SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------- ---------------
<TABLE>
<CAPTION>
Commission Registrant; State of Incorporation IRS Employer
file number Address; and Telephone Number Identification No.
- ----------- ---------------------------------- ------------------
<S> <C> <C>
1-11337 WPS RESOURCES CORPORATION 39-1775292
(A Wisconsin Corporation)
700 North Adams Street
P. O. Box 19001
Green Bay, WI 54307-9001
920-433-1466
1-3016 WISCONSIN PUBLIC SERVICE CORPORATION 39-0715160
(A Wisconsin Corporation)
700 North Adams Street
P. O. Box 19001
Green Bay, WI 54307-9001
920-433-1466
</TABLE>
Securities registered pursuant to Section 12(b) of the Act:
- -----------------------------------------------------------
Title of Name of each exchange
each class on which registered
---------- ---------------------
WPS RESOURCES CORPORATION Common Stock, New York Stock Exchange
$1 par value and Chicago Stock
Exchange
Rights to purchase New York Stock Exchange
Common Stock pursuant and Chicago Stock
to Rights Agreement Exchange
dated December 12, 1996
PAGE
<PAGE>
Securities registered pursuant to Section 12(g) of the Act:
- -----------------------------------------------------------
WISCONSIN PUBLIC SERVICE CORPORATION
Preferred Stock, Cumulative, $100 par value
5.00% Series 5.08% Series
5.04% Series 6.76% Series
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
State the aggregate market value of the voting stock held by nonaffiliates of
- -----------------------------------------------------------------------------
the Registrant.
- ---------------
WPS RESOURCES CORPORATION
$781,131,945 as of March 4, 1998
WISCONSIN PUBLIC SERVICE CORPORATION
None
Number of shares outstanding of each class of common stock, as of December 31,
- ------------------------------------------------------------------------------
1997
- ----
WPS RESOURCES CORPORATION Common Stock, $1 par value,
23,896,962 shares
WISCONSIN PUBLIC SERVICE CORPORATION Common Stock, $4 par value,
23,896,962 shares
DOCUMENTS INCORPORATED BY REFERENCE
(1) Definitive proxy statement for the WPS Resources Corporation Annual
Meeting of Shareholders on May 7, 1998 is incorporated into Parts I and
III.
PAGE
<PAGE>
WPS RESOURCES CORPORATION
and
WISCONSIN PUBLIC SERVICE CORPORATION
FORM 10-K
ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION
For the Year Ended December 31, 1997
TABLE OF CONTENTS
DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .v
PART I
1. BUSINESS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
A. GENERAL
WPS Resources Corporation . . . . . . . . . . . . . . . . . . .1
Wisconsin Public Service Corporation. . . . . . . . . . . . . .1
Regulatory Oversight. . . . . . . . . . . . . . . . . . . . . .2
Year 2000 Compliance. . . . . . . . . . . . . . . . . . . . . .2
Forward-Looking Statements. . . . . . . . . . . . . . . . . . .2
B. ELECTRIC MATTERS
Electric Operations . . . . . . . . . . . . . . . . . . . . . .3
Generating Capacity . . . . . . . . . . . . . . . . . . . . . .3
Kewaunee Nuclear Power Plant. . . . . . . . . . . . . . . . . .4
Fuel Supply . . . . . . . . . . . . . . . . . . . . . . . . . .6
Electric Generation Mix. . . . . . . . . . . . . . . . . . .6
Fuel Costs . . . . . . . . . . . . . . . . . . . . . . . . .6
Coal . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
Nuclear. . . . . . . . . . . . . . . . . . . . . . . . . . .6
Regulatory Matters in the Wisconsin Jurisdiction. . . . . . . .7
Industry Restructuring . . . . . . . . . . . . . . . . . . .7
Independent System Operator. . . . . . . . . . . . . . . . .8
Merger Activity. . . . . . . . . . . . . . . . . . . . . . .9
Electric Supply Issues . . . . . . . . . . . . . . . . . . .9
Customer Rate Matters. . . . . . . . . . . . . . . . . . . 10
Regulatory Matters in the Michigan Jurisdiction . . . . . . . 10
Industry Restructuring . . . . . . . . . . . . . . . . . . 10
Customer Rate Matters. . . . . . . . . . . . . . . . . . . 11
Regulatory Matters in the FERC Jurisdiction . . . . . . . . . 11
Customer Rate Matters. . . . . . . . . . . . . . . . . . . 11
Open Access Transmission Tariff. . . . . . . . . . . . . . 11
Marketer Status. . . . . . . . . . . . . . . . . . . . . . 11
Wholesale Status . . . . . . . . . . . . . . . . . . . . . 11
Regulatory Compliance. . . . . . . . . . . . . . . . . . . 12
Hydroelectric Licenses . . . . . . . . . . . . . . . . . . 12
Other Matters . . . . . . . . . . . . . . . . . . . . . . . . 12
Research and Development . . . . . . . . . . . . . . . . . 12
Customer Segmentation. . . . . . . . . . . . . . . . . . . 12
Electric Financial Summary. . . . . . . . . . . . . . . . . . 13
Electric Operating Statistics . . . . . . . . . . . . . . . . 14
WPS Resources Corporation. . . . . . . . . . . . . . . . . 14
Wisconsin Public Service Corporation . . . . . . . . . . . 15
i
<PAGE>
C. GAS MATTERS
Wisconsin Public Service Corporation's Gas Market . . . . . . 16
Gas Supply. . . . . . . . . . . . . . . . . . . . . . . . . . 16
General. . . . . . . . . . . . . . . . . . . . . . . . . . 16
Pipeline Capacity and Storage. . . . . . . . . . . . . . . 17
Gas Supply Contracts . . . . . . . . . . . . . . . . . . . 18
New Pipeline Supply Source . . . . . . . . . . . . . . . . 18
Federal Regulatory Activities . . . . . . . . . . . . . . . . 19
Dakota . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Viking Costs on ANR Pipeline . . . . . . . . . . . . . . . 19
ANR Rate Case Settlement . . . . . . . . . . . . . . . . . 19
Wisconsin Regulatory Activities . . . . . . . . . . . . . . . 20
General. . . . . . . . . . . . . . . . . . . . . . . . . . 20
Gas Cost Recovery Mechanism. . . . . . . . . . . . . . . . 20
Gas Distribution Restructuring . . . . . . . . . . . . . . 20
Customer Rate Matters. . . . . . . . . . . . . . . . . . . 21
Michigan Regulatory Activities. . . . . . . . . . . . . . . . 21
Gas Cost Recovery. . . . . . . . . . . . . . . . . . . . . 21
Gas Distribution Restructuring . . . . . . . . . . . . . . 21
Customer Rate Matters. . . . . . . . . . . . . . . . . . . 21
Gas Financial Summary . . . . . . . . . . . . . . . . . . . . 22
Gas Operating Statistics. . . . . . . . . . . . . . . . . . . 23
WPS Resources Corporation. . . . . . . . . . . . . . . . . 23
Wisconsin Public Service Corporation . . . . . . . . . . . 24
D. NONREGULATED BUSINESS ACTIVITIES
General . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
WPS Energy Services, Inc. . . . . . . . . . . . . . . . . . . 25
WPS Power Development, Inc. . . . . . . . . . . . . . . . . . 25
Earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . 26
E. ENVIRONMENTAL MATTERS
General . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Air Quality . . . . . . . . . . . . . . . . . . . . . . . . . 26
Water Quality . . . . . . . . . . . . . . . . . . . . . . . . 27
Gas Plant Cleanup . . . . . . . . . . . . . . . . . . . . . . 27
F. CAPITAL REQUIREMENTS . . . . . . . . . . . . . . . . . . . . . . 28
G. EMPLOYEES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
2. PROPERTIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
A. UTILITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
B. NONREGULATED . . . . . . . . . . . . . . . . . . . . . . . . . . 31
3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . 31
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . . 31
4A. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. . . . . . . . . 32
A. EXECUTIVE OFFICERS OF WPS RESOURCES CORPORATION. . . . . . . . . 32
B. EXECUTIVE OFFICERS OF WISCONSIN PUBLIC SERVICE CORPORATION . . . 33
ii
<PAGE>
PART II
5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . 34
WPS Resources Corporation Common Stock Two-Year Comparison . . . 34
Dividend Restrictions. . . . . . . . . . . . . . . . . . . . . . 34
Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . 34
6. SELECTED FINANCIAL DATA
WPS RESOURCES CORPORATION
COMPARATIVE FINANCIAL STATEMENTS AND
FINANCIAL STATISTICS (1993 TO 1997)
A. CONSOLIDATED STATEMENTS OF INCOME. . . . . . . . . . . . . . . . 35
B. CONSOLIDATED BALANCE SHEETS. . . . . . . . . . . . . . . . . . . 36
C. FINANCIAL STATISTICS . . . . . . . . . . . . . . . . . . . . . . 37
WISCONSIN PUBLIC SERVICE CORPORATION
COMPARATIVE FINANCIAL DATA AND FINANCIAL
STATISTICS (1993 TO 1997)
D. SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . . . . . . 38
E. FINANCIAL STATISTICS . . . . . . . . . . . . . . . . . . . . . . 39
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION FOR WPS RESOURCES CORPORATION AND
WISCONSIN PUBLIC SERVICE CORPORATION. . . . . . . . . . . . . . . . 40
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WPS RESOURCES CORPORATION
A. CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS. . . . . 52
B. CONSOLIDATED BALANCE SHEETS. . . . . . . . . . . . . . . . . . . 53
C. CONSOLIDATED STATEMENTS OF CAPITALIZATION. . . . . . . . . . . . 55
D. CONSOLIDATED STATEMENTS OF CASH FLOWS. . . . . . . . . . . . . . 56
E. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . 57
F. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS . . . . . . . . . . . . 76
WISCONSIN PUBLIC SERVICE CORPORATION
G. CONSOLIDATED STATEMENTS OF INCOME. . . . . . . . . . . . . . . . 77
H. CONSOLIDATED BALANCE SHEETS. . . . . . . . . . . . . . . . . . . 78
I. CONSOLIDATED STATEMENTS OF CAPITALIZATION. . . . . . . . . . . . 80
J. CONSOLIDATED STATEMENTS OF CASH FLOWS. . . . . . . . . . . . . . 81
K. CONSOLIDATED STATEMENTS OF RETAINED EARNINGS . . . . . . . . . . 82
L. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . 83
M. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS . . . . . . . . . . . . 84
9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . 85
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. . . . . . . . . 85
11. EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . . . . . . . . . 85
iii
<PAGE>
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. . . 85
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. . . . . . . . . . . 85
PART IV
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . . . . 86
DESCRIPTION OF DOCUMENTS. . . . . . . . . . . . . . . . . . . . . . 88
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
SCHEDULE III - CONDENSED PARENT COMPANY FINANCIAL STATEMENTS
WPS RESOURCES CORPORATION (PARENT COMPANY ONLY)
A. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS . . . . . . . . . . . . 95
B. STATEMENTS OF INCOME AND RETAINED EARNINGS . . . . . . . . . . . 96
C. BALANCE SHEETS . . . . . . . . . . . . . . . . . . . . . . . . . 97
D. STATEMENTS OF CASH FLOWS . . . . . . . . . . . . . . . . . . . . 98
E. NOTES TO PARENT COMPANY FINANCIAL STATEMENTS . . . . . . . . . . 99
EXHIBITS
10F-1 Power Purchase Agreement Between De Pere
Energy LLC and Wisconsin Public Service
Corporation dated November 8, 1995 and
amended by a Letter Agreement dated
February 18, 1997
Wisconsin Public Service Corporation. . . . . . . . . . . .100
10G-1 WPS Resources Corporation Amended and Restated
Deferred Compensation Plan Effective January 1,
1998
WPS Resources Corporation . . . . . . . . . . . . . . . . .213
10G-3 WPS Resources Corporation Short-Term Variable
Pay Plan Effective January 1, 1998
WPS Resources Corporation . . . . . . . . . . . . . . . . .240
11 Statement Regarding Computation of Per Share
Earnings
WPS Resources Corporation . . . . . . . . . . . . . . . . .248
21 Subsidiaries of the Registrant . . . . . . . . . . . . . . . . .249
23 Consent of Independent Public Accountants. . . . . . . . . . . .250
24 Powers of Attorney . . . . . . . . . . . . . . . . . . . . . . .251
27 Financial Data Schedule
WPS Resources Corporation . . . . . . . . . . . . . . . . .259
Wisconsin Public Service Corporation. . . . . . . . . . . .260
iv
<PAGE>
<PAGE>
DEFINITIONS
The following abbreviations and acronyms are used in the text of this
Form 10-K:
Act . . . . . . . . . . . Federal Clean Air Act Amendments of 1990
AFUDC . . . . . . . . . . Allowance for funds used during construction
ANR . . . . . . . . . . . ANR Pipeline Company
APBO. . . . . . . . . . . Accrued postretirement benefit obligation
Btu . . . . . . . . . . . British thermal unit
Columbia *. . . . . . . . The Columbia Energy Center
CWIP. . . . . . . . . . . Construction work in progress
Dakota *. . . . . . . . . Dakota Gasification Plant
De Pere . . . . . . . . . De Pere Energy Center
DNR . . . . . . . . . . . Wisconsin Department of Natural Resources
DOE . . . . . . . . . . . United States Department of Energy
DSM . . . . . . . . . . . Demand-side management of energy use
Dth . . . . . . . . . . . Dekatherm
Edgewater * . . . . . . . The Edgewater Unit 4 power plant
EPA . . . . . . . . . . . United States Environmental Protection Agency
ESOP. . . . . . . . . . . Employee Stock Ownership Plan and Trust of
Wisconsin Public Service Corporation
ESI . . . . . . . . . . . WPS Energy Services, Inc., a nonregulated
subsidiary of WPS Resources Corporation
FASB. . . . . . . . . . . Financial Accounting Standards Board
FERC. . . . . . . . . . . Federal Energy Regulatory Commission
Great Lakes . . . . . . . Great Lakes Transmission Company
GSR . . . . . . . . . . . Gas supply realignment
Interface . . . . . . . . Constrained Minnesota to Eastern Wisconsin
transmission interface
ISO . . . . . . . . . . . Independent system operator
Kewaunee. . . . . . . . . Kewaunee Nuclear Power Plant
v
<PAGE>
kVa . . . . . . . . . . . Kilovolt-ampere
kw. . . . . . . . . . . . Kilowatts
kWh . . . . . . . . . . . Kilowatt-hour
MG&E. . . . . . . . . . . Madison Gas and Electric Company
MPSC. . . . . . . . . . . Michigan Public Service Commission
NRC . . . . . . . . . . . Nuclear Regulatory Commission
Order . . . . . . . . . . Order No. 636 issued by the Federal Energy
Regulatory Commission in April 1992
PD. . . . . . . . . . . . Pricing differential
PDI . . . . . . . . . . . WPS Power Development, Inc., a nonregulated
subsidiary of WPS Resources Corporation
PGAC. . . . . . . . . . . Purchased gas adjustment clause
Polsky. . . . . . . . . . Polsky Energy Corporation
PBR . . . . . . . . . . . Performance based rates
PSCW. . . . . . . . . . . Public Service Commission of Wisconsin
Pulliam * . . . . . . . . The Pulliam generating facility
River Power . . . . . . . Wisconsin River Power Company
SEC . . . . . . . . . . . Securities and Exchange Commission
SFAS. . . . . . . . . . . Statement of Financial Accounting Standards
Sheboygan II. . . . . . . Property adjacent to the Sheboygan River
previously used by Wisconsin Public Service
Corporation for the gasification of coal
Stoneman. . . . . . . . . Stoneman Power Plant, a merchant steam plant
Superfund * . . . . . . . Comprehensive Environmental Response,
Compensation, and Liability Act
TransCanada . . . . . . . TransCanada Pipelines
Union . . . . . . . . . . Local 310 of the International Union of
Operating Engineers which represents certain
Wisconsin Public Service Corporation employees
UPEN. . . . . . . . . . . Upper Peninsula Energy Corporation
UPPCO . . . . . . . . . . Upper Peninsula Power Company
Viking. . . . . . . . . . Viking Gas Transmission Company
vi
<PAGE>
WDG . . . . . . . . . . . Wisconsin Distributors Group
WEPCO . . . . . . . . . . Wisconsin Electric Power Company
Weston *. . . . . . . . . The Weston generating facility
WP&L. . . . . . . . . . . Wisconsin Power and Light Company
WPPI. . . . . . . . . . . Wisconsin Public Power, Inc.
WPSC. . . . . . . . . . . Wisconsin Public Service Corporation, a
regulated electric and gas utility and the
principal subsidiary of WPS Resources
Corporation
WPSR. . . . . . . . . . . WPS Resources Corporation, a holding company
- -----
* Indicates items not defined elsewhere in this report.
vii
<PAGE>
<PAGE>
PART I
ITEM 1. BUSINESS
A. GENERAL
WPS RESOURCES CORPORATION
WPS Resources Corporation ("WPSR"), a Wisconsin Corporation, was
incorporated on December 3, 1993 and operates as a holding company with both
regulated (utility) and nonregulated business units. WPSR's principal
wholly-owned subsidiaries, each of which is a Wisconsin corporation, are:
Wisconsin Public Service Corporation ("WPSC"), a regulated electric and gas
utility; and WPS Energy Services, Inc. ("ESI") and WPS Power Development, Inc.
("PDI"), both nonregulated subsidiaries. WPSC, ESI, and PDI represent
approximately 79%, 21%, and .2% of WPSR's consolidated revenues for 1997 and
95%, 4%, and 1% of WPSR's consolidated assets at December 31, 1997,
respectively. All of WPSR's net income for 1997 was derived from WPSC.
On July 10, 1997, WPSR announced an agreement to merge with Upper
Peninsula Energy Corporation ("UPEN"). The S-4 Registration Statement of WPSR
was declared effective by the Securities and Exchange Commission ("SEC") on
December 5, 1997. The shareholders of UPEN approved the merger on January 29,
1998. The merger is subject to (1) approval by the Federal Energy Regulatory
Commission ("FERC"); (2) approval by the SEC under the Public Utility Holding
Company Act of 1935; (3) the expiration or termination of the waiting period
applicable to the merger under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976; (4) receipt by the parties of an opinion of counsel that the
exchange of stock qualifies as a tax-free transaction; (5) receipt by the
parties of appropriate assurances that the transaction will be accounted for
as a pooling of interests; and (6) the satisfaction of various other
conditions. The merger is expected to be completed in the second half of
1998. UPEN will merge with and into WPSR, and Upper Peninsula Power Company
("UPPCO"), UPEN's utility subsidiary, will become a wholly-owned subsidiary of
WPSR. Each of the 2,950,001 outstanding shares of UPEN common stock (no par
value) will be converted into 0.90 shares of WPSR common stock ($1.00 par
value), subject to adjustment for fractional shares, as provided in the merger
agreement.
On a stand-alone basis, WPSR incurred a net loss in 1997 of $1.0 million,
compared with net income of $0.8 million in 1996. The 1997 WPSR stand-alone
loss was attributable primarily to costs related to the proposed merger with
UPEN.
WISCONSIN PUBLIC SERVICE CORPORATION
At December 31, 1997, WPSC served 374,516 electric retail customers and
218,299 gas retail customers in an 11,000 square mile service territory in
northeastern and central Wisconsin and an adjacent part of Upper Michigan.
Additionally, WPSC provides wholesale (full or partial requirements) electric
service, either directly or indirectly, to 12 municipal utilities, 3 Rural
Electrification Administration financed electric cooperatives, and a privately
held utility. Operating revenues in the year 1997 were derived 97% from
Wisconsin customers and 3% from Michigan customers. Of total revenues in
1997, 69% were from electric operations and 31% were from gas operations. Of
-1-
<PAGE>
total electric revenues, 90% were from retail sales and 10% were from
wholesale sales.
WPSC's retail service areas are principally protected by indeterminate
permits secured by statute in Wisconsin and through franchises granted by
municipalities in Michigan.
REGULATORY OVERSIGHT
WPSR is exempt from registration under the Public Utility Holding
Company Act of 1935, as amended, but is subject to the various requirements
and prohibitions of the Wisconsin Public Utility Holding Company Act.
Utility rates, service, and securities issues of WPSC are subject to
regulation by the Public Service Commission of Wisconsin ("PSCW") and the
Michigan Public Service Commission ("MPSC"); and WPSC is subject to regulation
of its wholesale electric rates, hydroelectric projects, and certain other
matters by the FERC. WPSC is also subject to limited regulation by local
authorities. WPSC follows Statement of Financial Accounting Standards No. 71,
"Accounting for the Effects of Certain Types of Regulation," and its financial
statements reflect the effects of the different ratemaking principles of
various jurisdictions. These include the PSCW, 90% of revenues, the MPSC,
3% of revenues, and the FERC, 7% of revenues. The operation of the Kewaunee
Nuclear Power Plant ("Kewaunee") is subject to the jurisdiction of the Nuclear
Regulatory Commission ("NRC").
YEAR 2000 COMPLIANCE
WPSR has completed an initial assessment of the impact of year 2000
compliance on its computer systems. WPSR worked with a consultant beginning
in 1996 to analyze the year 2000 problem. Plans have been established to
analyze all in-house and third party software products and applications. A
preliminary plan indicates that all major in-house developed systems are
expected to be in compliance by the end of 1998. The plan is intended to
enable all systems to be in compliance by the year 2000. The most recent
estimated future internal labor and third party cost of year 2000 compliance
is approximately $13.4 million.
FORWARDING-LOOKING STATEMENTS
This report includes forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. Although WPSR
believes that its expectations are based on reasonable assumptions, no
assurance can be given that actual results may not differ materially from
those in the forward-looking statements included in this report for reasons
that include: the speed and degree to which competition enters the electric
and natural gas industries; state and federal legislative and regulatory
initiatives that increase competition, affect cost and investment recovery,
and have an impact on rate structures; the economic climate and industrial,
commercial, and residential growth in areas served by WPSC and ESI; the
weather and other natural phenomena; the timing and extent of changes in
commodity prices and interest rates; conditions in the capital markets; and
growth in opportunities for ESI and PDI.
A forward-looking statement speaks only as of the date on which such
statement is made, and WPSR does not undertake to update any forward-looking
-2-
<PAGE>
statement to reflect events or circumstances after the date on which such
statement is made or to reflect the occurrence of unanticipated events. New
factors emerge from time to time, and it is not possible for WPSR to predict
all such factors, nor can it assess the impact of each such factor or the
extent to which any factor, or combination of factors, may cause results to
differ materially from those contained in any forward-looking statement.
B. ELECTRIC MATTERS
ELECTRIC OPERATIONS
The largest communities served at retail with electricity are the cities
of Green Bay, Oshkosh, Wausau, and Stevens Point.
GENERATING CAPACITY
Coordinated planning for generation and transmission is a function of
the Wisconsin Upper Michigan Systems of which WPSC is a member. Other members
include Madison Gas and Electric Company ("MG&E"), UPPCO, Wisconsin Electric
Power Company ("WEPCO"), Wisconsin Power and Light Company ("WP&L"), and
Wisconsin Public Power, Inc. ("WPPI"). Existing and planned interconnections
with other neighboring utilities provide a further means of sharing reserve
capacities and interchanging energy.
WPSC experienced a 1997 net firm load peak of 1,607,000 kilowatts
("kw") on July 17. Considering a firm purchase of 234,000 kw and a total
generating capability of 1,831,300 kw, the system reserve margin was 30.1%.
In addition, 13,300 kw of firm opportunity sales were served during the peak
hour. WPSC's future generating reserves, adjusted for firm purchases, firm
sales, and planned capacity additions, are estimated to be above the planning
criteria of a 18% minimum reserve in 1998 and 1999. See Part I, Item 2,
PROPERTIES, at page 30 for information concerning generating facilities.
During 1997, the PSCW authorized Polsky Energy Corporation ("Polsky"),
an independent power producer, to build the De Pere Energy Center ("De Pere"),
a 179-megawatt combustion turbine generating facility that is scheduled to be
operational in 1999. De Pere will be converted to a 232-megawatt combined
cycle operation on or after the fifth year of operation, per the requirements
of the contract. A combined-cycle unit is a type of combustion turbine in
which the hot exhaust gases pass through a heat recovery steam generator to
produce steam that drives a steam turbine generator which produces
approximately one-third of the power generated. WPSC has a 25-year contract
to purchase capacity and energy from De Pere. WPSC will furnish the natural
gas fuel for the facility and is working closely with Polsky to ensure that
there are adequate transmission lines serving De Pere.
WPSC owns 33.1% of the outstanding capital stock of Wisconsin River
Power Company ("River Power"). The business of River Power consists of the
ownership and operation of two dams and related hydroelectric plants on the
Wisconsin River having an aggregate installed capacity of approximately
38.7 megawatts. The output of the hydroelectric plants is sold, at the sites
of the plants, to the three joint owners (Consolidated Water Power Company of
Wisconsin Rapids, Wisconsin; Wisconsin Power and Light Company of Madison,
Wisconsin; and WPSC of Green Bay, Wisconsin) substantially in proportion to
their stock ownership interests.
-3-
<PAGE>
KEWAUNEE NUCLEAR POWER PLANT
The Kewaunee Nuclear Power Plant ("Kewaunee"), a 562-megawatt
pressurized water reactor plant, is operated by WPSC and is jointly owned by
WPSC (41.2%), WP&L (41.0%), and MG&E (17.8%). The Kewaunee operating license
expires in 2013.
Kewaunee returned to service on June 12, 1997 after having been out of
service since September 21, 1996 for refueling, routine maintenance, and
repair of the two steam generators. The original Kewaunee steam generator
tubes are susceptible to corrosion and cracking. Tubes are repaired by
inserting sleeves (tubes within tubes) in the original steam generator tubes.
The most recent repair was undertaken when previously repaired tubes failed.
The repair consisted of removing old sleeves and inserting new slightly longer
sleeves which cover the areas of concern in the original steam generator
tubes. The new sleeves will be inspected during the next refueling and
maintenance outage which is scheduled for the fall of 1998. Kewaunee is
operating at 97% of rated capacity because certain steam generator tubes have
been removed from service rather than repaired.
Kewaunee operated for 238 consecutive days before being removed from
service on February 6, 1998 for repair of a reactor coolant pump seal. The
plant was returned to service on February 13, 1998.
Additional replacement power costs due to the extended Kewaunee outage
were recovered by a $2.0 million per month customer surcharge during the
period February 21, 1997 through July 1, 1997. Kewaunee steam generator
repair costs have been deferred as authorized by the PSCW. The WPSC portion
of these costs is approximately $3.6 million. The owners have requested the
PSCW to approve recovery of these costs through a customer surcharge which
for WPSC would be effective for April and May of 1998.
On March 15, 1996, WPSC filed an application with the PSCW for
permission to replace the Kewaunee steam generators. Public hearings were
held in January of 1998. A decision is expected in March of 1998. The total
cost of replacing the two steam generators would be approximately
$89.0 million. WPSC's share would be $36.7 million in year of occurrence
dollars. Because of work already completed, the elapsed time from placing a
firm order for steam generators to receiving delivery has been shortened to
approximately 22 months.
The owners of Kewaunee have differing views on the desirability of
proceeding with the steam generator replacement project. Although the new
resleeving repair technology may allow the plant to remain in service for an
extended period of time, WPSC favors replacement at the earliest possible date
because of reliability and cost concerns related to steam generator repairs.
To date, the other two owners have been unwilling to support replacement of
the steam generators. If the steam generator replacement project receives
PSCW approval, the issues related to the continued operation and future
ownership would still need to be resolved before steam generator replacement
could proceed.
The NRC's Systematic Assessment of Licensee Performance for Kewaunee for
the period February 19, 1995 through February 15, 1997 was received in 1997.
The report evaluated Kewaunee's performance in four categories: operations,
maintenance, engineering, and plant support. Maintenance was ranked
-4-
<PAGE>
"superior," and the other areas were rated as "good." The NRC stated that
Kewaunee's overall performance was generally characterized by effective
management involvement and interdepartmental communication, and a clear
emphasis on quality by the staff. Areas for improvement that were identified
were: timely evaluation of errors of personnel, adequacy of procedures and
equipment for monitoring equipment performance, and the timely resolution of
plant identified deficiencies.
On July 14, 1997, the NRC assessed a $50,000 penalty against Kewaunee.
The penalty was the result of a NRC inspection in January of 1997 where the
NRC questioned the procedures and equipment used to conduct routine
operational tests on several pumps. In response, the procedures were updated
to improve the test methods, and more sensitive equipment was obtained. All
safety-related pumps in the plant were then retested and found to be operating
within standards.
The federal government has the responsibility to dispose of or
permanently store spent nuclear fuel. Spent nuclear fuel is currently being
stored at Kewaunee. With minor plant modifications, Kewaunee should have
sufficient fuel storage capacity until the end of its licensed life in 2013.
Legislation is being considered on the federal level to provide for the
establishment of an interim storage facility as early as 2002. Permanent
storage pursuant to the Nuclear Waste Policy Act of 1982 is discussed at
page 7.
The Midwest Compact Commission, on June 26, 1997, halted development in
Ohio of a six-state, regional disposal facility for low-level radioactive
waste. The Commission cited dwindling regional waste volumes, continued
access to existing disposal facilities, and potentially high development costs
as the primary reasons for the decision. A site at Barnwell, South Carolina,
continues to be available for the storage of low-level radioactive waste from
Kewaunee. In addition, because of technological advances, waste compaction,
and the reduction of waste generated, Kewaunee has on-site low-level
radioactive waste storage capacity sufficient to store low-level waste
expected to be generated over a 10-year period.
The PSCW has directed the owners of Kewaunee to develop depreciation and
decommissioning cost levels based on full recovery by the end of 2002 versus
recovery by license expiration in 2013. This was prompted by the uncertainty
regarding the expected useful life of the plant without steam generator
replacement. At December 31, 1997, the net carrying amount of WPSC's
investment in Kewaunee was approximately $43.0 million. The current cost of
WPSC's share of the estimated costs to decommission Kewaunee, assuming early
retirement ($182.2 million), exceeds the trust assets at December 31, 1997
($134.1 million) by $48.1 million. WPSC's customers in the Wisconsin
jurisdiction are responsible for approximately 89% of WPSC's share of Kewaunee
costs.
As a result of accelerating the recovery of WPSC's share of Kewaunee
related costs, depreciation expense and decommissioning funding have increased
approximately $3.3 million (from $4.7 million in 1996 to $8.0 million in 1997)
and $8.3 million (from $9.0 million in 1996 to $17.3 million in 1997),
respectively, on an annualized basis. During 1997, $7.5 million of
depreciation expense related to unrecovered plant investment was recognized
compared to $4.7 million which was recognized in 1996. During 1997, the
decommissioning funding level was $16.1 million compared to $9.0 million in
-5-
<PAGE>
1996. Customer rates, which became effective in the Wisconsin jurisdiction on
February 21, 1997, are designed to recover the accelerated Kewaunee
depreciation and decommissioning costs.
Additional discussion of Kewaunee matters is included in MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION at
pages 46 and 48, and NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Notes 1(h),
1(j), 1(k), and 9 at pages 59, 60, 60, and 71, respectively.
FUEL SUPPLY
ELECTRIC GENERATION MIX
WPSC's electric generation mix in 1997 compared with 1996 was: steam
plants (coal), 68.9%, up from 67.9%; steam plant (nuclear), 8.2% down from
11.2%; hydro, 3.0% down from 3.1%; combined natural gas and fuel oil, 1.3% up
from .6%; and purchased power, 18.6% up from 17.3%. Purchased power
represents short-term energy purchases.
FUEL COSTS
Fuel costs in 1997 compared with 1996, expressed in dollars per million
British thermal unit ("Btu"), were: nuclear, $.43, down from $.47; coal,
$1.09, down from $1.14; natural gas, $2.96, up from $2.84; and No. 2 fuel oil,
$4.27, down from $4.36.
COAL
WPSC's primary fuel source is coal. In 1997, 99% of this coal came from
Powder River Basin mines located in Wyoming and Montana. This coal is very
low in sulfur and meets the standards of the 1990 Clean Air Act for the year
2000 and beyond. Further, this coal is the least cost coal for WPSC from any
of the subbituminous coal producing regions in the United States.
The majority of coal for WPSC's wholly-owned plants and the
jointly-owned Edgewater and Columbia plants is purchased under relatively
short-term contracts of up to three years duration. WPSC has one long-term
contract which covers approximately 16% of total requirements and has
take-or-pay obligations totaling $198.4 million from 1998 through 2016. Coal
transportation for these plants is purchased under contracts of up to five
years duration. Over 90% of the coal transported to these plants is moved
under competitive transportation market conditions which are expected to
continue to yield competitive fuel costs for WPSC for the long term.
NUCLEAR
WPSC purchases uranium concentrates, conversion services, enrichment
services, and fabrication services for nuclear fuel assemblies at Kewaunee.
New fuel assemblies replace used assemblies that are removed from the reactor
every 18 months and placed in storage at the plant site pending removal by the
United States Department of Energy ("DOE").
Uranium concentrates, conversion services, and enrichment services are
purchased at spot market prices, through a bid process, or using existing
contracts.
-6-
<PAGE>
A uranium inventory policy requires that sufficient inventory exist for
up to two reactor reloads of fuel. As of December 31, 1997, 960,000 pounds of
yellowcake or its equivalent are held in inventory for Kewaunee.
Two contracts are in place to provide conversion services for Kewaunee
nuclear fuel for reloads in 1998 and 2000.
