|
|
(16.0
|
)
|
|
91.0
|
|
|
(16.0
|
)
|
Issuance
of
long-term debt
|
|
|
-
|
|
|
-
|
|
|
125.0
|
|
Payments
of
long-term debt and capital lease
|
|
|
(0.4
|
)
|
|
(50.3
|
)
|
|
(59.5
|
)
|
Net
equity
contributions from parent
|
|
|
75.0
|
|
|
75.0
|
|
|
50.0
|
|
Dividends
to
parent
|
|
|
(81.0
|
)
|
|
(75.0
|
)
|
|
(69.0
|
)
|
Preferred
stock dividends
|
|
|
(3.1
|
)
|
|
(3.1
|
)
|
|
(3.1
|
)
|
Other
|
|
|
1.5
|
|
|
(0.7
|
)
|
|
3.5
|
|
Net
cash provided by (used for) financing activities
|
|
|
(24.0
|
)
|
|
36.9
|
|
|
30.9
|
|
Net
change in cash and equivalents
|
|
|
(1.0
|
)
|
|
(1.2
|
)
|
|
1.3
|
|
Cash
and equivalents at beginning of year
|
|
|
3.5
|
|
|
4.7
|
|
|
3.4
|
|
Cash
and equivalents at end of year
|
|
$
|
2.5
|
|
$
|
3.5
|
|
$
|
4.7
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying WPS Resources' and Wisconsin Public Service
Corporation's
|
|
|
notes
are an
integral part of these statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM
8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
WISCONSIN PUBLIC SERVICE
CORPORATION
Certain
notes to
WPSC's financial statements are combined with the notes to the financial
statements of WPS Resources in Item 8, Section E. The combined notes are
listed below.
|
Item
8,
Section E
Footnote Reference
|
Summary
of
Significant Accounting Policies
|
Note 1
|
Fair
Value of
Financial Instruments
|
Note 2
|
Risk
Management Activities
|
Note 3
|
Property,
Plant, and Equipment
|
Note 5
|
Acquisitions
and Sales of Assets
|
Note 6
|
Jointly
Owned
Utility Facilities
|
Note 7
|
Nuclear
Decommissioning Trust
|
Note
8
|
Regulatory
Assets and Liabilities
|
Note 9
|
Investments
in Affiliates, at Equity Method
|
Note 10
|
Goodwill
and
Other Intangible Assets
|
Note 11
|
Short-Term
Debt and Lines of Credit
|
Note
13
|
Long-Term
Debt
|
Note 14
|
Asset
Retirement Obligations
|
Note
15
|
Commitments
and Contingencies
|
Note 17
|
Guarantees
|
Note
18
|
Employee
Benefit Plans
|
Note 19
|
Preferred
Stock of Subsidiary
|
Note 20
|
Common
Equity
|
Note
21
|
Stock-Based
Compensation
|
Note 22
|
Regulatory
Environment
|
Note 23
|
Variable
Interest Entities
|
Note
24
|
In
addition to the combined notes, the following are supplemental notes for
WPSC.
These notes should be read in conjunction with WPS Resources' consolidated
financial statements and the related notes. WPSC is subject to regulation
by the
FERC under the Federal Power Act and follows the Uniform System of Accounts
prescribed by the FERC.
NOTE 1--CASH
AND CASH EQUIVALENTS
Cash
paid for taxes
during 2005, 2004, and 2003 was $45.3 million, $38.4 million, and
$29.7 million, respectively. During 2005, 2004, and 2003, cash paid for
interest totaled $30.4 million, $28.7 million, and $28.4 million,
respectively.
Non-cash
transactions were as follows:
(Millions)
|
|
2005
|
|
2004
|
|
2003
|
|
Weston
4
construction costs funded through accounts payable
|
|
$
|
16.6
|
|
$
|
22.6
|
|
$
|
-
|
|
Minimum
pension liability equity adjustment
|
|
|
16.9
|
|
|
5.8
|
|
|
12.2
|
|
Exchange
of
transmission assets for equity interest in ATC
|
|
|
-
|
|
|
-
|
|
|
5.9
|
|
NOTE 2--FAIR
VALUE OF FINANCIAL INSTRUMENTS
The
estimated fair
values of WPSC's financial instruments as of December 31 were:
(Millions)
|
|
2005
|
|
2004
|
|
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
$
|
497.1
|
|
$
|
509.1
|
|
$
|
497.1
|
|
$
|
523.2
|
|
Commercial
paper
|
|
|
75.0
|
|
|
75.0
|
|
|
91.0
|
|
|
91.0
|
|
Preferred
stock
|
|
|
51.2
|
|
|
49.0
|
|
|
51.2
|
|
|
50.1
|
|
Risk
management activities - net
|
|
|
33.9
|
|
|
33.9
|
|
|
10.4
|
|
|
10.4
|
|
Notes
payable
|
|
|
10.0
|
|
|
10.0
|
|
|
10.0
|
|
|
10.0
|
|
Cash
and cash
equivalents
|
|
|
2.5
|
|
|
2.5
|
|
|
3.5
|
|
|
3.5
|
|
Energy
conservation loans
|
|
|
1.5
|
|
|
1.5
|
|
|
1.6
|
|
|
1.6
|
|
Nuclear
decommissioning trusts - utility plant
|
|
|
-
|
|
|
-
|
|
|
344.5
|
|
|
344.5
|
|
Nuclear
decommissioning trusts - other assets
|
|
|
-
|
|
|
-
|
|
|
26.8
|
|
|
26.8
|
|
NOTE 3--REGULATORY
ASSETS AND LIABILITIES
The
following
regulatory assets and liabilities were reflected in WPSC's consolidated
balance
sheets as of December 31:
(Millions)
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Regulatory
assets
|
|
|
|
|
|
|
|
Manufactured
gas plant remediation costs (net of insurance recoveries)
|
|
$
|
72.3
|
|
$
|
71.3
|
|
Deferred
nuclear costs
|
|
|
63.8
|
|
|
10.9
|
|
De
Pere
Energy Center
|
|
|
42.9
|
|
|
45.3
|
|
Minimum
pension liability
|
|
|
32.3
|
|
|
6.4
|
|
Deferred
MISO
costs
|
|
|
21.2
|
|
|
-
|
|
Reserve
for
uncollectible accounts
|
|
|
8.5
|
|
|
5.5
|
|
Income
tax
related items
|
|
|
6.8
|
|
|
1.6
|
|
Reduced
coal
deliveries
|
|
|
6.4
|
|
|
-
|
|
Asset
retirement obligations
|
|
|
3.4
|
|
|
-
|
|
Plant
related
costs
|
|
|
2.7
|
|
|
6.5
|
|
Funding
for
enrichment facilities
|
|
|
1.2
|
|
|
1.8
|
|
Unamortized
loss on debt
|
|
|
1.1
|
|
|
2.4
|
|
Other
|
|
|
3.8
|
|
|
4.8
|
|
Total
|
|
$
|
266.4
|
|
$
|
156.5
|
|
|
|
|
|
|
|
|
|
Regulatory
liabilities
|
|
|
|
|
|
|
|
Cost
of
removal reserve
|
|
$
|
177.7
|
|
$
|
173.7
|
|
Non-qualified
decommissioning trust
|
|
|
126.9
|
|
|
-
|
|
Derivatives
|
|
|
35.6
|
|
|
11.0
|
|
Income
tax
related items
|
|
|
4.1
|
|
|
6.6
|
|
Deferred
ATC
and MISO costs
|
|
|
3.8
|
|
|
1.6
|
|
Deferred
gain
on emission allowance sales
|
|
|
2.4
|
|
|
3.7
|
|
Weston
4
costs
|
|
|
2.3
|
|
|
-
|
|
Demand-side
management expenditures
|
|
|
1.4
|
|
|
1.1
|
|
Asset
retirement obligations
|
|
|
-
|
|
|
46.6
|
|
Unrealized
gain on decommissioning trust
|
|
|
-
|
|
|
26.8
|
|
Other
|
|
|
0.4
|
|
|
-
|
|
Total
|
|
$
|
354.6
|
|
$
|
271.1
|
|
NOTE 4--LEASES
WPSC
leases various
property, plant, and equipment. Terms of the leases vary but generally
require
WPSC to pay property taxes, insurance premiums, and maintenance costs associated
with the leased property. Rental expense attributable to operating leases
was
$5.2 million, $4.2 million, and $3.9 million in 2005, 2004, and
2003 respectively. Future minimum rental obligations under non-cancelable
operating leases are payable as follows:
Year
ending
December 31
|
|
|
|
(Millions)
|
|
|
|
|
|
|
|
|
2006
|
|
$
|
3.4
|
|
2007
|
|
|
2.5
|
|
2008
|
|
|
2.1
|
|
2009
|
|
|
1.4
|
|
2010
|
|
|
1.3
|
|
Later
years
|
|
|
3.6
|
|
Total
payments
|
|
$
|
14.3
|
|
NOTE 5--COMMON
EQUITY
WPSC
is restricted
by a PSCW order to paying normal common stock dividends of no more than
109% of
the previous year's common stock dividend without the PSCW's approval.
WPS Resources may provide equity contributions or request a return of
capital in order to maintain utility common equity levels consistent with
those
allowed by the regulators. Wisconsin law prohibits WPSC from making loans
to or
guaranteeing obligations of WPS Resources or its other subsidiaries.
During
2005, WPSC
received equity contributions of $75.0 million from WPS Resources.
WPSC paid common dividends of $81.0 million to WPS Resources in 2005. The
equity contributions allowed WPSC's average equity capitalization ratio
for
ratemaking to remain within the target range as established by the PSCW
in its
most recent rate order.
NOTE
6--PREFERRED STOCK
WPSC
has issued
preferred stock with no mandatory redemption and a $100 par value. The
following
table shows the carrying value and shares outstanding at December 31, 2004,
and 2005 of the 1,000,000 shares authorized:
(Millions,
except share amounts)
|
|
Series
|
|
Shares
Outstanding
|
|
Carrying
Value
|
|
|
|
|
5.00
|
%
|
|
131,916
|
|
$
|
13.2
|
|
|
|
|
5.04
|
%
|
|
29,983
|
|
|
3.0
|
|
|
|
|
5.08
|
%
|
|
49,983
|
|
|
5.0
|
|
|
|
|
6.76
|
%
|
|
150,000
|
|
|
15.0
|
|
|
|
|
6.88
|
%
|
|
150,000
|
|
|
15.0
|
|
Total
|
|
|
|
|
|
511,882
|
|
$
|
51.2
|
|
NOTE 7--SHORT-TERM
DEBT AND LINES OF CREDIT
The
information in
the table below relates to short-term debt and lines of credit for the
years
indicated:
(Millions,
except for percentages)
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of
end of year
|
|
|
|
|
|
|
|
|
|
|
Commercial
paper outstanding
|
|
$
|
75.0
|
|
$
|
91.0
|
|
$
|
-
|
|
Average
discount rate on outstanding commercial paper
|
|
|
4.54
|
%
|
|
2.44
|
%
|
|
-
|
%
|
Short-term
notes payable outstanding
|
|
$
|
10.0
|
|
$
|
10.0
|
|
$
|
10.0
|
|
Average
interest rate on short-term notes payable
|
|
|
4.32
|
%
|
|
2.26
|
%
|
|
1.12
|
%
|
Available
(unused) lines of credit
|
|
$
|
36.2
|
|
$
|
20.2
|
|
$
|
115.0
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the year
|
|
|
|
|
|
|
|
|
|
|
Maximum
amount of short-term debt
|
|
$
|
121.0
|
|
$
|
116.0
|
|
$
|
103.0
|
|
Average
amount of short-term debt
|
|
$
|
69.9
|
|
$
|
36.3
|
|
$
|
64.7
|
|
Average
interest rate on short-term debt
|
|
|
3.22
|
%
|
|
1.67
|
%
|
|
1.24
|
%
|
The
commercial
paper had varying maturity dates ranging from January 5, 2006 through January
12, 2006.
NOTE 8--LONG-TERM
DEBT
At
December 31, 2005, WPSC was in compliance with all covenants relating to
outstanding debt. A schedule of all principal debt payment amounts, including
bond maturities and early retirement payments is as follows:
Year
ending
December 31
(Millions)
|
|
|
|
|
|
|
|
|
2006
|
|
$
|
-
|
|
2007
|
|
|
-
|
|
2008
|
|
|
-
|
|
2009
|
|
|
-
|
|
2010
|
|
|
-
|
|
Later
years
|
|
|
497.1
|
|
Total
payments
|
|
$
|
497.1
|
|
NOTE
9 -
ASSET RETIREMENT OBLIGATIONS
Effective
January
1, 2003, WPSC adopted SFAS No. 143, "Accounting for Asset Retirement
Obligations," and recorded a net asset retirement cost of $90.8 million
and an
asset retirement obligation of $324.8 million. The difference between the
previously recorded liabilities of $290.5 million and the cumulative effect
of
adopting SFAS No. 143 was deferred as a regulatory liability pursuant to
SFAS
No. 71. The asset retirement obligations related primarily to the final
decommissioning of Kewaunee. As a result of the sale of Kewaunee to Dominion
on
July 5, 2005, Dominion assumed the asset retirement obligation related
to
Kewaunee.