A contract with Cogema, Inc. provides a fixed quantity of enrichment
services through the year 2001. Additional enrichment services will be
acquired under a contract with the United States Enrichment Corporation which
is in effect for the life of Kewaunee or by purchases on the spot market.
A contract with Siemens Power Corporation provides fuel fabrication
services through March 15, 2001, for Kewaunee. This contract contains force
majeure and termination provisions.
If, for any reason, Kewaunee were forced to suspend operations
permanently, fuel-related obligations are as follows: (1) there are no
financial penalties associated with the present uranium supply, conversion
service, and enrichment agreements, and (2) the fuel fabrication contract
contains force majeure and termination for convenience provisions. As of the
end of 1997, the maximum exposure would not be expected to exceed $550,000.
Uranium inventories could be sold on the spot market.
The Nuclear Waste Policy Act of 1982 requires that the DOE accept,
transport, and dispose of spent nuclear fuel beginning no later than
January 31, 1998. The DOE has announced that it will delay the acceptance of
spent nuclear fuel beyond 1998. The nuclear utilities have been supported by
a decision of the United States Court of Appeals for the District of Columbia
Circuit in their claim that they may pursue the remedies provided in the DOE
standard contract in the event the DOE does not perform its duty to dispose of
spent nuclear fuel by the January 31, 1998 deadline.
The Energy Policy Act of 1992 requires that the federal government and
nuclear utilities fund the decontamination and decommissioning of the
government's three gaseous diffusion plants in the United States. WPSC is
required to pay approximately $600,000 per year (adjusted for inflation)
through the year 2007. WPSC, as well as other nuclear utilities, has filed
suit in the United States Court of Federal Claims disputing the
decontamination and decommissioning assessment. The suit has been stayed
pending the outcome of the Yankee Atomic Electric Company appeal. Yankee
Atomic Electric Company has received an adverse decision in the United States
Court of Appeals for the Federal Circuit and has filed a petition for
certiorari with the United States Supreme Court.
REGULATORY MATTERS IN THE WISCONSIN JURISDICTION
INDUSTRY RESTRUCTURING
In late 1995, the PSCW outlined a plan for restructuring the electric
industry in Wisconsin. The plan included a 32-step, 5-year process which
could conclude with retail competition by the year 2001. Progress on the plan
has been slow. During 1997, the PSCW chairperson developed a replacement
7-step plan for restructuring which is essentially a regrouping of the
original 32 steps with new priorities. To date, the revised plan has not been
adopted as the official PSCW restructuring plan. Restructuring and retail
-7-
<PAGE>
competition, although still under consideration, have been replaced as a
priority by electric reliability issues. As a result of the electric
reliability problems during the summer of 1997 (see Electric Supply Issues, at
page 9), the PSCW announced that its first priority is to develop the utility
infrastructure necessary to assure reliable electric service and to remove the
barriers to competition at the wholesale level.
WPSC currently applies accounting standards that recognize the economic
effects of rate regulations and record regulatory assets and liabilities
related to its generation, transmission, and distribution operations. If rate
recovery of generation-related costs becomes unlikely or uncertain, whether
due to competition or regulatory action, these accounting standards may no
longer apply to WPSC's generation operations. This change could result in
either full recovery of generation-related regulatory assets (net of related
regulatory liabilities) and costs or an impairment charge, depending on
whether regulators adopt a transition mechanism for the recovery of all or a
portion of these net regulatory assets and costs. WPSC believes that the
magnitude of any possible impairment charge is lower than the stranded cost
exposure of many other companies in this industry. Based on a current
evaluation of the various factors and conditions that are expected to impact
future cost recovery, management believes that its regulatory assets,
including those related to generation, are probable of future recovery.
Management expects that increased competition in a deregulated
environment will put pressure on operating margins at WPSC. Management also
believes that no significant changes to depreciable lives of WPSC's capital
assets would be necessary in a competitive environment. However, at this
time, management cannot predict the ultimate results of deregulation.
During 1997, in an effort to mitigate the effects of market power, the
PSCW issued an order that prohibited ownership by electric utility affiliates
of merchant electric generating plants. A merchant electric generating plant
is defined as a plant not owned by or under long-term contract with a public
utility. Later, the PSCW decided that it did not have statutory authority to
order a flat prohibition of utility affiliate ownership of merchant plants and
would consider such ownership on a case-by-case basis. The major utilities in
Wisconsin, including WPSC, have made legislative proposals, as part of
reliability and restructuring efforts, advocating deregulation of merchant
plants. PDI has an ownership interest in a merchant generating facility as
discussed on page 25.
In late 1997, the PSCW initiated a docket on essential services and
customer protections the purpose of which is to create a utility customer
safety net for a restructured electric and gas industry.
INDEPENDENT SYSTEM OPERATOR
A major feature of a restructured electric industry is establishment of
independent system operators ("ISOs"). An ISO is an independent third party
that would regulate on a "real-time" basis the operation of the transmission
systems in a defined geographic area. The ISO would monitor the generation,
transmission, and distribution systems, direct the operations of transmission
facilities, administer open access transmission tariffs, and direct generation
redispatch.
-8-
<PAGE>
WPSC has been working with a number of groups that are attempting to
form ISOs. The PSCW and the MPSC are considering the formation of statewide
ISOs. The Mid American Power Pool, one of ten National Electric Reliability
Council regions, is developing an ISO that would include utilities in portions
of Illinois, Minnesota, North Dakota, South Dakota, and Wisconsin.
Additionally, a group of 26 utilities in 10 Midwestern states is attempting to
form what is known as the Midwest ISO.
MERGER ACTIVITY
Industry restructuring has been accompanied by merger activity in the
region which could impact the competitive environment. The merger of WPSR and
UPEN, as previously described, is presently awaiting regulatory approval. The
proposed merger between Wisconsin Energy Corporation and Northern States Power
Company was terminated in May 1997 due to merger conditions imposed by the
FERC that were unacceptable to the applicants. The Interstate Energy
Corporation merger between WPL Holdings, Inc., IES Industries, Inc., and
Interstate Power Company has received FERC and state approvals. At
December 31, 1997, approval was pending from the Securities and Exchange
Commission. In May 1997, Wisconsin Energy Corporation announced the proposed
acquisition of ESELCO, Inc., the parent company of the Edison Sault Electric
Company. Regulatory approvals are pending.
ELECTRIC SUPPLY ISSUES
The summer of 1997 provided a serious challenge to the reliability of
the electric system in the region. Over 5,000 megawatts of generating
capacity were unavailable for most of the summer as various utility companies
experienced forced outages for a variety of reasons.
Kewaunee was returned to service after a longer than normal outage
before the greatest demands were placed on the WPSC electric system. WPSC's
Pulliam Unit 3, a 26.7-megawatt facility, was refurbished and returned to
service. WPSC's system operated at nearly full capacity during the warmest
portions of the summer months. WPSC's interruptible customers experienced
only limited interruptions as a result of WPSC being required to provide power
to other utilities in Wisconsin who were experiencing more severe energy
supply problems. See page 3 for a discussion of new generating capacity.
After the summer's reliability concerns, Governor Thompson requested
reports from the PSCW, electric utilities, and industrial customers assessing
the electric capacity problems experienced in eastern Wisconsin during this
past spring and summer. The reports provided analyses and recommendations on
how to assure the future reliability of the electrical supply and made
recommendations on how to improve the effectiveness of the state's utility
regulatory process. WPSC participated in the development of the utility
report.
WPSC is working closely with Governor Thompson, the PSCW, legislators,
and industry participants to ensure that Wisconsin has an adequate supply of
reliable power, an enhanced transmission system, and appropriate regulatory
changes.
-9-
<PAGE>
CUSTOMER RATE MATTERS
In the Wisconsin jurisdiction, of the major investor-owned utilities,
WPSC is the low cost electric provider (based on the Edison Electric Institute
Summer 1997 Typical Bill Rate Report) with rates being 91% of the state
average for residential rates, 86% for commercial rates, and 88% for large
industrial rates. WPSC also has some of the lowest gas rates in Wisconsin
with rates being 95% of the state average for residential rates and 94% for
commercial rates.
Customer rates are based on forecasted expenses and capital costs. On
February 20, 1997, the PSCW authorized a $35.5 million, or 8.1%, decrease in
retail electric rates. These rates are effective through 1998.
WPSR's return on common equity was 11.3% and 10.2% for 1997 and 1996,
respectively. WPSR's return on common equity is determined in large part by
the return authorized for WPSC by the PSCW. The authorized return was 11.8%
and 11.5% for 1997 and 1996, respectively, before giving consideration to
earnings on deferred investment tax credits. The authorized return for 1998
remains at 11.8%.
The PSCW approved an electric surcharge to allow WPSC to recover costs
of acquiring replacement power during the extended outage at Kewaunee. The
surcharge, which amounted to approximately $2.0 million per month
(approximately $.23 per kilowatt-hour) was in place for the period
February 21, 1997 through July 1, 1997.
The PSCW authorized deferral of Kewaunee steam generator repair costs
which totaled $10.4 million, with WPSC's share being $3.6 million. The owners
have requested the PSCW to approve recovery of these costs through a customer
surcharge which would be effective for April and May of 1998.
WPSR anticipates filing on April 1, 1998 an application with the PSCW
for increased electric rates to be effective for the years 1999 and 2000.
REGULATORY MATTERS IN THE MICHIGAN JURISDICTION
INDUSTRY RESTRUCTURING
On June 5, 1997, the MPSC ordered utilities under its jurisdiction to
file electric open access plans and related tariffs. This action followed two
years of public hearings and a lack of consensus among the stakeholders. The
MPSC order called for generation open access in increments of 2.5% of retail
load each year starting in 1997 and ending in 2001. Generation open access is
the ability of customers to purchase electric generation from any supplier and
to use existing transmission and distribution lines to transport the energy to
the purchaser's facilities at the same price that the local supplier would
charge itself for such transportation services. There would be full
generation open access for retail load in 2002.
WPSC submitted a plan which provides retail open access starting in 2000
when the MPSC order requires open access for 10% of retail load. The WPSC
plan then continues on the MPSC schedule including full open access in 2002.
There is uncertainty whether the MPSC has authority to order open
access. In early 1998, the Michigan Circuit Court issued a decision holding
-10-
<PAGE>
that the MPSC does not have the authority to order retail access, at least on
a pilot basis. It is expected that this court decision will be appealed. In
the meantime, the largest Michigan utilities are preparing for the start of
open access in 1998, and Michigan's small utilities are working with the MPSC
staff to determine when and how they should proceed toward open access.
CUSTOMER RATE MATTERS
WPSC is the lowest cost provider of electric service in Michigan for all
customer classes. WPSC's electric rates are 72% of the Michigan residential
customer average rate and 75% of the large industrial average rate.
Other than power supply cost recovery, WPSC has not had an electric rate
increase in Michigan since 1987.
REGULATORY MATTERS IN THE FERC JURISDICTION
CUSTOMER RATE MATTERS
WPSC has not had a FERC wholesale rate case since 1987.
OPEN ACCESS TRANSMISSION TARIFF
WPSC has reached agreement with a group of Wisconsin municipal
intervenors, the FERC staff, and two administrative law judges regarding the
proposed open access transmission tariff rates and conditions and WPSC's
request for market-based rates. FERC approval is expected early in 1998. The
settlement rate will be in effect for two years.
MARKETER STATUS
ESI has received FERC power "marketer" status. WPSC, ESI, and PDI have
also been authorized to sell electric energy and capacity at market rates.
WHOLESALE STATUS
In recent years, WPSC has experienced increased competition and reduced
margins in the wholesale power market. Transmission availability, pricing and
policy, the availability of reliable and economically priced energy and
capacity in the region, changing market participants (both suppliers and
consumers), the development and increasing use of risk management tools, and
regulatory and legislative developments at both the state and federal levels
are forces that will continue to influence the wholesale electric market.
WPSC aggressively and competitively procures, packages, markets, and
sells electric energy, capacity, ancillary services, and other associated
energy-related products and services to primarily municipal electric utilities
and electric distribution cooperatives. The objectives are to retain existing
wholesale customer load, obtain new customers, maintain margins, and optimize
the use of WPSC's generating assets. WPSC currently provides 12 wholesale
electric customers with approximately 300 megawatts of firm and various levels
of interruptible service. Wholesale sales represented 16% of WPSC's electric
sales volume in 1997 compared to 17% in 1996.
Effective in October 1997, WPPI discontinued purchasing power under a
full-requirements supply contract. WPPI had been purchasing 66 megawatts of
-11-
<PAGE>
electricity from WPSC for resale to municipal utilities. WPSC has been
successful in partially offsetting the loss of this load by securing new
customers and by other sales to WPPI.
During 1996, WPSC entered into agreements with UPPCO covering the
handling of after-hours calls, system operating services, and a multi-year
power supply agreement beginning in 1998. Subsequently, as described at
page 1 of this report, WPSR and UPEN, the parent of UPPCO, announced an
agreement to merge.
REGULATORY COMPLIANCE
WPPI requested transmission service across the WPSC portion of the
constrained Minnesota to eastern Wisconsin interface ("Interface") to serve
five of WPPI's municipal customers (Sturgeon Bay, Algoma, Eagle River,
New Holstein, and Washington Island) located in the WPSC service territory.
The Interface is owned by WEPCO, (52%), WP&L (28%), and WPSC (20%). WPPI has
a 1993 contract with WP&L that provides transmission service for these loads
through the WP&L portion of the Interface.
WPSC filed a complaint with the FERC contending that WPPI and WP&L were
conspiring to use the WPSC portion of the interface capacity for a service
that should use the WP&L portion of the Interface. WPPI responded with a FERC
complaint against both WPSC and WP&L indicating that neither has provided the
necessary transmission services across the constrained Interface. WPSC and
WP&L both maintain that they have previous claims to the interface capacity
consistent with the FERC first-come-first-served transmission scheduling
process.
HYDROELECTRIC LICENSES
New licenses were received in 1997 from the FERC for WPSC's
Caldron Falls, High Falls, Johnson Falls, Sandstone Rapids, Potato Rapids,
Peshtigo, and Grand Rapids hydroelectric projects. These licenses represent
29.7 megawatts of hydroelectric generating capacity.
OTHER MATTERS
RESEARCH AND DEVELOPMENT
Electric research and development expenditures totaled $1.3 million for
1997, $1.9 million for 1996, and $2.6 million for 1995. These expenditures
were made for WPSC sponsored projects and were primarily charged to electric
operations.
CUSTOMER SEGMENTATION
Although 13% of electric revenues come from sales to 26 paper mills,
resulting in a relatively high and favorable load factor, there is no single
customer or small group of customers, the loss of which would have a
materially adverse effect on the electric business of WPSC under the current
regulatory environment.
-12-
<PAGE>
ELECTRIC FINANCIAL SUMMARY
The following table sets forth the revenues, operating income, and
identifiable assets attributable to electric utility operations:
WISCONSIN PUBLIC SERVICE CORPORATION
==============================================================================
(Thousands) Year Ended December 31
- ------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------
Electric Operating Revenues $479,388 $490,506 $489,000
Operating Income, Including Allowance
For Funds Used During Construction $ 92,998 $101,425 $ 97,928
Identifiable Assets $906,198 $905,325 $906,029
==============================================================================
See Note 12 in Notes to Consolidated Financial Statements.
-13-
<PAGE>
<PAGE>
<TABLE>
ELECTRIC OPERATING STATISTICS
<CAPTION>
WPS Resources Corporation
=====================================================================================================================
1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues (Thousands)
Residential and farm $163,766 $169,587 $168,391 $163,381
Small commercial and industrial 138,949 144,055 140,280 137,323
Large commercial and industrial 120,312 118,997 117,978 118,121
Resale and other 62,734 58,648 62,351 61,991
- ---------------------------------------------------------------------------------------------------------------------
Total $485,761 $491,287 $489,000 $480,816
=====================================================================================================================
Kilowatt-hour sales (Thousands)
Residential and farm 2,565,432 2,570,397 2,548,373 2,406,479
Small commercial and industrial 2,876,832 2,761,278 2,672,359 2,555,488
Large commercial and industrial 3,943,275 3,744,153 3,644,764 3,468,390
Resale and other 2,126,805 1,970,083 2,112,635 2,121,660
- ---------------------------------------------------------------------------------------------------------------------
Total 11,512,344 11,045,911 10,978,131 10,552,017
=====================================================================================================================
</TABLE>
-14-
<PAGE>
<PAGE>
<TABLE>
ELECTRIC OPERATING STATISTICS
<CAPTION>
Wisconsin Public Service Corporation
================================================================================================================================
1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating revenues (Thousands)
Residential and farm $163,766 $169,587 $168,391 $163,381 $165,568
Small commercial and industrial 138,949 144,055 140,280 137,323 140,678
Large commercial and industrial 120,312 118,997 117,978 118,121 123,920
Resale and other 56,361 57,867 62,351 61,991 63,090
- --------------------------------------------------------------------------------------------------------------------------------
Total $479,388 $490,506 $489,000 $480,816 $493,256
================================================================================================================================
Kilowatt-hour sales (Thousands)
Residential and farm 2,565,432 2,570,397 2,548,373 2,406,479 2,349,307
Small commercial and industrial 2,876,832 2,761,278 2,672,359 2,555,488 2,444,548
Large commercial and industrial 3,943,275 3,744,153 3,644,764 3,468,390 3,296,254
Resale and other 1,873,788 1,936,014 2,112,635 2,121,660 2,060,804
- --------------------------------------------------------------------------------------------------------------------------------
Total 11,259,327 11,011,842 10,978,131 10,552,017 10,150,913
================================================================================================================================
Customers served (End of period)
Residential and farm 334,134 328,522 322,550 316,442 310,336
Small commercial and industrial 39,400 38,376 37,455 36,491 35,683
Large commercial and industrial 197 168 170 164 137
Resale and other 836 826 802 796 794
- --------------------------------------------------------------------------------------------------------------------------------
Total 374,567 367,892 360,977 353,893 346,950
================================================================================================================================
Annual average use (Kilowatt-hours)
Residential and farm 7,751 7,905 7,982 7,688 7,649
Small commercial and industrial 74,082 72,995 72,326 70,931 69,532
Large commercial and industrial 21,606,984 22,115,491 21,824,937 22,091,659 24,416,697
================================================================================================================================
Average kilowatt-hour price (Cents)
Residential and farm 6.38 6.60 6.61 6.79 7.05
Small commercial and industrial 4.83 5.22 5.25 5.37 5.75
Large commercial and industrial 3.05 3.18 3.24 3.41 3.76
================================================================================================================================
Production capacity (Summer - kilowatts)
Steam 1,326,000 1,325,400 1,325,400 1,318,300 1,315,300
Nuclear 212,200 213,800 216,700 215,100 215,100
Hydraulic 53,000 53,100 52,900 53,400 53,100
Combustion turbine 205,930 208,600 207,480 201,200 177,200
Other 7,800 4,200 4,240 4,240 4,240
Purchased capacity 14,750 27,250 26,400 26,400 27,700
- --------------------------------------------------------------------------------------------------------------------------------
Total system capacity 1,819,680 1,832,350 1,833,120 1,818,640 1,792,640
================================================================================================================================
Generation and purchases
(Thousands of kilowatt-hours)
Steam 8,213,518 7,956,378 7,428,612 7,047,511 7,004,634
Nuclear 973,485 1,305,751 1,564,268 1,631,003 1,572,696
Hydraulic 351,034 359,750 306,101 292,617 346,386
Purchases and other 2,327,334 2,050,762 2,310,399 2,243,021 1,849,047
- --------------------------------------------------------------------------------------------------------------------------------
Total 11,865,371 11,672,641 11,609,380 11,214,152 10,772,763
================================================================================================================================
Steam fuel costs
(Cents per million Btu)
Fossil 110.124 115.132 118.365 132.360 139.038
Nuclear 43.174 46.674 49.539 49.168 44.888
Total 103.093 105.439 106.320 116.782 121.949
- --------------------------------------------------------------------------------------------------------------------------------
System peak - firm (kilowatts) 1,607,000 1,591,000 1,670,000 1,543,000 1,569,000
================================================================================================================================
Annual load factor 79.42% 77.56% 73.32% 76.96% 73.29%
================================================================================================================================
</TABLE>
-15-
<PAGE>
<PAGE>
C. GAS MATTERS
WPSC'S GAS MARKET
As of December 31, 1997, WPSC provided natural gas distribution service
to 213,195 customers in 210 cities, villages, and towns in northeastern and
central Wisconsin, and 5,104 customers in and around the city of Menominee,
Michigan, for a total of 218,299 gas distribution customers. This represents
an increase of 6,205 customers, or 2.9%, compared to December 31, 1996. The
principal cities served by WPSC include Green Bay, Oshkosh, Sheboygan,
Two Rivers, Marinette, Stevens Point, and Rhinelander all in Wisconsin, and
the city of Menominee in Michigan.
WPSC's gas distribution business has a significant seasonal component
and is impacted by varying weather conditions from year-to-year.
Approximately 68% of WPSC's gas sales and 60% of WPSC's total gas system
throughput (i.e., total gas delivered by WPSC--includes gas sales and gas
delivered for transportation customers) occur during the 5 winter months of
November through March. Competition with other forms of energy exists in
varying degrees, particularly for large commercial and industrial customers
who have the ability to switch between natural gas and alternate fuels. WPSC
offers interruptible gas sales and gas transportation service for these
customers to enable them to reduce their energy costs and use natural gas
instead of other fuels. Transportation customers total 224. These customers
purchase their gas from other suppliers and contract with WPSC to transport
the gas from ANR Pipeline Company ("ANR") to the customer's facilities.
Another 133 customers still purchase their gas from WPSC but have elected to
do so on an interruptible basis. Additional customers are switching from firm
system supply to either interruptible system supply or transportation service
each year as the economics and service options become attractive for them.
WPSC's gas operations also provide gas to WPSC's electric operations for
power generation in combustion turbine peaking generators and for start-up,
flame stabilization, and peaking use at WPSC's Weston and Pulliam coal-fired
steam plants. Gas sales for power generation use are provided on an
interruptible basis, with the power plants maintaining alternate fuel
capability.
Total gas deliveries by WPSC in 1997, including customer-owned gas
transported by WPSC, were 67,289,030 Dth, a 0.4% decrease over 1996. A
dekatherm ("Dth") is equivalent to 10 therms or 1 million Btu of energy. Gas
transported for end-user transport customers included in the above total was
28,077,338 Dth in 1997, or approximately 42% of WPSC's total deliveries.
WPSC's peak day gas throughput in 1997 occurred on January 16 with
422,859 Dth total gas throughput at an average Green Bay temperature of minus
7.7 degrees Fahrenheit. This compares with WPSC's record gas system
throughput of 432,928 Dth set on February 2, 1996 at an average Green Bay
temperature of minus 23.8 degrees Fahrenheit.
GAS SUPPLY
GENERAL
Since the implementation of FERC Order 636 in November 1993, WPSC has
had full responsibility for the design, acquisition, and operation of gas
-16-
<PAGE>
supplies and the pipeline transportation and storage services required to meet
the varying daily, seasonal, and annual load requirements of its customers.
WPSC operates a portfolio of gas supply contracts and pipeline transportation
and storage services designed to meet reliably WPSC's varying load pattern at
the lowest reasonable cost.
WPSC is presently served by a single interstate pipeline, ANR Pipeline
Company. Because ANR's pipeline system in Wisconsin has reached its maximum
capacity, and because lower prices are generally available in other areas
where there is competition for pipeline services, WPSC is investigating
potential suppliers of pipeline services in addition to those offered by ANR.
Prominent among possible alternatives is the Viking Voyageur project proposed
by TransCanada Pipelines, Northern States Power Company, and NICOR. WPSC, as
part of the Wisconsin Capacity Coalition (a group of Wisconsin gas utilities
consisting of MG&E, Wisconsin Gas Company, Wisconsin Fuel and Light Company,
Northern States Power Company-Wisconsin, and WPSC who are working together to
encourage development of alternate pipeline capacity to serve Wisconsin), is
presently evaluating construction of lateral lines to interconnect WPSC's
distribution system with Viking Voyageur and thereby provide access to WPSC's
markets. Other pipeline service alternatives are also being evaluated.
PIPELINE CAPACITY AND STORAGE
ANR's system serving WPSC accesses three major gas producing areas of
North America: (1) the Gulf of Mexico, (2) the mid-continent areas of
Oklahoma, Texas, and Kansas, and (3) the Province of Alberta in western
Canada. WPSC holds firm long-term transportation capacity on ANR in roughly
equal proportions from each of these three supply areas. The term of these
long-line ANR firm transportation contracts from the Gulf Coast and
mid-continent areas extend through October 2003. The term of the ANR contract
for 83% of the supplies from Canada extends through October 1998. WPSC
intends to renew this ANR contract for supply from Canada in 1998 for another
five-year term through October 2003 at a reduced capacity to coincide with the
expiration of an upstream transportation contract with Viking Gas
Transmission. The remaining 17% of the Canadian contracts extend through
October 2003.
Because of the substantial daily and seasonal swings in gas usage in
WPSC's service territory, WPSC also has contracted with ANR for firm
underground storage capacity located in Michigan. There are no known
geological formations in Wisconsin capable of being developed into underground
storage facilities.
Besides providing WPSC the ability to manage significant changes in
daily gas demand, storage also provides WPSC the ability to purchase gas from
the production areas at high load factors, thus minimizing supply costs.
During the summer, gas purchased in excess of market demand is injected into
storage. During the winter, gas is withdrawn from storage and combined with
gas purchased in the production areas to meet the increased winter demand.
Gas from storage provides up to 63% of WPSC's supply on winter peak days,
approximately 32% of WPSC's winter sales volumes, and approximately 22% of
WPSC's total annual sales volumes. WPSC's total firm storage capacity with
ANR is 11.3 million Dth.
WPSC also contracts for high deliverability storage in the Gulf Coast
and mid-continent production areas during the winter from third-party
-17-
<PAGE>
suppliers. This storage capacity provides a back-up supply of gas into WPSC's
long-line transportation contracts when other supplies cannot be delivered due
to production supply losses caused by extremely cold weather in the production
areas.
As of December 31, 1997, WPSC's total firm winter long-line
transportation capacity from ANR was 128,952 Dth per day, and firm capacity
from ANR storage was 223,120 Dth per day, for a total winter peak day capacity
of 352,072 Dth per day. WPSC's forecasted peak day firm load requirement for
the 1997-1998 winter is 337,453 Dth per day, providing WPSC a 14,619 Dth per
day or 4.3% reserve margin of capacity for load growth and unforeseen needs.
On November 1, 1998, WPSC's total firm winter long-line transportation
capacity from ANR will be 121,254 Dth per day, and firm capacity from ANR
storage will be 223,120 Dth per day, for a total winter peak day capacity of
344,374 Dth per day. WPSC's forecasted peak day firm load requirement for the
1998-1999 winter is 323,885 Dth per day, providing WPSC a 20,489 Dth per day
or 6.3% reserve margin of capacity for load growth and unforeseen needs.
WPSC also holds firm transportation capacity with Viking Gas
Transmission Company, ("Viking") to deliver gas on a firm basis from Viking's
interconnection with TransCanada Pipelines ("TransCanada") at Emerson,
Manitoba, Canada to the interconnection with ANR at Marshfield, Wisconsin.
The Canadian suppliers, from whom WPSC purchases gas, hold firm capacity on
TransCanada and NOVA from Emerson back into the production areas in Alberta,
Canada.
GAS SUPPLY CONTRACTS
WPSC contracts for firm term supplies with approximately 12 to 16
suppliers each year for gas produced in each of the three production areas.
WPSC initially designed its supply portfolio with terms ranging from one to
ten years so that only a portion of WPSC's supply contracts expired in any
given year. With the current uncertainty surrounding the future of WPSC's gas
merchant function, however, as long-term contracts expire, WPSC has been
replacing them with contracts of a one-year term or less. This will minimize
potential stranded gas supply contract costs if retail gas deregulation should
proceed quickly in Wisconsin. WPSC's supply portfolio as of December 31, 1997
contained contracts with remaining terms ranging from two months to six years.
An exception to this short-term supply contracting practice will occur
if the proposed Viking Voyageur gas pipeline project is constructed. In which
case, WPSC plans to enter into five-year gas supply contracts with suppliers
to help support construction of the pipeline. Viking Voyageur supply
contracts will be assignable to third parties should WPSC's merchant function
be substantially reduced during the term of the supply agreements.
Additional supplies are purchased on the monthly spot market as required
to supplement supplies from long-term firm contracts. WPSC has been an active
spot market purchaser since 1985 and has contracts in place with a number of
suppliers of spot market gas.
NEW PIPELINE SUPPLY SOURCE
WPSC is planning a joint project with Wisconsin Electric Power Company-
Gas Operations to construct a new eight-inch pipeline from an interconnection
-18-
<PAGE>
with Great Lakes Gas Transmission Company ("Great Lakes") in the Upper
Peninsula of Michigan near Watersmeet into northern Wisconsin. WPSC plans to
build additional pipeline facilities to connect the new pipeline to WPSC's
existing northern area distribution system to reinforce pressures and increase
system reliability. WPSC plans to modify and extend the term of portions of
its existing pipeline capacity and storage contracts with ANR and add a new
transportation service on Great Lakes to deliver up to 7,000 Dth per day into
the new pipeline system during the winter. The new pipeline project is
expected to be in service by November 1998.
FEDERAL REGULATORY ACTIVITIES
WPSC's involvement in federal regulatory activities has been through the
Wisconsin Distributor Group ("WDG") which is made up of several Wisconsin gas
utilities. Over the past several years, the WDG has participated in numerous
dockets filed by ANR at the FERC.
Successes in three key issues this year are summarized below.
DAKOTA
In December 1996, ANR's Dakota Gasification Plant settlement was
approved by FERC. The settlement results in cost savings for WPSC's customers
compared to the original gas purchase contracts ANR had with Dakota, and
brings to an end the extensive litigation that surrounded this issue. As part
of the settlement, in July 1997, WPSC received a refund of previously paid
above-market Dakota costs in the amount of $1,912,225 which WPSC refunded to
customers in September 1997.
VIKING COSTS ON ANR PIPELINE
The WDG was also successful in obtaining refunds of overcollections by
ANR for Viking-related expenses. In July 1997, WPSC received a refund of
$890,325 which was refunded to its customers in September.
ANR RATE CASE SETTLEMENT
After nearly three years of effort, a settlement was achieved in the
rate case ANR filed on November 1, 1993 and put into effect on May 1, 1994.
The settlement will result in refunds to WPSC of $6.8 million, an annual
reduction in WPSC's rates paid to ANR of approximately $7.5 million, or 19%, a
moratorium period against rate increases, and an opportunity for additional
cost reduction through contract portfolio reshaping. The new, lower rates
went into effect November 1, 1997, subject to future FERC approval. On
February 13, 1998, FERC issued an order approving ANR's settlement agreement
as filed. ANR now has until March 15, 1998 to notify the FERC if any party
objects to any conditions imposed by the FERC in its order. Since the FERC
approved ANR's settlement without modification, WPSC expects ANR will notify
the FERC that no party objects, and the settlement will become effective by
April 15, 1998.
-19-
<PAGE>
WISCONSIN REGULATORY ACTIVITIES
GENERAL
The PSCW is considering gas restructuring issues including unbundling of
rates, pricing of contracted services in potential utility bypass situations
(i.e., situations in which a major industrial gas customer may construct a
pipeline connecting them directly to an interstate pipeline, thus avoiding
purchasing any delivery service from the local gas utility), and the
separation of gas utilities from their unregulated gas marketing affiliates.
GAS COST RECOVERY MECHANISM
Historically, Wisconsin gas utilities, including WPSC, have recovered
their costs for gas supply and pipeline services on a one-for-one basis
through a mechanism called the Purchased Gas Adjustment Clause. The PSCW
conducted an investigation in Docket 05-GI-106 to determine whether alternate
gas cost recovery mechanisms may be more appropriate in the evolving gas
market. In particular, Performance Based Rates ("PBR") were evaluated as
alternatives to the traditional one-for-one recovery mechanism. Under PBRs,
gas utilities are given an incentive to reduce gas costs by being allowed to
keep a portion of any cost savings they are able to obtain relative to a gas
cost target value.
In November 1996, the PSCW issued an order which gave gas utilities a
choice between continuing under a modified one-for-one gas cost recovery
mechanism, or switching to a PBR mechanism. WPSC elected to continue under a
modified one-for-one mechanism, as WPSC believes it provides the greatest
value to customers through regulatory oversight and the return to customers of
all savings achieved. Development of WPSC's modified one-for-one mechanism is
in process, with implementation expected in November 1998.
GAS DISTRIBUTION RESTRUCTURING
The PSCW has an ongoing investigation into gas industry restructuring in
Docket 05-GI-108. Although the gas utility distribution function is expected
to continue as a regulated monopoly, sales of the natural gas commodity and
associated services, which were formerly also utility monopoly functions, are
expected to become increasingly open for competition among unregulated
third-party suppliers. WPSC's position is that utilities should be allowed to
continue to offer a regulated gas supply merchant function if they so choose,
thereby providing customers with a regulated supply choice.
Phase I of this docket addressed issues of unbundling rates, pricing of
contracted service in potential utility bypass situations, and the separation
of gas utilities from their unregulated gas marketing affiliates. Phase II
established standards of conduct regarding how gas utilities can interact with
their marketing affiliates. Phase III explored the issue of how to determine
when a competitive market exists for various segments of customers, so the
utility could then be taken out of serving that market.