WPSC
adopted the
provisions of Interpretation No.47, "Accounting for Conditional Asset Retirement
Obligations" as of December 31, 2005, and recorded a net asset retirement
cost
of $1.2 million and an asset retirement obligation of $7.3 million. This
resulted in a cumulative effect of adopting the Interpretation of $6.1
million
before taxes, which was deferred as a regulatory asset as WPSC obtained
approval
to defer the cumulative effect of adopting the Interpretation and believes
it is
probable that the actual cost to dispose of the assets will be recoverable
in
future rates. At December 31, 2005, WPSC had already recorded a $2.9 million
regulatory liability related to the conditional asset retirement obligations,
pertaining to amounts previously recovered in customer rates for the disposal
of
these assets. This $2.9 million regulatory liability was netted against the
regulatory assets recorded upon adoption of the Interpretation.
NOTE 10
- INCOME TAXES
The
principal
components of WPSC's deferred tax assets and liabilities recognized in
the
balance sheet as of December 31 are as follows:
(Millions)
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Deferred
tax assets
|
|
|
|
|
|
|
|
Plant
related
|
|
$
|
36.7
|
|
$
|
53.5
|
|
Regulatory
deferrals
|
|
|
31.3
|
|
|
1.8
|
|
Employee
benefits
|
|
|
25.1
|
|
|
22.2
|
|
Deferred
income and deductions
|
|
|
19.5
|
|
|
14.5
|
|
Other
comprehensive income
|
|
|
2.5
|
|
|
13.8
|
|
Other
|
|
|
0.6
|
|
|
4.6
|
|
Total
|
|
$
|
115.7
|
|
$
|
110.4
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities
|
|
|
|
|
|
|
|
Plant
related
|
|
$
|
214.7
|
|
$
|
212.6
|
|
Regulatory
deferrals
|
|
|
15.6
|
|
|
10.6
|
|
Deferred
income and deductions
|
|
|
3.6
|
|
|
3.8
|
|
Employee
benefits
|
|
|
3.2
|
|
|
11.0
|
|
Other
|
|
|
8.5
|
|
|
3.1
|
|
Total
|
|
$
|
245.6
|
|
$
|
241.1
|
|
|
|
|
|
|
|
|
|
Consolidated
Balance Sheet Presentation
|
|
|
|
|
|
|
|
Prepayments
and other
|
|
$
|
(2.6
|
)
|
$
|
-
|
|
Other
current
liabilities
|
|
|
-
|
|
|
0.6
|
|
Long-term
deferred tax liabilities
|
|
|
132.5
|
|
|
130.1
|
|
Net
deferred tax liabilities
|
|
$
|
129.9
|
|
$
|
130.7
|
|
The
following table
presents a reconciliation of federal income taxes (which are calculated
by
multiplying the statutory federal income tax rate by book income before
federal
income tax) to the federal income tax expense reported in the Consolidated
Statements of Income for the periods ended December 31.
(Millions,
except for percentages)
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
Rate
|
|
Amount
|
|
Rate
|
|
Amount
|
|
Rate
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory
federal income tax
|
|
|
35.0
|
%
|
$
|
45.0
|
|
|
35.0
|
%
|
$
|
55.7
|
|
|
35.0
|
%
|
$
|
45.3
|
|
State
income
taxes, net
|
|
|
5.3
|
|
|
6.8
|
|
|
5.1
|
|
|
8.1
|
|
|
5.5
|
|
|
7.1
|
|
Investment
tax credit restored
|
|
|
(1.2
|
)
|
|
(1.6
|
)
|
|
(0.9
|
)
|
|
(1.4
|
)
|
|
(1.2
|
)
|
|
(1.5
|
)
|
Plant
related
|
|
|
0.6
|
|
|
0.8
|
|
|
0.1
|
|
|
0.2
|
|
|
(0.9
|
)
|
|
(1.2
|
)
|
Benefits
and
compensation
|
|
|
(3.1
|
)
|
|
(4.0
|
)
|
|
(1.9
|
)
|
|
(3.1
|
)
|
|
(1.5
|
)
|
|
(1.9
|
)
|
Federal
tax
credits
|
|
|
(0.2
|
)
|
|
(0.3
|
)
|
|
(0.2
|
)
|
|
(0.3
|
)
|
|
(0.2
|
)
|
|
(0.3
|
)
|
Other
differences, net
|
|
|
(2.1
|
)
|
|
(2.6
|
)
|
|
(5.0
|
)
|
|
(7.9
|
)
|
|
(1.4
|
)
|
|
(1.8
|
)
|
Effective
income tax
|
|
|
34.3
|
%
|
$
|
44.1
|
|
|
32.2
|
%
|
$
|
51.3
|
|
|
35.3
|
%
|
$
|
45.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
|
|
$
|
49.9
|
|
|
|
|
$
|
38.7
|
|
|
|
|
$
|
24.2
|
|
State
|
|
|
|
|
|
12.2
|
|
|
|
|
|
11.6
|
|
|
|
|
|
9.4
|
|
Total
current provision
|
|
|
|
|
|
62.1
|
|
|
|
|
|
50.3
|
|
|
|
|
|
33.6
|
|
Deferred
provision (benefit)
|
|
|
|
|
|
(16.4
|
)
|
|
|
|
|
2.3
|
|
|
|
|
|
13.6
|
|
Investment
tax credit restored
|
|
|
|
|
|
(1.6
|
)
|
|
|
|
|
(1.3
|
)
|
|
|
|
|
(1.5
|
)
|
Total
income tax expense
|
|
|
|
|
$
|
44.1
|
|
|
|
|
$
|
51.3
|
|
|
|
|
$
|
45.7
|
|
As
the related temporary differences reverse, WPSC is prospectively refunding
taxes
to customers for which deferred taxes were recorded in prior years at rates
different than current rates. The regulatory liability for these refunds
and
other regulatory tax effects totaled $4.1 million and $6.6 million as of
December 31, 2005, and 2004, respectively.
NOTE 11
- SEGMENTS OF BUSINESS
WPSC
manages its
reportable segments separately due to their different operating and regulatory
environments. Its principal business segments are the regulated electric
utility
operations and the regulated gas utility operations. The tables below present
information for the respective years pertaining to the operations of WPSC
segmented by lines of business.
|
|
|
|
|
|
|
|
|
|
|
|
Segments
of
Business
|
|
|
|
|
|
|
|
|
|
|
|
(Millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulated
Utilities
|
|
|
|
WPSC
Consolidated
|
|
2005
|
|
Electric
Utility
|
|
Gas
Utility
|
|
Total
Utility
|
|
Other1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
Statement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
|
$
|
932.9
|
|
$
|
522.0
|
|
$
|
1,454.9
|
|
$
|
-
|
|
$
|
1,454.9
|
|
Depreciation
and decommissioning
|
|
|
108.6
|
|
|
17.4
|
|
|
126.0
|
|
|
-
|
|
|
126.0
|
|
Other
income,
excluding taxes
|
|
|
51.5
|
|
|
0.5
|
|
|
52.0
|
|
|
10.1
|
|
|
62.1
|
|
Interest
expense
|
|
|
24.6
|
|
|
8.7
|
|
|
33.3
|
|
|
2.6
|
|
|
35.9
|
|
Income
taxes
|
|
|
36.1
|
|
|
7.3
|
|
|
43.4
|
|
|
0.7
|
|
|
44.1
|
|
Earnings
on
common stock
|
|
|
60.7
|
|
|
13.2
|
|
|
73.9
|
|
|
7.5
|
|
|
81.4
|
|
Total
assets
|
|
|
1,919.1
|
|
|
660.7
|
|
|
2,579.8
|
|
|
106.7
|
|
|
2,686.5
|
|
Cash
expenditures for long-lived assets
|
|
|
363.9
|
|
|
36.4
|
|
|
400.3
|
|
|
-
|
|
|
400.3
|
|
1Nonutility
operations are included in the Other column.
|
|
|
|
|
|
|
|
|
|
|
|
Segments
of
Business
|
|
|
|
|
|
|
|
|
|
|
|
(Millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulated
Utilities
|
|
|
|
WPSC
Consolidated
|
|
2004
|
|
Electric
Utility
|
|
Gas
Utility
|
|
Total
Utility
|
|
Other1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
Statement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
|
$
|
801.2
|
|
$
|
420.9
|
|
$
|
1,222.1
|
|
$
|
-
|
|
$
|
1,222.1
|
|
Depreciation
and decommissioning
|
|
|
75.0
|
|
|
16.0
|
|
|
91.0
|
|
|
-
|
|
|
91.0
|
|
Other
income,
excluding taxes
|
|
|
10.4
|
|
|
0.4
|
|
|
10.8
|
|
|
26.4
|
|
|
37.2
|
|
Interest
expense
|
|
|
23.1
|
|
|
7.7
|
|
|
30.8
|
|
|
2.9
|
|
|
33.7
|
|
Income
taxes
|
|
|
38.4
|
|
|
10.2
|
|
|
48.6
|
|
|
2.7
|
|
|
51.3
|
|
Earnings
on
common stock
|
|
|
65.8
|
|
|
17.3
|
|
|
83.1
|
|
|
21.7
|
|
|
104.8
|
|
Total
assets
|
|
|
2,080.8
|
|
|
577.9
|
|
|
2,658.7
|
|
|
109.9
|
|
|
2,768.6
|
|
Cash
expenditures for long-lived assets
|
|
|
210.1
|
|
|
62.7
|
|
|
272.8
|
|
|
-
|
|
|
272.8
|
|
1Nonutility
operations are included in the Other column.
|
|
|
|
|
|
|
|
|
|
|
|
Segments
of
Business
|
|
|
|
|
|
|
|
|
|
|
|
(Millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulated
Utilities
|
|
|
|
WPSC
Consolidated
|
|
2003
|
|
Electric
Utility
|
|
Gas
Utility
|
|
Total
Utility
|
|
Other1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
Statement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
|
$
|
724.9
|
|
$
|
404.2
|
|
$
|
1,129.1
|
|
$
|
-
|
|
$
|
1,129.1
|
|
Depreciation
and decommissioning
|
|
|
108.6
|
|
|
14.3
|
|
|
122.9
|
|
|
-
|
|
|
122.9
|
|
Other
income,
excluding taxes
|
|
|
43.7
|
|
|
1.3
|
|
|
45.0
|
|
|
17.7
|
|
|
62.7
|
|
Interest
expense
|
|
|
22.3
|
|
|
6.7
|
|
|
29.0
|
|
|
2.7
|
|
|
31.7
|
|
Income
taxes
|
|
|
31.7
|
|
|
9.2
|
|
|
40.9
|
|
|
4.8
|
|
|
45.7
|
|
Earnings
on
common stock
|
|
|
53.6
|
|
|
15.7
|
|
|
69.3
|
|
|
9.6
|
|
|
78.9
|
|
Cash
expenditures for long-lived assets
|
|
|
120.6
|
|
|
40.7
|
|
|
161.3
|
|
|
0.3
|
|
|
161.6
|
|
1Nonutility
operations are included in the Other column.
NOTE 12
- QUARTERLY FINANCIAL INFORMATION (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
(Millions)
|
|
Three
Months Ended
|
|
|
|
2005
|
|
|
|
March
|
|
June
|
|
September
|
|
December
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
|
$
|
394.4
|
|
$
|
309.1
|
|
$
|
338.5
|
|
$
|
412.9
|
|
$
|
1,454.9
|
|
Operating
income
|
|
|
43.0
|
|
|
3.8
|
|
|
31.0
|
|
|
-
|
|
|
77.8
|
|
Earnings
(loss) on common stock
|
|
|
37.6
|
|
|
21.3
|
|
|
25.7
|
|
|
(3.2
|
)
|
|
81.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
March |
|
|
June
|
|
|
September
|
|
|
December
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
|
$
|
372.0
|
|
$
|
259.8
|
|
$
|
260.2
|
|
$
|
330.1
|
|
$
|
1,222.1
|
|
Operating
income
|
|
|
37.7
|
|
|
15.8
|
|
|
34.4
|
|
|
20.7
|
|
|
108.6
|
|
Earnings
on
common stock
|
|
|
32.5
|
|
|
11.9
|
|
|
30.5
|
|
|
29.9
|
|
|
104.8
|
|
Because
of
various factors that affect the utility business, the quarterly results
of
operations are not necessarily comparable.
NOTE 13
- RELATED PARTY TRANSACTIONS
WPSC
routinely
enters into transactions with related parties, including WPS Resources, its
subsidiaries, and other entities in which WPSC has material interests.
The
following table
shows purchases from and sales to related parties:
(Millions)
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric
sales to UPPCO
|
|
$
|
33.5
|
|
$
|
16.1
|
|
$
|
27.1
|
|
Electric
purchases from UPPCO
|
|
|
28.0
|
|
|
4.9
|
|
|
1.4
|
|
Natural
gas
sales to ESI
|
|
|
9.0
|
|
|
20.8
|
|
|
16.4
|
|
Natural
gas
purchases from ESI
|
|
|
13.6
|
|
|
15.4
|
|
|
5.9
|
|
WPS Leasing,
a
consolidated subsidiary of WPSC, has a note payable to WPSC's parent company,
WPS Resources. The balance of the payable was $11.5 million and
$12.0 million at December 31, 2005, and 2004, respectively. Interest
expense on the note totaled $1.0 million per year in 2005, 2004, and
2003.
With
the exception
of UPPCO's Supplemental Employee Retirement Plan, the assets and liabilities
related to the qualified and non-qualified pension plans and the postretirement
plans of WPS Resources are recorded on WPSC's Consolidated Balance Sheets.