Because of the complexity of the many issues involved, industry work
groups were formed to study particular issues and bring recommendations back
to the PSCW. The six work groups are studying pipeline capacity, market-based
pricing for interruptible customers, end-user price reporting, marketer
certification, changes needed in the form of legislation or administrative
-20-
<PAGE>
rules, and social issues and essential services. Although most of this work
has not yet started, completion of these work groups' assignments is projected
for November 1999.
CUSTOMER RATE MATTERS
Customer rates are based on forecasted expenses and capital costs. On
February 20, 1997, the PSCW authorized a $5.7 million, or 2.7%, increase in
WPSC's retail natural gas rates. The rates are effective through 1998.
WPSC anticipates filing on April 1, 1998 an application with the PSCW
for increased gas rates to be effective for the years 1999 and 2000.
MICHIGAN REGULATORY ACTIVITIES
GAS COST RECOVERY
In June 1997, WPSC filed with the MPSC the annual reconciliation of gas
costs and gas revenues for the period April 1, 1996 through March 31, 1997.
WPSC's gas cost recovery clause in Michigan allows WPSC to recover all
prudently incurred gas costs on a one-for-one basis. The MPSC staff contested
the prudency of certain summer-only gas sales WPSC made to a single
large-volume customer and recommended that WPSC not be allowed to recover
approximately $245,088 of gas costs associated with these sales. In January
1998, an administrative law judge issued a Proposal For Decision and
recommended that the MPSC issue an order allowing WPSC to recover the entire
amount in contention. A final order in this case is expected in March 1998.
GAS DISTRIBUTION RESTRUCTURING
The MPSC is also investigating the deregulation of retail gas markets
and expansion of gas transportation service in Michigan in Case No. U-11017.
The MPSC decided it would be appropriate to conduct a series of pilot projects
to test the development of competitive retail gas markets in Michigan.
Michigan's four largest gas utilities were approached by the MPSC regarding
development and implementation of pilot programs.
Because of the small size and limited number of customers in WPSC's
Michigan service territory and the service territories of two other utility
companies, the MPSC did not conduct pilot transportation programs for these
three utilities.
CUSTOMER RATE MATTERS
WPSC has not had a natural gas rate case in Michigan since 1986.
-21-
<PAGE>
GAS FINANCIAL SUMMARY
The following table sets forth the amounts of revenues, operating
income, and identifiable assets attributable to gas utility operations:
WISCONSIN PUBLIC SERVICE CORPORATION
==============================================================================
(Thousands) Year Ended December 31
- ------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------
Gas Operating Revenues $211,090 $211,357 $174,693
Operating Income, Including Allowance
For Funds Used During Construction $ 18,584 $ 10,191 $ 12,116
Identifiable Assets $235,490 $255,200 $232,983
==============================================================================
See Note 12 in Notes to Consolidated Financial Statements.
-22-
<PAGE>
<PAGE>
<TABLE>
GAS OPERATING STATISTICS
<CAPTION>
WPS Resources Corporation
=====================================================================================================================
1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues (Thousands)
Residential $122,782 $122,224 $109,998 $104,020
Small commercial and industrial 23,790 22,392 19,933 18,586
Large commercial and industrial 53,517 55,211 47,627 45,115
Other 190,310 164,673 52,367 25,258
- ---------------------------------------------------------------------------------------------------------------------
Total $390,399 $364,500 $229,925 $192,979
=====================================================================================================================
Therms delivered (Thousands)
Residential 202,558 216,963 202,152 187,355
Small commercial and industrial 43,056 46,614 42,600 38,568
Large commercial and industrial 127,132 142,033 129,494 115,939
Other 595,154 527,069 294,372 56,961
- ---------------------------------------------------------------------------------------------------------------------
Total therm sales 967,900 932,679 668,618 398,823
Transportation 268,114 251,279 241,531 234,149
- ---------------------------------------------------------------------------------------------------------------------
Total 1,236,014 1,183,958 910,149 632,972
=====================================================================================================================
</TABLE>
-23-
<PAGE>
<PAGE>
<TABLE>
GAS OPERATING STATISTICS
<CAPTION>
Wisconsin Public Service Corporation
========================================================================================================================
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating revenues (Thousands)
Residential $122,782 $122,224 $109,998 $104,020 $110,541
Small commercial and industrial 23,790 22,392 19,933 18,586 20,254
Large commercial and industrial 53,517 55,211 47,627 45,115 47,091
Other 11,001 11,530 (2,865) 14,337 9,490
- ------------------------------------------------------------------------------------------------------------------------
Total $211,090 $211,357 $174,693 $182,058 $187,376
========================================================================================================================
Therms delivered (Thousands)
Residential 202,558 216,963 202,152 187,355 192,053
Small commercial and industrial 43,056 46,614 42,600 38,568 41,385
Large commercial and industrial 127,132 142,033 129,494 115,939 108,068
Other 21,148 9,709 15,415 9,810 6,337
- ------------------------------------------------------------------------------------------------------------------------
Total therm sales 393,894 415,319 389,661 351,672 347,843
Transportation 268,114 251,279 241,531 234,149 220,672
- ------------------------------------------------------------------------------------------------------------------------
Total 662,008 666,598 631,192 585,821 568,515
========================================================================================================================
Customers served (End of period)
Residential 198,524 192,947 186,267 178,992 172,902
Small commercial and industrial 16,770 16,133 15,905 14,689 14,571
Large commercial and industrial 2,780 2,846 2,432 2,867 2,508
Other 1 1 1 1 1
Transportation customers 224 167 121 117 127
- ------------------------------------------------------------------------------------------------------------------------
Total 218,299 212,094 204,726 196,666 190,109
========================================================================================================================
Average annual use (Therms)
Residential 1,037.3 1,146.6 1,112.3 1,068.8 1,128.4
Small commercial and industrial 2,619.4 2,937.2 2,770.8 2,673.9 2,888.8
Large commercial and industrial 32,423.5 37,163.7 39,707.6 34,651.2 41,354.4
========================================================================================================================
Average therm price (Cents)
Residential 60.62 56.33 54.41 55.52 57.56
Small commercial and industrial 55.25 48.04 46.79 48.19 48.94
Large commercial and industrial 45.92 42.84 40.63 41.84 44.97
========================================================================================================================
</TABLE>
-24-
<PAGE>
<PAGE>
D. NONREGULATED BUSINESS ACTIVITIES
GENERAL
At the end of 1997, WPSR had two principal nonregulated subsidiaries:
WPS Energy Services, Inc. ("ESI") and WPS Power Development, Inc. ("PDI").
These subsidiaries were formed in 1994 and 1995, respectively, for the purpose
of positioning WPSR strategically for participation in the evolving
nonregulated energy marketplace.
WPS ENERGY SERVICES, INC.
ESI is a diversified energy company. ESI targets retail energy sales
and related services in Midwestern and Eastern states with an emphasis on
serving commercial, industrial, and wholesale customers. Principal operations
are located in Illinois, Michigan, Ohio, and Wisconsin. ESI also is
participating in retail pilot projects in each of these states. Wholesale
energy sales and related services are provided nationwide.
ESI provides electric, natural gas, and alternate fuel products; risk
management consulting services; real-time energy management services; and
project management. ESI also provides energy utilization consulting which
identifies opportunities for improving purchasing practices, equipment, and
systems necessary for the efficient use of energy.
The gas markets in which ESI participates are characterized by strong
competition, narrow margins, and volatile commodity and transportation prices.
ESI uses various financial instruments to minimize the risks present in the
natural gas marketplace (see Note 1(e), Price Risk Management Activities on
page 57 of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS).
Revenues were predominantly from the sale of natural gas. Revenues from
the sale of natural gas were $179.3 million in 1997 compared to $153.1 million
in 1996. Sales totaled 574.0 million therms in 1997 compared to 517.4 million
therms in 1996. Electric sales are not significant because electric retail
access has been slow to develop in ESI's target market areas. ESI continues
to pursue the electric wholsesale market, but to a lesser extent than in the
past.
WPS POWER DEVELOPMENT, INC.
PDI develops and owns electric generation projects and provides services
to the electric power generation industry nationwide. PDI's services include
acquisition and investment analysis, project development, engineering and
management services, and operations and maintenance services. PDI's areas of
expertise include cogeneration, distributed generation, generation from
renewables, generation plant repowering projects, and conversion of paper mill
sludge to lightweight aggregate.
PDI owns a two-thirds interest in the Stoneman Power Plant ("Stoneman"),
a 53-megawatt merchant steam plant located in Cassville, Wisconsin. The
redevelopment of Stoneman as a 300-megawatt to 500-megawatt gas-fired combined
cycle facility is planned for the 1999 to 2000 time period. PDI also owns
landfill gas generating facilities.
-25-
<PAGE>
EARNINGS
Both ESI and PDI incurred losses for 1997 and 1996. The loss incurred
at ESI in 1997 was $4.9 million, compared with a loss of $6.3 million in 1996,
a decrease of 22.2%. The loss incurred by PDI in 1997 was $1.9 million,
compared with $4.0 million in 1996, a decrease of 52.5%. Operating losses at
the nonregulated subsidiaries were anticipated by management as the companies
develop infrastructure and finance additional working capital needed to
support growth.
See MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION at page 42 for additional information regarding
nonregulated operations.
E. ENVIRONMENTAL MATTERS
GENERAL
WPSC is subject to regulation with regard to the impact of its
operations on air and water quality and solid waste disposal, and may be
subject to regulation with regard to other environmental considerations by
various federal, state, and local authorities. The application of federal and
state restrictions to protect the environment involves or may involve review,
certification, or issuance of permits by various federal and state
authorities, including the United States Environmental Protection Agency
("EPA") and the Wisconsin Department of Natural Resources ("DNR"). Such
restrictions (particularly in regard to emissions into the air and water, and
solid waste disposal) may limit, prevent, or substantially increase the cost
of the operation of WPSC's generating facilities and may require substantial
investments in new equipment at existing installations. Such restrictions may
also require substantial additional investments for any new projects and may
delay or prevent authorization and completion of the projects. WPSC cannot
forecast effects of such regulation upon its generating, transmission, and
other facilities, or its operations, but believes that it is presently meeting
existing requirements.
AIR QUALITY
WPSC's generating plants are in compliance with all current sulfur
dioxide, nitrogen oxide, and particulate emission standards.
The Federal Clean Air Act Amendments of 1990 ("Act") required reductions
in sulfur dioxide in 1995 (Phase I) to meet limitations based on an emission
rate of 2.5 pounds per Btu multiplied by a historical generation baseline for
Pulliam Unit 8 and Edgewater Unit 4 generating units. The Act requires
further reductions beginning in the year 2000 (Phase II). The year 2000
limits are based on an emission rate of 1.2 pounds per million Btu multiplied
by a historical generation baseline for all generating units. WPSC's
generating facilities met the year 2000 standard in 1995. WPSC achieved
compliance with Wisconsin and federal sulfur dioxide emission limitations by
switching to low sulfur coal.
Because of the emission allowance system included in the Act, operations
during Phase I are expected to produce surplus allowances which will be
available to aid in compliance with the requirements of Phase II. To the
-26-
<PAGE>
extent WPSC determines that it will have allowances available beyond its own
requirements in both Phase I and Phase II, it will consider the sale of the
excess allowances. The PSCW has ordered that profits from the sale of
allowances be used to benefit utility customers.
The Act also requires the installation of low nitrogen oxide burners on
several units. Low nitrogen oxide burners were installed at Pulliam Unit 8
early in 1994. Phase I of the Act allows units smaller than 100 megawatts,
such as Pulliam Unit 7, to be designated Phase I units, thus building up
sulfur dioxide credits. Having made this election, low nitrogen oxide burners
were installed on Pulliam Unit 7 in 1994. Low nitrogen oxide emissions from
Pulliam Units 7 and 8 and Weston Unit 3 are averaged with Weston Units 1
and 2. This averaging plan generates additional emission allowances in
Phase I and locks in Phase I nitrogen oxide limits for these units. This
should reduce Phase II compliance costs.
Expenditures of $1.0 million to $2.0 million for Phase II of the Acid
Rain Program are projected through 1999 to assure nitrogen oxide emission
compliance at the Pulliam and Weston plants. The EPA recently proposed
additional nitrogen oxide emission reductions from facilities in 22 eastern
states, including those in Wisconsin. The reduction in nitrogen oxide
emissions that WPSC will need to achieve has yet to be determined. However,
it is likely that the reduction will be significant and beyond that required
by the existing rules. The proposed rules will probably take effect in 2002
to 2004 and result in significant emission control costs.
Air toxic provisions in the Act will not be applied until the EPA
determines if those standards need to be applied to utilities.
WATER QUALITY
WPSC is subject to regulation by the EPA and the DNR with respect to
thermal and other discharges into Lake Michigan and other waters of Wisconsin
from WPSC's power plants. Wastewater discharge permits with a term of five
years were reissued by the DNR to WPSC for Kewaunee in 1995 and the Pulliam
and Weston power plants in 1996. No new permit conditions or associated
material costs were imposed compared to permits issued during earlier
renewals. Revisions to state water quality rules as a result of the
Great Lakes Initiative should not result in any significant changes when
wastewater permits are reissued in 2000 for Kewaunee and in 2001 for the
Pulliam and Weston plants.
GAS PLANT CLEANUP
WPSC is investigating the cleanup of eight manufactured gas plant sites
which it previously operated in Green Bay, Two Rivers, Oshkosh, Marinette,
Sheboygan (two sites), Stevens Point, and Menominee (Michigan). In general,
WPSC is proceeding with these projects as the designated responsible party for
cleanup, although for two sites, Sheboygan II and Oshkosh, formal agreements
have been executed with the DNR covering the investigation and restoration
activities. The agreement for Sheboygan II allows WPSC to work with Wisconsin
on restoration. The site is not associated with the larger Sheboygan River
and Harbor Superfund site. The agreement for Oshkosh was entered into in
order to resolve a unilateral administrative order that was issued by the DNR.
-27-
<PAGE>
Total costs of cleanup for all eight sites, as estimated by an
environmental consultant, should be in the range of $34.1 million to
$41.1 million. The estimates assume removal of significantly contaminated
soil and groundwater treatment/monitoring for up to 25 years, depending on
site conditions. The cost estimates for five of the sites include removal and
disposal of contaminated river sediments.
Expenditures for the gas plant sites are estimated to be made over the
next 32 years. WPSC has recorded on its books a liability with an offsetting
deferred charge (i.e., a regulatory asset) in the amount of $41.7 million.
Insurance recoveries and collections in rates have reduced the regulatory
asset to $29.2 million at December 31, 1997. Expenditures have reduced the
liability to $40.2 million at December 31, 1997. Based on discussions with
regulators and a Wisconsin rate order, management believes that these costs,
but not the carrying costs associated with the deferred charges, will be
recoverable in future customer rates. In a rate order that became effective
in February 1997, the PSCW authorized current annualized recovery for gas site
cleanup of $225,000 for each of the years 1997 and 1998.
Work at the Stevens Point site is expected to commence in 1998. As
remedial feasibility studies and initial remedial activities are completed,
remediation cost estimates may be adjusted and these adjustments could be
significant. Other factors that can affect these estimates are changes in
remedial technology and regulatory requirements.
The cost estimates presented above do not take into consideration any
recovery from insurance carriers or other third parties which WPSC has
obtained or is pursuing. Insurance recoveries are deferred as a reduction to
the regulatory asset; therefore, neither adjustments to the estimated
liability nor insurance recoveries have an immediate impact on net income. To
date, WPSC has received insurance settlements of approximately $12.6 million.
F. CAPITAL REQUIREMENTS
WPSR's utility subsidiary, WPSC, makes large investments in capital
assets. Construction expenditures for WPSC are expected to continue in the
$75.0 million to $90.0 million range annually during the 1998 through 2000
period. This does not include any expenditures for the replacement of
Kewaunee steam generators. Steam generator replacement, WPSC's share of which
would be approximately $36.7 million in year of occurrence dollars, is
contingent upon receipt of approval from the PSCW to proceed with replacement
and agreement among the owners on a replacement plan. Potential expenditures
for gas pipeline laterals which would connect WPSC's distribution system with
the proposed Viking Voyageur pipeline from Canada are also not included.
In addition, other capital requirements for WPSC during the three-year
period include Kewaunee decommissioning trust fund contributions of
approximately $30.0 million and replacement financing for maturing
first-mortgage bonds of $50.0 million.
See note 9 of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Future Utility
Expenditures, at page 72 for additional information regarding forecasted
construction expenditures for WPSC.
-28-
<PAGE>
WPSR expects that internally-generated funds and short-term borrowing
will satisfy most of its capital requirements. WPSR may periodically issue
additional long-term debt and common stock to reduce short-term debt and to
maintain desired capitalization ratios. The specific forms of financing,
amounts, and timing will depend on the availability of projects, market
conditions, and other factors. However, at this time, it is anticipated that
trust originated preferred stock could be issued on behalf of WPSR in 1998.
WPSR may also expand its leveraged employee stock ownership plan during the
three-year period.
Investment expenditures for nonregulated projects are uncertain since
there are no material firm commitments at this time. Debt financing for most
nonregulated projects is expected to be on a nonrecourse basis.
G. EMPLOYEES
At December 31, 1997, WPSR, including its subsidiaries, employed
2,486 persons. Of this number, 2,399 employees were employed by WPSC.
Of the employees of WPSC, 1,888 were considered electric utility
employees and 511 were considered gas utility employees. Approximately
1,200 WPSC employees are represented by Local 310 of the International Union
of Operating Engineers ("Union"). The Union has been operating without a
contract since October 29, 1997. Unresolved issues remain and contract
negotiations continue. There has never been a strike against WPSC by its
employees.
-29-
<PAGE>
<PAGE>
ITEM 2. PROPERTIES
A. UTILITY
The following table includes information about electric generation
facilities of WPSC (including those jointly-owned):
<TABLE>
<CAPTION>
Rated
Capacity (a)
Type Name Location Fuel (Kilowatts)
- ------------- ---------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Steam Pulliam Green Bay, WI Coal 400,900 (b)
Weston Wausau, WI Coal or Gas 480,100 (c)
Kewaunee Kewaunee, WI Nuclear 210,500 (d)
Columbia -
Units No. 1 & 2 Portage, WI Coal 325,100 (d)
Edgewater
Unit No. 4 Sheboygan Coal 106,200 (d)
---------
Total Steam 1,522,800
Hydro Various 68,400 (e)
(15 Plants)
Combustion Various Gas or Oil 269,410 (f)
Turbine (7 Plants)
& Diesel ---------
Total System 1,860,610
=========
(a) Based on winter-rated capacity.
(b) This plant has six units.
(c) This plant has three units. Two units burn only coal and the
other unit can burn coal or natural gas.
(d) These facilities are jointly-owned. Kewaunee is operated by
WPSC. WP&L is operator of the Columbia and Edgewater units.
The capacity indicated is WPSC's portion of total plant
capacity based on percent of ownership.
(e) Includes 12,900 kw purchased from Wisconsin River Power Company.
(f) WPSC and the Marshfield Electric and Water Department jointly
own 115,600 kilowatts of combustion turbine peaking capacity
which WPSC operates. The capacity indicated is WPSC's
portion of total plant capacity based on percent of
ownership.
</TABLE>
WPSC owns 55 transmission substations with a transformer capacity of
5,616,110 kilovolt-ampere ("kVa"), 110 distribution substations with a
transformer capacity of 2,881,270 kVa, 1,549 miles of electric transmission
lines, and 19,358 miles of electric distribution lines.
-30-
<PAGE>
Gas properties include approximately 4,623 miles of main, 68 gate and
city regulator stations, and 201,566 services. All gas facilities are located
in Wisconsin except for distribution facilities in and near the city of
Menominee, Michigan.
Substantially all of WPSC's utility plant is subject to a first mortgage
lien.
B. NONREGULATED
The following table includes information about jointly-owned electric
generation facilities of PDI:
<TABLE>
<CAPTION>
Rated
Capacity
Type Name Location Fuel (Kilowatts)
- ----- -------------- ------------ ---- -----------
<S> <C> <C> <C> <C>
Steam Stoneman Cassville, WI Coal 53,000 (a)
(a) The Stoneman facility is owned by Mid-American Power, LLC.
PDI Stoneman, Inc. (a wholly-owned subsidiary of WPS Power
Development, Inc.) and B. M. Stoneman, Inc., (a wholly-owned
subsidiary of Burns and McDonnell) own 66-2/3% and 33-1/3%,
respectively, of Mid-American Power, LLC.
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
See Part I, Item 1E, ENVIRONMENTAL MATTERS, at page 26, for a
description of various proceedings relating to environmental matters.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year.
-31-
<PAGE>
<PAGE>
ITEM 4A. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information about outside directors is omitted for the reason that such
information will be included in a proxy statement for the Annual Meeting of
Shareholders of WPSR which is scheduled to be held on May 7, 1998.
A. EXECUTIVE OFFICERS OF WPS RESOURCES CORPORATION ("WPSR")
<TABLE>
<CAPTION>
Current Position and Business Effective
Name and Age Experience During Past Five Years Date
- ----------------------------- ------------------------------------------- ---------
<S> <C> <C>
Larry L. Weyers 52 Chairman, President, and Chief Executive
Officer 02-12-98
President and Chief Executive Officer 05-01-97
President and Chief Operating Officer 01-01-96
Patrick D. Schrickel 53 Executive Vice President 12-29-96
Vice President 12-09-93
Phillip M. Mikulsky 49 Senior Vice President-Development 02-12-98
Vice President-Development 09-01-95
Manager-System Operations 10-01-91 *
Director-System Operations 09-28-91 *
Daniel P. Bittner 54 Vice President and Chief Financial Officer 05-01-97
Vice President 12-29-96
Richard E. James 44 Vice President-Corporate Planning 12-29-96
Vice President-Corporate Planning 08-01-95 *
Assistant Vice President-Corporate Planning 05-09-94 *
Assistant Vice President-Rates and Economic
Evaluation 03-01-92 *
Thomas P. Meinz 51 Vice President-Public Affairs 02-12-98
Bernard J. Treml 48 Vice President-Human Resources 02-12-98
Glen R. Schwalbach 52 Assistant Vice President-Corporate Planning 12-29-96
Assistant Vice President-Corporate Planning 07-28-96 *
Assistant Vice President-Gas Engineering
and Supply 06-01-90 *
Francis J. Kicsar 58 Secretary 01-01-96
Ralph G. Baeten 54 Treasurer 12-09-93
Diane L. Ford 44 Controller and Chief Accounting Officer 05-01-97
Controller 12-15-93
George R. Wiesner 40 Assistant Controller 12-15-96
Director-Financial Accounting ESI/PDI 08-25-96 *
Financial Reporting Supervisor 05-01-87 *
* Identifies experience with Wisconsin Public Service Corporation ("WPSC")
for Richard E. James, Phillip M. Mikulsky, Glen R. Schwalbach, and
George R. Wiesner. The other listed officers of WPSR are also officers
of WPSC and their experience with WPSC is indicated below.
</TABLE>
All of the above named executive officers have been employed by WPSR or WPSC
for at least five years.
-32-
<PAGE>
<PAGE>
B. EXECUTIVE OFFICERS OF WISCONSIN PUBLIC SERVICE CORPORATION ("WPSC")
<TABLE>
<CAPTION>
Current Position and Business Effective
Name and Age Experience During Past Five Years Date
- ----------------------------- ------------------------------------------- ---------
<S> <C> <C>
Larry L. Weyers 52 Chairman and Chief Executive Officer 02-12-98
President and Chief Executive Officer 05-04-97
President and Chief Operating Officer 01-01-96
Senior Vice President-Power Supply and
Engineering 08-01-95
Vice President-Power Supply and Engineering 05-09-94
Vice President-Energy Supply 01-01-92
Patrick D. Schrickel 53 President and Chief Operating Officer 02-12-98
Executive Vice President 12-29-96
Senior Vice President-Finance and Corporate
Services 05-09-94
Senior Vice President-Operations 06-01-89
Daniel P. Bittner 54 Senior Vice President-Finance and Corporate
Services 12-29-96
Senior Vice President-Customer Service 05-09-94
Senior Vice President-Finance 03-01-92
Vice President-Treasurer 02-01-89
Clark R. Steinhardt 56 Senior Vice President-Nuclear Power 06-01-91
Ralph G. Baeten 54 Vice President-Treasurer 08-01-95
Treasurer 03-01-92
Insurance and Benefits Director 05-01-87
Thomas P. Meinz 51 Vice President-Public Affairs 02-12-98
Vice President-Power Supply and Engineering 02-23-97
Power Supply and Engineering Executive 01-14-96
Senior Corporate Planning Executive 05-09-94
Manager-System Planning and Licensing 03-01-91
Bernard J. Treml 48 Vice President-Human Resources 05-09-94
Assistant Vice President-Human Resources 07-01-93
Manager-Human Resources 08-01-92
Manager-Marketing Programs and Services 08-01-91
Wayne J. Peterson 39 Vice President-Distribution and Customer
Service 02-12-98
Assistant Vice President-Customer Service 02-23-97
Manager-System Operations 10-01-95
Site Leader 10-01-94
Electric Superintendent 04-01-92
Director-Distribution Services 01-02-92
David W. Schonke 64 Assistant Vice President-Electric
Distribution Engineering 06-01-86
Francis J. Kicsar 58 Secretary 01-01-96
Assistant Secretary 03-01-92
Director-Corporate Tax 10-01-76
Diane L. Ford 44 Controller 03-01-92
Administrator-Corporate Accounting 05-01-87
NOTE: All ages for the officers of WPSR and WPSC are as of December 31,
1997. None of the executives listed above for WPSR or for WPSC are
related by blood, marriage, or adoption to any of the other officers
listed or to any director of the Registrant. Each officer shall hold
office until his or her successor shall have been duly elected and
qualified, or until his or her death, resignation, disqualification,
or removal.
</TABLE>
-33-
<PAGE>
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
WPS RESOURCES CORPORATION COMMON STOCK TWO-YEAR COMPARISON
Dividends
Share Data Per Share Price Range
- ---------- --------- ---------------------
High Low
------- -------
1997
1st Quarter $ .475 28-3/4 26-1/8
2nd Quarter .475 27-7/8 23-3/8
3rd Quarter .485 29-1/4 26-3/4
4th Quarter .485 34-1/4 28-1/16
-----
Total $1.92
1996
1st Quarter $ .465 34-3/8 31-7/8
2nd Quarter .465 33-1/2 30-1/8
3rd Quarter .475 32-1/8 30-3/8
4th Quarter .475 30-5/8 28-1/4
-----
Total $1.88
DIVIDEND RESTRICTIONS
WPSC, WPSR's principal subsidiary, is restricted by a PSCW order to
paying normal common stock dividends of no more than 109% of the previous
year's common stock dividend without prior notice to the PSCW. Also,
Wisconsin law prohibits WPSC from making loans to WPSR and its nonregulated
subsidiaries and from guaranteeing their obligations.
On January 15, 1997, a special common stock dividend of $10.0 million
was declared by WPSC to be paid to WPSR. The special dividend allowed WPSC's
average equity capitalization ratio to remain at approximately 54%, the level
approved by the PSCW for ratemaking. The dividend was paid in January 1997.
COMMON STOCK
Listed on the New York and Chicago Stock Exchanges
Ticker Symbol: WPS
Transfer Agent and Registrar: Firstar Trust Company
P. O. Box 2077
Milwaukee, Wisconsin 53201
As of December 31, 1997, there were 23,704 common stock shareholders of
record.
-34-
<PAGE>
<PAGE>
<TABLE>
ITEM 6. SELECTED FINANCIAL DATA
WPS RESOURCES CORPORATION
COMPARATIVE FINANCIAL STATEMENTS AND
FINANCIAL STATISTICS (1993 TO 1997)*
A. CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
========================================================================================================================
Consolidated Statements of Income
========================================================================================================================
Year Ended December 31
(Thousands, except share amounts) 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating revenues
Electric utility $479,388 $490,506 $489,000 $480,816 $493,256
Gas utility 211,090 211,357 174,693 182,058 187,376
Nonregulated energy and other 187,862 156,391 56,155 10,921 -
- ------------------------------------------------------------------------------------------------------------------------
Total operating revenues 878,340 858,254 719,848 673,795 680,632
========================================================================================================================
Operating expenses
Electric production fuels 107,538 105,418 104,858 111,011 114,051
Purchased power 45,876 37,737 39,593 38,631 30,703
Gas purchased for resale 147,755 149,388 116,253 126,351 133,347
Nonregulated energy cost of sales 182,863 155,133 53,983 10,663 -
Other operating expenses 148,569 168,905 154,445 148,917 148,270
Maintenance 41,661 48,806 50,761 49,983 51,597
Depreciation and decommissioning 77,541 65,178 65,627 56,365 60,609
Taxes other than income 26,448 26,868 25,921 26,063 25,204
- ------------------------------------------------------------------------------------------------------------------------
Total operating expenses 778,251 757,433 611,441 567,984 563,781
========================================================================================================================
Operating income 100,089 100,821 108,407 105,811 116,851
- ------------------------------------------------------------------------------------------------------------------------
Other income
Allowance for equity funds
used during construction 129 139 170 108 287
Other, net 11,511 (1,084) 6,080 4,473 3,356
- ------------------------------------------------------------------------------------------------------------------------
Total other income 11,640 (945) 6,250 4,581 3,643
========================================================================================================================
Income before interest expense 111,729 99,876 114,657 110,392 120,494
- ------------------------------------------------------------------------------------------------------------------------
Interest on long-term debt 22,331 21,532 22,859 23,407 24,393
Other interest 4,172 3,596 2,604 1,796 1,562
Allowance for borrowed funds
used during construction (100) (128) (68) (139) (200)
- ------------------------------------------------------------------------------------------------------------------------
Total interest expense 26,403 25,000 25,395 25,064 25,755
========================================================================================================================
Income before income taxes 85,326 74,876 89,262 85,328 94,739
Income taxes 29,270 24,358 30,808 29,526 32,539
Minority interest (797) (348) - - -
Preferred stock dividends of
subsidiary 3,111 3,111 3,111 3,111 3,311
- ------------------------------------------------------------------------------------------------------------------------
Net income $ 53,742 $ 47,755 $ 55,343 $ 52,691 $ 58,889
========================================================================================================================
Shares of common stock
Outstanding at December 31 23,897 23,897 23,897 23,897 23,897
Average 23,873 23,891 23,897 23,897 23,888
Basic and diluted earnings per
average share of common stock $2.25 $2.00 $2.32 $2.21 $2.47
Dividend per share of common stock 1.92 1.88 1.84 1.80 1.76
========================================================================================================================
* WPS Resources Corporation became a holding company in 1994. The data in the 1993 column is that of Wisconsin Public
Service Corporation.
</TABLE>
-35-
PAGE
<PAGE>
<TABLE>
ITEM 6. SELECTED FINANCIAL DATA
WPS RESOURCES CORPORATION
COMPARATIVE FINANCIAL STATEMENTS AND
FINANCIAL STATISTICS (1993 TO 1997)*
B. CONSOLIDATED BALANCE SHEETS
<CAPTION>
========================================================================================================================
Consolidated Balance Sheets
At December 31 (Thousands) 1997 1996 1995 1994 1993
========================================================================================================================
<S> <C> <C> <C> <C> <C>
Assets
- ------------------------------------------------------------------------------------------------------------------------
Utility plant
Electric $1,513,310 $1,483,829 $1,449,201 $1,423,316 $1,386,007
Gas 252,029 241,367 228,734 203,384 184,234
- ------------------------------------------------------------------------------------------------------------------------
Total 1,765,339 1,725,196 1,677,935 1,626,700 1,570,241
Less - Accumulated depreciation
and decommissioning 1,032,149 952,296 905,427 846,505 801,056
- ------------------------------------------------------------------------------------------------------------------------
Total 733,190 772,900 772,508 780,195 769,185
Nuclear decommissioning trusts 134,108 100,570 82,109 64,147 56,699
Nuclear fuel, net 19,062 19,381 14,275 19,417 17,981
- ------------------------------------------------------------------------------------------------------------------------
Net utility plant 886,360 892,851 868,892 863,759 843,865
========================================================================================================================
Current assets 196,591 219,144 186,085 170,015 180,140
Net nonutility and nonregulated plant 19,194 19,738 3,307 2,218 2,121
Regulatory and other assets 197,457 199,132 208,459 181,283 172,715
- ------------------------------------------------------------------------------------------------------------------------
Total assets $1,299,602 $1,330,865 $1,266,743 $1,217,275 $1,198,841
========================================================================================================================
========================================================================================================================
Capitalization and Liabilities
========================================================================================================================
Capitalization
Common stock equity $ 477,823 $ 467,524 $ 463,441 $ 446,540 $ 433,724
Preferred stock of subsidiary
with no mandatory redemption 51,200 51,200 51,200 51,200 51,200
Long-term debt of subsidiary 304,008 305,788 306,590 309,945 314,225
- ------------------------------------------------------------------------------------------------------------------------
Total capitalization 833,031 824,512 821,231 807,685 799,149
========================================================================================================================
Liabilities
Short-term borrowings 30,706 57,950 26,500 22,500 21,000
Deferred income taxes 125,804 130,208 135,958 126,639 138,952
Other liabilities and credits 310,061 318,195 283,054 260,451 239,740
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities 466,571 506,353 445,512 409,590 399,692
========================================================================================================================
Total capitalization and liabilities $1,299,602 $1,330,865 $1,266,743 $1,217,275 $1,198,841
========================================================================================================================
* WPS Resources Corporation became a holding company in 1994. The data in the 1993 column is that of Wisconsin Public
Service Corporation.