The net periodic benefit cost associated with the plans is allocated among
WPS Resources' subsidiaries. At December 31, 2005, and 2004, WPSC's
Consolidated Balance Sheets included $1.7 million and $1.4 million,
respectively, in receivables from related parties related to these benefit
plans.
WPS Resources
and its consolidated subsidiaries file consolidated federal income tax
returns.
WPSC pays the income taxes, which are then allocated to the appropriate
entities. The tax allocable to each subsidiary is the amount of tax it
would
have paid had it filed a separate return for the tax year in question,
after
application of any credit to which it would be entitled on a separate return
basis. At December 31, 2005, WPSC's Consolidated Balance Sheet included
intercompany taxes payable of $19.1 million. At December 31, 2004,
WPSC's Consolidated Balance Sheet included intercompany taxes receivable
of
$3.1 million and intercompany taxes payable of $24.4 million.
At
December 31, 2005, WPSC had a 24.91% interest in WPS Investments
accounted for under the equity method. WPS Investments is a consolidated
subsidiary of WPS Resources that is jointly owned by WPS Resources,
WPSC, and UPPCO. Prior to 2003, WPS Investments was a consolidated
subsidiary of WPSC, but capital contributions during 2003 resulted in majority
ownership by WPS Resources. The ownership interests have varied throughout
2005, 2004, and 2003 and will continue to change as cash is contributed
by
WPS Resources or additional assets are contributed by the utilities. Equity
income recorded by WPSC during 2005, 2004, and 2003 was $7.6 million,
$6.9 million, and $5.8 million respectively.
WPSC
also provides
and receives other services, property, and things of value to and from
its
parent, WPS Resources, and other subsidiaries of WPS Resources. All
such transactions are made pursuant to a master affiliated interest agreement
approved by the PSCW. The agreement provides that WPSC receives payment
equal to
the higher of its cost or fair value for services and property and other
things
of value which WPSC provides to WPS Resources or its other nonregulated
subsidiaries, and WPSC makes payments equal to the lower of the provider's
cost
or fair value for property, services, and other things of value which
WPS Resources or its other nonregulated subsidiaries provide to WPSC. The
agreement further provides that any services, property, or other things
of value
provided to or from WPSC to or for any other regulated subsidiary of
WPS Resources be provided at cost. Modification or amendment to the master
agreement requires the approval of the PSCW.
ITEM
8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WISCONSIN
PUBLIC SERVICE CORPORATION
To
the Board of Directors of Wisconsin Public Service Corporation
We
have audited the accompanying consolidated balance sheets and statements
of
capitalization of Wisconsin Public Service Corporation and subsidiary (the
"Company") as of December 31, 2005 and 2004, and the related consolidated
statements of income, shareholder's equity, and cash flows for each of the
three
years in the period ended December 31, 2005. Our audits also included the
financial statement schedules listed in the Index at Item 15. These
financial statements and financial statement schedules are the responsibility
of
the Company's management. Our responsibility is to express an opinion on
these financial statements and financial statement schedules based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In
our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Wisconsin Public Service
Corporation and subsidiary as of December 31, 2005 and 2004, and the results
of
their operations and their cash flows for each of the three years in the
period
ended December 31, 2005, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, such
financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
As
discussed in Note 9 to the consolidated financial statements, effective January
1, 2003 the Company changed its method of accounting for asset retirement
obligations to adopt Statement of Financial Accounting Standard No. 143,
"Accounting for Asset Retirement Obligations." As discussed in Note 9 to
the
consolidated financial statements, effective December 31, 2005, the Company
changed its method of accounting for conditional asset retirement obligations
to
adopt FASB Interpretation No. 47, "Conditional Asset Retirement
Obligations."
We
have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of December 31, 2005, based
on the
criteria established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission and
our
report dated February 28, 2006 expressed an unqualified opinion on
management's assessment of the effectiveness of the Company's internal control
over financial reporting and an unqualified opinion on the effectiveness
of the
Company's internal control over financial reporting.
/s/
Deloitte &
Touche LLP
Milwaukee,
Wisconsin
February
28,
2006
None.
Evaluation
of Disclosure Controls and Procedures
As
of the end of the period covered by this Annual Report on Form 10-K,
WPS Resources' and WPSC's management evaluated, with the participation of
WPS Resources' and WPSC's Chief Executive Officer and Chief Financial
Officer, the effectiveness of the design and operation of WPS Resources'
and WPSC's disclosure controls and procedures (as defined in the Securities
Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) and have concluded that,
WPS Resources' and WPSC's disclosure controls and procedures were effective
as of the date of such evaluation in timely alerting them to material
information relating to WPS Resources and WPSC (including their
consolidated subsidiaries) required to be included in their periodic SEC
filings, particularly during the period in which this Annual Report on Form
10-K
was being prepared.
Changes
in
Internal Controls
On
April 1, 2005, the MISO "Day 2" Market became effective which impacted
electric generation and purchased power practices and systems of
WPS Resources' subsidiaries (including WPSC, UPPCO and ESI). In
conjunction with WPS Resources' participation in the MISO Day 2 Market,
certain changes in internal controls over financial reporting were made that
have materially affected, or are reasonably likely to materially affect,
WPS Resources', WPSC's and ESI's internal control over financial reporting.
In the fourth quarter of 2005, WPS Resources, WPSC and ESI made changes in
internal controls, primarily related to revenue and cost recognition associated
with electric generation and purchased power, in response to changes made
by
MISO in its controls and procedures as a result of issues raised by FERC,
market
participants and MISO's review of its internal controls.
In
October 2005, our regulated utilities converted to a new customer billing
and
information system. Changes in internal control over financial reporting
were
made as a result of implementing the new system. Some of these changes have
materially affected, or are reasonably likely to materially affect, our
regulated utilities' internal control over financial reporting. The internal
controls affected primarily relate to the billing process and revenue
recognition associated with electric and natural gas energy sales at the
regulated utilities.
Other
than the
matters discussed in the preceding paragraphs, there were no changes in
WPS Resources' and WPSC's internal controls over financial reporting (as
such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities
Exchange Act of 1934) that occurred during the quarter ended December 31,
2005, that have materially affected, or are reasonably likely to materially
affect, the internal control over financial reporting.
Management
Reports on Internal Control over Financial Reporting
For
the WPS
Resources' and WPSC's Management Report on Internal Control Over Financial
Reporting see Sections A and I of Item 8.
Reports
of
Independent Registered Public Accounting Firm
For
the WPS
Resources' and WPSC's Reports of Independent Registered Public Accounting
Firm
see Sections B and J of Item 8.
None.
Information
required by this Item regarding the directors of WPS Resources, Section 16
compliance and the members of the Audit Committee and the Audit Committee
financial expert can be found in WPS Resources' Proxy Statement for its
Annual Meeting of Shareholders to be held May 18, 2006, under the captions
"Election of Directors," "Ownership of Voting Securities-Section 16(a)
Beneficial Ownership Reporting Compliance" and "Committees of the Board of
Directors," respectively. Such information is incorporated by reference as
if
fully set forth herein. The directors of WPS Resources are also the
directors of WPSC.
Information
regarding the executive officers of WPS Resources and WPSC can be found in
this Annual Report on Form 10-K in Item 4A.
WPS Resources
has adopted a Code of Conduct, which serves as our Code of Business Conduct
and
Ethics. The Code of Conduct applies to all of our directors, officers, and
employees, including the Chief Executive Officer, Chief Financial Officer,
Chief
Accounting Officer and Controller and any other persons performing similar
functions. The Code of Conduct also applies to WPSC and all of its directors,
officers, and employees. WPS Resources has also adopted corporate
governance guidelines.
WPS Resources'
Code of Conduct, Corporate Governance Guidelines and charters of the board
committees may be accessed on the WPS Resources web site,
www.wpsr.com under "Investor Information" then select "Corporate
Governance." Copies of WPS Resources' Code of Conduct, Corporate Governance
Guidelines and charters of the board committees can also be obtained by writing
to WPS Resources Corporation, Attention: Barth J. Wolf, Secretary and
Manager - Legal Services, P.O. Box 19001, Green Bay, Wisconsin
54307-9001. Any amendments to, or waivers from, our Code of Conduct will be
disclosed on our web site within the prescribed time period.
WPS Resources
Corporation
Information
required by this Item regarding compensation paid by WPS Resources to its
directors and its "named executive officers" can be found in WPS Resources'
Proxy Statement for its Annual Meeting of Shareholders to be held May 18,
2006,
under the captions "Board Compensation" and "Executive Compensation." Such
information is incorporated by reference as if fully set forth herein. Named
executive officers include the Chief Executive Officer and the next four
most
highly compensated executive officers for 2005.
Wisconsin
Public Service Corporation
Summary
Compensation Table
The
following table
sets forth cash and other compensation paid to or earned by each of the named
executive officers of WPSC for the last three fiscal years. Named executive
officers include the Chief Executive Officer and the next four most highly
compensated executive officers for 2005. Compensation amounts for those WPSC
named executive officers also reported as named executive officers of
WPS Resources are repeated in this table and do not reflect
additional compensation.
|
Long-Term
Compensation
|
|
Annual
Compensation
|
Awards
|
Payouts
|
|
|
|
|
|
|
|
|
|
|
Name
and
Title
|
Year
|
Salary
|
Bonus
|
Other
Annual
Compen-sation
|
Restricted
Stock Awards
|
Securities
Underlying Options
|
LTIP
Payouts
|
All
Other
Compen-sation
|
|
|
($)
(1)
|
($)
|
($)
(2)
|
($)
(3)
|
(#)
|
($)
|
($)(4)
|
Larry
L.
Weyers
Chairman
and
Chief Executive Officer
|
2005
2004
2003
|
625,000
600,000
544,817
|
890,485
777,060
409,465
|
56,759
30,078
38,880
|
-
-
-
|
121,705
111,607
97,015
|
823,018
1,161,681
1,058,688
|
35,078
25,669
27,837
|
Joseph
P.
O'Leary
Senior
Vice
President and Chief Financial Officer
|
2005
2004
2003
|
290,000
261,862
234,778
|
182,272
158,016
98,428
|
-
-
-
|
-
-
-
|
23,955
23,304
17,371
|
147,803
234,603
120,936
|
13,024
7,717
2,065
|
Thomas
P.
Meinz
Executive
Vice
President - Public Affairs
|
2005
2004
2003
|
199,000
186,992
174,265
|
113,420
108,082
71,267
|
21,552
11,421
14,763
|
-
-
-
|
12,183
13,326
11,505
|
102,414
162,557
159,485
|
20,822
16,895
17,498
|
Charles
A.
Schrock
President
and
Chief Operating Officer - Generation
|
2005
2004
2003
|
256,000
248,153
240,031
|
67,442
144,223
34,294
|
1,936
1,026
1,326
|
-
-
-
|
13,585
16,000
14,404
|
140,979
223,854
-
|
21,909
18,134
18,711
|
Bernard
J.
Treml
Senior
Vice
President - Human Resources
|
2005
2004
2003
|
190,000
175,213
165,678
|
113,705
97,138
62,552
|
12,525
6,637
8,579
|
-
-
-
|
9,412
7,634
6,538
|
55,598
88,275
87,724
|
20,845
17,062
17,740
|
(1)
|
In
addition to
base salary, these amounts include elective deferred compensation
in a
reserve account for each individual.
|
(2)
|
These
amounts
reflect above-market earnings on elective deferred compensation.
Perquisites for the Chief Executive Officer and the four other
named
executive officers were less than $50,000 or 10% of the total
of salary
and bonus for the year and, accordingly, are not
listed.
|
(3)
|
Performance
shares of WPS Resources' Common Stock have been awarded to each of
the named executive officers as reported in the Long-Term Incentive
Plan
table presented below. At December 31, 2005, the closing stock price
of WPS Resources common stock was $55.31. Based on this valuation, an
award of the performance shares at target would have a value
at year-end
of $2,380,708 for Larry L. Weyers, $464,383 for Joseph P.
O'Leary, $315,212 for Charles A. Schrock, $265,543 for
Thomas P. Meinz, and $170,521 for
Bernard J. Treml.
|
(4)
|
All
Other
Compensation for 2005 as reported in the table above
is:
|
Name
and
Title
|
Year
|
Contributions
to Employee Stock Ownership Plan
($)
|
Deferred
Compensation Contribution for ESOP Restoration Benefit
($)
|
Life
Insurance
Premiums
($)
|
Above
Market
Earnings on Mandatory Deferred Compensation
($)
|
Larry
L.
Weyers
|
2005
|
11,065
|
-
|
4,350
|
19,663
|
Joseph
P.
O'Leary
|
2005
|
10,686
|
-
|
2,338
|
-
|
Thomas
P.
Meinz
|
2005
|
10,957
|
-
|
1,587
|
8,278
|
Charles
A.
Schrock
|
2005
|
10,580
|
-
|
2,033
|
9,296
|
Bernard
J.
Treml
|
2005
|
8,475
|
2,066
|
1,514
|
8,790
|
Agreements
with Named Executive Officers
Individual
employment and severance agreements exist with each of the named executive
officers. The agreements are intended to retain the services of these executive
officers in the event of a change in control of WPS Resources. Each
agreement entitles the executive officer to a continuation of salary and
benefits for a maximum period of three years after a change in control. Each
employment and severance agreement also provides a cash termination payment
should there be a termination of the executive officer's employment after
a
change in control or in anticipation of a change in control. Generally, any
such
cash termination payment will not exceed the present value of 2.99 times
the
executive officer's average annual salary and annual bonuses for the five
years
immediately preceding a change in control. Larry L. Weyers may receive cash
termination payments, plus a tax gross up payment exceeding 2.99 times
average annual salary, portions of which WPS Resources may not be able to
deduct for income tax purposes. The cash termination payments replace all
other
severance payments to which the executive officer may be entitled under the
existing severance agreements.
Option
Grants to Named Executives in Last Fiscal Year
Individual
Grants
|
Name
|
Number
of
securities underlying options/SARs granted
|
Percent
of
total options/SARs granted to employees in fiscal year
|
Exercise
or
base price
($/sh)
|
Expiration
date
|
Grant
date
present value $
|
|
|
|
|
|
|
Larry
L.
Weyers
|
121,705
|
37.41%
|
$54.85
|
12/07/15
|
401,625
|
Joseph
P.
O'Leary
|
23,955
|
7.36%
|
$54.85
|
12/07/15
|
79,050
|
Thomas
P.
Meinz
|
12,183
|
3.74%
|
$54.85
|
12/07/15
|
40,204
|
Charles
A.
Schrock
|
13,585
|
4.18%
|
$54.85
|
12/07/15
|
44,831
|
Bernard
J.
Treml
|
9,412
|
2.89%
|
$54.85
|
12/07/15
|
31,060
|
All
options
reported above will vest at a rate of 25% per year beginning December 7,
2006, and ending December 7, 2009. On December 31, 2005, the closing price
of WPS Resources stock was $55.31. There were no stock appreciation rights
granted to any employee in 2005.
The
grant date
present value above is based on option values of $3.30 per option granted
on
December 7, 2005. This value was calculated using a closed-form binomial
lattice model. For purposes of determining the value of these options, the
following assumptions were made:
|
|
Annual
dividend yield
|
4.29%
|
Volatility
|
12.02%
|
Risk
free
rate of return (Yield Curve)
|
1.50%
to
4.50%
|
Time
of
exercise
|
6.25
years
|
The
annual dividend
yield assumption was based on actual dividends and stock prices of
WPS Resources' common stock over the prior 12-month period to determine an
annualized 12-month yield. Volatility is based on the monthly price changes
of
WPS Resources' common stock over the 36 months prior to the grant date. The
risk free rate of return assumption employs a yield curve based on the yield
of
a 30-year treasury with a remaining term equal to the respective point in
the
option's life. The expected life of the option was calculated using the SEC
"safe harbor" formula of full option term plus vesting divided by two.
Aggregated
Option Exercises in Last Fiscal Year and Fiscal Year End Option Values for
the
Named Executive Officers
|
|
|
Number
of securities underlying unexercised options/SARs at fiscal year
end
|
Value
of unexercised
in-the-money
options/SARs at fiscal year end (1)
|
|
|
|
(#)
|
($)
|
Name
|
Shares
acquired on exercise (#)
|
Value
realized ($)
|
Exercisable/
Unexercisable
|
Exercisable/
Unexercisable
|
|
|
|
|
|
Larry
L.
Weyers
|
-
|
-
|
311,636
/
278,674
|
5,368,785
/
1,601,398
|
Joseph
P.
O'Leary
|
-
|
-
|
56,443
/
54,563
|
968,763
/
305,869
|
Thomas
P.
Meinz
|
5,638
|
94,662
|
36,013
/
31,008
|
616,793
/
191,838
|
Charles
A.
Schrock
|
7,500
|
188,438
|
52,026
/
37,029
|
970,509
/
242,445
|
Bernard
J.
Treml
|
-
|
-
|
22,944
/
20,079
|
401,810
/
109,162
|
(1)
|
Amounts
represent the excess fair market value of the underlying stock
at year-end
and the exercise price of each option. The year-end stock price
was
$55.31.
|
Performance
Share (Long-Term Incentive Plan) Awards to the Named Executive
Officers
|
|
|
|
|
|
Long-Term
Incentive Plans -
Awards in Last Fiscal Year
|
|
|
|
|
|
|
|
Estimated
future payouts under non-stock
price-based
plans
|
Name
|
Number
of
shares,
units or other rights (#)
|
Performance
or
other
period until maturation or
payout
|
Threshold
($
or #)
|
Target
($
or #)
|
Maximum
($
or #)
|
|
|
|
|
|
|
Larry
L. Weyers
|
16,974
|
3
Years
|
4,244
|
16,974
|
33,948
|
Joseph
P. O'Leary
|
3,341
|
3
Years
|
835
|
3,341
|
9,052
|
Thomas
P. Meinz
|
1,699
|
3
Years
|
425
|
1,699
|
3,398
|
Charles
A. Schrock
|
1,895
|
3
Years
|
474
|
1,895
|
3,790
|
Bernard
J. Treml
|
1,313
|
3
Years
|
328
|
1,313
|
2,626
|
Performance
shares
are issued under the WPS Resources' 2005 Omnibus Incentive Compensation
Plan. Under the Plan, the Compensation Committee sets performance goals,
based
on Total Shareholder Return (TSR), at the start of each three-year period.
The
Compensation Committee determines if the performance share awards are ultimately
issued, and if so, how many, by comparing WPS Resources' total shareholder
return with the shareholder return of a peer group of major publicly traded
energy companies. The number of performance shares initially awarded individuals
is based on market levels of incentive compensation and competitiveness of
the
total compensation package. Award levels are targeted to meet the median
of the
range of similar awards paid by comparable companies. To obtain a threshold
payout requires a TSR peer group ranking at the 35th percentile. If
TSR results are lower than the 35th percentile, no payout is made.
Target and maximum payouts are based on a TSR result at the 50th and
90th percentiles, respectively.
Pension
Plans
The
tables below
show the lump sum retirement benefit payable to a covered participant for
specified salary levels and years of service under the provisions of the
WPSC
Retirement Plan and the WPS Resources Corporation Pension Restoration and
Supplemental Retirement Plan in effect January 1, 2006, assuming
termination of employment on that date:
Pension
Plan Table
Lump
Sum Retirement Benefits (1)
at
January
1, 2006
For
Years of Service Indicated
(for
hires prior to January 1, 2001)
|
Final
Average Pay(2)
|
15
Years
|
20
Years
|
25
Years
|
30
Years
|
35
Years
|
$
300,000
|
$
761,850
|
$
962,100
|
$1,200,000
|
$1,425,000
|
$1,650,000
|
350,000
|
888,825
|
1,122,450
|
1,400,000
|
1,662,500
|
1,925,000
|
400,000
|
1,015,800
|
1,282,800
|
1,600,000
|
1,900,000
|
2,200,000
|
450,000
|
1,142,775
|
1,443,150
|
1,800,000
|
2,137,500
|
2,475,000
|
500,000
|
1,269,750
|
1,603,500
|
2,000,000
|
2,375,000
|
2,750,000
|
550,000
|
1,396,725
|
1,763,850
|
2,200,000
|
2,612,500
|
3,025,000
|
600,000
|
1,523,700
|
1,924,200
|
2,400,000
|
2,850,000
|
3,300,000
|
650,000
|
1,650,675
|
2,084,550
|
2,600,000
|
3,087,500
|
3,575,000
|
700,000
|
1,777,650
|
2,244,900
|
2,800,000
|
3,325,000
|
3,850,000
|
750,000
|
1,904,625
|
2,405,250
|
3,000,000
|
3,562,500
|
4,125,000
|
800,000
|
2,031,600
|
2,565,600
|
3,200,000
|
3,800,000
|
4,400,000
|
850,000
|
2,158,575
|
2,725,950
|
3,400,000
|
4,037,500
|
4,675,000
|
900,000
|
2,285,550
|
2,886,300
|
3,600,000
|
4,275,000
|
4,950,000
|
950,000
|
2,412,525
|
3,046,650
|
3,800,000
|
4,512,500
|
5,225,000
|
1,000,000
|
2,539,500
|
3,207,000
|
4,000,000
|
4,750,000
|
5,500,000
|
1,050,000
|
2,666,475
|
3,367,350
|
4,200,000
|
4,987,500
|
5,775,000
|
1,100,000
|
2,793,450
|
3,527,700
|
4,400,000
|
5,225,000
|
6,050,000
|
1,150,000
|
2,920,425
|
3,688,050
|
4,600,000
|
5,462,500
|
6,325,000
|
1,200,000
|
3,047,400
|
3,848,400
|
4,800,000
|
5,700,000
|
6,600,000
|
1,250,000
|
3,174,375
|
4,008,750
|
5,000,000
|
5,937,500
|
6,875,000
|
1,300,000
|
3,301,350
|
4,169,100
|
5,200,000
|
6,175,000
|
7,150,000
|
1,350,000
|
3,428,325
|
4,329,450
|
5,400,000
|
6,412,500
|
7,425,000
|
1,400,000
|
3,555,300
|
4,489,800
|
5,600,000
|
6,650,000
|
7,700,000
|
1,450,000
|
3,682,275
|
4,650,150
|
5,800,000
|
6,887,500
|
7,975,000
|
(1) |
The
Pension
Plan provides a lump sum benefit, which may be converted into an
actuarially equivalent annuity with monthly payments. The benefit
is not
subject to any deduction for Social Security or other
offset.
|
(2) |
"Final
Average Pay" is the average of the last 60 months or the 5 highest
calendar years' compensation within the 10-year period immediately
proceeding the participant's termination of employment, whichever
is
greater.
|
Pension
Plan Table
Lump
Sum Retirement Benefits(1)
at
January
1, 2006
For
Years of Service Indicated
(for
hires after December 31, 2000)
|
Final
Average Pay(2)
|
15
Years
|
20
Years
|
25
Years
|
30
Years
|
35
Years
|
$350,000
|
$507,500
|
$
700,000
|
$
927,500
|
$1,155,000
|
$1,382,500
|
400,000
|
580,000
|
800,000
|
1,060,000
|
1,320,000
|
1,580,000
|
450,000
|
652,500
|
900,000
|
1,192,500
|
1,485,000
|
1,777,500
|
500,000
|
725,000
|
1,000,000
|
1,325,000
|
1,650,000
|
1,975,000
|
550,000
|
797,500
|
1,100,000
|
1,457,500
|
1,815,000
|
2,172,500
|
(1) |
The
pension
plan provides a lump sum benefit, which may be converted into an
actuarially equivalent annuity with monthly payments. The benefit
is not
subject to any deduction for Social Security or other
offset.
|
"Final
Average Pay"
is the average of the last 60 months or the 5 highest calendar years'
compensation within the 10-year period immediately proceeding the participant's
termination of employment, whichever is greater.
Named
executive
officers' compensation for pension purposes differs from annual compensation
reported in the Summary Compensation Table. Pension compensation for the
named
executive officers is:
Name
|
2005
Pension
Compensation ($)
|
Years
of
Service
|
Larry
L.
Weyers
|
1,406,868
|
20
|
Joseph
P.
O'Leary
|
443,587
|
4
|
Thomas
P.
Meinz
|
308,612
|
36
|
Charles
A.
Schrock
|
394,012
|
26
|
Bernard
J.
Treml
|
283,974
|
33
|
Annual
benefits
payable from the pension plan were subject to a maximum limitation of $170,000
for 2005 under the Internal Revenue Code. The amount of compensation considered
for purposes of the pension plan was limited to $210,000 for 2005 under the
Internal Revenue Code. The pension restoration plan provides additional pension
benefits for pension restoration plan participants to compensate for any
loss of
benefit payable under the pension plan caused by the maximum benefit limitation,
compensation limitation, or any salary deferral under the WPS Resources
Deferred Compensation Plan. Retirement benefits presented in the pension
plan
tables include the pension restoration benefit.
The
WPS Resources Supplemental Retirement Plan provides supplemental monthly
payments to its participants. Certain executive officers, including the Chief
Executive Officer and each of the other named executive officers, participate
in
the supplemental retirement plan. Retirement benefits presented in the pension
plan tables do not include benefits under the supplemental retirement
plan.
Benefits
under the
supplemental retirement plan are payable if the participant retires or
terminates employment after reaching age 55 and completing at least
10 years of credited service or 5 years in the event of termination
following a change in control. An eligible participant with 15 or more years
of
credited service will receive a monthly benefit equal to 60 percent of the
participant's "Final Average Earnings," reduced by the monthly pension plan
benefit and restoration plan benefit to which the participant is entitled
or
would be entitled had the participant elected an annuity form of payment.
"Final
Average Earnings" mean 1/36th of the base salary and annual bonus
paid to the participant during the month in which the participant's employment
is terminated and the immediately preceding 35 months, or during the 3
calendar years immediately preceding the calendar year in which the
participant's employment is terminated. If the participant has fewer than
15 years of credited service, the 60 percent target benefit percentage is
reduced by 4 percent for each year by which the participant's years of credited
service is less than 15 years.
Estimated
annual
benefits to be received by each of the named executive officers under the
Supplemental Retirement Plan upon normal retirement are as follows:
Name
|
Estimated
Supplemental
Retirement
Benefit ($)
|
Larry
L.
Weyers
|
$431,126
|
Joseph
P.
O'Leary
|
-
|
Thomas
P.
Meinz
|
57,234
|
Charles
A.
Schrock
|
113,168
|
Bernard
J.