</TABLE>
-36-
<PAGE>
<PAGE>
<TABLE>
ITEM 6. SELECTED FINANCIAL DATA
WPS RESOURCES CORPORATION
COMPARATIVE FINANCIAL STATEMENTS AND
FINANCIAL STATISTICS (1993 TO 1997)*
C. FINANCIAL STATISTICS
<CAPTION>
================================================================================================================
Year Ended December 31 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Stock price $33-13/16 $28-1/2 $34 $26-3/4 $33-5/8
Book value per share $20.00 $19.56 $19.39 $18.69 $18.18
Return on average equity 11.3% 10.2% 12.2% 12.0% 13.9%
Number of common stock shareholders 23,704 23,998 24,341 25,395 25,240
Number of employees 2,486 2,606 2,547 2,578 2,603
================================================================================================================
* WPS Resources Corporation became a holding company in 1994. The data in the 1993 column is that of
Wisconsin Public Service Corporation.
</TABLE>
-37-
PAGE
<PAGE>
<TABLE>
ITEM 6. SELECTED FINANCIAL DATA
WISCONSIN PUBLIC SERVICE CORPORATION
COMPARATIVE FINANCIAL DATA AND
FINANCIAL STATISTICS (1993 TO 1997)
D. SELECTED FINANCIAL DATA
<CAPTION>
========================================================================================================
(Millions) 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating Revenues $ 690.5 $ 701.9 $ 663.7 $ 662.8 $ 680.6
Net Income 64.7 60.4 59.2 55.8 62.2
Total Assets (At December 31) 1,234.0 1,258.9 1,233.4 1,205.2 1,198.8
Long-Term Debt, Net (At December 31) 307.6 310.8 312.7 316.1 314.2
========================================================================================================
</TABLE>
-38-
PAGE
<PAGE>
<TABLE>
ITEM 6. SELECTED FINANCIAL DATA
WISCONSIN PUBLIC SERVICE CORPORATION
COMPARATIVE FINANCIAL STATEMENTS AND
FINANCIAL STATISTICS (1993 TO 1997)
E. FINANCIAL STATISTICS
<CAPTION>
===================================================================================================================
Year Ended December 31 (Millions) 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Coverage
Times interest earned before income taxes 4.48 4.36 4.00 4.19 4.49
Times interest earned after income taxes 3.30 3.21 3.03 3.09 3.29
Times interest and preferred dividends
earned after income taxes 2.97 2.88 2.70 2.77 2.93
===================================================================================================================
Capitalization ratios
Common equity including ESOP 56.0 55.3 55.0 53.9 54.3
Preferred stock 6.3 6.3 6.3 6.4 6.4
Long-term debt 37.7 38.4 38.7 39.7 39.3
===================================================================================================================
Percent long-term debt to net utility plant 34.7 34.8 36.0 36.6 37.2
===================================================================================================================
Average rate
Bonds 7.0 7.0 7.1 7.1 7.1
Preferred stock 6.1 6.1 6.1 6.1 6.1
===================================================================================================================
Number of preferred stock shareholders 2,734 2,965 3,165 3,372 3,577
===================================================================================================================
Weather information
Cooling degree days 255 352 808 519 432
Cooling degree days as a percent of normal 53.3% 73.6% 170.1% 107.0% 86.2%
Heating degree days 8,099 8,566 7,813 7,578 7,916
Heating degree days as a percent of normal 101.6% 107.5% 98.0% 95.5% 100.2%
===================================================================================================================
</TABLE>
-39-
<PAGE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION OF
WPS RESOURCES CORPORATION AND
WISCONSIN PUBLIC SERVICE CORPORATION
RESULTS OF OPERATIONS
WPS Resources Corporation ("WPSR") is a holding company. Approximately
79% and 95% of WPSR's 1997 revenues and assets, respectively, and all of its
net income are derived from Wisconsin Public Service Corporation ("WPSC"), an
electric and gas utility. WPSR's wholly-owned subsidiaries include WPSC, WPS
Energy Services, Inc. ("ESI"), and WPS Power Development, Inc. ("PDI").
1997 COMPARED WITH 1996
WPS RESOURCES CORPORATION OVERVIEW
Revenues at WPSR increased from $858.3 million in 1996 to $878.3 million
in 1997, or 2.3%. Net income increased 12.3% from $47.8 million in 1996 to
$53.7 million in 1997. Basic and diluted earnings per share increased 12.5%,
from $2.00 in 1996 to $2.25 in 1997. The primary reasons for the increase in
earnings at WPSR were decreased operating and maintenance expenses, increased
other income, an increased nonregulated energy margin, and an increased gas
utility margin. Partially offsetting these increases in earnings were a
decrease in the electric utility margin, an increase in depreciation
and decommissioning expense, and an increase in income tax expense.
Earnings on common stock of WPSC were $61.6 million in 1997 and
$57.3 million in 1996. Nonregulated losses were $7.9 million in 1997 and
$9.5 million in 1996.
WISCONSIN PUBLIC SERVICE CORPORATION OVERVIEW
Revenues at WPSC were $690.5 million in 1997 compared with
$701.9 million in 1996, a decrease of 1.6%. Earnings on common stock
increased 7.5%, from $57.3 million in 1996 to $61.6 million in 1997. The
primary reasons for the increase in earnings at WPSC were a decrease in
operating and maintenance expenses, an increase in other income, and an
increase in the gas utility margin. Offsetting these increases in earnings
were a decrease in the electric utility margin, an increase in depreciation
and decommissioning expense, and an increase in income tax expense.
ELECTRIC UTILITY OPERATIONS
Electric margins decreased $21.4 million (see table below), or 6.2%, due
to implementation of a Public Service Commission of Wisconsin ("PSCW") rate
order which authorized a $35.5 million, or 8.1%, electric revenue reduction.
A second factor contributing to decreased margins was increased replacement
power costs as a result of an extended outage at the Kewaunee Nuclear Power
Plant ("Kewaunee"). WPSC is the operator and 41.2% owner of Kewaunee. A
surcharge authorized by the PSCW partially offset increases in replacement
power costs in the latter part of the first quarter and in the second
quarter of 1997.
-40-
<PAGE>
=================================================================
ELECTRIC MARGINS ($000) 1997 1996 1995
-----------------------------------------------------------------
Revenues $479,388 $490,506 $489,000
Fuel and purchased power 153,414 143,155 144,451
-----------------------------------------------------------------
Margins $325,974 $347,351 $344,549
=================================================================
Sales (kWh 000) 11,259,327 11,011,842 10,978,131
=================================================================
In spite of a 27.6% decrease in cooling degree days, electric
kilowatt-hour ("kWh") sales increased by 2.2% due to increased demand by
commercial and industrial customers. Commercial and industrial kWh sales
increased 4.8%, while wholesale kWh sales decreased 3.4%. Electric operating
revenues decreased $11.1 million, or 2.3%, due primarily to the electric rate
decrease.
Electric production fuel expense increased $2.1 million, or 2.0%.
Nuclear fuel expense was $2.0 million lower than in 1996 due to decreased
generation at Kewaunee in the first and second quarters of 1997 as a result of
an extended outage. Steam fuel expense was higher by $1.0 million and
combustion turbine generation expense was higher by $3.2 million due to
increased generation requirements from these sources during the extended
outage at Kewaunee.
Purchased power expense increased $8.1 million, or 21.6%, due to
increased purchase requirements and higher costs of purchased power during the
extended outage at Kewaunee.
The PSCW allows WPSC to pass changes in the cost of fuel and purchased
power, within a specified range, on to its customers through a fuel adjustment
clause. WPSC is required to file an application to adjust rates either higher
or lower when costs are plus or minus 2% from forecasted costs on an annual
basis. The additional fuel costs in 1997 did not result in WPSC being outside
this 2% window.
GAS UTILITY OPERATIONS
Gas margins increased $1.4 million (see table below), or 2.2%, due
primarily to implementation of a PSCW rate order which authorized a
$5.7 million, or 2.7%, increase in gas revenues.
=================================================================
GAS MARGINS ($000) 1997 1996 1995
-----------------------------------------------------------------
Revenues $211,090 $211,357 $174,693
Purchase costs 147,755 149,388 116,253
-----------------------------------------------------------------
Margins $ 63,335 $ 61,969 $ 58,440
=================================================================
Volume (Therms 000) 662,008 666,598 631,192
=================================================================
Gas operating revenues remained relatively stable reflecting the rate
increase offset by a 5.5% reduction in heating degree days. Gas revenues also
-41-
<PAGE>
reflect a one-time reduction of $0.9 million in the first quarter of 1997 as a
result of a PSCW directive to change the accounting treatment for previous
customer line extensions. This reduction represents a decrease of
approximately $.02 per share after income tax effects.
Gas purchase costs showed a net decrease of $1.6 million, or 1.1%, due
primarily to reduced purchases because of decreased demand as a result of the
reduction in heating degree days. The PSCW allows WPSC to pass changes in the
cost of gas on to customers through a purchased gas adjustment clause
("PGAC").
OTHER UTILITY EXPENSES/INCOME
Other operating expenses at WPSC decreased $24.1 million, or 15.2%. Cost
saving initiatives and decreased amortization of deferred demand-side
management expenditures resulted in lower customer service and sales expenses
of $9.5 million. Administrative expenses decreased $5.8 million due to cost
saving measures and reduced postretirement medical, dental, and other benefit
expenses. Generation operating expenses were lower by $7.3 million primarily
as a result of the completion in 1996 of an amortization of deferred expenses
related to a previous coal contract settlement. Gas operating expenses
decreased $1.5 million as the result of a PSCW directive requiring gas
servicing revenues and expenses to be classified as other income and
deductions beginning in 1997.
Maintenance expense decreased $7.1 million, or 14.5%. Electric
transmission and distribution expenses decreased $3.4 million as a result of
cost saving initiatives and less maintenance of overhead lines in 1997 due to
less storm damage. Expenses were $1.9 million lower at Kewaunee in 1997
because Kewaunee was out of service in 1996 for scheduled maintenance. Gas
distribution had lower expenses of $0.9 million due to cost saving initiatives
and decreased maintenance activities. Steam costs decreased $0.6 million at
WPSC's coal-fired plants due to changes in maintenance schedules as a result
of the extended outage at Kewaunee.
Depreciation and decommissioning expenses increased $12.0 million, or
18.8%, largely due to the accelerated recovery of investment in Kewaunee and
accelerated funding of Kewaunee decommissioning costs.
Other income increased $7.5 million, or 141.7%, due primarily to gains in
1997 on the sale of nonutility property of $4.8 million which represented an
increase of approximately $.12 per share after income tax effects. Also
included in other income in 1997 was interest of $2.2 million resulting from
an income tax audit settlement. Income tax expense increased $1.9 million
reflecting higher net income in 1997.
OVERVIEW OF NONREGULATED OPERATIONS
Nonregulated operations primarily represent the gas and electric sales
of ESI, an energy marketing subsidiary. Nonregulated operations also include
PDI which participates in the development of electric generation projects,
invests in generating projects, and provides services to the electric power
generation industry. Nonregulated operations experienced a loss of $7.9
million in 1997 compared with a loss of $9.5 million in 1996.
-42-
<PAGE>
On a stand-alone basis, WPSR incurred a net loss in 1997 of
$1.0 million, compared with net income of $0.8 million in 1996. The 1997 WPSR
stand-alone loss was attributable primarily to costs related to the proposed
merger with Upper Peninsula Energy Corporation ("UPEN").
ESI incurred a loss of $4.9 million in 1997 and $6.3 million in 1996, a
decrease of 22.2%. PDI incurred a loss of $1.9 million in 1997 and
$4.0 million in 1996, a decrease of 52.5%. Operating losses at the
nonregulated subsidiaries were anticipated by management as the companies
develop infrastructure and finance additional working capital needed to
support growth.
NONREGULATED MARGINS
Gas margins at ESI increased $3.2 million from a negative $1.1 million
in 1996 to a positive $2.1 million in 1997. In 1996, customer commitments at
ESI were not fully hedged during a period of volatile gas commodity markets
and certain gas suppliers defaulted which negatively impacted margins.
Electric margins increased $0.9 million in 1997.
Nonregulated energy and other operating revenues increased
$31.5 million, or 20.1%. The increase in nonregulated energy revenues
consisted largely of increased gas sales at ESI of $26.2 million, or 17.1%, as
a result of customer growth and increased electric sales of $5.6 million, or
716.0%.
Nonregulated energy cost of sales increased $27.7 million, or 17.9%, due
primarily to increased gas purchases and purchased power of $20.5 million and
$4.7 million, respectively, at ESI.
OTHER NONREGULATED EXPENSES/INCOME
Other nonregulated operating expenses increased $3.7 million, or 34.6%.
Other operating expenses increased $2.3 million at WPSR due primarily to
expenses associated with the UPEN merger.
Other operating expenses at ESI increased $1.3 million, or 19.4%, due to
expansion of the business and the development of infrastructure as ESI
positions itself for the future. Although increased margins more than offset
other operating expenses, interest costs increased due to the financing of
additional working capital needed to support the growth of ESI.
Other operating expenses at PDI increased $0.4 million as a result of
expansion of the business and operation of the Stoneman Power Plant
("Stoneman"). Project revenues at PDI partially offset costs related to the
investigation of possible energy-related investments and a loss from Stoneman
operations.
ESI experienced trading losses of $1.4 million in 1997 and $2.5 million
in 1996. PDI experienced a loss of $4.0 million in 1996 related to the
write-off of an investment in an industrial processing facility. This
write-off represented a decrease in 1996 earnings of $.10 per share after
income tax effects.
-43-
<PAGE>
1996 COMPARED WITH 1995
WPS RESOURCES CORPORATION OVERVIEW
Revenues at WPSR increased 19.2% from $719.8 million in 1995 to
$858.3 million in 1996. Net income was $55.3 million in 1995 compared with
$47.8 million in 1996, a decrease of 13.6%. Basic and diluted earnings per
share were $2.32 in 1995 and $2.00 in 1996, a decrease of 13.8%. The most
significant reasons for the decrease in earnings at WPSR were increased
operating expenses at the nonregulated subsidiaries, decreased gas margins at
ESI, a loss on an industrial processing facility investment at PDI, and
increased operating expenses at WPSC.
Earnings on common stock of WPSC were $57.3 million in 1996 and
$56.1 million in 1995. Nonregulated losses were $9.5 million in 1996 and
$0.8 million in 1995.
WISCONSIN PUBLIC SERVICE CORPORATION OVERVIEW
Revenues at WPSC increased 5.8%, from $663.7 million in 1995 to
$701.9 million in 1996. Earnings on common stock increased 2.1%, from
$56.1 million in 1995 to $57.3 million in 1996.
ELECTRIC UTILITY OPERATIONS
Electric margins increased $2.8 million, or 0.8%, due primarily to
increased sales volumes and decreased purchased power expenses. Electric
operating revenues remained relatively stable between 1996 and 1995. Electric
production fuels and purchased power decreased $1.3 million, or 0.9%, as a
result of $1.9 million lower purchased power costs, $1.8 million lower
generation costs at Kewaunee due to an extended outage, and $1.5 million lower
combustion turbine generation costs. Offsetting these decreases was an
increase in generating costs at coal-fired plants of $3.9 million.
GAS UTILITY OPERATIONS
Gas margins increased $3.5 million, or 6.0%, due to customer growth at
WPSC and colder weather. Based on degree days, the weather was 9.6% colder in
1996 than in 1995. Gas operating revenues increased $36.7 million, or 21.0%,
and gas purchased for resale increased $33.1 million, or 28.5%, both due to
increased volumes as a result of customer growth and higher gas costs.
OTHER UTILITY EXPENSES/INCOME
Other operating expenses at WPSC increased $7.3 million, or 4.8%.
Higher operating expenses included an increase of $4.5 million related to
expansion of certain operating activities in anticipation of more competitive
markets and an increase in gas operating expenses of $1.9 million as a result
of customer growth. Partially offsetting these increases was a decrease in
employee benefit costs of approximately $2.6 million due to a reduction in
postretirement benefit expenses.
Maintenance expense decreased $2.0 million, or 4.0%, due to lower
maintenance activity at WPSC's coal-fired plants of $3.3 million. This
decrease was partially offset by increased maintenance expense at Kewaunee of
$1.0 million.
-44-
<PAGE>
OVERVIEW OF NONREGULATED OPERATIONS
Nonregulated energy and other operating revenues increased 178.3%, from
$56.2 million in 1995 to $156.4 million in 1996. The loss at the nonregulated
subsidiaries was $0.8 million in 1995 and $9.5 million in 1996.
NONREGULATED MARGINS
Gas margins at ESI decreased from a positive $1.2 million in 1995 to a
negative $1.1 million in 1996. Gas margins were negatively impacted due
primarily to the volatile gas commodity market experienced during 1996 in
which ESI was not fully hedged for its customer commitments and ESI's decision
to honor customer contracts, despite defaults by certain gas suppliers, during
a period of exceptionally high demand.
Nonregulated energy and other operating revenues increased
$100.2 million, or 178.5%. Nonregulated energy revenues primarily represent
electric and gas sales made by ESI. The increase in nonregulated energy
revenues was due to increased gas sales at ESI from $55.2 million in 1995 to
$153.1 million in 1996, an increase of $97.9 million, or 177.2%. The
increased gas sales resulted from ESI's acquisition of a gas marketing company
in the fourth quarter of 1995, additional customer growth in the wholesale
market, and higher unit prices due to gas commodity market conditions. Other
operating revenues increased $1.5 million, or 167.3%, and were comprised of
consulting and construction revenue from ESI and PDI.
Nonregulated energy cost of sales increased $101.2 million, or 187.4%,
due primarily to increased gas purchases and increased gas costs at ESI from
$54.0 million in 1995 to $154.3 million in 1996, an increase of
$100.3 million, or 185.7%.
OTHER NONREGULATED EXPENSES/INCOME
Other operating expenses increased $7.1 million reflecting the expansion
of ESI's and PDI's business and the development of infrastructure including
personnel and systems.
In 1996, PDI experienced a $4.0 million loss on a write-off of an
investment in an industrial processing facility which had been made in
anticipation of energy sales opportunities. This loss represented a $.10 per
share decrease in earnings after income tax effects. ESI experienced trading
losses of $2.5 million in 1996.
-45-
<PAGE>
BALANCE SHEET
1997 COMPARED WITH 1996
Nuclear decommissioning trusts increased $33.5 million due to continued
funding and favorable investment returns. Customer receivables decreased
$19.3 million primarily as a result of decreased sales and increased
collection efforts at WPSC. Regulatory assets decreased $18.4 million due
primarily to gas plant cleanup insurance recoveries recorded as an offset to
regulatory assets in 1997. Investments and other assets increased $16.7
million as a result of increased prepaid pension assets and an increased
unrealized gain on the nuclear decommissioning trust.
Short-term notes payable and commercial paper decreased $16.6 million
and $10.6 million, respectively, due to decreased operational cash needs at
WPSC and decreased notes payable at WPSR. Internally generated funds exceeded
cash requirements at both WPSC and WPSR.
FINANCIAL CONDITION
Internally generated funds exceeded WPSR's cash requirements resulting
in the reduction of short-term borrowings during 1997. Pretax interest
coverage was 4.48 times for the 12 months ended December 31, 1997 for WPSC.
WPSC's bond ratings are AA+ (Standard & Poor's and Duff & Phelps) and Aa2
(Moody's).
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 dividends
without prior notice to the PSCW. Also, Wisconsin law prohibits WPSC from
making loans to WPSR and its nonregulated subsidiaries and from guaranteeing
their obligations. A special common stock dividend of $10.0 million was paid
by WPSC to WPSR in January 1997. The special dividend allowed WPSC's average
equity capitalization ratio to remain at approximately 54%, the level
approved by the PSCW for ratemaking.
WPSC makes large investments in capital assets. Construction
expenditures for WPSC are expected to continue in the $75.0 million to
$90.0 million range annually during the 1998 through 2000 period. This does
not include expenditures for the replacement of Kewaunee steam generators.
Steam generator replacement, WPSC's share of which would be approximately
$36.7 million in year of occurrence dollars, is contingent upon receipt of
approval from the PSCW to proceed with replacement and agreement among the
owners on a replacement plan. Potential expenditures for gas pipeline
laterals which would connect WPSC's distribution system with the proposed
Viking Voyageur pipeline from Canada are also not included.
In addition, other capital requirements for WPSC during the three-year
period include Kewaunee decommissioning trust fund contributions of
approximately $30.0 million and maturing first-mortgage bonds of
$50.0 million.
WPSR expects that internally-generated funds and short-term borrowing
will satisfy most of its capital requirements. WPSR may periodically issue
additional long-term debt and common stock to reduce short-term debt and to
maintain desired capitalization ratios. The specific forms of financing,
amounts, and timing will depend on the availability of projects, market
-46-
<PAGE>
conditions, and other factors. WPSR may expand its leveraged employee stock
ownership plan during the three-year period. Trusted preferred stock may be
issued on behalf of WPSR in 1998 to reduce short-term borrowing.
Investment expenditures for nonregulated projects are uncertain since
there are no material firm commitments at this time. Debt financing for most
nonregulated projects is expected to be on a nonrecourse basis.
Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets to be Disposed of," became
effective in March 1995. This statement imposes a stricter criterion for
regulatory assets by requiring that such assets be probable of future recovery
at each balance sheet date. WPSR adopted this statement on January 1, 1996.
The adoption of this statement did not have a material impact on the financial
position or results of operations based on the current regulatory structure.
SFAS No. 121 may impact WPSR in the future as competitive factors influence
wholesale and retail pricing in the electric and gas industries and as
regulatory policy regarding recovery of stranded investment is developed.
SFAS No. 123, "Accounting for Stock-Based Compensation," became
effective in 1996. This statement permits, but does not require, companies to
change their accounting for stock-based compensation. The statement also
requires additional disclosures. WPSR has adopted only the disclosure
provision of the statement and currently does not provide significant
stock-based compensation.
In February 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 128, "Earnings Per Share." This statement establishes
standards for computing and presenting earnings per share. Adoption of this
standard by WPSR at December 31, 1997 had no impact on the presentation of
earnings per share as basic and diluted earnings per share are identical to
previously reported earnings per share.
In June 1997, the FASB issued SFAS No. 130, "Reporting of Comprehensive
Income," which establishes standards for reporting and display of
comprehensive income and its components of revenues, expenses, gains, and
losses. The statement is effective for fiscal years beginning after
December 15, 1997. WPSR will be adopting the requirements for reporting
comprehensive income in the first quarter of 1998.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." This statement establishes
standards for reporting information about operating segments and is effective
for periods beginning after December 15, 1997. WPSR will be adopting the
requirements of this statement at year-end 1998 and has not yet determined the
segments which will be disclosed.
On July 10, 1997, WPSR announced a merger agreement with UPEN. The S-4
Registration Statement was declared effective by the Securities and Exchange
Commission ("SEC") on December 5, 1997. The shareholders of UPEN approved the
merger on January 29, 1998. The merger is subject to (1) approval by the
Federal Energy Regulatory Commission ("FERC"); (2) approval by the SEC under
the Public Utility Holding Company Act of 1935; (3) the expiration or
termination of the waiting period applicable to the merger under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976; (4) receipt by the
parties of an opinion of counsel that the exchange of stock qualifies as a
-47-
<PAGE>
tax-free transaction; (5) receipt by the parties of appropriate assurances
that the transaction will be accounted for as a pooling of interests; and
(6) the satisfaction of various other conditions. The merger is expected to
be completed during the second half of 1998. UPEN will merge with and into
WPSR, and Upper Peninsula Power Company, UPEN's utility subsidiary, will
become a wholly-owned subsidiary of WPSR. Each of the 2,950,001 outstanding
shares of UPEN common stock (no par value) will be converted into 0.90 shares
of WPSR common stock ($1.00 par value), subject to adjustment for fractional
shares, as provided in the merger agreement.
Effective March 20, 1997, WPSC received authorization from the PSCW to
defer all costs associated with the repair of the Kewaunee steam generators.
Repairs are complete and Kewaunee returned to service on June 12, 1997 after
having been out of service since September 21, 1996. Repair costs of
$3.6 million (WPSC's portion) have been deferred. The joint owners of
Kewaunee have requested rate recovery of these deferred costs through a
customer surcharge which would be effective for April and May 1998.
On July 1, 1997, the PSCW authorized WPSC to defer all advertising costs
associated with developing a communication plan to educate customers on the
potential energy shortage. WPSC was also authorized to defer all costs
related to returning its fossil-fueled plant, Pulliam Unit 3, to service and
all subsequent operating costs for Pulliam Unit 3 until the next rate filing.
The recovery of these deferred costs will be considered in a future rate
proceeding. To date, approximately $0.5 million related to advertising costs
and Pulliam Unit 3 operating costs has been deferred.
A PSCW order granting a Certificate of Public Convenience and Necessity
for construction of the De Pere Energy Center was issued on October 9, 1997.
WPSC has a 25-year commitment with Polsky Energy Corporation to purchase the
output of the facility which is scheduled for operation in 1999. The
transaction will be accounted for as a capital lease. WPSC will make any
necessary adjustments to debt and equity levels, and appropriate rate relief
is expected. Should electric retail deregulation occur, this contract may be
deemed uneconomical which could require a loss accrual if the regulator would
not allow recovery as part of the deregulation transition plan.
WPSC's contract with the International Union of Operating Engineers
Local 310 expired on October 28, 1997. Unresolved issues remain and contract
negotiations continue. Approximately 1,200 employees are covered under this
contract. The employees continue to work without a contract.
WPSR has completed an initial assessment of the impact of the year 2000
compliance on its computer systems. WPSR worked with a consultant beginning
in 1996 to analyze the year 2000 problem. Plans have been established to
analyze all in-house and third party software products and applications. A
preliminary plan indicates that all major in-house developed systems are
expected to be compliant by the end of 1998. The plan is intended to enable
all systems to be compliant by the year 2000. The most recent estimated
future internal labor and third party cost of year 2000 compliance is
approximately $13.4 million.
TRENDS
WPSC follows SFAS No. 71, "Accounting for the Effects of Certain Types of
Regulation," and its financial statements reflect the effects of the
-48-
<PAGE>
different ratemaking principles followed by the various jurisdictions
regulating the utility. These include the PSCW, 90% of revenues; the Michigan
Public Service Commission ("MPSC"), 3% of revenues; and the FERC, 7% of
revenues. In addition, Kewaunee is regulated by the Nuclear Regulatory
Commission ("NRC"). Environmental matters are primarily governed by the
United States Environmental Protection Agency and the Wisconsin Department of
Natural Resources.
In late 1995, the PSCW outlined its plan for restructuring the electric
industry in Wisconsin. The plan included 32 steps in a 5-year process
concluding with retail competition by the year 2001. In 1997, the 32-step
process was changed to a 7-step process which has not yet been adopted as the
official PSCW restructuring plan.
Should electric deregulation occur such that WPSC would no longer
qualify to reflect the effects of ratemaking under SFAS No. 71 in its
financial statements, no impairment of significant recorded assets or
reduction in reported equity is anticipated. WPSC does not have any
significant assets which it foresees as being potentially stranded and no
potential disparity between the depreciable lives of WPSC's capital assets and
those lives applicable to a competitive environment has been identified.
Increased competition is likely to put pressure on margins at WPSC. However,
at this time, management cannot predict the ultimate results of deregulation.
Part of electric utility restructuring involves establishing independent
system operators ("ISOs"). An ISO is an independent third party which
potentially owns the transmission facilities, oversees the operations of
transmission facilities, administers open access transmission tariffs, and
directs power dispatch. WPSC is working with several groups which are
attempting to form ISOs.
During the past summer, Governor Thompson requested reports from the
PSCW, electric utilities, and industrial customers assessing the electric
capacity problems experienced in eastern Wisconsin during this past spring and
summer. The reports provided analyses and recommendations on how to assure
the future reliability of the electrical supply and made recommendations on
how to improve the effectiveness of the state's utility regulatory process.
WPSC participated in the development of the utility report. The Governor is
expected to make energy supply and regulatory recommendations based on the
reports.
Both the PSCW and the MPSC continue to review gas industry
restructuring. In a current docket, the PSCW is addressing gas restructuring
issues including unbundling of rates, pricing of contracted services in
potential utility bypass situations, and the separation of gas utilities from
their nonregulated gas marketing affiliates. The MPSC is conducting pilot
studies to test the development of competitive retail gas markets in Michigan.
WPSC has historically recovered gas costs through a PGAC. The PSCW has
recently allowed utilities to select either an incentive gas cost recovery
mechanism or a modified one-for-one mechanism for gas cost recovery. WPSC has
selected the modified one-for-one gas cost recovery plan and implementation of
the new mechanism, which is currently under development and is similar to the
recovery received under the existing PGAC, is expected in November 1998.
-49-
<PAGE>
WPSC is investigating the environmental cleanup of eight manufactured gas
plant sites. Cleanup estimates have been determined for seven of the sites.
A detailed investigation has not yet been performed for the eighth site.
Future investigation and cleanup costs for all eight sites is estimated in the
range of $34.1 million to $41.1 million. These estimates may be adjusted in
the future contingent upon remedial technology, regulatory requirements, and
experience gained through cleanup activities.
An initial liability of $41.7 million for cleanup had been established
with an offsetting regulatory asset (deferred charge). Of this amount,
approximately $1.5 million has been spent to date. Management believes that
cleanup costs net of insurance recoveries, but not the carrying costs
associated with the cleanup expenditures, will be recoverable in current and
future customer rates. WPSC has received $12.6 million in insurance
recoveries which have been recorded as a reduction in the regulatory asset.
The PSCW has authorized current annualized recovery for gas site cleanup of
$225,000 for 1997 and 1998.
WPSC is in compliance with both the Phase I and II sulfur dioxide and
nitrogen oxide emission limits established by the Federal Clean Air Act
Amendments of 1990. Additional capital expenditures of $1.0 million to
$2.0 million are projected through 1999 for Wisconsin and federal air quality
compliance. Management believes that all costs incurred for additional
compliance will be recoverable in future customer rates.
On March 15, 1996, WPSC filed an application with the PSCW for
permission to replace the Kewaunee steam generators. Public hearings were
held in January of 1998. A decision is expected in March of 1998. The total
cost of replacing the two steam generators would be approximately
$89.0 million. WPSC's share would be $36.7 million in year of occurrence
dollars. The other two owners of Kewaunee do not favor steam generator
replacement.
WPSC received a rate order in the Wisconsin jurisdiction effective in
February 1997. The impact was approximately a $35.5 million decrease in
electric revenues and a $5.7 million increase in gas revenues on an annual
basis. The new rates are effective for 1997 and 1998. WPSC intends to file
an application with the PSCW on April 1, 1998 for electric and gas rate
increases which would be effective in 1999 and 2000.
ESI incurred a $4.9 million loss in 1997 and a $6.3 million loss in
1996. A primary strategy for ESI is rapid growth to gain market presence
which is reflected in a 237.7% growth in revenues during the three-year period
1995 through 1997, from $55.2 million in 1995 to $186.4 million in 1997. To
support this growth, significant expenditures were made for personnel
additions and system improvements. These expenditures, coupled with extreme
gas market volatility, contributed to the losses incurred at ESI. Gas market
volatility was reflected in the NYMEX gas futures prices per dekatherm which,
in 1997, ranged from a high of $3.55 to a low of $1.82. In 1996, gas futures
prices ranged from a high of $4.57 to a low of $1.86. Gas market volatility
has a direct impact on revenue.
PDI expects to improve the overall performance of its investment in
Stoneman due to a multi-year capacity sale agreement. Stoneman was also
grandfathered by the PSCW as a merchant plant which increases the probability
-50-
<PAGE>
that the plant will be repowered as a 300-megawatt to 500-megawatt gas-fired
combined cycle generating facility.
IMPACT OF INFLATION
WPSR's current financial statements are prepared in accordance with
generally accepted accounting principles and report operating results in terms
of historic cost. They 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 projected operating costs are recoverable in revenues. Because
forecasts are prepared assuming inflation, the majority of inflationary
effects on normal operating costs are recoverable in rates. However, in these
forecasts, WPSC is only allowed to recover the historic cost of plant via
depreciation.
-51-
<PAGE>
<PAGE>
<TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WPS RESOURCES CORPORATION
A. CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
<CAPTION>
===========================================================================================================
Year Ended December 31 (Thousands, except share amounts) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating revenues
Electric utility $479,388 $490,506 $489,000
Gas utility 211,090 211,357 174,693
Nonregulated energy and other 187,862 156,391 56,155
- -----------------------------------------------------------------------------------------------------------
Total operating revenues 878,340 858,254 719,848
===========================================================================================================
Operating expenses
Electric production fuels 107,538 105,418 104,858
Purchased power 45,876 37,737 39,593
Gas purchased for resale 147,755 149,388 116,253
Nonregulated energy cost of sales 182,863 155,133 53,983
Other operating expenses 148,569 168,905 154,445
Maintenance 41,661 48,806 50,761
Depreciation and decommissioning 77,541 65,178 65,627
Taxes other than income 26,448 26,868 25,921
- -----------------------------------------------------------------------------------------------------------
Total operating expenses 778,251 757,433 611,441
===========================================================================================================
Operating income 100,089 100,821 108,407
- -----------------------------------------------------------------------------------------------------------
Other income
Allowance for equity funds used during construction 129 139 170
Other, net 11,511 (1,084) 6,080
- -----------------------------------------------------------------------------------------------------------
Total other income 11,640 (945) 6,250
===========================================================================================================
Income before interest expense 111,729 99,876 114,657
- -----------------------------------------------------------------------------------------------------------
Interest on long-term debt 22,331 21,532 22,859
Other interest 4,172 3,596 2,604
Allowance for borrowed funds used during construction (100) (128) (68)
- -----------------------------------------------------------------------------------------------------------
Total interest expense 26,403 25,000 25,395
===========================================================================================================
Income before income taxes 85,326 74,876 89,262
Income taxes 29,270 24,358 30,808
Minority interest (797) (348) -
Preferred stock dividends of subsidiary 3,111 3,111 3,111
- -----------------------------------------------------------------------------------------------------------
Net income 53,742 47,755 55,343
===========================================================================================================
Retained earnings at beginning of year 311,794 308,965 297,592
Cash dividends on common stock (45,882) (44,926) (43,970)
- -----------------------------------------------------------------------------------------------------------
Retained earnings at end of year $319,654 $311,794 $308,965
===========================================================================================================
Average shares of common stock 23,873 23,891 23,897
Basic and diluted earnings per average share of common stock $2.25 $2.00 $2.32
Dividend per share of common stock 1.92 1.88 1.84
===========================================================================================================
The accompanying notes are an integral part of these statements.
</TABLE>
-52-
PAGE
<PAGE>
<TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WPS RESOURCES CORPORATION
B. CONSOLIDATED BALANCE SHEETS
<CAPTION>
=================================================================================================
Assets
- -------------------------------------------------------------------------------------------------
At December 31 (Thousands) 1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Utility plant
Electric $1,506,470 $1,474,104
Gas 251,603 240,791
- -------------------------------------------------------------------------------------------------
Total 1,758,073 1,714,895
Less - Accumulated depreciation and decommissioning 1,032,149 952,296
- -------------------------------------------------------------------------------------------------
Total 725,924 762,599
Nuclear decommissioning trusts 134,108 100,570
Construction in progress 7,266 10,301
Nuclear fuel, less accumulated amortization 19,062 19,381
- -------------------------------------------------------------------------------------------------
Net utility plant 886,360 892,851
=================================================================================================
Current assets
Cash and equivalents 6,424 5,978
Customer and other receivables, net of reserves 87,709 106,967
Accrued utility revenues 30,750 35,386
Fossil fuel, at average cost 10,336 8,224
Gas in storage, at average cost 22,080 19,987
Materials and supplies, at average cost 18,793 19,944
Prepayments and other 20,499 22,658
- -------------------------------------------------------------------------------------------------
Total current assets 196,591 219,144
=================================================================================================
Regulatory assets 78,544 96,920
Net nonutility and nonregulated plant 19,194 19,738
Investments and other assets 118,913 102,212
=================================================================================================
Total $1,299,602 $1,330,865
=================================================================================================
</TABLE>
-53-
<PAGE>
<PAGE>
<TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WPS RESOURCES CORPORATION
B. CONSOLIDATED BALANCE SHEETS (CONTINUED)
<CAPTION>
=================================================================================================
Capitalization and Liabilities
- -------------------------------------------------------------------------------------------------
At December 31 (Thousands) 1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Capitalization
Common stock equity $ 477,823 $ 467,524
Preferred stock of subsidiary with no mandatory redemption 51,200 51,200
Long-term debt 304,008 305,788
- -------------------------------------------------------------------------------------------------
Total capitalization 833,031 824,512
=================================================================================================
Current liabilities
Notes payable 10,000 26,600
Commercial paper 20,706 31,350
Accounts payable 85,651 96,531
Accrued taxes 3,514 1,350
Accrued interest 7,801 8,134
Other 9,536 12,771
- -------------------------------------------------------------------------------------------------
Total current liabilities 137,208 176,736
=================================================================================================
Long-term liabilities and deferred credits
Accumulated deferred income taxes 125,804 130,208
Accumulated deferred investment tax credits 26,901 28,669
Regulatory liabilities 50,279 48,870
Environmental remediation liabilities 40,215 41,697
Other long-term liabilities 86,164 80,173
- -------------------------------------------------------------------------------------------------
Total long-term liabilities and deferred credits 329,363 329,617
=================================================================================================
Commitments and contingencies (See Note 9)
=================================================================================================
Total $1,299,602 $1,330,865
=================================================================================================
The accompanying notes are an integral part of these statements.
</TABLE>
-54-
<PAGE>
<PAGE>
<TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WPS RESOURCES CORPORATION
C. CONSOLIDATED STATEMENTS OF CAPITALIZATION
<CAPTION>
===========================================================================================
At December 31 (Thousands, except share amounts) 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Common stock equity
Common stock, $1 par value, 100,000,000 shares authorized;
23,896,962 shares outstanding $ 23,897 $ 23,897
Premium on capital stock 145,021 145,021
Retained earnings 319,654 311,794
Shares in deferred compensation trust, 33,430 and 14,223 shares
at an average cost of $28.44 and $31.16 per
share at December 31, 1997 and 1996, respectively (951) (443)
ESOP loan guarantees (9,798) (12,745)
- -------------------------------------------------------------------------------------------
Total common stock equity 477,823 467,524
===========================================================================================
Preferred stock - Wisconsin Public Service Corporation
Cumulative, $100 par value, 1,000,000 shares authorized;
with no mandatory redemption
Series Shares Outstanding
------ ------------------
5.00% 132,000 13,200 13,200
5.04% 30,000 3,000 3,000
5.08% 50,000 5,000 5,000
6.76% 150,000 15,000 15,000
6.88% 150,000 15,000 15,000
- -------------------------------------------------------------------------------------------
Total preferred stock 51,200 51,200
===========================================================================================
Long-term debt
First mortgage bonds - Wisconsin Public Service Corporation
Series Year Due
------ --------
5-1/4% 1998 50,000 50,000
7.30% 2002 50,000 50,000
6.80% 2003 50,000 50,000
6-1/8% 2005 9,075 9,075
6.90% 2013 22,000 22,000
8.80% 2021 53,100 53,100
7-1/8% 2023 50,000 50,000
- -------------------------------------------------------------------------------------------
Total 284,175 284,175
Unamortized discount and premium on bonds, net (890) (978)
- -------------------------------------------------------------------------------------------
Total first mortgage bonds 283,285 283,197
- -------------------------------------------------------------------------------------------
ESOP loan guarantees 9,798 12,745
Notes payable to bank, secured by nonregulated plant 10,710 9,581
Other long-term debt 215 265
- -------------------------------------------------------------------------------------------
Total long-term debt 304,008 305,788
===========================================================================================
Total capitalization $833,031 $824,512
===========================================================================================
The accompanying notes are an integral part of these statements.
</TABLE>
-55-
PAGE
<PAGE>
<TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WPS RESOURCES CORPORATION
D. CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
=============================================================================================================
Year Ended December 31 (Thousands) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 53,742 $ 47,755 $ 55,343
Adjustments to reconcile net income to net cash from
operating activities
Depreciation and decommissioning 77,541 65,178 65,627
Amortization of nuclear fuel and other 14,665 28,691 33,499
Deferred income taxes (5,917) (7,715) 319
Investment tax credit restored (1,767) (1,778) (1,725)
Allowance for equity funds used during construction (129) (139) (170)
Pension income (11,432) (12,413) (11,678)
Postretirement liability 4,952 7,150 6,917
Deferred demand-side management expenditures (5) (6,250) (8,595)
(Gain)/loss on sale of nonutility property (4,802) (8) 13
Other, net (6,936) 7,954 7,150
Changes in
Customer and other receivables 19,258 (27,666) (19,272)
Accrued utility revenues 4,636 2,200 (8,766)
Fossil fuel inventory (2,112) 477 1,804
Gas in storage (2,093) (9,911) 5,711
Accounts payable (10,880) 29,048 840
Accrued taxes 2,164 (394) 592
Environmental remediation insurance recovery 12,374 200 -
Gas refunds (318) (6,175) 4,926
- -------------------------------------------------------------------------------------------------------------
Net cash from operating activities 142,941 116,204 132,535
=============================================================================================================
Cash flows from (used for) investing activities
Construction of utility plant and nuclear fuel expenditures (58,258) (84,750) (80,226)
Purchase of other property and equipment (2,030) (16,431) (1,089)
Decommissioning funding (16,059) (8,978) (8,181)
Purchase of investments and acquisitions - (728) (10,217)
Proceeds from sale of nonutility property 6,255 10 29
Other (558) (359) 485
- -------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (70,650) (111,236) (99,199)
=============================================================================================================
Cash flows from (used for) financing activities
Redemption of first mortgage bonds - (6,900) -
Issuance of notes payable 92,760 141,225 15,000
Redemption of notes payable (109,360) (129,625) (10,000)
Issuance of other long-term debt 1,789 15,296 -
Issuance of commercial paper 700,540 345,339 51,500
Redemption of commercial paper (711,184) (325,489) (52,500)
Cash dividends on common stock (45,882) (44,926) (43,970)
Purchase of deferred compensation stock (508) (443) -
- -------------------------------------------------------------------------------------------------------------
Net cash used for financing activities (71,845) (5,523) (39,970)
=============================================================================================================
Net increase (decrease) in cash and equivalents 446 (555) (6,634)
=============================================================================================================
Cash and equivalents at beginning of year 5,978 6,533 13,167
=============================================================================================================
Cash and equivalents at end of year $ 6,424 $ 5,978 $ 6,533
=============================================================================================================
Cash paid during year for
Interest, less amount capitalized $ 22,089 $ 21,983 $ 21,255
Income taxes 35,374 31,735 34,300
Preferred stock dividends of subsidiary 3,111 3,111 3,111
Other information
Construction and nuclear fuel expenditures,
including accruals, allowance for funds used during
construction, and customer contributions $ 65,646 $ 81,714 $ 73,251
=============================================================================================================
The accompanying notes are an integral part of these statements.
</TABLE>
-56-
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WPS RESOURCES CORPORATION AND
WISCONSIN PUBLIC SERVICE CORPORATION
E. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) NATURE OF OPERATIONS--WPS Resources Corporation ("WPSR") is a
holding company. Approximately 79% and 95% of WPSR's 1997
revenues and assets, respectively, and all of its net income are
derived from Wisconsin Public Service Corporation ("WPSC"), all of
the outstanding common stock of which is owned by WPSR. WPSC is
an electric and gas utility engaged in the supply and distribution
of electric power and natural gas in its franchised service
territory. WPSR also provides gas and electric marketing and
energy-related services in nonregulated markets through its
wholly-owned subsidiary, WPS Energy Services, Inc. ("ESI").
WPS Power Development, Inc. ("PDI"), another wholly-owned
subsidiary of WPSR, participates in the development of electric
generation projects, provides service to the electric power
generation industry, and owns a two-thirds interest in a merchant
generating plant, the Stoneman Power Plant ("Stoneman").
The term "utility" refers to the regulated activities of WPSC,
while the term "nonutility" refers to the activities of WPSC which
are not regulated. The term "nonregulated" refers to activities
other than those of WPSC.
(b) USE OF ESTIMATES--The preparation of WPSR's financial statements
is in conformity with generally accepted accounting principles.
Management may make estimates and assumptions that affect the
reported amounts of assets and liabilities and 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 could differ from
those estimates.
(c) ACQUISITIONS AND NONREGULATED INVESTMENTS--In the fourth quarter
of 1995, ESI acquired interests in a producing gas reserves
operation and in a gas marketing operation. The acquisitions have
been accounted for under the purchase method of accounting. The
price paid in excess of the fair value of identifiable assets
acquired for the gas marketing operation is being amortized over a
five-year period.
(d) CONSOLIDATION--WPSR consolidates all majority-owned subsidiaries.
All significant intercompany transactions and accounts have been
eliminated.
(e) PRICE RISK MANAGEMENT ACTIVITIES--ESI utilizes derivative
financial and commodity instruments (derivatives), including
futures and forward contracts, to reduce market risk associated
with fluctuations in the price of natural gas and electricity sold
-57-
<PAGE>
under firm commitments with certain of its customers. ESI also
utilizes derivatives, including price swap agreements, call and
put option contracts, and futures and forward contracts, to manage
market risk associated with a portion of its anticipated supply
requirements. In addition, ESI utilizes derivatives, within
specified guidelines, for trading purposes.
Gains or losses on derivatives associated with firm commitments
are recognized as adjustments to the cost of sales or to revenues
when the related transactions affect earnings. Gains and losses
on derivatives associated with forecasted transactions are
recognized when such forecasted transactions affect earnings. At
December 31, 1997, $0.5 million in losses related to firm
commitments and forecasted transactions were deferred. If it is
no longer probable that a forecasted transaction will occur, any
gain or loss on the derivative instrument as of such date is
immediately recognized in earnings. Derivatives for trading
purposes are marked to market each accounting period, and gains
and losses are recognized as a component of other income at that
time. In 1997 and 1996, trading losses of $1.4 million and
$2.5 million, respectively, were recognized.
At December 31, 1997, ESI had outstanding 3.9 million notional
dekatherms of natural gas under futures and option agreements and
3.2 million notional dekatherms of natural gas under basis swap
agreements for purposes of managing market risk. The financial
instruments outstanding at December 31, 1997 expire at various
times through May 1999. ESI has certain gas sales commitments
through May 1999 with a range of sale prices from $2.25 to $3.58
per dekatherm and a range of associated gas purchase costs of
$2.18 to $3.51 per dekatherm.
As of December 31, 1997, the fair value of trading instruments
included assets of $0.5 million. The average fair value of
trading instruments during 1997 included assets of $0.5 million
and liabilities of $0.5 million. Except for an insignificant
level of electric trading instruments, financial instruments used
for trading in 1997 and 1996 were natural gas derivatives. At
December 31, 1997, ESI had outstanding 0.9 million notional
dekatherms of natural gas under futures and option agreements and
3.9 million notional dekatherms of natural gas under basis swap
agreements for trading purposes.
(f) UTILITY PLANT--Utility plant is stated at the original cost of
construction which includes an allowance for funds used during
construction ("AFUDC"). Approximately 50% of retail
jurisdictional construction work in progress ("CWIP") expenditures
are subject to AFUDC using a rate based on WPSC's overall cost of
capital. Major new generating facilities earn AFUDC on total CWIP
expenditures. For 1997, the AFUDC retail rate was approximately
10.4%.
-58-
<PAGE>
AFUDC is recorded on wholesale jurisdictional electric CWIP at
debt and equity percentages specified in the Federal Energy
Regulatory Commission ("FERC") Uniform System of Accounts. For
1997, the AFUDC wholesale rate was approximately 5.7%.
Substantially all of WPSC's utility plant is subject to a first
mortgage lien.
(g) PROPERTY ADDITIONS, MAINTENANCE, AND RETIREMENTS OF UTILITY
PLANT--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. No gain or loss is
recognized in connection with ordinary retirements of utility
property units. The cost of units of property retired, sold, or
otherwise disposed of, plus removal cost, less salvage, are
charged to the accumulated provision for depreciation.
Maintenance and repair costs and replacement and renewal costs
associated with items not qualifying as units of property are
generally charged to operating expense.
Nonutility property and nonregulated property follow a similar
policy except that gains and losses are recognized in connection
with retirements.
(h) DEPRECIATION--Straight-line composite depreciation expense is
recorded over the estimated useful life of utility property and
includes estimated salvage and cost of removal. Except for the
Kewaunee Nuclear Power Plant ("Kewaunee"), rates approved by the
Public Service Commission of Wisconsin ("PSCW") on January 1, 1994
remain in effect.
============================================================
1997 1996 1995
------------------------------------------------------------
Annual composite
depreciation rates
Electric 3.52% 3.33% 3.43%
Gas 3.26% 3.35% 3.46%
============================================================
Nonutility property and nonregulated property are depreciated
using straight-line depreciation. Most assets have depreciation
lives ranging from five to ten years.
Property at Stoneman is depreciated using various lives, certain
of which are as long as 40 years.
Depreciation and nuclear decommissioning costs are accrued over
the estimated service life of Kewaunee. On January 3, 1997, the
PSCW accepted WPSC's recommendation to accelerate cost recovery of
the remaining unrecovered investment in Kewaunee and accelerate
funding of Kewaunee decommissioning costs. The PSCW order directs
the owners of Kewaunee to develop depreciation and decommissioning
estimates to provide for full recovery by the end of 2002. Prior
to 1997, the service life of Kewaunee was estimated to end in
2013, the year its license expires. This decision results in a
-59-
<PAGE>
significant acceleration of the Wisconsin retail jurisdictional
portion of Kewaunee depreciation and decommissioning collections
in customer rates for 1997 and future years. Depreciation
expense, exclusive of depreciation expense related to nuclear
decommissioning costs, increased by approximately $3.3 million on
an annualized basis from $4.7 million in 1996 to $8.0 million in
1997.
(i) IMPAIRMENT--WPSR follows the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of." SFAS No. 121 requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment
whenever circumstances indicate that the carrying amount of an
asset may not be recoverable. Impairment losses resulting from
application of this statement are reported in income in the period
in which the recognition criteria are first applied and met. This
statement does not have a material impact on the current carrying
amount of WPSR's assets.
(j) NUCLEAR FUEL--The cost of nuclear fuel is amortized to electric
production fuel expense based on the quantity of heat produced for
the generation of electric energy by Kewaunee. Costs amortized to
electric fuel expense (which assume no salvage values for uranium
and plutonium) include an amount for ultimate disposal and are
recovered through current customer rates. As required by the
Nuclear Waste Policy Act of 1982, a contract has been signed with
the United States Department of Energy ("DOE") for the ultimate
storage of the fuel; and quarterly payments, based on generation,
are made to the DOE for fuel storage. Interim storage space for
spent nuclear fuel is provided at Kewaunee, and expenses
associated with this storage are recognized as current operating
costs. Currently, there is on-site storage capacity for spent
fuel through the year 2013. As of December 31, 1997 and 1996, the
accumulated provisions for nuclear fuel totaled $151.2 million and
$147.7 million, respectively.
(k) NUCLEAR DECOMMISSIONING--Nuclear decommissioning costs to date
have been accrued over the estimated service life of Kewaunee,
recovered currently from customers in rates, and deposited in
external trusts. Such costs totaled $16.1 million in 1997 and
$9.0 million in both 1996 and 1995. The increase in 1997 was the
result of the PSCW's approval of the acceleration of Kewaunee
depreciation and decommissioning funding as described in
note 1(h). The increase is $8.3 million on an annualized basis,
from $9.0 million to $17.3 million.
Based on the standard cost escalation assumptions required by a
July 1994 PSCW order, the undiscounted amount of WPSC's
decommissioning costs forecasted to be expended between the years
2003 and 2039 is $614.0 million under the revised funding plan
which became effective in 1997. In developing the funding plan, a
long-term after-tax earnings rate of approximately 5.5% was
assumed.
-60-
<PAGE>
WPSC's share of Kewaunee decommissioning is estimated to be
$182.2 million in current dollars based on a site-specific study.
The study, which was performed in 1992, uses immediate
dismantlement as the method of decommissioning beginning after a
dormant period extending from 2002 until 2015. As of December 31,
1997, the market value of the external nuclear decommissioning
trusts totaled $134.1 million.
Depreciation expense includes future decommissioning costs
collected in customer rates and an offsetting charge for earnings
from external trusts. As of December 31, 1997, the accumulated
provision for depreciation and decommissioning included
accumulated provisions for decommissioning totaling
$134.1 million. Realized trust earnings totaled $3.7 million,
$3.0 million, and $4.0 million, and unrealized trust earnings
totaled $13.8 million, $6.5 million, and $5.0 million for the
years ended December 31, 1997, 1996, and 1995, respectively.
Unrealized gains, net of tax, in external trusts are reflected as
an increase to the decommissioning reserve, since decommissioning
expense will be recognized as the gains are realized, in
accordance with regulatory requirements.
Investments in the nuclear decommissioning trusts are recorded at
market value. The investments classified as utility plant are
presented net of related income tax effects on unrealized gains
and represent the amount of assets available to accomplish
decommissioning. The nonqualified trust investments designated to
pay income taxes when unrealized gains become realized are
classified as other assets. An offsetting regulatory liability
reflects the expected reduction in future rates as unrealized
gains in the nonqualified trust are realized.
(l) CASH AND EQUIVALENTS--WPSR considers short-term investments with
an original maturity of three months or less to be cash
equivalents.
(m) REVENUE AND CUSTOMER RECEIVABLES--WPSR accrues revenues related to
electric and gas service, including estimated amounts for service
rendered but not billed.
Automatic fuel adjustment clauses are used for FERC
wholesale-electric and Michigan Public Service Commission ("MPSC")
retail-electric portions of WPSC's business. The PSCW
retail-electric portion of the business uses a "cost variance
range" approach. This range is based on a specific estimated fuel
cost for the forecast year. If WPSC's actual fuel costs fall
outside this range, a hearing may be held and an adjustment to
future rates may result. WPSC has a purchased gas adjustment
clause ("PGAC") which allows it to pass changes in the cost of gas
purchased from its suppliers on to system gas customers, subject
to PSCW and MPSC review. The continued use of a PGAC for all
Wisconsin utilities has been reexamined by the PSCW and utilities
were given the choice between continuing under a modified
one-for-one gas cost recovery plan or switching to an incentive
gas cost recovery mechanism. WPSC has applied for a modified
one-for-one gas cost recovery plan which is similar to cost
-61-
<PAGE>
recovery under the existing PGAC. Implementation of the modified
one-for-one gas cost recovery plan is expected in November 1998.
WPSC is required to provide service and grant credit to customers
within its service territory and is precluded from discontinuing
service to residential customers during certain periods of the
year. WPSC continually reviews its customers' credit-worthiness
and obtains deposits or refunds deposits accordingly. WPSC is
permitted to recover bad debts in utility rates.
Approximately 12% of WPSC's total revenues are from companies in
the paper products industry.
In October 1997, WPSC lost a major wholesale customer representing
annual sales of approximately 380,000 megawatt-hours. An effort
is being made to replace these lost sales with additional
opportunity sales.
(n) REGULATORY ASSETS AND LIABILITIES--WPSC is subject to the
provisions of SFAS No. 71, "Accounting for the Effects of Certain
Types of Regulation." Regulatory assets represent probable future
revenue associated with certain incurred costs which will be
recovered from customers through the ratemaking process.
Regulatory liabilities represent costs previously collected that
are refundable in future customer rates. The following regulatory
assets and liabilities were reflected in the Consolidated Balance
Sheets as of December 31:
============================================================
(Thousands) 1997 1996
------------------------------------------------------------
Regulatory assets
Demand-side management expenditures $31,360 $39,355
Environmental remediation costs
(net of insurance recoveries) 29,249 43,062
Coal and rail contract buy-out costs 2,293 2,404
Debt refinancing costs 1,859 2,919
Enrichment facility fee 5,544 5,979
Kewaunee steam generator
resleeving costs 3,577 -
Other 4,662 3,201
------------------------------------------------------------
Total $78,544 $96,920
============================================================
Regulatory liabilities
Income tax related items $26,119 $30,056
Pensions 2,443 4,885
Conservation costs 6,491 9,101
Unrealized gain on decommissioning
trust 11,348 3,587
Other 3,878 1,241
------------------------------------------------------------
Total $50,279 $48,870
============================================================
-62-
<PAGE>
As of December 31, 1997, the majority of WPSC's regulatory assets
are being recovered through rates charged to customers over
periods ranging from two to ten years. Carrying costs for all
regulatory assets are being recovered except for those associated
with environmental costs. Based on prior and current rate
treatment of such costs, management believes it is probable that
WPSC will continue to recover from ratepayers the regulatory
assets described above.
See notes 7 and 8 for specific information on pension and deferred
tax regulatory liabilities. See note 9 for information on
environmental remediation deferred costs.
(o) INVESTMENTS AND OTHER ASSETS--Investments include ownership
interests in Wisconsin River Power Company and Wisconsin Valley
Improvement Company. Income related to these investments is
included in other income and deductions using the equity method of
accounting. Other assets include prepaid pension assets,
operating deposits for jointly-owned plants, the cash surrender
value of life insurance policies, the long-term portion of energy
conservation loans to customers, and the decommissioning trust
investments designated for payment of income taxes.
(p) RECLASSIFICATIONS--Certain prior year financial statement amounts
have been reclassified to conform to current year presentation.
(q) RETIREMENT OF DEBT--Historically, gains or losses resulting from
the settlement of long-term debt obligations have been deferred
and amortized concurrent with rate recovery as required by
regulators.
(r) COMPREHENSIVE INCOME--In June 1997, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 130, "Reporting of
Comprehensive Income," which establishes standards for reporting
and displaying comprehensive income and its components of
revenues, expenses, gains, and losses. The statement is effective
for fiscal years beginning after December 15, 1997. WPSR will be
adopting the requirements for reporting comprehensive income in
the first quarter of 1998. WPSR currently has no components of
comprehensive income other than net income.
(s) SEGMENT DISCLOSURES--In June 1997, the FASB issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related
Information." This statement establishes standards for reporting
information about operating segments and is effective for periods
beginning after December 15, 1997. WPSR will be adopting the
requirements of this statement at year-end 1998 and has not yet
determined the segments which will be disclosed.
-63-
<PAGE>
NOTE 2--JOINTLY-OWNED FACILITIES
Information regarding WPSC's share of major jointly-owned electric
generating facilities in service at December 31, 1997 is set forth
below.
<TABLE>
<CAPTION>
===========================================================================================
(Thousands, West Marinette Columbia Edgewater
except for percentages) Unit No. 33 Energy Center Unit No. 4 Kewaunee
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ownership 68% 31.8% 31.8% 41.2%
Plant capacity (Megawatts) 83.5 335.2 104.9 221.0
Utility plant in service $15,914 $110,045 $22,209 $132,898
Accumulated depreciation $ 2,774 $ 63,432 $13,204 $ 89,858
In-service date 1993 1975 and 1978 1969 1974
===========================================================================================
</TABLE>
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 3--SHORT-TERM DEBT AND LINES OF CREDIT
To provide short-term borrowing flexibility and security for commercial
paper outstanding, WPSR and its subsidiaries maintain bank lines of
credit. Most of these lines of credit require a fee.
The information in the table below relates to short-term debt and lines
of credit for the years indicated:
<TABLE>
<CAPTION>
================================================================================================
(Thousands, except for percentages) 1997 1996 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
As of end of year
Commercial paper outstanding $20,706 $31,350 $11,500
Discount rate on outstanding commercial paper 6.55% 5.73% 5.65%
Notes payable outstanding $10,000 $26,600 $15,000
Interest rate on notes payable 5.92% 5.81% 5.77%-6.18%
Available lines of credit $23,500 $40,400 $28,050
================================================================================================
For the year
Maximum amount of short-term debt $75,017 $70,250 $32,500
Average amount of short-term debt $30,092 $28,424 $14,305
Average interest rate on short-term debt 5.50% 4.89% 5.97%
================================================================================================
</TABLE>
NOTE 4--LONG-TERM DEBT
Substantially all utility plant assets are secured by first mortgage
bonds.
In June 1996, WPSC repurchased $6.9 million of the First Mortgage Bonds,
8.80% Series, due in 2021. The repurchase was funded through short-term
borrowings. The repurchase premium and the unamortized discount from
the original issue have been deferred and are being amortized over
approximately a two-year period to correspond with ratemaking treatment.
In 1998, $50.0 million of 5-1/4% bonds will mature.
As of December 31, 1997, $8.2 million has been drawn against PDI's
revolving credit note of $11.5 million which is secured by the assets of
-64-
<PAGE>
Stoneman. An additional $3.3 million, which is to be paid in the year
2000, has been committed against this note. The note, which is
guaranteed by WPSR, is due in the year 2000 when the plant may be
converted to a 300-megawatt to 500-megawatt gas-fired combined cycle
facility.
NOTE 5--COMMON EQUITY
Under WPSR's Stock Investment Plan, WPSR's common stock is purchased in
the open market to satisfy shareholder and employee purchase
requirements.
In December 1996, WPSR adopted a Shareholder Rights Plan designed to
enhance the ability of the Board of Directors to protect shareholders
and WPSR if efforts are made to gain control of WPSR in a manner that is
not in the best interests of WPSR and its shareholders. The plan gives
existing shareholders, under certain circumstances, the right to
purchase stock at a discounted price. The rights expire on December 11,
2006.
At December 31, 1997, WPSR had $318.6 million of retained earnings
available for dividends. WPSC is restricted by a PSCW order to paying
normal common stock dividends of no more than 109.0% of the previous
year's common stock dividend without PSCW approval. Also, Wisconsin law
prohibits WPSC from making loans to WPSR and its subsidiaries and from
guaranteeing their obligations. In January 1997, WPSC paid to WPSR a
special common dividend of $10.0 million. The special dividend allowed
WPSC's average common equity capitalization ratio to remain at
approximately 54.0%, the level approved by the PSCW for ratemaking.
NOTE 6--FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments 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 those investments and obligations.
Nuclear Decommissioning Trusts: The value of WPSC's nuclear
decommissioning trust investments is recorded at market value.
Long-Term Debt, Preferred Stock, and ESOP Loan Guarantees: The fair
value of WPSC's long-term debt, preferred stock, and ESOP loan
guarantees is estimated based on the quoted market price for the same or
similar issues or on the current rates offered to WPSC for debt of the
same remaining maturity.
-65-
<PAGE>
The estimated fair values of WPSR's financial instruments as of
December 31 were:
<TABLE>
<CAPTION>
=================================================================================================
(Thousands) 1997 1996
- -------------------------------------------------------------------------------------------------
Carrying Amount Fair Value Carrying Amount Fair Value
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 6,424 $ 6,424 $ 5,978 $ 5,978
Energy conservation loans 7,195 7,195 5,388 5,388
Nuclear decommissioning
trusts - utility plant 134,108 134,108 100,570 100,570
Nuclear decommissioning
trusts - other assets 11,348 11,348 5,991 5,991
Notes payable 10,000 10,000 26,600 26,600
Commercial paper 20,706 20,706 31,350 31,350
ESOP loan guarantees 9,798 10,243 12,745 13,412
Long-term debt 294,210 309,206 293,043 300,906
Preferred stock 51,200 48,595 51,200 45,314
Gas commodity instruments 504 436 (61) 650
=================================================================================================
</TABLE>
NOTE 7--EMPLOYEE BENEFIT PLANS
WPSC has non-contributory retirement plans covering substantially all
employees under which annual contributions may be made to an irrevocable
trust established to provide retired employees with a monthly payment if
conditions relating to age and length of service have been met. The
plans are fully funded, and no contributions were made in 1997, 1996, or
1995. WPSC recovers pension costs in customer rates under SFAS No. 87,
"Employers' Accounting for Pensions," and is returning to ratepayers
through 1998 the amounts previously recovered from customers in excess
of SFAS No. 87 costs.
The retirement plans hold assets with a fair market value of
$488.6 million as of December 31, 1997. These assets consist of
domestic and international equity and fixed income investments, and
domestic real estate investments.
The following table sets forth the plans' funded status and expense
(income).
-66-
<PAGE>
<TABLE>
<CAPTION>
============================================================================
As of December 31 1997 1996 1995
(Thousands, except for percentages)
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Vested benefit obligation $(218,541) $(189,097) $(177,490)
Non-vested benefit obligation (13,112) (10,213) (8,980)
- ----------------------------------------------------------------------------
Total actuarial present value of
accumulated benefit obligation $(231,653) $(199,310) $(186,470)
============================================================================
Projected benefit obligation for
service rendered to date $(296,711) $(252,268) $(255,188)
Plan assets at fair value 488,555 429,948 391,070
- ----------------------------------------------------------------------------
Plan assets in excess of projected
benefit obligation 191,844 177,680 135,882
Unrecognized net gain (136,264) (121,066) (84,098)
Unrecognized prior service cost 13,813 7,254 8,020
Unrecognized net transition asset (16,526) (19,991) (23,455)
- ----------------------------------------------------------------------------
Prepaid retirement plan asset $ 52,867 $ 43,877 $ 36,349
============================================================================
The net retirement plan expense
(income) includes the following
components
Service cost $ 5,854 $ 6,371 $ 5,888
Interest cost 19,363 19,097 18,211
Actual return on plan assets (71,729) (48,244) (73,242)
Net amortization and deferral 37,522 15,248 42,791
Regulatory adjustment (2,442) (4,885) (5,326)
- ---------------------------------------------------------------------------
Net retirement plan (income) $ (11,432) $ (12,413) $ (11,678)
===========================================================================
The assumed rates for calculations
used in the above tables were
Expected long-term return on
investments 8.75% 8.50% 9.00%
Average rate for future salary
increases 5.50% 5.50% 6.25%
Discount rate to compute projected
benefit obligation 7.25% 7.75% 7.75%
==========================================================================
</TABLE>
WPSC also offers medical, dental, and life insurance benefits to
employees, retirees, and their dependents. The expenses for active
employees are expensed as incurred.
WPSC accounts for retiree benefits using SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," which
requires the cost of postretirement benefits for employees to be accrued
as expense over the period in which the employee renders service and
becomes eligible to receive benefits. WPSC elected to recognize the
transition obligation for current and future retirees over 20 years
beginning in 1993.