Treml
|
63,177
|
WPS Resources
Corporation
Information
required by this Item regarding the principal securities holders of
WPS Resources and the security holdings of its directors and executive
officers can be found in WPS Resources' Proxy Statement for its Annual
Meeting of Shareholders to be held May 18, 2006 under the caption "Ownership
of
Voting Securities--Beneficial Ownership." Such information is incorporated
by
reference as if fully set forth herein.
Wisconsin
Public Service Corporation
Ownership
of Voting Securities
All
of the common
stock of WPSC is held by WPS Resources.
Listed
in the
following table are the shares of WPS Resources' common stock owned as of
February 15, 2006 by the directors and named executive officers of WPSC,
who are
not directors or named executive officers of WPS Resources, as well as the
number of shares owned by the directors and executive officers of WPSC as
a
group as of February 15, 2006.
|
|
Amount
and
Nature of Shares Beneficially Owned
February
15,
2006
|
Name
and
Title
|
|
Aggregate
Number of Shares Beneficially Owned (1)
|
Number
of
Shares Subject to Stock Options
|
Percent
of
Shares
|
|
|
|
|
|
Thomas
P.
Meinz
Executive
Vice
President - Public Affairs
|
|
53,802
|
36,013
|
*
|
Charles
A.
Schrock
President
and
Chief Operating Officer - Generation
|
|
62,946
|
52,026
|
*
|
Bernard
J.
Treml
Senior
Vice
President - Human Resources
|
|
35,036
|
22,944
|
*
|
All
18
directors and executive officers as a group
|
|
817,888
|
559,153
|
2.0%
|
*
Less than 1% of
WPS Resources outstanding shares of common stock
|
(1)
|
Aggregate
Number of Shares Beneficially Owned includes shares of common stock
held
in the Employee Stock Ownership Plan and Trust, the WPSC Deferred
Compensation Trust, and all stock options, which are exercisable
within 60
days of February 15, 2006. Each director or officer has sole voting
and
investment power with respect to the shares reported, unless otherwise
noted. No voting or investment power exists related to the stock
options
reported until exercised.
|
None
of the persons
listed beneficially owns shares of any other class of WPS Resources' equity
securities.
Equity
Compensation Plan Information
Information
required by this Item regarding equity compensation plans of WPS Resources
can be found in WPS Resources' Proxy Statement for its Annual Meeting of
Shareholders to be held May 18, 2006, under the caption "Ownership of Voting
Securities--Equity Compensation Plan Information." Such information is
incorporated by reference as if fully set forth herein.
WPSC
provides and
receives services, property, and other things of value to and from its parent,
WPS Resources, and other subsidiaries of WPS Resources. All such
transactions are made pursuant to a master affiliated interest agreement
approved by the PSCW. The agreement provides that WPSC receives payment equal
to
the higher of its cost or fair value for services and property and other
things
of value which WPSC provides to WPS Resources or its other nonregulated
subsidiaries, and WPSC makes payments equal to the lower of the provider's
cost
or fair value for property, services, and other things of value which
WPS Resources or its other nonregulated subsidiaries provide to WPSC. The
agreement further provides that any services, property, or other things of
value
provided to or from WPSC to or for any other regulated subsidiary of
WPS Resources be provided at cost. Modification or amendment to the master
agreement requires the approval of the PSCW.
The
following is a
summary of the fees billed to WPS Resources and WPSC by Deloitte &
Touche LLP for professional services performed for 2005 and 2004:
Fees
|
2005
|
2004
|
Audit
Fees
(a)
|
$2,169,279
|
$2,050,083
|
Audit
Related
Fees (b)
|
80,250
|
197,415
|
Tax
Fees
(c)
|
-
|
-
|
All
Other
Fees (d)
|
19,523
|
14,345
|
Total
Fees
|
$2,269,052
|
$2,261,843
|
a)
|
Audit
Fees.
Consists of
aggregate fees billed to WPS Resources and WPSC by Deloitte &
Touche LLP for professional services rendered for the audits
of the annual
consolidated financial statements, reviews of the interim consolidated
financial statements included in quarterly reports and audits
of the
effectiveness of, and management's assessment of the effectiveness
of,
internal control over financial reporting, of WPS Resources and its
subsidiaries. Audit fees also include services that are normally
provided
by Deloitte & Touche in connection with statutory and regulatory
filings or engagements, including comfort letters, consents and
other
services related to SEC matters, and consultations arising during
the
course of the audits and reviews concerning financial accounting
and
reporting standards.
|
b)
|
Audit
Related Fees. Consists
of
fees billed for assurance and related services that are reasonably
related
to the performance of the audit or review of the consolidated
financial
statements or internal control over financial reporting and are
not
reported under "Audit Fees." These services include employee
benefit plan
audits, accounting consultations in connection with potential
transactions, and consultations concerning financial accounting
and
reporting standards.
|
c)
|
Tax
Fees.
Consists of
fees billed for professional services for tax compliance, tax
advice and
tax planning. These services include assistance regarding federal
and
state tax compliance, tax audit issues, mergers and acquisitions,
and tax
planning.
|
d)
|
All
Other
Fees.
Consists of
other fees billed to WPS Resources and WPSC by Deloitte & Touche
LLP for products and services other than the services reported
above. All
Other Fees are for software licensing provided in 2005 and 2004.
The
nature of the software license fees, which include support and
learning
services, have been deemed to be permissible non-attest
services.
|
In
considering the nature of the services provided by the independent auditor,
the
Audit Committee determined that such services are compatible with the provision
of independent audit services. The Audit Committee discussed these services
with
the independent auditor and WPS Resources management and determined that
they are permitted under the rules and regulations concerning auditor
independence promulgated by the SEC to implement the Sarbanes-Oxley Act of
2002,
as well as those of the American Institute of Certified Public Accountants.
The
Audit Committee has approved in advance 100% of the services, if any, described
in the table above under "Audit-Related Fees," "Tax Fees" and "All Other
Fees"
in accordance with its pre-approval policy.
Documents
filed as part of this report:
|
|
|
(1)
|
Consolidated
Financial Statements included in Part II at Item 8
above:
|
|
|
|
Description
|
Pages
in
10-K
|
|
|
|
|
WPS Resources
|
|
|
Consolidated
Statements of Income for the three years ended December 31, 2005,
2004, and 2003
|
99
|
|
|
|
|
Consolidated
Balance Sheets as of December 31, 2005 and 2004
|
100
|
|
|
|
Consolidated
Statements of Common Shareholders' Equity for the three years ended
December 31, 2005, 2004, and 2003
|
101
|
|
|
|
Consolidated
Statements of Cash Flows for the three years ended December 31, 2005,
2004, and 2003
|
102
|
|
|
|
|
Notes
to
Consolidated Financial Statements
|
103
|
|
|
|
|
Report
of
Independent Registered Public Accounting Firm
|
161
|
|
|
|
|
Wisconsin
Public Service
|
|
|
Consolidated
Statements of Income for the three years ended December 31, 2005,
2004, and 2003
|
165
|
|
|
|
Consolidated
Balance Sheets as of December 31, 2005 and 2004
|
166
|
|
|
|
Consolidated
Statements of Capitalization as of December 31, 2005 and
2004
|
167
|
|
|
|
Consolidated
Statements of Common Shareholder's Equity for the three years ended
December 31, 2005, 2004, and 2003
|
168
|
|
|
|
Consolidated
Statements of Cash Flows for the three years ended December 31, 2005,
2004, and 2003
|
169
|
|
|
|
Notes
to
Consolidated Financial Statements
|
170
|
|
|
|
|
Report
of
Independent Registered Public Accounting Firm
|
178
|
|
|
|
(2)
|
Financial
Statement Schedules.
The
following
financial statement schedules are included in Part IV of this report.
Schedules not included herein have been omitted because they are
not
applicable or the required information is shown in the financial
statements or notes thereto.
|
|
|
|
Description
|
Pages
in
10-K
|
|
|
|
|
Schedule
I -
Condensed Parent Company Only Financial Statements
|
|
|
|
|
|
A.
|
Statements
of
Income and Retained Earnings
|
197
|
|
|
|
|
|
B.
|
Balance
Sheets
|
198
|
|
|
|
|
|
C.
|
Statements
of
Cash Flows
|
199
|
|
|
|
|
|
D.
|
Notes
to
Parent Company Financial Statements
|
200
|
|
|
|
|
|
Schedule
II
WPS Resources Valuation and Qualifying Accounts
|
204
|
|
|
|
|
Schedule
II
WPSC Valuation and Qualifying Accounts
|
205
|
|
|
|
(3)
|
Listing
of
all exhibits, including those incorporated by
reference.
|
Exhibit
Number
|
Description
of Documents
|
|
|
2.1*
|
Asset
Contribution Agreement between ATC and Wisconsin Electric Power
Company,
Wisconsin Power and Light Company, WPSC, Madison Gas & Electric Co.,
Edison Sault Electric Company, South Beloit Water, Gas and Electric
Company, dated as of December 15, 2000. (Incorporated by reference to
Exhibit 2A-3 to WPS Resources' and WPSC's Form 10-K for the year
ended December 31, 2000.)
|
|
|
2.2*
|
Asset
Purchase Agreement by and between Aquila, Inc. and WPS Michigan
Utilities, Inc. (n/k/a Michigan Gas Utilities Corporation) dated
September
21, 2005. (Incorporated by reference to Exhibit 2.1 to WPS Resources'
Form 8-K filed September 27, 2005.)
|
|
|
2.3*
|
Asset
Purchase Agreement by and between Aquila, Inc. and WPS Minnesota
Utilities, Inc. (n/k/a Minnesota Energy Resources Corporation)
dated
September 21, 2005. (Incorporated by reference to Exhibit 2.2 to
WPS Resources' Form 8-K filed September 27,
2005.)
|
|
|
3.1
|
Restated
Articles of Incorporation of WPS Resources. (Incorporated by
reference to Exhibit 3(i).(2) to WPS Resources' Form 10-Q for
the quarter ended September 30, 2002.)
|
|
|
3.2
|
Articles
of
Incorporation of WPSC as effective May 26, 1972 and amended through
May
31, 1988 (Incorporated by reference to Exhibit 3A to Form 10-K
for the
year ended December 31, 1991); Articles of Amendment to Articles of
Incorporation dated June 9, 1993. (Incorporated by reference to
Exhibit 3
to Form 8-K filed June 10, 1993.)
|
|
|
3.3
|
By-Laws
of
WPS Resources, as amended through April 1, 2004. (Incorporated by
reference to Exhibit 3.1 to WPS Resources' and WPSC's Form 10-Q for
the quarterly period ended March 31, 2004.)
|
|
|
3.4
|
By-Laws
of
WPSC, as in effect August 15, 2004. (Incorporated by reference
to Exhibit
3.1 to WPS Resources' and WPSC's Form 10-Q for the quarterly period
ended September 30, 2005.)
|
|
|
4.1
|
Rights
Agreement, dated December 12, 1996, between WPS Resources and
U.S. Bank National Association (successor to Firstar Trust Company).
(Incorporated by reference to Exhibit 4.1 to WPS Resources' Form 8-A
filed December 13, 1996 [File No.1-11337].)
|
|
|
4.2
|
Amendment
to
Rights Agreement, effective as of October 9, 2002, by and among
WPS Resources, U.S. Bank National Association and American Stock
Transfer & Trust Company. (Incorporated by reference to Exhibit 4(h)
to WPS Resources' Form S-3 filed on April 28, 2003, File No.
333-104787.)
|
|
|
4.3
|
First
Mortgage and Deed of Trust, dated as of January 1, 1941 from WPSC
to U.S.
Bank National Association (successor to First Wisconsin Trust Company),
Trustee (Incorporated by reference to Exhibit 7.01 - File No. 2-7229);
Supplemental Indenture, dated as of November 1, 1947 (Incorporated by
reference to Exhibit 7.02 - File No. 2-7602); Supplemental Indenture,
dated as of November 1, 1950 (Incorporated by reference to Exhibit
4.04 -
File No. 2-10174); Supplemental Indenture, dated as of May 1, 1953
(Incorporated by reference to Exhibit 4.03 - File No. 2-10716);
Supplemental Indenture, dated as of October 1, 1954 (Incorporated
by
reference to Exhibit 4.03 - File No. 2-13572); Supplemental
Indenture, dated as of December 1, 1957 (Incorporated by reference to
Exhibit 4.03 - File No. 2-14527); Supplemental Indenture, dated as of
October 1, 1963 (Incorporated by reference to Exhibit 2.02B -
File No. 2-65710); Supplemental Indenture, dated as of June 1, 1964
(Incorporated by reference to Exhibit 2.02B - File No. 2-65710);
Supplemental Indenture, dated as of November 1, 1967 (Incorporated
by
reference to Exhibit 2.02B - File No. 2-65710); Supplemental Indenture,
dated as of April 1, 1969 (Incorporated by reference to Exhibit
2.02B -
File No. 2-65710); Fifteenth Supplemental Indenture, dated as of
May 1,
1971 (Incorporated by reference to Exhibit 2.02B - File No. 2-65710);
Sixteenth Supplemental Indenture, dated as of August 1, 1973
(Incorporated by reference to Exhibit 2.02B - File No. 2-65710);
Seventeenth Supplemental Indenture, dated as of September 1, 1973
(Incorporated by reference to Exhibit 2.02B - File No. 2-65710);
Eighteenth Supplemental Indenture, dated as of October 1, 1975
(Incorporated by reference to Exhibit 2.02B - File No. 2-65710);
Nineteenth Supplemental Indenture, dated as of February 1, 1977
(Incorporated by reference to Exhibit 2.02B - File No. 2-65710);
Twentieth Supplemental Indenture, dated as of July 15, 1980 (Incorporated
by reference to Exhibit 4B to Form 10-K for the year ended
December 31, 1980); Twenty-First Supplemental Indenture, dated as of
December 1, 1980 (Incorporated by reference to Exhibit 4B to
Form 10-K for the year ended December 31, 1980); Twenty-Second
Supplemental Indenture dated as of April 1, 1981 (Incorporated
by
reference to Exhibit 4B to Form 10-K for the year ended December 31,
1981); Twenty-Third Supplemental Indenture, dated as of February
1, 1984
(Incorporated by reference to Exhibit 4B to Form 10-K for the year
ended
December 31, 1983); Twenty-Fourth Supplemental Indenture, dated as of
March 15, 1984 (Incorporated by reference to Exhibit 1 to Form
10-Q for
the quarter ended June 30, 1984); Twenty-Fifth Supplemental
Indenture, dated as of October 1, 1985 (Incorporated by reference
to
Exhibit 1 to Form 10-Q for the quarter ended September 30,
1985); Twenty-Sixth Supplemental Indenture, dated as of December 1,
1987 (Incorporated by reference to Exhibit 4A-1 to Form 10-K for
the year
ended December 31, 1987); Twenty-Seventh Supplemental Indenture,
dated as of September 1, 1991 (Incorporated by reference to Exhibit
4 to
Form 8-K filed September 18, 1991); Twenty-Eighth Supplemental
Indenture,
dated as of July 1, 1992 (Incorporated by reference to Exhibit
4B - File
No. 33-51428); Twenty-Ninth Supplemental Indenture, dated as of
October 1,
1992 (Incorporated by reference to Exhibit 4 to Form 8-K filed
October 22,
1992); Thirtieth Supplemental Indenture, dated as of February 1,
1993
(Incorporated by reference to Exhibit 4 to Form 8-K filed
January 27, 1993); Thirty-First Supplemental Indenture, dated as of
July 1, 1993 (Incorporated by reference to Exhibit 4 to Form 8-K
filed
July 7, 1993); Thirty-Second Supplemental Indenture, dated as of
November 1, 1993 (Incorporated by reference to Exhibit 4 to
Form 10-Q for the quarter ended September 30, 1993); Thirty-Third
Supplemental Indenture, dated as of December 1, 1998 (Incorporated by
reference to Exhibit 4D to Form 8-K filed December 18, 1998);
Thirty-Fourth Supplemental Indenture, dated as of August 1, 2001
(Incorporated by reference to Exhibit 4D to Form 8-K filed August
24,
2001); Thirty-Fifth Supplemental Indenture, dated as of December 1,
2002 (Incorporated by reference to Exhibit 4D to Form 8-K filed
December 16, 2002); and Thirty-Sixth Supplemental Indenture, dated as
of December 8, 2003 (Incorporated by reference to Exhibit 4.2 to Form
8-K filed December 9, 2003.)
All
references to periodic reports are to those of WPSC (File No.
1-3016).
|
|
|
4.4
|
Indenture,
dated as of December 1, 1998, between WPSC and U.S. Bank National
Association (successor to Firstar Bank Milwaukee, N.A., National
Association) (Incorporated by reference to Exhibit 4A to Form 8-K
filed
December 18, 1998); First Supplemental Indenture, dated as of
December 1, 1998 between WPSC and Firstar Bank Milwaukee, N.A.,
National Association (Incorporated by reference to Exhibit 4C to
Form 8-K
filed December 18, 1998); Second Supplemental Indenture, dated as of
August 1, 2001 between WPSC and Firstar Bank, National Association
(Incorporated by reference to Exhibit 4C of Form 8-K filed August 24,
2001); Third Supplemental Indenture, dated as of December 1, 2002
between WPSC and U.S. Bank National Association (Incorporated by
reference
to Exhibit 4C of Form 8-K filed December 16, 2002); and Fourth
Supplemental Indenture, dated as of December 8, 2003, by and between
WPSC and U.S. Bank National Association (successor to Firstar Bank,
National Association and Firstar Bank Milwaukee, N.A., National
Association). (Incorporated by reference to Exhibit 4.1 to Form
8-K filed
December 9, 2003). References to periodic reports are to those
of WPSC (File No. 1-3016).
|
|
|
4.5
|
Indenture,
dated as of October 1, 1999, between WPS Resources and
U.S. Bank National Association (successor to Firstar Bank Milwaukee,
N.A., National Association) (Incorporated by reference to Exhibit
4(b) to
Amendment No. 1 to Form S-3 filed October 21, 1999 [Reg. No. 333-88525]);
First Supplemental Indenture, dated as of November 1, 1999 between
WPS Resources and Firstar Bank, National Association (Incorporated
by
reference to Exhibit 4A of Form 8-K filed November 12, 1999); and
Second
Supplemental Indenture, dated as of November 1, 2002 between
WPS Resources and U.S. Bank National Association. (Incorporated by
reference to Exhibit 4A of Form 8-K filed November 25, 2002). All
references to filings are those of WPS Resources (File No.
1-11337).
|
|
|
10.1
|
Joint
Power
Supply Agreement among WPSC, Wisconsin Power and Light Company,
and
Madison Gas and Electric Company, dated February 2, 1967. (Incorporated
by
reference to Exhibit 4.09 in File No. 2-27308.)
|
|
|
10.2
|
Joint
Power
Supply Agreement (Exclusive of Exhibits) among WPSC, Wisconsin
Power and
Light Company, and Madison Gas and Electric Company dated July 26,
1973. (Incorporated by reference to Exhibit 5.04A in File No.
2-48781.)
|
|
|
10.3*
#
|
Joint
Plant
Agreement by and between WPSC and Dairyland Power Cooperative,
dated as of
November 23, 2004. (Incorporated by reference to Exhibit 10.19
to WPS
Resources' and WPSC's Form 10-K for the year ended December 31,
2004.)
|
|
|
10.4
|
Basic
Generating Agreement, Unit 4, Edgewater Generating Station, dated
June 5,
1967, between Wisconsin Power and Light Company and WPSC. (Incorporated
by
reference to Exhibit 4.10 in File No. 2-27308.)
|
|
|
10.5
|
Agreement
for
Construction and Operation of Edgewater 5 Generating Unit, dated
February 24, 1983, between Wisconsin Power and Light Company,
Wisconsin Electric Power Company, and WPSC. (Incorporated by reference
to
Exhibit 10C-1 to WPSC's Form 10-K for the year ended
December 31, 1983.)
|
|
|
10.6
|
Amendment
No.
1 to Agreement for Construction and Operation of Edgewater 5 Generating
Unit, dated December 1, 1988. (Incorporated by reference to Exhibit
10C-2 to WPSC's Form 10-K for the year ended December 31,
1988.)
|
|
|
10.7
|
Revised
Agreement for Construction and Operation of Columbia Generating
Plant
among WPSC, Wisconsin Power and Light Company, and Madison Gas
and
Electric Company, dated July 26, 1973. (Incorporated by reference
to
Exhibit 5.07 in File No. 2-48781.)
|
|
|
10.8+
|
Form
of Key
Executive Employment and Severance Agreement entered into between
WPS Resources and each of the following:
Phillip M. Mikulsky and Larry L. Weyers. (Incorporated
by reference to Exhibit 10.8 to WPS Resources' and WPSC's Form 10-K
for the year ended December 31, 2002.)
|
|
|
10.9+
|
Form
of Key
Executive Employment and Severance Agreement entered into between
WPS Resources and each of the following: Larry B. Borgard, Diane L.
Ford, David W. Harpole, Richard E. James, Bradley A.
Johnson, Thomas P. Meinz, Barbara A. Nick, Joseph P. O'Leary,
Mark A. Radtke, Charles A. Schrock, Bernard J. Treml and Daniel
J Verbanac. (Incorporated by reference to Exhibit 10.9 to
WPS Resources' and WPSC's Form 10-K for the year ended
December 31, 2002.)
|
|
|
10.10+
|
Form
of Key
Executive Employment and Severance Agreement entered into between
WPS Resources and each of the following: Barth J. Wolf. (Incorporated
by reference to Exhibit 10.10 to WPS Resources' and WPSC's Form 10-K
for the year ended December 31, 2002.)
|
|
|
10.11+
|
Form
of
WPS Resources NonQualified Stock Option Agreement. (Incorporated by
reference to Exhibit 10.1 to WPS Resources' and WPSC's Form 8-K filed
December 13, 2005.)
|
|
|
10.12+
|
Form
of
WPS Resources Performance Stock Right Agreement. (Incorporated by
reference to Exhibit 10.2 to WPS Resources' and WPSC's Form 8-K filed
December 13, 2005.)
|
|
|
10.13+
|
WPS Resources
1999 Stock Option Plan. (Incorporated by reference to Exhibit 10-2
in
WPS Resources' Form 10-Q for the quarter ended June 30, 1999, filed
August 11, 1999.)
|
|
|
10.14+
|
WPS Resources
1999 Non-Employee Directors Stock Option Plan. (Incorporated by
reference
to Exhibit 4.2 in WPS Resources' Form S-8, filed December 21,
1999. [Reg. No. 333-93193].)
|
|
|
10.15+
|
WPS Resources
Deferred Compensation Plan as Amended and Restated Effective
January 1, 2005. (Incorporated by reference to Exhibit 10.10 to
Annual Report on Form 10-K for the period ended December 31, 2004,
filed March 9, 2005 [File No. 1-11337].)
|
|
|
10.16+
|
WPS Resources
2001 Omnibus Incentive Compensation Plan.
|
|
|
10.17+
|
WPS
Resources
Corporation 2005 Omnibus Incentive Compensation Plan. (Incorporated
by
reference to Exhibit 10.1 to WPS Resources' and WPSC's Form 10-Q
filed August 4, 2005.)
|
|
|
10.18
|
Term
Loan
Agreement, dated as of November 5, 1999 among PDI New England, Inc.,
PDI Canada, Inc., and Bayerische Landesbank Girozentrale.
(Incorporated by reference to Exhibit 4H to WPS Resources' and WPSC's
Form 10-K for the year ended December 31, 1999.)
|
|
|
10.19
|
Five
Year
Credit Agreement among WPS Resources Corporation and the lenders
identified herein, Citibank, N.A., Wells Fargo Bank National Association,
J P Morgan Chase Bank, N.A., UBS Securities LLC, U.S. Bank
National Association, and U.S. Bank National Association and
Citigroup Global Markets Inc., dated as of June 2, 2005. (Incorporated
by
reference to Exhibit 10.1 to WPS Resources' and WPSC's Form 10-Q for
the quarter ended June 30, 2005, filed August 4,
2005.)
|
|
|
10.20
|
Credit
Agreement among WPS Resources Corporation, as Borrower, the Lenders
Identified Therein, Bank of America, N.A., as Syndication Agent,
JPMorgan
Chase Bank, N.A., as Agent and J. P. Morgan Securities Inc. and
Banc of
America Securities LLC, as Co-Lead Arrangers and Book Managers
Dated as of
November 9, 2005. (Incorporated by reference to Exhibit 99.1 to
WPS Resources' Form 8-K filed November 16,
2005.)
|
|
|
10.21
|
Credit
Agreement among WPS Resources Corporation, as Borrower, the Lenders
Identified Therein, Bank of America, N.A., as Syndication Agent,
JPMorgan
Chase Bank, N.A., as Agent and J. P. Morgan Securities Inc. and
Banc of
America Securities LLC, as Co-Lead Arrangers and Book Managers
Dated as of
November 9, 2005. (Incorporated by reference to Exhibit 99.2 to
WPS Resources' Form 8-K filed November 16,
2005.)
|
|
|
10.22
|
Forward
Sale
Agreement, dated as of November 15, 2005, by and between
WPS Resources and J.P. Morgan Securities Inc., as agent for J.P.
Morgan Chase Bank, National Association, London Branch. (Incorporated
by
reference to Exhibit 99.2 to WPS Resources' Form 8-K filed
November 17, 2005.)
|
|
|
12.1
|
WPS Resources
Ratio of Earnings to Fixed Charges
|
|
|
12.2
|
WPSC
Ratio of
Earnings to Fixed Charges and Ratio of Earnings to Fixed Charges
and
Preferred Dividends
|
|
|
21
|
Subsidiaries
of the Registrants
|
|
|
23.1
|
Consent
of
Independent Registered Public Accounting Firm for WPS Resources
|
|
|
23.2
|
Consent
of
Independent Registered Public Accounting Firm for WPSC
|
|
|
24
|
Powers
of
Attorney
|
|
|
31.1
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act and Rule 13a-14(a) or 15d-14(a) under the Securities Exchange
Act of
1934 for WPS Resources
|
|
|
31.2
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act and Rule 13a-14(a) or 15d-14(a) under the Securities Exchange
Act of
1934 for WPS Resources
|
|
|
31.3
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act and Rule 13a-14(a) or 15d-14(a) under the Securities Exchange
Act of
1934 for WPSC
|
|
|
31.4
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act and Rule 13a-14(a) or 15d-14(a) under the Securities Exchange
Act of
1934 for WPSC
|
|
|
32.1
|
Written
Statement of the Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350 for WPS Resources
|
|
|
32.2
|
Written
Statement of the Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350 for
WPSC
|
|
|
99
|
Proxy
Statement for WPS Resources' 2006 Annual Meeting of Shareholders [To
be filed with the SEC under Regulation 14A within 120 days after
December 31, 2005; except to the extent specifically incorporated by
reference, the Proxy Statement for the 2006 Annual Meeting of Shareholders
shall not be deemed to be filed with the SEC as part of this Annual
Report
on Form 10-K]
|
|
|
*
|
Schedules
and
exhibits to this document are not filed therewith. The registrant
agrees
to furnish supplementally a copy of any such schedule or exhibit
to the
SEC upon request.
|
|
|
+
|
A
management
contract or compensatory plan or arrangement.
|
|
|
#
|
Portions
of
this exhibit have been redacted and are subject to a confidential
treatment request filed with the Secretary of SEC pursuant to Rule
24b-2
under the Securities and Exchange Act of 1934, as amended. The
redacted
material is being filed separately with the
SEC.
|
Pursuant
to the
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the
Registrants have duly caused this report to be signed on their behalf by
the
undersigned, thereunto duly authorized, on this 28th day of February,
2006.