-67-
<PAGE>
WPSC funds amounts to irrevocable trusts as allowed for income tax
purposes. These funded amounts have been expensed and recovered through
customer rates. The non-administrative plan is a collectively bargained
plan and, therefore, is tax exempt. The investments in the trust
covering administrative employees are subject to federal unrelated
business income taxes at a 39.6% tax rate.
The postretirement plans hold assets with a fair market value of
$121.0 million as of December 31, 1997. These assets consist of
domestic and international equity securities and domestic fixed income
investments.
The table below sets forth the plans' accrued postretirement benefit
obligation ("APBO") and the expense provisions.
<TABLE>
<CAPTION>
=========================================================================
(Thousands) 1997 1996 1995
- -------------------------------------------------------------------------
<S> <C> <C> <C>
APBO attributable to
Retirees and dependents $ (44,414) $ (43,746) $ (46,681)
Fully eligible active plan
participants (11,637) (5,273) (5,983)
Other active plan participants (57,594) (52,112) (58,611)
- -------------------------------------------------------------------------
Total APBO (113,645) (101,131) (111,275)
Fair value of plan assets 120,960 103,748 91,038
- -------------------------------------------------------------------------
APBO in excess of plan assets 7,315 2,617 (20,237)
Unrecognized net (gain)/loss (80,090) (66,045) (38,371)
Unrecognized transition
obligation 36,018 38,453 40,887
Unrecognized prior service cost 4,583 (1,897) (2,027)
- -------------------------------------------------------------------------
Accrued postretirement
benefit obligation $ (32,174) $ (26,872) $ (19,748)
=========================================================================
Service cost $ 3,192 $ 3,613 $ 4,392
Interest cost 8,220 8,488 9,833
Actual return on plan assets (20,176) (18,136) (20,918)
Net amortization and deferral 14,241 13,726 17,809
- -------------------------------------------------------------------------
Postretirement benefit cost $ 5,477 $ 7,691 $ 11,116
=========================================================================
</TABLE>
The assumed before tax expected long-term return on investments and the
discount rate used to measure the APBO under SFAS No. 106 are consistent
with rates used to calculate the pension plans' funded status and
expense under SFAS No. 87. Only the administrative plan is subject to
federal income taxes which are reflected in the expense and funding
status. The assumed health care cost trend rates for 1998 are 8.0% for
medical and 7.5% for dental, both decreasing to 5.0% by the year 2006.
Increasing each of the medical and dental cost trend rates by 1.0% in
each year would increase the total APBO as of December 31, 1997 by
$20.0 million and the total net periodic postretirement benefit cost for
the year then ended by $2.3 million.
-68-
<PAGE>
WPSC has a leveraged Employee Stock Ownership Plan and Trust ("ESOP")
that held 2,070,144 shares of WPSR common stock (market value of
approximately $70.0 million) at December 31, 1997. At that date, the
ESOP also had one loan guaranteed by WPSC and secured by common stock.
Principal and interest on the loan are to be paid using contributions
from WPSC and dividends on WPSR common stock held by the ESOP. Shares
in the ESOP are allocated to participants as the loan is repaid. Tax
benefits from dividends paid to the ESOP are recognized as a reduction
in WPSC's cost of providing service to customers. The PSCW has allowed
WPSC to include in cost of service an additional employer contribution
to the plan. The net effect of the tax benefits and of the employer
contribution is an approximately equal sharing of the tax benefits of
the program between customers and employees.
NOTE 8--INCOME TAXES
WPSR accounts for income taxes using the liability method as prescribed
by SFAS No. 109, "Accounting for Income Taxes." Under the liability
method, deferred income tax liabilities are established for all
temporary differences in the book and tax bases of assets and
liabilities based upon enacted tax laws and rates applicable to the
periods in which the taxes become payable. Taxes provided in prior
years at rates greater than current rates are being refunded to
customers prospectively as the temporary differences reverse. The net
regulatory liability totaled $26.1 million as of December 31, 1997.
As of December 31, 1997 and 1996, WPSR had the following significant
temporary differences that created deferred tax assets and liabilities:
===================================================================
(Thousands) 1997 1996
-------------------------------------------------------------------
Deferred tax assets
Plant related $ 68,175 $ 55,040
Customer advances 8,187 8,232
Postretirement medical and dental 12,831 10,844
Other 16,522 14,752
-------------------------------------------------------------------
Total $105,715 $ 88,868
===================================================================
Deferred tax liabilities
Plant related $192,347 $179,573
Demand-side management expenditures 12,383 15,540
Pension 20,054 13,676
Other 6,735 10,287
-------------------------------------------------------------------
Total $231,519 $219,076
===================================================================
Net deferred tax liabilities $125,804 $130,208
===================================================================
Previously deferred investment tax credits are being amortized as
a reduction to income tax expense over the life of the related
utility plant. The components of income tax expense are set forth
in the tables below.
-69-
<PAGE>
<TABLE>
<CAPTION>
============================================================================================
(Thousands,
except for percentages) 1997 1996 1995
- --------------------------------------------------------------------------------------------
Rate Amount Rate Amount Rate Amount
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Statutory federal income tax 35.0% $30,143 35.0% $26,329 35.0% $31,242
State income taxes, net 5.7 4,862 5.7 4,275 5.4 4,850
Investment tax credit restored (2.1) (1,768) (2.4) (1,778) (1.9) (1,725)
Rate difference on reversal
of income tax temporary
differences (2.2) (1,888) (2.1) (1,579) (1.9) (1,656)
Dividends paid to ESOP (1.6) (1,381) (1.9) (1,424) (1.6) (1,444)
Other differences, net (0.8) (698) (2.0) (1,465) (0.5) (459)
- --------------------------------------------------------------------------------------------
Effective income tax 34.0% $29,270 32.3% $24,358 34.5% $30,808
============================================================================================
Current provision
Federal $29,427 $26,122 $25,628
State 7,527 7,729 6,586
- --------------------------------------------------------------------------------------------
Total current provision 36,954 33,851 32,214
Deferred (benefit) provision (5,917) (7,715) 319
Investment tax credit
restored, net (1,767) (1,778) (1,725)
- --------------------------------------------------------------------------------------------
Total income tax expense $29,270 $24,358 $30,808
============================================================================================
NOTE 9--COMMITMENTS AND CONTINGENCIES
COAL CONTRACTS
To ensure a reliable, low-cost supply of coal, WPSC entered into a long-term
contract that has take-or-pay obligations totaling $198.4 million from 1998
through 2016. The obligations are subject to force majeure provisions which
provide WPSC other options if the specified coal does not meet emission limits
which may be mandated in future legislation. In the opinion of management,
any amounts paid under the take-or-pay obligations described above would be
considered costs of service subject to recovery in customer rates.
PURCHASED POWER
WPSC has several take-or-pay contracts for either capacity or energy related
to purchased power. These contracts total $38.5 million through 1999.
Management expects to recover these costs in future customer rates.
LONG-TERM POWER SUPPLY
In November 1995, WPSC signed a 25-year agreement to purchase power from
Polsky Energy Corporation ("Polsky"), an independent power producer proposing
to build a cogeneration facility and sell electrical power to WPSC. In
October 1997, the PSCW issued a Certificate of Public Convenience and
Necessity authorizing construction of the project. Phase I of the project,
which is expected to be operational during 1999, will be accounted for as a
capitalized lease with the capitalized amount being approximately
$77.0 million. If Phase II becomes operational (Phase II is currently
projected to be operational within five years of the start of Phase I), an
additional plant asset of approximately $77.0 million will be recorded.
-70-
<PAGE>
GAS COSTS
WPSC has natural gas supply and transportation contracts that will require
total estimated demand payments of $238.9 million through October 2008.
The FERC has allowed ANR Pipeline Company ("ANR"), WPSC's primary pipeline
supplier, to recover from its customers, including WPSC, a portion of certain
take-or-pay costs it incurred from renegotiating its long-term gas supply
contracts. To date, the PSCW and MPSC have granted WPSC recovery of all ANR
take-or-pay costs. WPSC has satisfied all current direct billed take-or-pay
costs from ANR. Remaining take-or-pay volumetric surcharges are estimated to
be $0.5 million during 1998.
In April 1992, the FERC issued Order No. 636 ("Order") which required natural
gas pipelines to restructure their sales and transportation services. As a
result, WPSC was obligated to pay for a portion of ANR's transition costs
incurred to comply with the Order. ANR recovers these transition costs
through a Gas Supply Realignment ("GSR") surcharge and a Pricing Differential
("PD") surcharge, with most charges recovered through the PD mechanism. On
December 31, 1997, ANR made its seventh PD cost recovery filing. WPSC
believes this may be ANR's final PD filing as most PD eligible contracts have
now expired, and ANR's PD mechanism ends effective January 31, 1999. WPSC's
estimated remaining PD costs are $0.7 million. Though there may be additional
PD and GSR transition costs, which could be significant, the amount and timing
of these costs are unknown at this time. Management expects to recover these
costs in future customer rates since the PSCW and MPSC have allowed such
recovery to date.
In December 1996, FERC approved a settlement agreement which establishes the
price for ANR's gas purchases and demand charges from the Dakota Gasification
Plant. Demand charges for WPSC through 2003 are estimated to be $1.5 million.
NUCLEAR LIABILITY
The Price-Anderson Act provides for the payment of funds for public liability
claims arising out of a nuclear incident. In the event of a nuclear incident
involving any of the nation's licensed reactors, WPSC is subject to a
proportional assessment which is approximately $32.7 million per incident, not
to exceed $4.1 million per incident, per calendar year. These amounts
represent WPSC's 41.2% ownership share in Kewaunee.
NUCLEAR PLANT OPERATION
On March 15, 1996, WPSC filed an application with the PSCW for permission to
replace the Kewaunee steam generators. Public hearings were held in
January 1998. A decision is expected in March 1998. The total cost of
replacing the two steam generators is approximately $89.0 million. WPSC's
share is $36.7 million in year of occurrence dollars. The other two owners of
Kewaunee do not favor steam generator replacement.
The net book value of WPSC's share of Kewaunee at December 31, 1997 is
$43.0 million. In addition, the current cost of WPSC's share of the estimated
costs to decommission Kewaunee, assuming early retirement, exceeds the trust
assets at December 31, 1997 by $48.1 million. If retired early, Kewaunee
would be placed in a dormant state following the transfer of spent fuel to
temporary storage facilities. Under this plan, Kewaunee would remain intact
-71-
<PAGE>
with minimal monitoring and maintenance until physical decommissioning begins.
Actual decommissioning would probably not begin until approximately 2015. If
the owners of Kewaunee decide not to replace the steam generators or if the
PSCW does not authorize replacement, management believes the carrying amount
and any unfunded decommissioning costs at the date of Kewaunee's retirement
would be recoverable from customers in rates, and that no write-down for
impairment would be necessary. On January 3, 1997, the PSCW accepted WPSC's
recommendation to accelerate recovery of the Wisconsin retail portion of both
the current undepreciated plant balance and the unfunded decommissioning costs
over a six-year period, 1997 through 2002.
CLEAN AIR REGULATIONS
WPSC is in compliance with both the Phase I and Phase II sulfur dioxide and
nitrogen oxide emission limits established by the Federal Clean Air Act
Amendments of 1990. Additional capital expenditures of $1.0 million to
$2.0 million are projected through 1999 for Wisconsin and federal air quality
compliance. Management believes that all costs incurred for additional
compliance will be recoverable in future customer rates.
MANUFACTURED GAS PLANT REMEDIATION
WPSC is investigating the environmental cleanup of eight manufactured gas
plant sites. A detailed investigation has not yet been performed for the
eighth site. Future investigation and cleanup costs for all eight sites is
estimated to be in the range of $34.1 million to $41.1 million. These
estimates may be adjusted in the future contingent upon remedial technology,
regulatory requirements, and experience gained through cleanup activities.
A liability for cleanup of $41.7 million had been established with an
offsetting regulatory asset (deferred charge). Of this amount, approximately
$1.5 million has been spent to date. Management believes that cleanup costs
net of insurance recoveries, but not the carrying costs associated with the
cleanup expenditures, will be recoverable in current and future customer
rates. WPSC has received $12.6 million in insurance recoveries which have
been recorded as a reduction in the regulatory asset. The PSCW has authorized
current annualized recovery for gas site cleanup of $225,000 for each of the
years 1997 and 1998.
FUTURE UTILITY EXPENDITURES
Management estimates 1998 utility plant construction expenditures to be
approximately $88.3 million. Demand-side management ("DSM") expenditures are
estimated to be $8.0 million. No DSM expenditures will be deferred in 1998,
and the outstanding deferred asset balance at December 31, 1997 of
$31.4 million will be amortized over the next four years consistent with rate
recovery.
NOTE 10--REGULATORY ENVIRONMENT
WPSC received a rate order in the Wisconsin jurisdiction in February 1997.
The impact was approximately a $35.5 million decrease in electric revenues and
a $5.7 million increase in gas revenues on an annualized basis. The new rates
were effective for 1997 and will be effective for 1998. WPSC intends to file
an application with the PSCW on April 1, 1998, for electric and gas rate
increases which would be effective in 1999 and 2000.
-72-
<PAGE>
NOTE 11--AGREEMENT TO MERGE WITH UPPER PENINSULA ENERGY CORPORATION
On July 10, 1997, WPSR announced an agreement to merge with Upper Peninsula
Energy Corporation ("UPEN"). The S-4 Registration Statement was declared
effective by the Securities and Exchange Commission ("SEC") on
December 5, 1997. The shareholders of UPEN approved the merger on
January 29, 1998. The merger is subject to (1) approval by the FERC;
(2) approval by the SEC under the Public Utility Holding Company Act of 1935;
(3) the expiration or termination of the waiting period applicable to the
merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976;
(4) receipt by the parties of an opinion of counsel that the exchange of stock
qualifies as a tax-free transaction; (5) receipt by the parties of appropriate
assurances that the transaction will be accounted for as a pooling of
interests; and (6) the satisfaction of various other conditions. The merger
is expected to be completed in the second half of 1998. UPEN will merge with
and into WPSR, and Upper Peninsula Power Company ("UPPCO"), UPEN's utility
subsidiary, will become a wholly-owned subsidiary of WPSR.
The summary below contains selected unaudited pro forma financial data for the
year ended December 31, 1997. The financial data should be read in
conjunction with the historical WPSR and UPEN consolidated financial
statements and related notes. The pro forma combined earnings per share
reflect the issuance of shares associated with the merger agreement.
Under the terms of the merger agreement, each of the 2,950,001 outstanding
shares of UPEN common stock (no par value) will be converted into 0.90 shares
of WPSR common stock ($1.00 par value), subject to adjustment for fractional
shares.
</TABLE>
<TABLE>
<CAPTION>
==========================================================================================
Pro Forma
WPSR UPEN Combined
(In thousands, except per share data) (as reported) (as reported) (unaudited)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating revenues $ 878,340 $ 60,104 $ 938,444
Net income $ 53,742 $ 2,067 $ 55,809
Basic and diluted earnings per share $2.25 $0.70 $2.10
Assets at December 31, 1997 $1,299,602 $136,844 $1,435,804
Long-term obligations at December 31, 1997 $ 304,008 $ 43,007 $ 347,015
==========================================================================================
</TABLE>
UPEN is a holding company incorporated under the laws of the
State of Michigan. UPEN's principal subsidiary, UPPCO, is
an electric utility engaged in the generation, purchase,
transmission, distribution, and sale of electric energy in
the Upper Peninsula of Michigan. UPPCO serves approximately
48,000 customers in two-thirds of Michigan's Upper Peninsula.
UPPCO's service territory covers approximately 4,460 square
miles of primarily rural areas. UPPCO furnishes energy to
99 communities and adjacent areas and provides energy for
resale to 2 other investor-owned electric utilities,
2 cooperatives, and 4 municipalities. The main industries
in UPPCO's service territory are forest products, iron
mining and processing, tourism, and small manufacturing.
-73-
<PAGE>
NOTE 12--SEGMENTS OF BUSINESS
The table below presents information for the respective years pertaining to
WPSR's operations segmented by lines of business.
<TABLE>
<CAPTION>
===========================================================================================
(Thousands) 1997
- -------------------------------------------------------------------------------------------
Electric Gas Nonregulated
Utility Utility Operations Total
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues $479,388 $211,090 $187,862 $ 878,340
Operating expenses
Operation and maintenance 294,897 181,784 197,581 674,262
Depreciation 68,469 7,350 1,722 77,541
Other taxes 23,024 3,372 52 26,448
- -------------------------------------------------------------------------------------------
Total operating expenses 386,390 192,506 199,355 778,251
- -------------------------------------------------------------------------------------------
Operating income $ 92,998 $ 18,584 $(11,493) $ 100,089
===========================================================================================
Identifiable assets(a) $906,198 $235,490 $ 65,648 $1,207,336
- --------------------------------------------------------------------------
Assets not allocated(b) 92,266
- -------------------------------------------------------------------------------------------
Total assets $1,299,602
===========================================================================================
Construction and nuclear fuel
expenditures including AFUDC $ 48,696 $ 16,950 $ - $ 65,646
===========================================================================================
</TABLE>
<TABLE>
<CAPTION>
===========================================================================================
(Thousands) 1996
- -------------------------------------------------------------------------------------------
Electric Gas Nonregulated
Utility Utility Operations Total
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues $490,506 $211,357 $156,391 $ 858,254
Operating expenses
Operation and maintenance 309,212 190,331 165,844 665,387
Depreciation 56,708 7,127 1,343 65,178
Other taxes 23,161 3,708 (1) 26,868
- -------------------------------------------------------------------------------------------
Total operating expenses 389,081 201,166 167,186 757,433
- -------------------------------------------------------------------------------------------
Operating income $101,425 $ 10,191 $(10,795) $ 100,821
===========================================================================================
Identifiable assets(a) $905,325 $255,200 $ 71,917 $1,232,442
- --------------------------------------------------------------------------
Assets not allocated(b) 98,423
- -------------------------------------------------------------------------------------------
Total assets $1,330,865
===========================================================================================
Construction and nuclear fuel
expenditures including AFUDC $ 63,941 $ 17,773 $ - $ 81,714
===========================================================================================
</TABLE>
-74-
<PAGE>
<TABLE>
<CAPTION>
===========================================================================================
(Thousands) 1995
- -------------------------------------------------------------------------------------------
Electric Gas Nonregulated
Utility Utility Operations Total
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues $489,000 $174,693 $56,155 $ 719,848
Operating expenses
Operation and maintenance 310,293 152,062 57,538 519,893
Depreciation 58,608 6,766 253 65,627
Other taxes 22,171 3,749 1 25,921
- -------------------------------------------------------------------------------------------
Total operating expenses 391,072 162,577 57,792 611,441
- -------------------------------------------------------------------------------------------
Operating income $ 97,928 $ 12,116 $(1,637) $ 108,407
===========================================================================================
Identifiable assets(a) $906,029 $232,983 $33,332 $1,172,344
- -------------------------------------------------------------------------
Assets not allocated(b) 94,399
- -------------------------------------------------------------------------------------------
Total assets $1,266,743
===========================================================================================
Construction and nuclear fuel
expenditures including AFUDC $ 56,916 $ 16,335 $ - $ 73,251
===========================================================================================
(a) At December 31 and net of the respective accumulated depreciation.
(b) Primarily includes cash, investments, pension assets, nonutility property, and other receivables.
</TABLE>
NOTE 13--QUARTERLY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
==================================================================================================================
(Thousands, except for share amounts) Three Months Ended
- ------------------------------------------------------------------------------------------------------------------
1997
March June September December Total
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating revenues $263,013 $191,360 $185,225 $238,742 $878,340
Operating income $ 33,270 $ 15,620 $ 26,390 $ 24,809 $100,089
Net income $ 18,235 $ 9,571 $ 12,903 $ 13,033 $ 53,742
Average number of shares of common stock 23,880 23,875 23,870 23,866 23,873
Basic and diluted earnings per share $.76 $.40 $.54 $.55 $2.25
==================================================================================================================
- ------------------------------------------------------------------------------------------------------------------
1996
March June September December Total
- ------------------------------------------------------------------------------------------------------------------
Operating revenues $251,337 $181,628 $178,980 $246,309 $858,254
Operating income $ 40,999 $ 20,606 $ 23,695 $ 15,521 $100,821
Net income $ 23,520 $ 10,120 $ 10,385 $ 3,730 $ 47,755
Average number of shares of common stock 23,896 23,893 23,893 23,885 23,891
Basic and diluted earnings per share $.98 $.42 $.43 $.17 $2.00
==================================================================================================================
Because of various factors which affect the utility business, the quarterly results of operations are not necessarily
comparable. Fourth quarter 1996 results include a loss of $.25 per share at WPSR's nonregulated subsidiaries due to
trading losses and a loss on the write-off of an investment.
</TABLE>
-75-
PAGE
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WPS RESOURCES CORPORATION
F. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of WPS Resources Corporation:
We have audited the accompanying consolidated balance sheets and consolidated
statements of capitalization of WPS Resources Corporation (a Wisconsin
corporation) and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income and retained earnings and cash flows
for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
WPS Resources Corporation and subsidiaries as of December 31, 1997 and 1996
and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin
January 29, 1998
-76-
<PAGE>
<PAGE>
<TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WISCONSIN PUBLIC SERVICE CORPORATION
G. CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
===================================================================================================
Year Ended December 31 (Thousands) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating revenues
Electric $479,388 $490,506 $489,000
Gas 211,090 211,357 174,693
- ---------------------------------------------------------------------------------------------------
Total operating revenues 690,478 701,863 663,693
===================================================================================================
Operating expenses
Electric production fuels 107,538 105,418 104,858
Purchased power 45,876 37,737 39,593
Gas purchased for resale 147,493 149,388 116,253
Other operating expenses 134,113 158,167 150,880
Maintenance 41,661 48,734 50,761
Depreciation and decommissioning 75,819 63,835 65,374
Federal income taxes 26,460 25,267 25,645
Investment tax credit restored (1,768) (1,778) (1,725)
State income taxes 7,569 7,732 7,378
Gross receipts tax and other 26,396 26,869 25,920
- ---------------------------------------------------------------------------------------------------
Total operating expense 611,157 621,369 584,937
===================================================================================================
Operating income 79,321 80,494 78,756
- ---------------------------------------------------------------------------------------------------
Other income and (deductions)
Allowance for equity funds used during construction 129 139 170
Other, net 12,591 5,123 6,019
Income taxes (1,110) (294) 160
- ---------------------------------------------------------------------------------------------------
Total other income and (deductions) 11,610 4,968 6,349
===================================================================================================
Income before interest expense 90,931 85,462 85,105
- ---------------------------------------------------------------------------------------------------
Interest expense
Interest on long-term debt 22,530 22,512 23,409
Other interest 3,759 2,688 2,526
Allowance for borrowed funds used during construction (100) (128) (68)
- ---------------------------------------------------------------------------------------------------
Total interest expense 26,189 25,072 25,867
===================================================================================================
Net income 64,742 60,390 59,238
===================================================================================================
Preferred stock dividend requirements 3,111 3,111 3,111
Earnings on common stock $ 61,631 $ 57,279 $ 56,127
===================================================================================================
The accompanying WPS Resources Corporation notes are an integral part of these statements.
</TABLE>
-77-
<PAGE>
<PAGE>
<TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WISCONSIN PUBLIC SERVICE CORPORATION
H. CONSOLIDATED BALANCE SHEETS
<CAPTION>
===============================================================================================
Assets
- -----------------------------------------------------------------------------------------------
At December 31 (Thousands) 1997 1996
===============================================================================================
<S> <C> <C>
Utility plant
Electric $1,506,470 $1,474,104
Gas 251,603 240,791
- -----------------------------------------------------------------------------------------------
Total 1,758,073 1,714,895
Less - Accumulated depreciation and decommissioning 1,032,149 952,296
- -----------------------------------------------------------------------------------------------
Total 725,924 762,599
Nuclear decommissioning trusts 134,108 100,570
Construction in progress 7,266 10,301
Nuclear fuel, less accumulated amortization 19,062 19,381
- -----------------------------------------------------------------------------------------------
Net utility plant 886,360 892,851
===============================================================================================
Current assets
Cash and equivalents 3,921 4,165
Customer and other receivables, net of reserves 55,893 66,234
Accrued utility revenues 30,750 35,326
Fossil fuel, at average cost 9,964 8,224
Gas in storage, at average cost 17,194 16,440
Materials and supplies, at average cost 18,793 19,796
Prepayments and other 20,155 22,189
- -----------------------------------------------------------------------------------------------
Total current assets 156,670 172,374
===============================================================================================
Regulatory assets 78,544 96,920
Net nonutility plant 2,972 4,191
Investments and other assets 109,408 92,612
===============================================================================================
Total $1,233,954 $1,258,948
===============================================================================================
</TABLE>
-78-
<PAGE>
<PAGE>
<TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WISCONSIN PUBLIC SERVICE CORPORATION
H. CONSOLIDATED BALANCE SHEETS (CONTINUED)
<CAPTION>
===============================================================================================
Capitalization and Liabilities
- -----------------------------------------------------------------------------------------------
At December 31 (Thousands) 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Capitalization
Common stock equity $ 457,121 $ 448,425
Preferred stock with no mandatory redemption 51,200 51,200
Long-term debt to parent 14,321 14,612
Long-term debt 293,298 296,207
- -----------------------------------------------------------------------------------------------
Total capitalization 815,940 810,444
===============================================================================================
Current liabilities
Note payable 10,000 10,000
Commercial paper 15,500 29,000
Accounts payable 46,453 62,500
Accrued taxes 3,514 1,350
Accrued interest 7,801 8,134
Other 10,049 12,324
- -----------------------------------------------------------------------------------------------
Total current liabilities 93,317 123,308
===============================================================================================
Long-term liabilities and deferred credits
Accumulated deferred income taxes 127,512 131,549
Accumulated deferred investment tax credits 26,901 28,669
Regulatory liabilities 50,279 48,870
Environmental remediation liabilities 40,215 41,697
Other long-term liabilities 79,790 74,411
- -----------------------------------------------------------------------------------------------
Total long-term liabilities and deferred credits 324,697 325,196
===============================================================================================
Commitments and contingencies (See Note 9)
===============================================================================================
Total $1,233,954 $1,258,948
===============================================================================================
The accompanying WPS Resources Corporation notes are an integral part of these balance sheets.
</TABLE>
-79-
<PAGE>
<PAGE>
<TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WISCONSIN PUBLIC SERVICE CORPORATION
I. CONSOLIDATED STATEMENTS OF CAPITALIZATION
<CAPTION>
=======================================================================================
At December 31 (Thousands, except share amounts) 1997 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Common stock equity
Common stock $ 95,588 $ 95,588
Premium on capital stock 73,842 73,842
Retained earnings 297,489 291,740
ESOP loan guarantees (9,798) (12,745)
- ---------------------------------------------------------------------------------------
Total common stock equity 457,121 448,425
=======================================================================================
Preferred stock
Cumulative, $100 par value, 1,000,000 shares authorized:
with no mandatory redemption -
Series Shares Outstanding
------ ------------------
5.00% 132,000 13,200 13,200
5.04% 30,000 3,000 3,000
5.08% 50,000 5,000 5,000
6.76% 150,000 15,000 15,000
6.88% 150,000 15,000 15,000
- ---------------------------------------------------------------------------------------
Total preferred stock 51,200 51,200
=======================================================================================
Long-term debt to parent
Series Year Due
------ --------
8.76% 2015 5,914 6,012
7.35% 2016 8,407 8,600
- ---------------------------------------------------------------------------------------
Total long-term debt to parent 14,321 14,612
=======================================================================================
Long-term debt
First mortgage bonds
Series Year Due
------ --------
5-1/4% 1998 50,000 50,000
7.30% 2002 50,000 50,000
6.80% 2003 50,000 50,000
6-1/8% 2005 9,075 9,075
6.90% 2013 22,000 22,000
8.80% 2021 53,100 53,100
7-1/8% 2023 50,000 50,000
- ---------------------------------------------------------------------------------------
Total 284,175 284,175
Unamortized discount and premium on bonds, net (890) (978)
- ---------------------------------------------------------------------------------------
Total first mortgage bonds 283,285 283,197
- ---------------------------------------------------------------------------------------
ESOP loan guarantees 9,798 12,745
Other long-term debt 215 265
- ---------------------------------------------------------------------------------------
Total long-term debt 293,298 296,207
=======================================================================================
Total capitalization $815,940 $810,444
=======================================================================================
</TABLE>
The accompanying WPS Resources Corporation notes are an integral
part of these statements.
-80-
PAGE
<PAGE>
<TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WISCONSIN PUBLIC SERVICE CORPORATION
J. CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
========================================================================================================
Year Ended December 31 (Thousands) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 64,742 $ 60,390 $ 59,238
Adjustments to reconcile net income to net cash from
operating activities -
Depreciation and decommissioning 75,819 63,835 65,374
Amortization of nuclear fuel and other 14,665 27,687 33,344
Deferred income taxes (5,846) (6,623) 103
Investment tax credit restored (1,767) (1,778) (1,725)
Allowance for equity funds used during construction (129) (139) (170)
Pension income (11,432) (12,413) (11,678)
Postretirement liability 4,952 7,150 6,917
Deferred demand-side management expenditures (5) (6,250) (8,595)
(Gain)/loss on sale of nonutility property (4,802) (8) 13
Other, net (6,196) 7,069 6,627
Changes in -
Customer and other receivables 10,341 (4,078) (4,120)
Accrued utility revenues 4,576 2,260 (8,766)
Fossil fuel inventory (1,740) 477 1,804
Gas in storage (754) (6,537) 5,880
Accounts payable (16,047) 9,619 (12,455)
Accrued taxes 2,164 (394) 545
Environmental remediation insurance recovery 12,374 200 -
Gas refunds (318) (6,175) 4,926
- --------------------------------------------------------------------------------------------------------
Net cash from operating activities 140,597 134,292 137,262
========================================================================================================
Cash flows from (used for) investing activities:
Construction of utility plant and nuclear fuel expenditures (58,258) (84,750) (80,226)
Decommissioning funding (16,059) (8,978) (8,181)
Purchase of other property and equipment (111) (2,050) 77
Proceeds from sale of nonutility property 6,255 10 29
Other (175) 939 142
- --------------------------------------------------------------------------------------------------------
Net cash used for investing activities (68,348) (94,829) (88,159)
========================================================================================================
Cash flows from (used for) financing activities:
Redemption of first mortgage bonds - (6,900) -
Proceeds of long-term debt from parent - 8,668 -
Proceeds from issuance of commercial paper 257,100 153,300 51,500
Redemptions of commercial paper (270,600) (135,800) (52,500)
Preferred stock dividends (3,111) (3,111) (3,111)
Common stock dividends (55,882) (55,926) (43,970)
- --------------------------------------------------------------------------------------------------------
Net cash used for financing activities (72,493) (39,769) (48,081)
========================================================================================================
Net increase (decrease) in cash and equivalents (244) (306) 1,022
========================================================================================================
Cash and equivalents at beginning of year 4,165 4,471 3,449
========================================================================================================
Cash and equivalents at end of year $ 3,921 $ 4,165 $ 4,471
========================================================================================================
Cash paid during year for:
Interest, less amount capitalized $ 22,311 $ 22,100 $ 21,177
Income taxes $ 41,151 $ 35,662 $ 34,562
Other information
Construction and nuclear fuel expenditures, including
accruals, allowance for funds used during
construction and customer contributions $ 65,646 $ 81,714 $ 73,251
========================================================================================================
The accompanying WPS Resources Corporation notes are an integral part of these statements.
</TABLE>
-81-
PAGE
<PAGE>
<TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WISCONSIN PUBLIC SERVICE CORPORATION
K. CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
<CAPTION>
====================================================================================
Year Ended December 31 (Thousands) 1997 1996 1995
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $291,740 $290,387 $280,730
Add - Net income 64,742 60,390 59,238
- ------------------------------------------------------------------------------------
356,482 350,777 339,968
- ------------------------------------------------------------------------------------
Deduct -
Cash dividends declared on preferred stock
5.00% Series ($5.00 per share) 660 660 660
5.04% Series ($5.04 per share) 151 151 151
5.08% Series ($5.08 per share) 254 254 254
6.76% Series ($6.76 per share) 1,014 1,014 1,014
6.88% Series ($6.88 per share) 1,032 1,032 1,032
Dividends declared on common stock 45,882 44,926 43,970
Dividend to parent 10,000 11,000 2,500
- ------------------------------------------------------------------------------------
58,993 59,037 49,581
- ------------------------------------------------------------------------------------
Balance at end of year $297,489 $291,740 $290,387
====================================================================================
The accompanying WPS Resources Corporation notes are an integral part of these statements.
</TABLE>
-82-
<PAGE>
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WISCONSIN PUBLIC SERVICE CORPORATION
L. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Notes to Consolidated Financial Statements for Wisconsin Public Service
Corporation are incorporated in the Notes to Consolidated Financial Statements
for WPS Resources Corporation at page 57 of this report.
-83-
<PAGE>
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WISCONSIN PUBLIC SERVICE CORPORATION
M. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Wisconsin Public Service Corporation:
We have audited the accompanying consolidated balance sheets and consolidated
statements of capitalization of Wisconsin Public Service Corporation (a
Wisconsin corporation) and subsidiary as of December 31, 1997 and 1996, and
the related consolidated statements of income and retained earnings and cash
flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Wisconsin
Public Service Corporation and subsidiary as of December 31, 1997 and 1996,
and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin
January 29, 1998
-84-
<PAGE>
<PAGE>
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information about WPSR's directors and those Class A directors seeking
re-election may be found on pages 3 and 4 of WPSR's March 23, 1998 Proxy
Statement. Such information is incorporated by reference as if fully set
forth herein.