WPS RESOURCES
CORPORATION
|
WISCONSIN
PUBLIC SERVICE CORPORATION
|
|
|
|
|
(Registrants)
|
|
|
|
|
By:
|
/s/
Larry L.
Weyers
|
By:
|
/s/
Larry L.
Weyers
|
|
Larry
L.
Weyers
Chairman,
President and
Chief
Executive Officer
|
|
Larry
L.
Weyers
Chairman
and
Chief
Executive Officer
|
Pursuant
to the
requirements of the Securities Exchange Act of 1934, this report has been
signed
below by the following persons on behalf of each of the Registrants and
in the
capacities and on the dates indicated.
Signature
|
Title
|
Date
|
|
|
|
Richard
A.
Bemis*
|
Director
|
|
Albert
J.
Budney, Jr.*
|
Director
|
|
Ellen
Carnahan*
|
Director
|
|
Robert
C.
Gallagher*
|
Director
|
|
Kathryn
M.
Hasselblad-Pascale*
|
Director
|
|
James
L.
Kemerling*
|
Director
|
|
John
C.
Meng*
|
Director
|
|
William
F.
Protz, Jr.*
|
Director
|
|
|
|
|
/s/
Larry L.
Weyers
|
Chairman,
President, Chief Executive Officer and Director
(principal
executive officer)
|
February
28,
2006
|
Larry
L.
Weyers
|
|
|
|
|
|
/s/
Joseph P.
O'Leary
|
Senior
Vice
President and Chief Financial Officer
(principal
financial officer)
|
February
28,
2006
|
Joseph
P.
O'Leary
|
|
|
|
|
|
/s/
Diane L.
Ford
|
Vice
President - Controller and Chief Accounting Officer
(principal
accounting officer)
|
February
28,
2006
|
Diane
L.
Ford
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*By: /s/
Joseph P. O'Leary
|
|
|
Joseph
P.
O'Leary
|
Attorney-in-Fact
|
February
28,
2006
|
|
|
|
|
|
|
|
|
SCHEDULE
I - CONDENSED
|
|
|
|
|
|
|
|
PARENT
COMPANY FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
WPS
RESOURCES CORPORATION (PARENT COMPANY ONLY)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended
December 31
|
|
|
|
|
|
|
|
(Millions)
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
Equity
earnings in excess of dividends from subsidiaries
|
|
$
|
91.3
|
|
$
|
79.4
|
|
$
|
35.8
|
|
Dividends
from
subsidiaries
|
|
|
92.3
|
|
|
81.0
|
|
|
72.0
|
|
Income
from
subsidiaries
|
|
|
183.6
|
|
|
160.4
|
|
|
107.8
|
|
Investment
income and other
|
|
|
3.3
|
|
|
1.8
|
|
|
3.4
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
income
|
|
|
186.9
|
|
|
162.2
|
|
|
111.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
10.6
|
|
|
12.3
|
|
|
7.6
|
|
Income
before interest expense and income taxes
|
|
|
176.3
|
|
|
149.9
|
|
|
103.6
|
|
Interest
expense
|
|
|
23.3
|
|
|
17.6
|
|
|
20.6
|
|
Income
before taxes
|
|
|
153.0
|
|
|
132.3
|
|
|
83.0
|
|
Provision
for
income taxes
|
|
|
(6.0
|
)
|
|
(7.4
|
)
|
|
(8.5
|
)
|
Net
income before cumulative effect of change in accounting
principles
|
|
|
159.0
|
|
|
139.7
|
|
|
91.5
|
|
Cumulative
effect of change in accounting principles, net of tax
|
|
|
(1.6
|
)
|
|
-
|
|
|
3.2
|
|
Net
Income
|
|
$
|
157.4
|
|
$
|
139.7
|
|
$
|
94.7
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
earnings, beginning of year
|
|
|
497.0
|
|
|
438.8
|
|
|
415.9
|
|
Common
stock dividends
|
|
|
(85.4
|
)
|
|
(81.3
|
)
|
|
(71.8
|
)
|
Other
|
|
|
(0.3
|
)
|
|
(0.2
|
)
|
|
-
|
|
Retained
earnings, end of year
|
|
$
|
568.7
|
|
$
|
497.0
|
|
$
|
438.8
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
shares of common stock
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
38.3
|
|
|
37.4
|
|
|
33.0
|
|
Diluted
|
|
|
38.7
|
|
|
37.6
|
|
|
33.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per common share (basic)
|
|
|
|
|
|
|
|
|
|
|
Net
income before cumulative effect of change in accounting
principles
|
|
$
|
4.15
|
|
$
|
3.74
|
|
$
|
2.77
|
|
Cumulative effect of change in accounting principles
|
|
|
($0.04
|
)
|
|
-
|
|
$
|
0.10
|
|
Earnings per common share (basic)
|
|
$
|
4.11
|
|
$
|
3.74
|
|
$
|
2.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per common share (diluted)
|
|
|
|
|
|
|
|
|
|
|
Net
income before cumulative effect of change in accounting
principles
|
|
$
|
4.11
|
|
$
|
3.72
|
|
$
|
2.75
|
|
Cumulative effect of change in accounting principles
|
|
|
($0.04
|
)
|
|
-
|
|
$
|
0.10
|
|
Earnings per common share (diluted)
|
|
$
|
4.07
|
|
$
|
3.72
|
|
$
|
2.85
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
per common share
|
|
$
|
2.24
|
|
$
|
2.20
|
|
$
|
2.16
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes to WPS Resources Corporation's parent
company financial
statements
|
|
|
are
an
integral part of these statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SCHEDULE
I - CONDENSED
|
|
|
|
|
|
PARENT
COMPANY FINANCIAL STATEMENTS
|
|
|
|
|
|
WPS
RESOURCES CORPORATION (PARENT COMPANY ONLY)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
December
31
|
|
|
|
|
|
(Millions)
|
|
2005
|
|
2004
|
|
Assets
|
|
|
|
|
|
|
|
Cash
and cash
equivalents
|
|
$
|
0.1
|
|
$
|
0.5
|
|
Accounts
receivable - affiliates
|
|
|
10.6
|
|
|
7.7
|
|
Other
receivables
|
|
|
1.3
|
|
|
2.2
|
|
Deferred
income taxes
|
|
|
0.1
|
|
|
0.1
|
|
Notes
receivable - affiliates
|
|
|
85.7
|
|
|
66.6
|
|
Current
assets
|
|
|
97.8
|
|
|
77.1
|
|
|
|
|
|
|
|
|
|
Long-term
notes receivable - affiliates
|
|
|
26.5
|
|
|
27.0
|
|
|
|
|
|
|
|
|
|
Investments
in subsidiaries, at equity
|
|
|
|
|
|
|
|
Wisconsin
Public Service Corporation
|
|
|
996.5
|
|
|
899.7
|
|
WPS
Resources
Capital Corporation
|
|
|
453.7
|
|
|
391.8
|
|
Upper
Peninsula Power Company
|
|
|
66.7
|
|
|
64.0
|
|
Other
|
|
|
154.3
|
|
|
82.2
|
|
Total
investments in subsidiaries, at equity
|
|
|
1,671.2
|
|
|
1,437.7
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
1.0
|
|
|
0.3
|
|
Other
investments
|
|
|
26.9
|
|
|
21.2
|
|
Advance
to affiliate
|
|
|
16.1
|
|
|
18.6
|
|
Deferred
income taxes
|
|
|
-
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
1,839.5
|
|
$
|
1,582.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders' Equity
|
|
|
|
|
|
|
|
Notes
payable
- affiliates
|
|
$
|
-
|
|
$
|
20.5
|
|
Commercial
paper
|
|
|
179.8
|
|
|
188.8
|
|
Accounts
payable - affiliates
|
|
|
3.7
|
|
|
4.1
|
|
Accounts
payable
|
|
|
0.7
|
|
|
0.4
|
|
Current
liabilities from risk management activities
|
|
|
1.4
|
|
|
-
|
|
Other
current
liabilities
|
|
|
7.0
|
|
|
6.3
|
|
Current
liabilities
|
|
|
192.6
|
|
|
220.1
|
|
|
|
|
|
|
|
|
|
Long-term
debt
- affiliates
|
|
|
21.0
|
|
|
21.0
|
|
Long
term
debt
|
|
|
314.8
|
|
|
249.1
|
|
Deferred
Income taxes
|
|
|
3.6
|
|
|
-
|
|
Long-term
liabilities from risk management activities
|
|
|
3.3
|
|
|
-
|
|
Long-term
liabilities
|
|
|
342.7
|
|
|
270.1
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
equity
|
|
|
1,304.2
|
|
|
1,091.8
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders' equity
|
|
$
|
1,839.5
|
|
$
|
1,582.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes to WPS Resources Corporation's parent
company financial
statements
|
|
|
are
an
integral part of these statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SCHEDULE
I - CONDENSED
|
|
|
|
|
|
|
|
PARENT
COMPANY FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
WPS
RESOURCES CORPORATION (PARENT COMPANY ONLY)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended
December 31
|
|
|
|
|
|
|
|
(Millions)
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Activities
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
157.4
|
|
$
|
139.7
|
|
$
|
94.7
|
|
|
|
|
|
|
|
|
|
|
|
|
(Deduct)
equity earnings from subsidiaries in excess of dividends
|
|
|
(91.3
|
)
|
|
(79.4
|
)
|
|
(35.8
|
)
|
Deferred
income taxes
|
|
|
2.7
|
|
|
4.0
|
|
|
(0.2
|
)
|
Cumulative
effect of change in accounting principles, net of tax
|
|
|
1.6
|
|
|
-
|
|
|
(3.2
|
)
|
Other
|
|
|
4.1
|
|
|
(14.8
|
)
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes
in working capital
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
0.9
|
|
|
0.3
|
|
|
(0.1
|
)
|
Receivables
-
affiliates
|
|
|
(2.9
|
)
|
|
(3.5
|
)
|
|
(1.8
|
)
|
Accounts
payable
|
|
|
0.3
|
|
|
(0.6
|
)
|
|
(0.3
|
)
|
Accounts
payable - affiliates
|
|
|
(0.4
|
)
|
|
3.2
|
|
|
0.6
|
|
Other
current
liabilities
|
|
|
0.6
|
|
|
2.5
|
|
|
(0.8
|
)
|
Net
cash provided by operating activities
|
|
|
73.0
|
|
|
51.4
|
|
|
54.3
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing
Activities
|
|
|
|
|
|
|
|
|
|
|
Advance
to
affilates
|
|
|
(16.1
|
)
|
|
5.7
|
|
|
(83.7
|
)
|
Capital
contributions - affiliates
|
|
|
(135.3
|
)
|
|
(128.9
|
)
|
|
(117.6
|
)
|
Other
|
|
|
(4.4
|
)
|
|
(1.1
|
)
|
|
(1.1
|
)
|
Net
cash used for investing activities
|
|
|
(155.8
|
)
|
|
(124.3
|
)
|
|
(202.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Financing
Activities
|
|
|
|
|
|
|
|
|
|
|
Commercial
paper, net
|
|
|
(9.0
|
)
|
|
160.8
|
|
|
28.0
|
|
Notes
payable
- affiliates, net
|
|
|
(20.5
|
)
|
|
18.5
|
|
|
(13.6
|
)
|
Issuance
of
long-term debt
|
|
|
65.6
|
|
|
-
|
|
|
-
|
|
Repayment
of
note to preferred stock trust
|
|
|
-
|
|
|
(51.5
|
)
|
|
-
|
|
Purchase
of
deferred compensation stock
|
|
|
-
|
|
|
-
|
|
|
(1.0
|
)
|
Issuance
of
common stock
|
|
|
127.3
|
|
|
26.3
|
|
|
197.7
|
|
Dividends
paid
on common stock
|
|
|
(85.4
|
)
|
|
(81.3
|
)
|
|
(71.8
|
)
|
Other
|
|
|
4.4
|
|
|
0.1
|
|
|
0.2
|
|
Net
cash provided by financing activities
|
|
|
82.4
|
|
|
72.9
|
|
|
139.5
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
change in cash and cash equivalents
|
|
|
(0.4
|
)
|
|
-
|
|
|
(8.6
|
)
|
Cash
and cash equivalents at beginning of year
|
|
|
0.5
|
|
|
0.5
|
|
|
9.1
|
|
Cash
and cash equivalents at end of year
|
|
$
|
0.1
|
|
$
|
0.5
|
|
$
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes to WPS Resources Corporation's parent company
financial
statements
|
|
|
are
an
integral part of these statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SCHEDULE
I
- CONDENSED
PARENT
COMPANY FINANCIAL STATEMENTS
WPS RESOURCES
CORPORATION (PARENT COMPANY ONLY)
The
following are
supplemental notes to the WPS Resources Corporation (parent company only)
financial statements and should be read in conjunction with our consolidated
financial statements and the related notes.
SUPPLEMENTAL
NOTES
|
|
|
NOTE
1
|
SHORT-TERM
NOTES RECEIVABLE - AFFILIATES
|
|
|
|
WPS
Resources
has short-term notes receivable from affiliates outstanding as
of December
31, 2005 and 2004. Notes receivable bear interest rates that approximate
current market rates.
|
|
|
|
|
(Millions)
|
2005
|
2004
|
|
Affiliate
|
|
|
|
Upper
Peninsula Power Company
|
$14.0
|
$11.6
|
|
WPS
Energy
Services
|
71.7
|
55.0
|
|
Total
|
$85.7
|
$66.6
|
|
|
NOTE
2
|
LONG-TERM
NOTES RECEIVABLE - AFFILIATES
|
|
|
|
WPS
Resources
has long-term notes receivable from affiliates outstanding as of
December
31, 2005 and 2004.
|
|
|
|
(Millions)
|
2005
|
2004
|
|
Affiliate
|
|
|
|
Wisconsin
Public Service
|
|
|
|
Series
|
Year
Due
|
|
|
|
8.76%
|
2015
|
$4.7
|
$5.0
|
|
7.35%
|
2016
|
6.8
|
7.0
|
|
|
|
|
|
Upper
Peninsula Power Company
|
|
|
|
Series
|
Year
Due
|
|
|
|
5.25%
|
2013
|
15.0
|
15.0
|
|
Total
|
$26.5
|
$27.0
|
|
|
NOTE
3
|
SHORT-TERM
DEBT AND LINES OF CREDIT
|
|
|
|
WPS
Resources
has short-term notes payable to WPS Energy Services at December
31, 2004
of $20.5 million. The note bears interest at a rate that approximates
current market rates.
|
|
|
|
The
information
in the
table below relates to short-term debt and lines of credit for the
years:
(Millions,
except for percentages)
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
As
of
end of year
|
|
|
|
|
|
|
|
Commercial
paper outstanding
|
|
$
|
179.8
|
|
$
|
188.8
|
|
Average
discount rate on outstanding commercial paper
|
|
|
4.48
|
%
|
|
2.44
|
%
|
Available
(unused) lines of credit
|
|
$
|
212.9
|
|
$
|
141.7
|
|
|
|
|
|
|
|
|
|
The
commercial
paper had varying maturity dates ranging from January 5, 2006 through January
20, 2006.
NOTE
4
|
LONG-TERM
DEBT
|
|
|
|
WPS
Resources
has long-term unsecured notes payable at December 31, 2005 and
2004.
Interest is paid semiannually.
|
|
|
|
|
(Millions)
|
2005
|
2004
|
|
Unsecured
senior notes (Millions)
|
|
|
|
Series
|
Year
Due
|
|
|
|
7.00%
|
2009
|
$150.0
|
$150.0
|
|
5.375%
|
2012
|
100.0
|
100.0
|
|
Unsecured
term loan due 2010
|
65.6
|
-
|
|
Total
|
315.6
|
250.0
|
|
Unamortized
discount on notes
|
(0.8)
|
(0.9)
|
|
Total
long-term debt
|
$314.8
|
$249.1
|
|
On
June 17,
2005, $62.9 million of non-recourse debt at WPS Energy Services
collateralized by nonregulated assets was restructured to a five-year
WPS Resources obligation as a result of the sale of Sunbury’s
allocated emission allowances. In addition, $2.7 million drawn
on a line
of credit at ESI was rolled into the five-year WPS Resources
obligation. The floating interest rate on the total five-year
WPS Resources’ obligation of $65.6 million has been fixed at 4.595%
through two interest rate swaps.
|
|
|
|
WPS
Resources
has a long-term note payable to WPS Energy Services at December 31,
2005 and 2004 of $21.0 million. The notes bear interest at a rate
that
approximates current market rates and are due in 2021. We also
have
guaranteed other long-term debt and obligations of our subsidiaries
arising in the normal course of business for both years as described
in
Note 5.
|
|
At
December
31, 2005, WPS Resources (parent company) was in compliance with
all
covenants relating to outstanding debt. A schedule of all principal
debt
payment amounts for WPS Resources (parent company) is as
follows:
|
|
|
|
Year
ending December 31
(Millions)
|
|
|
|
|
|
2006
|
-
|
|
2007
|
-
|
|
2008
|
-
|
|
2009
|
150.0
|
|
2010
|
65.6
|
|
Later
years
|
121.0
|
|
Total
payments
|
$336.6
|
|
|
NOTE
5
|
GUARANTEES
|
|
|
|
As
part of
normal business, WPS Resources enters into various guarantees
providing financial or performance assurance to third parties on
behalf of
certain subsidiaries. These guarantees are entered into primarily
to
support or enhance the creditworthiness otherwise attributed to
a
subsidiary on a stand-alone basis, thereby facilitating the extension
of
sufficient credit to accomplish the subsidiaries' intended commercial
purposes.
|
|
Most
of the
guarantees issued by WPS Resources include inter-company guarantees
between parents and their subsidiaries, which are eliminated in
consolidation, and guarantees of the subsidiaries' own performance.
As
such, these guarantees are excluded from the recognition and measurement
requirements of FASB Interpretation No. 45, "Guarantors' Accounting
and Disclosure Requirements for Guarantees, including Indirect
Guarantees
of Indebtedness of Others."
|
|
At
December 31, 2005, 2004, and 2003, outstanding guarantees totaled
$1,292.2 million, $967.8 million, and $976.3 million,
respectively, as follows:
|
|
|
|
WPS
Resources'
Outstanding
Guarantees
(Millions)
|
December
31,
2005
|
December
31,
2004
|
December
31,
2003
|
|
|
|
|
|
|
Guarantees
of
subsidiary debt
|
$
27.2
|
$
27.2
|
$
39.7
|
|
Guarantees
supporting commodity transactions of subsidiaries
|
1,154.7
|
863.9
|
874.4
|
|
Standby
letters of credit
|
109.5
|
76.1
|
61.1
|
|
Surety
bonds
|
0.8
|
0.6
|
1.1
|
|
Total
guarantees
|
$1,292.2
|
$967.8
|
$976.3
|
|
WPS
Resources'
Outstanding
Guarantees
(Millions)
Commitments
Expiring
|
Total
Amounts Committed At December 31, 2005
|
Less
Than
1
Year
|
1
to 3
Years
|
4
to 5
Years
|
Over
5
Years
|
|
|
|
|
|
|
|
|
Guarantees
of
subsidiary debt
|
$
27.2
|
$
-
|
$
-
|
$
-
|
$27.2
|
|
Guarantees
supporting commodity transactions of subsidiaries
|
1,154.7
|
1,063.0
|
33.1
|
15.0
|
43.6
|
|
Standby
letters of credit
|
109.5
|
104.8
|
4.7
|
-
|
-
|
|
Surety
bonds
|
0.8
|
0.8
|
-
|
-
|
-
|
|
Total
guarantees
|
$1,292.2
|
$1,168.6
|
$37.8
|
$15.0
|
$70.8
|
|
|
|
At
December 31, 2005, WPS Resources had outstanding
$27.2 million in corporate guarantees supporting indebtedness. Of
that total, $27.0 million supports outstanding debt at one of ESI's
subsidiaries. The underlying debt related to these guarantees is
reflected
on the Consolidated Balance Sheet of WPS Resources.
|
|
|
|
WPS Resources'
Board of Directors has authorized management to issue corporate
guarantees
in the aggregate amount of up to $1.35 billion to support the
business operations of ESI. WPS Resources primarily issues the
guarantees to counterparties in the wholesale electric and natural
gas
marketplace to provide them assurance that ESI will perform on
its
obligations and permit ESI to operate within these markets. At
December 31, 2005, WPS Resources provided parental guarantees in
the amount of $1,150.0 million, reflected in the above table, for
ESI's indemnification obligations for business operations, including
$8.1 million of guarantees that received specific authorization from
WPS Resources' Board of Directors and are not included in the
$1.35 billion general authorized amount. Of the parental guarantees
provided by WPS Resources, the outstanding balance at
December 31, 2005, which WPS Resources would be obligated to
support, is approximately $299 million.
|
|
|
|
Another
$4.7 million of corporate guarantees support energy and transmission
supply at UPPCO and are not reflected on WPS Resources' consolidated
balance sheet. In February 2005, WPS Resources' Board of Directors
authorized management to issue corporate guarantees in the aggregate
amount of up to $15.0 million to support the business operations of
UPPCO. Corporate guarantees issued in the future under the Board
authorized limit may or may not be reflected on WPS Resources'
consolidated balance sheet, depending on the nature of the
guarantee.
|
|
|
|
At
WPS Resources' request, financial institutions have issued
$109.5 million in standby letters of credit for the benefit of third
parties that have extended credit to certain subsidiaries. If a
subsidiary
does not pay amounts when due under a covered contract, the counterparty
may present its claim for payment to the financial institution,
which will
request payment from WPS Resources. Any amounts owed by our
subsidiaries are reflected in the Consolidated Balance Sheet of
WPS
Resources.
|
|
|
|
At
December 31, 2005, WPS Resources furnished $0.8 million of
surety bonds for various reasons including worker compensation
coverage
and obtaining various licenses, permits, and rights-of-way. Liabilities
incurred as a result of activities covered by surety bonds are
included in
the Consolidated Balance Sheet of WPS
Resources.
|
NOTE 6
FAIR VALUE OF FINANCIAL INSTRUMENTS
The
estimated fair
values of WPS Resources’ financial instruments as of December 31
were:
(Millions)
|
2005
|
2004
|
|
Carrying
Amount
|
Fair
Value
|
Carrying
Amount
|
Fair
Value
|
|
|
|
|
|
Long-term
debt
|
$335.8
|
$345.6
|
$270.1
|
$293.6
|
Commercial
paper
|
179.8
|
179.8
|
188.8
|
188.8
|
Risk
management activities - net
|
4.7
|
4.7
|
-
|
-
|
Cash
and cash
equivalents
|
0.1
|
0.1
|
0.5
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WPS
RESOURCES CORPORATION
|
|
VALUATION
AND QUALIFYING ACCOUNTS
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for Doubtful Accounts
|
|
Years
Ended December 31, 2005, 2004, and 2003
|
|
(in
Millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at
|
|
Additions
|
|
|
|
|
|
|
|
Beginning
of
|
|
Charged
to
|
|
|
|
Balance
at
|
|
Fiscal
Year
|
|
Year
|
|
Expense
|
|
Reductions
*
|
|
End
of
Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
$
|
7.0
|
|
$
|
7.0
|
|
$
|
7.4
|
|
$
|
6.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
$
|
6.6
|
|
$
|
7.1
|
|
$
|
5.7
|
|
$
|
8.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
$
|
8.0
|
|
$
|
9.6
|
|
$
|
4.9
|
|
$
|
12.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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*
Represents
amounts written off to the reserve, net of recoveries.
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WISCONSIN
PUBLIC SERVICE CORPORATION
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VALUATION
AND QUALIFYING ACCOUNTS
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Allowance
for Doubtful Accounts
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Years
Ended December 31, 2005, 2004, and 2003
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(In
millions)
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Balance
at
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Additions
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Beginning
of
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Charged
to
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Balance
at
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Fiscal
Year
|
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Year
|
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Expense
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Reductions
*
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End
of
Year
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2003
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$
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3.7
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$
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5.2
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$
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4.5
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$
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4.4
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2004
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$
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4.4
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$
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6.0
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$
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4.9
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$
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5.5
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2005
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$
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5.5
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$
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6.2
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$
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3.2
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$
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8.5
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*
Represents
amounts written off to the reserve, net of recoveries.
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10.16
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WPS Resources
2001 Omnibus Incentive Compensation Plan
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12.1
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WPS
Resources
Corporation Ratio of Earnings to Fixed Charges
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12.2
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Wisconsin
Public Service Corporation Ratio of Earnings to Fixed Charges and
Ratio of
Earnings to Fixed Charges and Preferred Dividends
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21
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Subsidiaries
of the Registrants
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23.1
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Consent
of
Independent Registered Public Accounting Firm for WPS Resources
Corporation
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23.2
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Consent
of
Independent Registered Public Accounting Firm for Wisconsin Public
Service
Corporation
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24
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Powers
of
Attorney
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31.1
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Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act and Rule 13a-14(a) or 15d-14(a) under the Securities Exchange
Act of
1934 for WPS Resources Corporation
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31.2
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Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act and Rule 13a-14(a) or 15d-14(a) under the Securities Exchange
Act of
1934 for WPS Resources Corporation
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31.3
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Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act and Rule 13a-14(a) or 15d-14(a) under the Securities Exchange
Act of
1934 for Wisconsin Public Service Corporation
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31.4
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Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act and Rule 13a-14(a) or 15d-14(a) under the Securities Exchange
Act of
1934 for Wisconsin Public Service Corporation
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32.1
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Written
Statement of the Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350 for WPS Resources
Corporation
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32.2
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Written
Statement of the Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350 for Wisconsin Public Service
Corporation
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