Information regarding the executive officers, which is not a part of
WPSR's Proxy Statement, is set forth in Part I, Item 4A, at page 32.
ITEM 11. EXECUTIVE COMPENSATION
Information required under Item 11 regarding compensation paid by WPSR
to its Chief Executive Officer and other executive officers of WPSR may be
found in WPSR's March 23, 1998 Proxy Statement, which information is
incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning principal securities holders and securities
holdings of management which may be found on pages 2 and 3 of WPSR's March 23,
1998 Proxy Statement is incorporated by reference as if fully set forth
herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There have been no transactions since the beginning of fiscal year 1997,
or any currently proposed transactions, or series of similar transactions, to
which WPSR or any of its subsidiaries was or is to be party in which the
amount exceeds $60,000 and in which any director, executive officer, any
nominee for election as a director, any security holder owning of record or
beneficially more than 5% of the Common Stock of WPSR, or any member of the
immediate family of any of the foregoing persons had or will have a direct
material interest.
-85-
<PAGE>
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
(1) The following financial consolidated statements are included
in Part II at Item 8 above:
Description Pages in 10-K
----------- -------------
WPS RESOURCES CORPORATION
Consolidated Statements of Income and 52
Retained Earnings for the three years
ended December 31, 1997, 1996, and 1995
Consolidated Balance Sheets as of 53
December 31, 1997 and 1996
Consolidated Statements of Capitalization 55
as of December 31, 1997 and 1996
Consolidated Statements of Cash Flows for 56
the three years ended December 31, 1997,
1996, and 1995
Notes to Consolidated Financial Statements 57
Report of Independent Public Accountants 76
WISCONSIN PUBLIC SERVICE CORPORATION
Consolidated Statements of Income for the 77
three years ended December 31, 1997, 1996,
and 1995
Consolidated Balance Sheets as of 78
December 31, 1997 and 1996
Consolidated Statements of Capitalization 80
as of December 31, 1997 and 1996
Consolidated Statements of Cash Flows for 81
the three years ended December 31, 1997,
1996, and 1995
Consolidated Statements of Retained Earnings 82
Notes to Consolidated Financial Statements 83
Report of Independent Public Accountants 84
-86-
<PAGE>
(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 III - Condensed Parent
Company Only Financial Statements
A. Report of Independent Public 95
Accountants
B. Statements of Income and Retained 96
Earnings
C. Balance Sheets 97
D. Statements of Cash Flows 98
E. Notes to Parent Company Financial 99
Statements
(3) All exhibits, including those incorporated by reference.
-87-
<PAGE>
<PAGE>
Exhibit
Number Description of Documents
- ------- ------------------------
3A-1 Restated Articles of Incorporation of the Company. (Incorporated
by reference to Appendix B to Amendment No. 1 to the Company's
Registration Statement on Form S-4, filed February 28, 1994 [Reg.
No. 33-52199]).
3A-2 Articles of Incorporation of Wisconsin Public Service Corporation
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).
3B-1 By-Laws of the Company as in effect July 11, 1996. (Incorporated
by reference to Exhibit 3(ii) to Form 10-Q for the quarter ended
September 30, 1996). (File No. 1-11337)
3B-2 By-Laws of Wisconsin Public Service Corporation as in effect
July 11, 1996. (Incorporated by reference to Exhibit 3(ii) to
Form 10-Q for the quarter ended September 30, 1996). (File
No. 1-3016)
4A Copy of Rights Agreement, dated December 12, 1996 between
WPS Resources Corporation and Firstar Trust Company (Incorporated
by reference to Exhibit 4.1 to Form 8-A filed December 13, 1996
[File No.1-11337]).
4B Copy of First Mortgage and Deed of Trust, dated as of January 1,
1941 from Wisconsin Public Service Corporation 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
-88-
<PAGE>
Exhibit
Number Description of Documents
- ------- ------------------------
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). All
references to periodic reports are to those of Wisconsin Public
Service Corporation (File No. 1-3016).
10A Copy of Joint Power Supply Agreement among Wisconsin Public
Service Corporation, 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).
10B Copy of Joint Power Supply Agreement (Exclusive of Exhibits) among
Wisconsin Public Service Corporation, 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).
10C Copy of Basic Generating Agreement, Unit 4, Edgewater Generating
Station, dated June 5, 1967, between Wisconsin Power and Light
Company and Wisconsin Public Service Corporation (Incorporated by
reference to Exhibit 4.10 in File No. 2-27308).
-89-
<PAGE>
Exhibit
Number Description of Documents
- ------- ------------------------
10C-1 Copy of 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 Wisconsin
Public Service Corporation (Incorporated by reference to
Exhibit 10C-1 to Form 10-K of Wisconsin Public Service Corporation
for the year ended December 31, 1983 [File No. 1-3016]).
10C-2 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 Form 10-K of Wisconsin Public
Service Corporation for the year ended December 31, 1988 [File
No. 1-3016]).
10D Copy of revised Agreement for Construction and Operation of
Columbia Generating Plant among Wisconsin Public Service
Corporation, 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).
10E Copy of Guaranty and Agreements and Note Agreements for Wisconsin
Public Service Corporation Employee Stock Ownership Plan and Trust
(ESOP) dated November 1, 1990 (Incorporated by reference to
Exhibits 10.1 and 10.2 to Form 8-K of Wisconsin Public Service
Corporation filed November 2, 1990 [File No. 1-3016]).
10F-1 Copy of Power Purchase Agreement Between De Pere Energy LLC and
Wisconsin Public Service Corporation dated November 8, 1995 and
amended by a Letter Agreement dated February 18, 1997. (Included
as Exhibit 10F-1 to this Form 10-K for the year ended December 31,
1997, filed March 6, 1998 [File No. 1-3016]).
10F-2 Agreement and Plan of Merger, dated as of July 10, 1997, by and
among WPS Resources Corporation and Upper Peninsula Energy
Corporation (Incorporated by reference to Appendix A to the Proxy
Statement/Prospectus forming part of Amendment 2 to the
Registration Statement on Form S-4, filed November 21, 1997
[Reg. No. 333-3401]).
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
10G-1 Copy of amended and restated WPS Resources Corporation Deferred
Compensation Plan for executives and non-employee directors,
effective January 1, 1998. (Included as Exhibit 10G-1 to this
Form 10-K for the year ended December 31, 1997, filed March 6,
1998 [File No. 1-11337]).
-90-
<PAGE>
Exhibit
Number Description of Documents
- ------- ------------------------
10G-2 Copy of Form of Executive Employment and Severance Agreement
entered into between WPS Resources Corporation and each of the
following: Ralph G. Baeten, Daniel P. Bittner, Diane L. Ford,
Richard E. James, Thomas P. Meinz, Phillip M. Mikulsky,
Wayne J. Peterson, Patrick D. Schrickel, Charles A. Schrock,
Clark R. Steinhardt, Bernard J. Treml, and Larry L. Weyers
(Incorporated by reference to Exhibit 10.6 to Form 10-Q for the
quarter ended June 30, 1997, filed July 25, 1997 [File
No. 1-11337]).
10G-3 Copy of WPS Resources Corporation Short-Term Variable Pay Plan
effective January 1, 1998. (Included as Exhibit 10G-3 to this
Form 10-K for the year ended December 31, 1997, filed March 6,
1998 [File No. 1-11337]).
-91-
<PAGE>
<PAGE>
Exhibit
Number Description of Document Pages in 10-K
- ------- ----------------------- -------------
10F-1 Power Purchase Agreement Between De Pere
Energy LLC and Wisconsin Public Service
Corporation dated November 8, 1995 and
amended by a Letter Agreement dated
February 18, 1997
Wisconsin Public Service Corporation 100
10G-1 WPS Resources Corporation Amended and Restated
Deferred Compensation Plan Effective January 1,
1998
WPS Resources Corporation 213
10G-3 WPS Resources Corporation Short-Term Variable
Pay Plan Effective January 1, 1998
WPS Resources Corporation 240
11 Statement Regarding Computation of Per Share
Earnings
WPS Resources Corporation 248
21 Subsidiaries of the Registrant 249
23 Consent of Independent Public Accountants 250
24 Powers of Attorney 251
27 Financial Data Schedule
WPS Resources Corporation 259
Wisconsin Public Service Corporation 260
-92-
<PAGE>
<PAGE>
(b) Reports on Form 8-K
Form 8-K dated October 20, 1997 and filed October 21, 1997
transmitting a press release dated October 20, 1997 regarding the
financial results of WPS Resources Corporation for the quarterly
period ended September 30, 1997.
-93-
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
WPS RESOURCES CORPORATION
and
WISCONSIN PUBLIC SERVICE CORPORATION
(Registrant)
By /s/ L. L. Weyers
--------------------------------------------------------------------
L. L. Weyers L. L. Weyers
Chairman, President, and Chairman and
Chief Executive Officer Chief Executive Officer
WPS Resources Corporation Wisconsin Public Service Corporation
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
- ------------------------------------------------------------------------------
A. Dean Arganbright Director March 6, 1998
Michael S. Ariens Director
Richard A. Bemis Director
Daniel A. Bollom Director
M. Lois Bush Director
Robert C. Gallagher Director By /s/ L. L. Weyers
Kathryn M. Hasselblad-Pascale Director --------------------------
James L. Kemerling Director L. L. Weyers
Attorney-in-Fact
/s/ L. L. Weyers Principal Executive March 6, 1998
- ---------------------------------Officer and Director
L. L. Weyers
/s/ D. P. Bittner Principal Financial March 6, 1998
- ---------------------------------Officer
D. P. Bittner
/s/ D. L. Ford Principal Accounting March 6, 1998
- ---------------------------------Officer
D. L. Ford
-94-
<PAGE>
<PAGE>
SCHEDULE III - CONDENSED
PARENT COMPANY FINANCIAL STATEMENTS
WPS RESOURCES CORPORATION (PARENT COMPANY ONLY)
A. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of WPS Resources Corporation:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of WPS Resources Corporation included in
this Form 10-K, and have issued our report thereon dated January 29, 1998.
Our audit was made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. Supplemental Schedule III
is the responsibility of the Company's management and is presented for
purposes of complying with the Securities and Exchange Commission's rules and
is not part of the basic consolidated financial statements. This schedule has
been subjected to the auditing procedures applied in the audit of the basic
consolidated financial statements and, in our opinion, fairly states in all
material respects, the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin
January 29, 1998
-95-
<PAGE>
<PAGE>
<TABLE>
SCHEDULE III - CONDENSED
PARENT COMPANY FINANCIAL STATEMENTS
WPS RESOURCES CORPORATION (PARENT COMPANY ONLY)
B. STATEMENTS OF INCOME AND RETAINED EARNINGS
<CAPTION>
===============================================================================================
Year Ended December 31 (Thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income
Equity in earnings of subsidiaries after dividends $ (1,432) $ (8,941) $ 11,236
Cash dividends from subsidiaries 55,882 55,926 43,970
- -----------------------------------------------------------------------------------------------
Income from subsidiaries 54,450 46,985 55,206
- -----------------------------------------------------------------------------------------------
Investment income and other 2,901 2,251 872
- -----------------------------------------------------------------------------------------------
Total income 57,351 49,236 56,078
===============================================================================================
Operating expenses 2,864 585 589
- -----------------------------------------------------------------------------------------------
Income before interest expense 54,487 48,651 55,489
Interest expense 417 454 68
- -----------------------------------------------------------------------------------------------
Income before income taxes 54,070 48,197 55,421
Income taxes 328 442 78
- -----------------------------------------------------------------------------------------------
Net Income 53,742 47,755 55,343
===============================================================================================
Retained earnings, beginning of year 311,794 308,965 297,592
Common stock dividend (45,882) (44,926) (43,970)
- -----------------------------------------------------------------------------------------------
Retained earnings at end of year $319,654 $311,794 $308,965
===============================================================================================
</TABLE>
-96-
PAGE
<PAGE>
<TABLE>
SCHEDULE III - CONDENSED
PARENT COMPANY FINANCIAL STATEMENTS
WPS RESOURCES CORPORATION (PARENT COMPANY ONLY)
C. BALANCE SHEETS
<CAPTION>
==============================================================================
At December 31 (Thousands) 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
Assets
- ------------------------------------------------------------------------------
Current assets
Cash and equivalents $ 5 $ 3
Accounts receivable - affiliates 417 614
Other receivables 217 12
Notes receivable - affiliates (note 1) 4,498 14,875
- ------------------------------------------------------------------------------
Total current assets 5,137 15,504
==============================================================================
Long-term notes receivable - affiliates (note 2) 15,950 16,382
==============================================================================
Investments in subsidiaries, at equity
Wisconsin Public Service Corporation 457,121 448,425
WPS Energy Services, Inc. 4,495 2,443
WPS Power Development, Inc. 7 2,238
- ------------------------------------------------------------------------------
Total investments in subsidiaries, at equity 461,623 453,106
==============================================================================
Net equipment 321 68
Other investments 2,856 3,025
Deferred income taxes 45 52
- ------------------------------------------------------------------------------
Total assets $485,932 $488,137
==============================================================================
==============================================================================
Liabilities and Capitalization
- ------------------------------------------------------------------------------
Current liabilities
Notes payable $ 5,206 $ 18,950
Accounts payable - affiliates 549 86
Accounts payable 1,699 519
Dividends payable 626 948
Other 29 62
- ------------------------------------------------------------------------------
Total current liabilities 8,109 20,565
==============================================================================
Other liabilities - 48
==============================================================================
Capitalization
Common stock, $1 par value, 100,000,000 shares
authorized; 23,896,962 shares outstanding 23,897 23,897
Premium on capital stock 145,021 145,021
Retained earnings 319,654 311,794
ESOP loan guarantees (9,798) (12,745)
Shares in deferred compensation trust (951) (443)
- ------------------------------------------------------------------------------
Total capitalization 477,823 467,524
==============================================================================
Total liabilities and capitalization $485,932 $488,137
==============================================================================
</TABLE>
-97-
PAGE
<PAGE>
<TABLE>
SCHEDULE III - CONDENSED
PARENT COMPANY FINANCIAL STATEMENTS
WPS RESOURCES CORPORATION (PARENT COMPANY ONLY)
D. STATEMENTS OF CASH FLOWS
<CAPTION>
=====================================================================================================
Year Ended December 31 (Thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating
Net income $ 53,742 $ 47,755 $ 55,343
Add equity in earnings of subsidiaries after dividends 1,432 8,941 (11,236)
Deferred income taxes 7 46 139
Other - net 3 1,883 (30)
Changes in other items
Receivables (8) (463) (1,740)
Accounts payable 1,258 357 64
Other (16) 110 285
- -----------------------------------------------------------------------------------------------------
Net cash - operating 56,418 58,629 42,825
=====================================================================================================
Investing
Notes receivable - affiliates 10,809 (21,346) (1,825)
Capital contributions - affiliates (7,005) (5,250) (5,400)
Investments - other (87) (2,371) (4,434)
- -----------------------------------------------------------------------------------------------------
Net cash - investing 3,717 (28,967) (11,659)
=====================================================================================================
Financing
Proceeds from short-term debt 536,200 333,264 15,000
Payments on short-term debt (549,944) (319,314) (10,000)
Purchase of deferred compensation stock (507) (443) -
Common stock dividends (45,882) (44,926) (43,970)
- -----------------------------------------------------------------------------------------------------
Net cash - financing (60,133) (31,419) (38,970)
=====================================================================================================
Net change in cash 2 (1,757) (7,804)
Cash, beginning of period 3 1,760 9,564
- -----------------------------------------------------------------------------------------------------
Cash, end of period $ 5 $ 3 $ 1,760
=====================================================================================================
</TABLE>
-98-
PAGE
<PAGE>
SCHEDULE III - CONDENSED
PARENT COMPANY FINANCIAL STATEMENTS
WPS RESOURCES CORPORATION (PARENT COMPANY ONLY)
E. NOTES TO PARENT COMPANY FINANCIAL STATEMENTS
The following are supplemental notes to the WPS Resources Corporation (parent
company only) financial statements and should be read in conjunction with the
WPS Resources Corporation Consolidated Financial Statements and Notes thereto
included herein:
SUPPLEMENTAL NOTES
Note 1 WPS Resources Corporation ("WPSR") has short-term notes receivable
from WPS Energy Services, Inc. ("ESI") and WPS Power Development,
Inc. for $3.2 million and $1.3 million, respectively. These notes
bear interest at between 6.90% and 8.50%, depending upon the
operational use of the loaned funds.
Note 2 WPSR has long-term notes receivable from Wisconsin Public Service
Corporation for $5.9 million and $8.4 million bearing interest at
8.76% and 7.35%, respectively. The notes are to be repaid in
monthly payments of $51,670 and $63,896 through January 2015 and
May 2016, respectively. WPSR also has a long-term note receivable
from ESI totaling $1.6 million and bearing interest at 7-7/8%.
The note is to be repaid in quarterly payments of $69,076 through
October 2005.
-99-
EXHIBIT 10F-1
EXECUTION COPY
POWER PURCHASE AGREEMENT
BETWEEN
DEPERE ENERGY LLC
AND
WISCONSIN PUBLIC SERVICE CORPORATION
NOVEMBER 8, 1995
-100-
PAGE
<PAGE>
POWER PURCHASE AGREEMENT
BETWEEN DEPERE ENERGY LLC AND
WISCONSIN PUBLIC SERVICE CORPORATION
TABLE OF CONTENTS
ARTICLE TITLE PAGE
- ------- ----- ----
ARTICLE I: DEFINITIONS. . . . . . . . . . . . . . . . . . . . 3
1.1 Defined Terms. . . . . . . . . . . . . . . . . . . . 3
ARTICLE II: DESIGN AND CONSTRUCTION OF THE FACILITY . . . . . 12
2.1 The Facility . . . . . . . . . . . . . . . . . . . . 12
2.2 Company Interest in Design Specifications. . . . . . 12
2.3 Approval of Design Specifications. . . . . . . . . . 12
2.4 Approval of Critical Components. . . . . . . . . . . 14
2.5 Construction . . . . . . . . . . . . . . . . . . . . 15
2.6 Construction Milestone Schedule Assurances . . . . . 15
2.7 Delay in Date of Commercial Operation. . . . . . . . 15
2.8 Seller's Responsibility for Design and
Construction . . . . . . . . . . . . . . . . . . . . 17
2.9 Significant Technological Modifications. . . . . . . 17
2.10 Application of Confidentiality Provisions. . . . . . 18
ARTICLE III: OPERATION OF FACILITY. . . . . . . . . . . . . . 18
3.1 Dispatchability. . . . . . . . . . . . . . . . . . . 18
3.2 Operation of Facility. . . . . . . . . . . . . . . . 20
3.3 Obligations of the Parties.. . . . . . . . . . . . . 25
ARTICLE IV: SALE OF ENERGY AND CAPACITY . . . . . . . . . . . 27
4.1 Conditions Precedent to Sale and Purchase. . . . . . 27
4.2 Energy Sale and Purchase . . . . . . . . . . . . . . 28
4.3 Capacity Sale and Purchase . . . . . . . . . . . . . 28
4.4 Performance Standards. . . . . . . . . . . . . . . . 28
4.5 Power Characteristics. . . . . . . . . . . . . . . . 32
4.6 Parallel Operation . . . . . . . . . . . . . . . . . 32
4.7 Power Purchases by Seller. . . . . . . . . . . . . . 33
ARTICLE V: RATES FOR PURCHASE . . . . . . . . . . . . . . . . 33
5.1 Rates for Purchases. . . . . . . . . . . . . . . . . 33
ARTICLE VI: METERING, INSTRUMENTATION AND BILLING . . . . . . 36
6.1 Metering and Instrumentation Devices . . . . . . . . 36
6.2 Billing and Payment. . . . . . . . . . . . . . . . . 37
ARTICLE VII: TESTING AND CAPACITY RATINGS . . . . . . . . . . 37
7.1 Notice of Projected Rating . . . . . . . . . . . . . 37
7.2 Test of Capability . . . . . . . . . . . . . . . . . 38
7.3 Method of Testing and Results. . . . . . . . . . . . 38
7.4 Notification of Testing. . . . . . . . . . . . . . . 38
-101-
<PAGE>
Page 2 of 5
ARTICLE TITLE PAGE
- ------- ----- ----
ARTICLE VIII: PRE-OPERATION PERIOD. . . . . . . . . . . . . . 39
8.1 Permits and Approvals. . . . . . . . . . . . . . . . 39
8.2 Schedule, Reports and Inspection . . . . . . . . . . 40
8.3 Facility Design Data . . . . . . . . . . . . . . . . 40
8.4 Fuel Supply. . . . . . . . . . . . . . . . . . . . . 41
8.5 Water Rights . . . . . . . . . . . . . . . . . . . . 41
8.6 Voltage Schedule . . . . . . . . . . . . . . . . . . 41
8.7 Notice of Initial Energizing . . . . . . . . . . . . 41
8.8 Energy Delivered During Testing. . . . . . . . . . . 42
8.9 Preliminary Notice of Commercial Operation . . . . . 42
8.10 Notice of Compliance and Verification Prior
to Commercial Operation. . . . . . . . . . . . . . . 42
ARTICLE IX: DESIGN, INSTALLATION, OPERATION
AND MAINTENANCE OF INTERCONNECTION FACILITIES. . . . . . . . 43
ARTICLE X: FORCE MAJEURE. . . . . . . . . . . . . . . . . . . 43
10.1 Conditions of Excuse From Performance. . . . . . . . 43
10.2 Time Limits. . . . . . . . . . . . . . . . . . . . . 44
ARTICLE XI: EVENTS OF DEFAULT; REMEDIES . . . . . . . . . . . 44
11.1 List of Default Events . . . . . . . . . . . . . . . 44
11.2 Company Right to Suspend Performance . . . . . . . . 48
11.3 Seller's Right to Suspend Performance. . . . . . . . 48
11.4 Liquidated Damages . . . . . . . . . . . . . . . . . 49
11.5 Limit on Remedy. . . . . . . . . . . . . . . . . . . 53
11.6 No Consequential Damages . . . . . . . . . . . . . . 54
ARTICLE XII: CONDITIONS, REPRESENTATIONS AND WARRANTIES . . . 54
12.1 Conditions . . . . . . . . . . . . . . . . . . . . . 54
12.2 Seller's Warranties and Representations. . . . . . . 57
12.3 The Company Warranties and Representations . . . . . 59
12.4 Opinions of Counsel. . . . . . . . . . . . . . . . . 60
ARTICLE XIII: INDEMNITY AND LIMITATION OF LIABILITY . . . . . 60
13.1 Indemnification by Seller. . . . . . . . . . . . . . 60
13.2 Indemnification by the Company . . . . . . . . . . . 61
13.3 Worker's Compensation. . . . . . . . . . . . . . . . 62
13.4 Joint Negligence . . . . . . . . . . . . . . . . . . 62
13.5 No Partnership . . . . . . . . . . . . . . . . . . . 62
13.6 Responsibility for Employees . . . . . . . . . . . . 62
ARTICLE XIV: INSURANCE. . . . . . . . . . . . . . . . . . . . 63
14.1 Specified Coverages. . . . . . . . . . . . . . . . . 63
14.2 Insurance Certificates . . . . . . . . . . . . . . . 64
14.3 Coverage For Full Term . . . . . . . . . . . . . . . 64
-102-
<PAGE>
Page 3 of 5
ARTICLE TITLE PAGE
- ------- ----- ----
14.4 Insurance Proceeds . . . . . . . . . . . . . . . . . 64
ARTICLE XV: TERM. . . . . . . . . . . . . . . . . . . . . . . 64
15.1 Term . . . . . . . . . . . . . . . . . . . . . . . . 64
ARTICLE XVI: COMPANY'S OPTION TO PURCHASE . . . . . . . . . . 66
16.1 Option to Purchase Upon Seller Default . . . . . . . 66
16.2 Limit on Option. . . . . . . . . . . . . . . . . . . 67
16.3 Right of First Refusal . . . . . . . . . . . . . . . 67
16.4 Termination. . . . . . . . . . . . . . . . . . . . . 69
ARTICLE XVII: RECORDS . . . . . . . . . . . . . . . . . . . . 69
17.1 Company Records. . . . . . . . . . . . . . . . . . . 69
17.2 Seller Records . . . . . . . . . . . . . . . . . . . 70
ARTICLE XVIII: NOTICES. . . . . . . . . . . . . . . . . . . . 70
18.1 Certain Notices. . . . . . . . . . . . . . . . . . . 70
18.2 Notices in Writing . . . . . . . . . . . . . . . . . 71
18.3 Date of Notification . . . . . . . . . . . . . . . . 71
18.4 Oral Notice in Emergency . . . . . . . . . . . . . . 72
18.5 Primary Contact. . . . . . . . . . . . . . . . . . . 72
ARTICLE XIX: DISPUTE RESOLUTION . . . . . . . . . . . . . . . 72
19.1 Negotiation. . . . . . . . . . . . . . . . . . . . . 72
19.2 Mediation. . . . . . . . . . . . . . . . . . . . . . 72
19.3 Binding Arbitration. . . . . . . . . . . . . . . . . 72
19.4 Deadlines. . . . . . . . . . . . . . . . . . . . . . 73
19.5 Exclusive Procedure. . . . . . . . . . . . . . . . . 73
19.6 Survival of Procedure. . . . . . . . . . . . . . . . 73
19.7 Binding Upon Parties . . . . . . . . . . . . . . . . 74
ARTICLE XX: CONFIDENTIALITY . . . . . . . . . . . . . . . . . 74
20.1 Non-Disclosure to Third Parties. . . . . . . . . . . 74
20.2 Disclosure Permitted . . . . . . . . . . . . . . . . 74
20.3 Survival of Confidentiality. . . . . . . . . . . . . 74
ARTICLE XXI: ASSIGNMENT . . . . . . . . . . . . . . . . . . . 74
21.1 Restriction on Assignment. . . . . . . . . . . . . . 74
21.2 Finance Assignments. . . . . . . . . . . . . . . . . 75
ARTICLE XXII: MISCELLANEOUS . . . . . . . . . . . . . . . . . 77
22.1 Lack of Precedent. . . . . . . . . . . . . . . . . . 77
22.2 Compliance with Laws . . . . . . . . . . . . . . . . 78
22.3 Governing Law. . . . . . . . . . . . . . . . . . . . 78
22.4 Entire Agreement; Amendment. . . . . . . . . . . . . 78
22.5 Modification . . . . . . . . . . . . . . . . . . . . 78
-103-
<PAGE>
Page 4 of 5
ARTICLE TITLE PAGE
- ------- ----- ----
22.6 No Implied Waiver. . . . . . . . . . . . . . . . . . 78
22.7 Captions . . . . . . . . . . . . . . . . . . . . . . 79
22.8 Payment of Taxes . . . . . . . . . . . . . . . . . . 79
22.9 Severability . . . . . . . . . . . . . . . . . . . . 79
22.10 No Exclusivity/Dedication of Facilities. . . . . . . 79
22.11 Emission Standards . . . . . . . . . . . . . . . . . 79
22.12 Expenses . . . . . . . . . . . . . . . . . . . . . . 79
22.13 No Reliance. . . . . . . . . . . . . . . . . . . . . 79
22.14 Individual Responsibility. . . . . . . . . . . . . . 80
22.15 Exhibits . . . . . . . . . . . . . . . . . . . . . . 80
22.16 Further Assurances . . . . . . . . . . . . . . . . . 80
22.17 Survival . . . . . . . . . . . . . . . . . . . . . . 80
-104-
<PAGE>
Page 5 of 5
Exhibits
- --------
2.1A Site
2.1B Description of Facility
2.4 Critical Components
2.6 Construction Milestone Schedule
5.1 Capacity and Energy Price
7.2 Procedure to Establish Net Demonstrated Capability
9.1 Interconnection Facilities
11.4 Irrevocable Letter of Credit
12.1.2 Sample Calculation of Seller's Phase I Delay Compensation
12.1.3 Sample Calculation of Seller's Phase II Delay
Compensation
-105-
<PAGE>
Page 1 of 82
---- ----
POWER PURCHASE AGREEMENT
BETWEEN DEPERE ENERGY LLC AND
WISCONSIN PUBLIC SERVICE CORPORATION
AGREEMENT, entered into as of the 8th day of November, 1995, by
and between DEPERE ENERGY LLC, a limited liability company with its
headquarters at Edens Corporate Center, 650 Dundee Road, Suite 150,
Northbrook, Illinois 60062 (herein called the Seller), and
WISCONSIN PUBLIC SERVICE CORPORATION, with its headquarters at
700 North Adams Street, Green Bay, Wisconsin (herein called the
Company) (hereinafter the parties hereto are sometimes referred to
collectively as the "Parties", or individually as a "Party").
W I T N E S S E T H:
WHEREAS, the Company is a public utility which operates a system
for generation and distribution of electric power and distribution
of natural gas, primarily in the State of Wisconsin, for wholesale
and retail sale; and
WHEREAS, Seller proposes to construct, own and/or operate a
facility for the generation of electricity and transfer of
electricity to the Company's electric transmission system, and, at
a later date, the cogeneration and transfer of steam to a paper
mill; and
WHEREAS, the Public Service Commission of Wisconsin ("Commission")
has determined that cogeneration and other non-traditional sources
of power are in the best interest of Wisconsin and must be
considered for integrated resource planning in establishing the
long-term electricity supply policies of Wisconsin. Consistent
therewith, the Company has adopted a "competitive bidding" process
under which competing proposals from all supply side sources
including IPPs and utilities have been evaluated in determining the
least cost generation supply alternatives for meeting the
requirements of its electrical customers with adequate reliability
at reasonable costs; and
WHEREAS, the Parties acknowledge that this Agreement is the result
of a two-stage CPCN process under the regulatory jurisdiction of
the Commission and, as well, is the result of a competitive bidding
process in stage one of that process, which determined the least
cost supply side option for meeting the Company's requirements for
electricity projected at the time of that bid review process; and
that this Agreement and the Facility shall be the subject of the
second stage of that process, and that in stage two, the Commission
will consider all issues subject to its jurisdiction under the
pertinent statutes and regulations associated with its CPCN
authority, which the Commission has not finally determined in stage
one of the CPCN process; and
WHEREAS, the Commission has, in that stage one of the CPCN process,
as the result of the competitive bid process in stage one and the
failure of the Rhinelander Energy Center project, ordered the
Company to negotiate in good faith to attempt to accomplish a power
purchase agreement between Seller and Company which is consistent
with, but in any case not less advantageous to, the Company's
customers than the bid submitted by Seller in that stage one; and
-106-
<PAGE>
Page 2 of 82
---- ----
WHEREAS, the Company and Seller believe that this Agreement is
consistent with and, in any case, no less advantageous to the
Company's customers than the bid submitted by Seller in stage one
of the CPCN process based upon the use of assumptions which are
consistent with the assumptions used by the Company in that stage
one bid evaluation; and
WHEREAS, by the execution of this Agreement the Company does not
intend to represent that as of the execution date of the Agreement
its current forecasted system electric demand is consistent with
the construction of the Facility and the purchase of the power
contemplated by this Agreement but rather expects to provide to
Seller pending the CPCN process and to the Commission in the CPCN
process the Company's best and most current information on the
"need" for the Facility issue; and
WHEREAS, Seller asserts that prior to the execution of this
Agreement, the Company's current forecasted system electric demand
was consistent with the construction of the Facility and the
purchase of the power contemplated by this Agreement and
specifically Seller asserts that (1) at the time the Company filed
its forecasted system electric demand in Advance Plan 6; (2) at the
time that the Company filed its CPCN application for the
Rhinelander Energy Center; (3) throughout the competitive bid
process conducted by the Company and the Commission; (4) at the
time of the Commission's Findings of Fact, Conclusions of Law and
Order, dated December 22, 1994, in Docket No. 6690-CE-156; and
(5) at the time that the Company and Rhinelander Paper Company
announced the cancellation of the Rhinelander Energy Center on
July 21, 1995, the Company's then current forecasted system
electric demand filed with the Commission was consistent with the
construction of the Facility and the purchase of the power
contemplated by this Agreement; and
WHEREAS, Seller has assured the Company that it understands and
appreciates the Company's operating and reliability requirements
and has access to the financial resources, technical knowledge,
operating experience, and fuel supply sufficient to design,
construct, and operate this Facility so as to meet the Company's
requirements; and
WHEREAS, Seller may from time to time require additional electric
services such as Supplementary Power, Maintenance Power, and Back-up
Power, and the Company desires to provide said services to
Seller under the terms and conditions provided herein.
NOW THEREFORE, in consideration of the mutual agreements contained
herein, the Parties agree as follows:
-107-
<PAGE>
Page 3 of 82
---- ----
ARTICLE I: DEFINITIONS
-----------------------
1.1 Defined Terms
As used in this Agreement, the following terms shall have the
following meanings:
1.1.1 "AGREEMENT" means this Power Purchase Agreement
entered into by Seller and the Company, including
all Exhibits and any subsequent modifications or
amendments thereto.
1.1.2 "AVAILABILITY" shall have the meaning ascribed to
that term in Section 4.4.1.2 of this Agreement.
1.1.3 "BACK-UP POWER" is electric energy supplied by the
Company to replace energy ordinarily generated by
Seller's own generation equipment, which equipment
is not available during an unscheduled (i.e. forced)
outage of that Facility.
1.1.4 "BILLING CYCLE" means the period of time
(approximately 30 days) between monthly meter
readings made pursuant to this Agreement.
1.1.5 "CALENDAR YEAR" means a twelve-month period
beginning January 1 and ending December 31.
1.1.6 "CAPACITY" means the maximum volume of instantaneous
service (electrical power) that Seller is capable of
providing to the Company upon demand.
1.1.7 "CAPACITY PAYMENT" shall have the meaning ascribed
to that term in Section 5.1.1 of this Agreement.
1.1.8 "COMMENCEMENT OF CONSTRUCTION" shall mean the
issuance by Seller of a notice to proceed to the
construction contractor legally obligating Seller to
proceed with and carry out the construction of Phase
I of the Facility.
1.1.9 "COMMERCIAL OPERATION" means that (a) all start-up
and testing operations for Phase I are complete, (b)
a determination has been made by Seller and the
Company that Phase I of the Facility is able to
generate electricity for synchronization with, and
delivery into, the Company's system in accordance
with the terms of this Agreement, (c) the Company
has not notified Seller in writing pursuant to
Section 8.10 hereof that Seller has failed to comply
with all terms and conditions of this Agreement
required to be performed prior to the Date of
Commercial Operation, (d) the Company has inspected
and approved the operation of the Seller's
Interconnection Facilities, which approval shall not
be unreasonably withheld, (e) Seller has provided
the Company at least 60 days notice declaring its
intention to commence deliveries of Energy to the
Company on a specified date and (f) Seller shall
have established the Initial Net Demonstrated
Capability of Phase I of the Facility at the level
and in the manner required by Section 7.2.1.
-108-
<PAGE>
Page 4 of 82
---- ----
1.1.10 "COMMERCIAL OPERATION DEADLINE" means the absolute
deadline for the Date of Commercial Operation, which
shall be July 1, 2002, extended on a day-for-day
basis for (i) delays in the Scheduled Date of
Commercial Operation pursuant to Section 12.1.2,
(ii) delays pursuant to Section 8.1.3, and (iii)
delays due to Force Majeure in accordance with
Section 2.7.1.2(b).
1.1.11 "COMMISSION" means the Public Service Commission of
Wisconsin or any successor thereto.
1.1.12 "COMPANY" shall mean Wisconsin Public Service
Corporation and its successors and assigns in
accordance with this Agreement.
1.1.13 "COMPANY'S INTERCONNECTION FACILITIES" shall
mean those Interconnection Facilities on the
Company's side of the Interconnection Point.
1.1.14 "CONSTRUCTION MILESTONE SCHEDULE" shall have the
meaning ascribed to that term in Section 2.6 of this
Agreement.
1.1.15 "CONTEMPLATED ENERGIZING DATE" shall mean the date
upon which the Interconnection Facilities will be
prepared for initial energizing.
1.1.16 "CONTRACT DEVELOPMENT DEPOSIT" shall have the
meaning ascribed to that term in Section 11.4.3.2(b)
of this Agreement.
1.1.17 "CONTRACT PERFORMANCE DEPOSIT" shall have the
meaning ascribed to that term in Section 11.4.3.2(c)
of this Agreement.
1.1.18 "CONTRACT YEAR" shall mean initially the period
which begins on the Date of Commercial Operation and
ends on the following December 31 and thereafter the
periods which begin on January 1 and end on each
December 31 thereafter with a final year ending on
the Termination Date.
1.1.19 "CONVERSION OUTAGE" shall have the meaning ascribed
to that term in Section 3.2.2.4 of this Agreement.
1.1.20 "CPCN" shall mean a Certificate of Public
Convenience and Necessity issued by the Commission
pursuant to Section 196.491(3), Wis. Stats., and all
associated Commission approvals required for
construction of the Facility.
1.1.21 "CPCN DEVELOPMENT DEPOSIT" shall have the meaning
ascribed to that term in Section 11.4.3.2(a) of this
Agreement.
1.1.22 "CRITICAL COMPONENTS" shall mean those major
components described in Section 2.4 of this
Agreement.
1.1.23 "CURRENT NET DEMONSTRATED CAPABILITY" or "CNDC"
shall have the meaning ascribed to that term in
Section 7.2 of this Agreement.
-109-
<PAGE>
Page 5 of 82
---- ----
1.1.24 "DATE OF COMMERCIAL OPERATION" means the date that
"Commercial Operation" commences.
1.1.25 "DESIGN DOCUMENTS" shall mean documents describing
a design of the Facility in sufficient written
detail to identify: (a) the location of all major
equipment and all structures on the Site, including
all Critical Components; (b) the major items of
equipment and components, including all Critical
Components; (c) the relationship and connection of
major components and all major auxiliary systems;
(d) the expected operating, fuel use, and emission
characteristics of the equipment; (e) the control
and monitoring systems; (f) steam delivery and
extraction equipment; (g) fire protection and
related systems meeting National Fire Protection
Association Standard No. 850; and (h) other matters
usually contained in the design of similar projects.
The documents containing such design shall be in the
form of descriptive text, blueprints, charts and
graphs or other appropriate forms, and shall be
those used by Seller in its design of the Facility.
1.1.26 "DESIGN NET CAPABILITY PERFORMANCE CURVE" shall have
the meaning ascribed to that term in Exhibit 7.2 of
this Agreement.
1.1.27 "DESIGN NET HEAT RATE PERFORMANCE CURVE" shall have
the meaning ascribed to that term in Exhibit 7.2 of
this Agreement.
1.1.28 "DESIGN RATING" means the Net Energy Output the
Facility is designed to deliver to the Company over
a one-hour period, given an ambient temperature of
90 degrees Fahrenheit, 60 percent (%) relative
humidity, and the actual elevation of the Site when
the Facility is in its full output baseload mode of
operation, and as provided in Section 7.2.
1.1.29 "DISCOUNT RATE" shall mean a discount rate equal to
the lesser of (i) 9.5%, or (ii) the Company's pre-tax
economic cost of capital from the Company's last
Commission rate order.
1.1.30 "DISPUTE RESOLUTION PROCESS" shall have the meaning
ascribed to that term in Article XIX of this
Agreement.
1.1.31 "EFFECTIVE DATE" means the date set forth in the
first paragraph of page one of this Agreement.
1.1.32 "EFFECTIVE HOURS OF OPERATION" means the total
number of hours of actual operation of the
combustion turbine, adjusted to reflect twenty (20)
hours for each normal Successful Start and four
hundred (400) hours for each emergency Successful
Start.
1.1.33 "ENERGY" means electric energy expressed in
kilowatt-hours generated by the Facility, delivered
and sold to the Company.
-110-
<PAGE>
Page 6 of 82
---- ----
1.1.34 "ENVIRONMENTAL LAWS" shall mean all federal, state
and local laws, statutes, rules, ordinances,
regulations, orders and requirements relating to:
(a) pollution or the protection of the environment
(including air, surface water, groundwater, soil, land
service or subsurface strata); or (b) disposal,
emissions, discharges, spills, releases or threatened
releases of hazardous substances (as that term is
defined in federal and Wisconsin Law) to the
environment; or (c) the processing, distribution,
transport, treatment, disposal or handling of any
hazardous substance, hazardous material, solid or
hazardous waste, petroleum product, radioactive
material, or substances otherwise regulated on the
basis that they may present a danger to human health
or the environment.
1.1.35 "EXEMPT WHOLESALE GENERATOR" or "EWG" shall mean an
Exempt Wholesale Generator for which an application
for determination has been filed and EWG status has
not been denied by the FERC, provided, however, that
Seller shall be deemed to satisfy the requirements
of an EWG notwithstanding the denial of a request
for determination of EWG status if a subsequent
application is filed as soon as practicable, and EWG
status is thereafter granted.
1.1.36 "FACILITY" means the electric generating facility
that is designed, purchased, constructed, installed,
owned, and operated by the Seller under this
Agreement, as more particularly described in Exhibit
2.1.B hereto.
1.1.37 "FERC" means the Federal Energy Regulatory
Commission or any successor thereto.
1.1.38 "FINAL SPECIFICATIONS" shall have the meaning
ascribed to that term in Section 2.3 of this
Agreement.
1.1.39 "FORCE MAJEURE" means causes beyond the reasonable
control of and which occur without the fault or
negligence of the Party claiming Force Majeure,
including, without limitation, acts of God, wars,
insurrections, riots, explosions, fires, floods,
earthquakes, landslides, lightning, wind, labor
strikes or lockouts, sabotage or other similar
events. Failure of a step-up transformer shall also
be an event of Force Majeure.
Force Majeure specifically does not include:
(a) unavailability of funds or financing; (b) an event
caused by conditions of national or local economics or
markets; (c) delays in obtaining any regulatory
permits or approvals required by Seller;
(d) unavailability of fuel supply except in the case
where such unavailability is caused by the Company's
non-delivery to Seller of natural gas or No. 2 oil
purchased from the Company or transported by the
Company; (e) any delay in construction of the Facility
not itself caused by acts of God, wars, insurrections,
riots, explosions, fires, floods, earthquakes,
landslides, lightning, wind, labor strikes or
lockouts, sabotage or other similar events; and
(f) any failure of equipment which is not directly
caused by acts of God, wars, insurrections, riots,
explosions, fires, floods, earthquakes, landslides,
lightning, wind or sabotage.
-111-
<PAGE>
Page 7 of 82
---- ----
1.1.40 "FORCED OUTAGE HOURS" means the duration from when
the Facility failed to achieve a Successful Start in
response to a Company request or becomes unavailable
due to an outage during its operation after a
Successful Start to the time when the Seller
reasonably demonstrates that the Facility is
available for dispatch by the Company in a manner
reasonably satisfactory to the Company, calculated
in a manner consistent with Sections 3.2.2.2,
4.4.1.4, and 10.1.4.
1.1.41 "INCREMENTAL CAPACITY" means the projected capacity
of the Facility during Phase II which is in excess
of the Initial Net Demonstrated Capability.
1.1.42 "INITIAL NET DEMONSTRATED CAPABILITY" or "INDC"
means the Net Demonstrated Capability of the
Facility during Phase I, established in accordance
with Section 7.2.1 of this Agreement.
1.1.43 "INTERCONNECTION FACILITIES" means all the
materials, equipment and facilities installed and
utilized solely for the purpose of interconnecting
the electrical systems of Seller and the Company
that are necessary for Seller to economically,
reliably and safely deliver Energy from the Facility
to the electrical system of the Company. Materials,
equipment and facilities installed as
Interconnection Facilities and subsequently
incorporated into the electrical system of the
Company shall no longer be considered
Interconnection Facilities for the purposes of this
Agreement.
1.1.44 "INTERCONNECTION POINT" means the physical point or
points at which interconnection is made between the
electrical systems of Seller and the Company, as
more specifically described in Exhibit 9.1 hereto.
In the event that the Interconnection Point shall
consist of more than one physical point, then the
flow of energy across the Interconnection Point
shall at all times be equal to the instantaneous
total net flow of energy across all physical points
which shall constitute such Interconnection Point.
1.1.45 "ISO-CONDITIONS" are defined as 59 degrees
Fahrenheit ambient temperature, sea level and 60
percent (%) relative humidity.
1.1.46 "LAW" shall mean any federal, state or local law,
rule, regulation or governmental requirement of any
kind and the rules, regulations or orders
promulgated thereunder.
1.1.47 "LIQUIDATED DAMAGES" shall have the meaning ascribed
to that term in Section 11.4 of this Agreement.
1.1.48 "MAINTENANCE POWER" is electric energy supplied by
the Company during scheduled outages of Seller's
Facility.
1.1.49 "MAJOR OVERHAUL" shall have the meaning ascribed to
that term in Section 3.2.2.2 of this Agreement.
-112-
<PAGE>
Page 8 of 82
---- ----
1.1.50 "MANUFACTURER'S MAINTENANCE REQUIREMENTS" means the
minimum time period required for Scheduled Routine
Maintenance, and the maximum time which can elapse
between periods of Scheduled Routine Maintenance,
without endangering the Facility or its operator(s),
increasing the likelihood of Forced Outages or other
operational problems, or shortening the useful life
of the Facility or any component thereof, determined
in accordance with Prudent Electrical Practices and
the manufacturer's specifications for the Facility.
1.1.51 "METERING DEVICE" means an instrument or instruments
used for a purpose described in Section 6.1.1.
1.1.52 "METERING POINT" means the point on the 138 KV side
of the 13.8-138 KV step up transformer(s) where the
Metering Device(s) are located.
1.1.53 "MMBTU" means one million (1,000,000) British
Thermal Units.
1.1.54 "NAMEPLATE RATING" means the Net Energy Output the
Facility is designed to deliver to the Company over
a one-hour period, given International Standard
Organization referenced conditions ("ISO-Conditions")
corrected to the Referenced Site Conditions of the
Facility, when the Facility is in its full output
baseload mode of operation.
1.1.55 "NET DEMONSTRATED CAPABILITY" means the maximum
capacity expressed in kilowatts that the Facility's
generators can sustain under the method of testing
set forth in Article VII less any capacity utilized
for the Facility's Station Use and any losses
between the Facility and the Interconnection Point.
1.1.56 "NET DEMONSTRATED HEAT RATE" shall have the meaning
ascribed to that term in Exhibit 7.2.
1.1.57 "NET ENERGY OUTPUT" means the gross electrical
output from the generators less Station Use and any
losses between the Facility and the Interconnection
Point, measured at 138 KV.
1.1.58 "NICOLET PAPER MILL" shall mean the paper mill in
DePere, Wisconsin, owned as of the Effective Date by
International Paper Company, at which the Facility
will be located.
1.1.59 "OFF-PEAK HOURS" shall be all hours that are not
On-Peak Hours.
1.1.60 "OFF-PEAK MONTHS" shall be those months of the
Calendar Year that are not On-Peak Months.
-113-
<PAGE>
Page 9 of 82
---- ----
1.1.61 "ON-PEAK HOURS" refers to those hours Monday through
Friday from 9:00 a.m. to 7:00 p.m., except Holidays.
1.1.62 "ON-PEAK MONTHS" shall be the months of January,
July, August and December of each Calendar Year,
except as otherwise agreed to by the Parties.
1.1.63 "OUTSTANDING DEBT" shall mean all amounts due to any
Project Lender and secured by the Facility,
including, without limitation, principal and
interest due on any amounts advanced by any Project
Lender; any cost, fee, penalty, premium or other
amount due in connection with such amounts or the
prepayment thereof; and any cost, fee, penalty,
premium or other amount due in connection with the
termination of any interest swap, cap, collar or
other interest rate protection arrangement associated
with such amounts.
1.1.64 "PHASE I" shall mean the development, ownership,
operation and maintenance of a simple cycle
combustion turbine electric generating facility, as
more fully described in Exhibit 2.1.B.
1.1.65 "PHASE II" shall mean the development, ownership,
operation and maintenance of a combined cycle
combustion turbine electric generating facility,
incorporating some or all of the components of Phase
I of the Facility, as more fully described in
Exhibit 2.1.B.
1.1.66 "PHASE II COMMENCEMENT OF CONSTRUCTION" shall mean
the issuance by Seller of a notice to proceed to the
construction contractor legally obligating Seller to
proceed with and carry out the construction of Phase
II of the Facility.
1.1.67 "PHASE II COMMERCIAL OPERATION DEADLINE" means the
absolute deadline for the Phase II Date of
Commercial Operation, which shall be January 1,
2006, extended on a day-for-day basis for (i) delays
in the Scheduled Date of Commercial Operation
pursuant to Section 12.1.3, (ii) delays pursuant to
Section 8.1.3 and (iii) delays due to Force Majeure
in accordance with Section 2.7.1.4(b).
1.1.68 "PHASE II CONTRACT PERFORMANCE DEPOSIT" shall have
the meaning ascribed to that term in Section
11.4.3.2(d) of this Agreement.
1.1.69 "PHASE II DATE OF COMMERCIAL OPERATION" is the first
day Energy is delivered to the Company on or after
the completion of construction of Phase II of the
Project.
1.1.70 "PHASE II INITIAL NET DEMONSTRATED CAPABILITY" or
"Phase II INDC" means the Net Demonstrated
Capability of the Facility during Phase II,
established in accordance with Section 7.2.2 of this
Agreement.
1.1.71 "PHASE II SCHEDULED DATE OF COMMERCIAL OPERATION"
shall mean the first day of the twenty-ninth (29th)
month after the necessary permits and approvals are
received to commence construction for Phase II
(including, but not limited to, the CPCN for Phase
II), extended on a day-for-day basis for (i) delays
in the Phase II
-114-
<PAGE>
Page 10 of 82
---- ----
Scheduled Date of Commercial Operation pursuant to
Section 12.1.3, (ii) delays in the Phase II Scheduled
Date of Commercial Operation pursuant to Section
15.1.1.5, (iii) delays pursuant to Section 8.1.3 and
(iv) delays due to Force Majeure or a good-faith
invocation of the Dispute Resolution Process.
1.1.72 "PRACTICES IN THE INDEPENDENT POWER INDUSTRY" means
those practices, methods, and equipment, as changed
from time to time, that are commonly used in prudent
electrical engineering and operations to construct,
operate, and maintain equipment for the generation
and delivery of electricity comparable to the
Facility by independent power producers, lawfully
and with efficiency and dependability, and that are in
accordance with national safety codes dealing with
electrical engineering for the safe production of
electricity.
1.1.73 "PREVENTION ACTIVITIES" are those activities
referenced in Section 3.2.4.1(b) of this Agreement.
1.1.74 "PROJECT LENDER" shall mean any financial
institution or other creditor providing any
financing or refinancing from time to time in
connection with the development, construction,
ownership, operation, maintenance or improvement of
the Facility.
1.1.75 "PROJECT MANAGER" shall have the meaning ascribed to
that term in Section 19.1 of this Agreement.
1.1.76 "PRUDENT ELECTRICAL PRACTICES" means those
practices, methods, and equipment, as changed from
time to time, that are commonly used in prudent
electrical engineering and operations to construct,
operate, and maintain equipment for the generation
and delivery of electricity, lawfully and with
efficiency and dependability, and that are in
accordance with national safety codes dealing with
electrical engineering for the safe production of
electricity, and shall include Practices in the
Independent Power Industry to the extent that such
practices, methods and equipment are more stringent
than Prudent Electrical Practices.
1.1.77 "PUHCA" means the Public Utility Holding Company
Act, as amended from time to time.
1.1.78 "PURPA" means the Public Utility Regulatory Policies
Act of 1978, as amended from time to time.
1.1.79 "QUALIFYING FACILITY" shall have the meaning set
forth in PURPA and in Part 292 of the rules and
regulation of the FERC under PURPA.
1.1.80 "REFERENCED SITE CONDITIONS" are defined as 59
degrees Fahrenheit ambient temperature, the
elevation of the Facility with respect to sea level
and 60 percent (%) relative humidity.
1.1.81 "RULES" are such Rules, Regulations and Orders
promulgated by the Commission as shall be in effect
from time to time.
-115-
<PAGE>
Page 11 of 82
---- ----
1.1.82 "SCHEDULED DATE OF COMMERCIAL OPERATION" shall mean
the first day of the twenty-seventh (27th) month
after approval of the CPCN by the Commission,
extended on a day-for-day basis for (i) delays in
the Scheduled Date of Commercial Operation pursuant
to Section 12.1.2, (ii) delays in the Scheduled Date
of Commercial Operation pursuant to Section
15.1.1.2, (iii) delays pursuant to Section 8.1.3,
and (iv) delays due to Force Majeure or a good-faith
invocation of the Dispute Resolution Process.
1.1.83 "SCHEDULED ROUTINE MAINTENANCE" shall have the
meaning ascribed to that term in Section 3.2.2.1 of
this Agreement.
1.1.84 "SELLER" shall mean DePere Energy LLC and its
successors and assigns in accordance with this
Agreement.
1.1.85 "SELLER'S INTERCONNECTION FACILITIES" shall
mean those Interconnection Facilities on
Seller's side of the Interconnection Point.
1.1.86 "SENIOR EXECUTIVE" shall have the meaning ascribed
to that term in Section 19.1 of this Agreement.
1.1.87 "SITE" shall mean the parcel of real estate,
described in Exhibit 2.1.A, in the City of DePere,
Wisconsin, to be transferred from International
Paper Company and owned or leased by Seller and on
which the Facility will be constructed and operated.
1.1.88 "STARTING RELIABILITY" means the total number of
Successful Starts for delivery of Energy to the
Company divided by the total number of requested
Facility starts by the Company.
1.1.89 "STATION USE" means the kilowatts and the
kilowatt-hours of electricity which are used by
Seller solely for the purposes of excitation and
operation of the Facility.
1.1.90 "SUCCESSFUL START" means causing the Facility's
combustion turbine generator to achieve electrical
synchronization with the Company's system within
plus or minus fifteen (15) minutes of the time
requested by the Company, provided the Seller has
received the minimum notice required by Section
3.1.6. hereof for non-emergency situations, and, in
addition, during Phase II, the electrical
synchronization of the Facility's steam turbine
generator with the Company's system within a
reasonable time after electrical synchronization of
the Facility's combustion turbine generator with the
Company's system. Successful Start shall also
include any Facility start requested by the Company
if the request is subsequently withdrawn within two
(2) hours and fifteen (15) minutes before Seller
would have been required to achieve electrical
synchronization with the Company's system.
1.1.91 "SUPPLEMENTARY POWER" is electric energy supplied by
Company regularly used by Seller in addition to (a)
any electric energy generated by Seller's Facility
itself, and/or (b) provided by the Company as either
Back-up Power or Maintenance Power.
-116-
<PAGE>
Page 12 of 82
---- ----
1.1.92 "SYSTEM EMERGENCY" means a condition on or affecting
the Company system which is likely to result in
disruption of safe, adequate and continuous electric
service to the Company customers or could endanger
life or property, which condition is materially
adversely affected by the continued deliveries of
Energy from the Facility.
1.1.93 "TECHNOLOGICAL MODIFICATION" shall have the meaning
ascribed to that term in Section 2.9 of this
Agreement.
1.1.94 "TERM" shall mean the period of time during which
the Agreement is in effect and is described in
Article XV of this Agreement.
1.1.95 "TERMINATION DATE" shall have the meaning ascribed
to that term in Section 15.1.1 of this Agreement.
1.1.96 "TRANSFER INTEREST" shall have the meaning ascribed
to that term in Section 16.3.2 of this Agreement.
1.1.97 "UNSCHEDULED OUTAGE" means an interruption in the
generation and delivery of Energy under the
Agreement which interruption was not previously
scheduled by Seller pursuant to Section 3.2.2
hereof.
ARTICLE II: DESIGN AND CONSTRUCTION OF THE FACILITY
----------------------------------------------------
2.1 The Facility
The Company and Seller agree that the long-term electric
supply contemplated under this Agreement shall be provided by
an electric generation Facility, constructed in two phases,
which Facility shall be located at the Site described in
Exhibit 2.1.A., and shall have a projected Nameplate Rating
of 179,841 KW in Phase I and a projected Nameplate Rating of
237,246 KW in Phase II. The Facility shall have the
conceptual design characteristics set forth in Exhibit 2.1.B,
together with all support equipment, structures and
facilities other than the Company's Interconnection
Facilities. Interconnection Facilities are addressed in
Article IX of this Agreement.
2.2 Company Interest in Design Specifications
Because the Company has certain rights in the Facility under
this Agreement in certain circumstances, and because the
Company is relying upon the reliability of the Facility over
the life of this Agreement as one of the material reasons the
Company is entering into this Agreement in this form, Seller
acknowledges and agrees the Company has a material interest
in the specifications for, and construction of, the Facility.
2.3 Approval of Design Specifications
2.3.1 Seller, after the Effective Date, under a schedule
to be established within ninety (90) days of the
Effective Date, shall produce conceptual documents
for Phase I of the Facility and shall provide the
Company with copies of the conceptual
-117-
<PAGE>
Page 13 of 82
---- ----
documents for its review and information upon their
completion. Seller, under a schedule to be
established within ninety (90) days after receipt of
the CPCN, shall produce Design Documents for Phase I
of the Facility and shall provide the Company with
copies of the Design Documents for its review and
information upon their completion. The Company shall
notify Seller within thirty (30) working days after
receipt of the Design Documents of any objections and
suggested improvements or other comments the Company
has based upon a good-faith evaluation of the design
with respect to the reasonable reliability of the
Facility consistent with Prudent Electrical
Practices, and its impact on the Company's system.
If mutual agreement is not reached on what design is
consistent with this Agreement when the design is
premised on the Facility being constructed and
operated using Prudent Electrical Practices, the
disputed issues shall be submitted to the Dispute
Resolution Process. If the objections of the
Company are affirmed in whole or in part by the
Dispute Resolution Process, and if Seller does not
modify the Facility design in accordance with the
results of the Dispute Resolution Process as soon as
is reasonably practical (which time period shall be
determined within the Dispute Resolution Process),
the Company may terminate this Agreement without any
liability whatsoever to the Seller. If mutual
agreement is reached regarding the Design Documents,
or if Seller modifies the documents in accordance
with the decision of the Dispute Resolution Process,
Seller shall promptly proceed with developing
detailed engineering specifications ("Final
Specifications") and a vendor selection process for
Phase I of the Facility.
2.3.2 Seller, after the Effective Date, under a schedule
consistent with achieving the Phase II Date of
Commercial Operation in accordance with this
Agreement (which schedule shall be established at
least 36 months prior to the Phase II Scheduled Date
of Commercial Operation, or if mutual agreement is
not reached with respect to such schedule, within
the time period determined by the Dispute Resolution
Process), shall produce Design Documents for Phase
II of the Facility and shall provide the Company
with copies of the Design Documents for its review
and information upon their completion. The Company
shall notify Seller within thirty (30) working days
after receipt of the Design Documents of any
objections and suggested improvements or other
comments the Company has based upon a good-faith
evaluation of the design with respect to the
reasonable reliability of the Facility consistent
with Prudent Electrical Practices, and its impact on
the Company's system. If mutual agreement is not
reached on what design is consistent with this
Agreement when the design is premised on the
Facility being operated using Prudent Electrical
Practices, the disputed issues shall be submitted to
the Dispute Resolution Process. If the objections
of the Company are affirmed in whole or in part by
the Dispute Resolution Process, and if Seller does
not modify the Facility design in accordance with
the results of the Dispute Resolution Process as
soon as is reasonably practical (which time period
shall be determined within the Dispute Resolution
Process), the Company may terminate this Agreement
with respect to its obligation to purchase the
Incremental Capacity of the Facility without any
liability whatsoever to the Seller, in which case
Seller shall not proceed with the development of
Phase II without the Company's prior authorization;
provided, however, that the rights and obligations
of the Parties with respect to Phase I of the
Facility shall be unaffected by such termination.
-118-
<PAGE>
Page 14 of 82
---- ----
Notwithstanding anything herein to the contrary, the
Company shall have the right to have the terms of
this Agreement revised to require Seller to modify
the Design Documents for Phase II of the Facility to
reflect any improvements suggested by the Company,
which would constitute Technological Modifications
(as defined in Section 2.9 hereof) and which are
based on technological developments occurring after
the Effective Date, under such terms as will assure
Seller the recovery of its costs for such
improvements, and as will hold Seller harmless from
any additional risks or operating costs associated
with the improvements, and as will achieve an
equitable sharing between the Parties of the
benefits of the improvements. If mutual agreement
is reached regarding the Design Documents, or if
Seller modifies the documents in accordance with the
decision of the Dispute Resolution Process, Seller
shall promptly proceed with developing detailed
engineering specifications ("Final Specifications")
and a vendor selection process for Phase II of the
Facility.
2.4 Approval of Critical Components
Seller shall disclose to the Company the Final Specifications
and recommended vendors for the Critical Components for Phase
I and Phase II of the Facility sufficiently in advance of
making a request for proposal from potential vendors so that
the Company will have fifteen (15) days to provide comments
regarding such specifications or proposed vendors.
Components and material which will be considered Critical
Components are more specifically described and listed in
Exhibit 2.4.
2.4.1 The Company shall have the same objection rights
regarding the Critical Components of Phase I as is
established in Section 2.3.1 for the design of Phase
I. If an objection of the Company regarding
Critical Components based upon reliability concerns
is affirmed by the Dispute Resolution Process and if
Seller does not modify the Critical Components in
accordance with the results of the Dispute
Resolution Process as soon as is reasonably
practical (which time period shall be determined
within the Dispute Resolution Process), then the
Company shall have the right to terminate the
Agreement without any liability whatsoever to the
Seller.
2.4.2 The Company shall have the same objection rights
regarding the Critical Components of Phase II as is
established in Section 2.3.2. for the design of
Phase II. If an objection of the Company regarding
Critical Components based upon reliability concerns
is affirmed by the Dispute Resolution Process and if
Seller does not modify the Critical Components in
accordance with the results of the Dispute
Resolution Process as soon as is reasonably
practical (which time period shall be determined
within the Dispute Resolution Process), then the
Company shall have the right to terminate the
Agreement with respect to the Incremental Capacity
of the Facility without any liability whatsoever to
the Seller; provided, however, that the rights and
obligations of the Parties with respect to Phase I
of the Facility shall be unaffected by such
termination.
2.4.3 The award of any bid on a Critical Component (other
than the award of a bid on the combustion turbine to
Westinghouse Electric Corp.) shall be subject to the
Company's approval, provided, however, that (a) if
bids are obtained from at least
-119-
<PAGE>
Page 15 of 82
---- ----
three (3) independent bidders with reasonable
qualifications, the Company may not withhold its
approval for all competing bids; (b) notice of
disapproval and the reasons therefor must be given to
Seller within 10 days; and (c), in any event, approval
must not be unreasonably withheld with respect to any
bid.
2.5 Construction
Seller shall construct the Facility substantially in
accordance with the Design Documents, the Final
Specifications, applicable building codes and standards and
good engineering and construction practices. Seller shall
bear the sole responsibility and costs for complying with all
legal requirements associated with constructing the Facility,
including all environmental requirements.
2.6 Construction Milestone Schedule Assurances
The Construction Milestone Schedule for the Facility is set
forth in Exhibit 2.6. Seller shall provide the Company
written notice of the date upon which it meets each milestone
in the Construction Milestone Schedule. Timeliness in
meeting dates and milestones for construction of the Facility
is of the essence under this Agreement.
2.6.1 Seller shall, consistent with Prudent Electrical
Practices, include in contracts with vendors,
contractors and service providers, reasonable and
customary warranties and other enforceable
commitments to timely and competent performance
consistent with the Construction Milestone Schedule,
including performance bonds where appropriate,
required for maintenance of the Construction
Milestone Schedule.
2.6.2 Seller will submit its application for a CPCN to the
Commission at the earliest reasonable date after the
Effective Date which is consistent with the
regulations or operating procedures of the
Commission and is timely and consistent with meeting
the Construction Milestone Schedule. Except as
otherwise provided herein, the Date of Commercial
Operation shall occur on or before the Scheduled
Date of Commercial Operation, but in any case not
later than the Commercial Operation Deadline.
2.6.3 Seller shall submit its application for a CPCN (if
required) and an air permit for Phase II by
September 1, 2001. Except as otherwise provided
herein, the Phase II Date of Commercial Operation
shall occur on or before the Phase II Scheduled Date
of Commercial Operation, but in any case not later
than the Phase II Commercial Operation Deadline.
2.7 Delay in Date of Commercial Operation
2.7.1 Force Majeure Delays.
2.7.1.1 If an event in the Construction Milestone
Schedule is delayed due to an event of Force
Majeure or a good-faith invocation of the
Dispute Resolution Process, the Scheduled Date
of Commercial Operation and all milestone
dates subsequent to the event so delayed in
the portion of the
-120-
<PAGE>
Page 16 of 82
---- ----
Construction Milestone Schedule pertaining to
Phase I shall be extended, but by no more than
that reasonable amount of time commensurate with
the delay caused by the event, and not beyond the
Commercial Operation Deadline except as
provided in Section 2.7.1.2. Seller shall take
reasonable and prudent steps to offset or minimize
the effects of any delays.
2.7.1.2 If an event of Force Majeure or a good-faith
invocation of the Dispute Resolution Process
would delay the Date of Commercial Operation
to a date after the Commercial Operation
Deadline, the Company shall have the option
to:
(a) Terminate this Agreement pursuant to Section
11.1, in which case the Company shall not be
entitled to any Liquidated Damages or other
damages or compensation with respect to such
termination.
(b) Grant Seller a day-for-day extension of the
Commercial Operation Deadline equal to the
duration of the Force Majeure or good-faith
invocation of the Dispute Resolution Process,
up to a maximum of one hundred and eighty-three
(183) days, in which case, the Company
shall be entitled to collect Liquidated
Damages in the event that the Date of
Commercial Operation has not occurred by the
Commercial Operation Deadline, as so extended.
2.7.1.3 If an event in the Construction Milestone
Schedule with respect to Phase II is delayed
due to an event of Force Majeure or a good-faith
invocation of the Dispute Resolution Process,
the Phase II Scheduled Date of Commercial
Operation and all milestone dates subsequent to
the event so delayed in the portion of the
Construction Milestone Schedule pertaining to
Phase II shall be extended, but by no more than
that reasonable amount of time commensurate with
the delay caused by the event, and not beyond the
Phase II Commercial Operation Deadline except as
provided in Section 2.7.1.4. Seller shall take
reasonable and prudent steps to offset or minimize
the effects of any delays.
2.7.1.4 If an event of Force Majeure or a good-faith
invocation of the Dispute Resolution Process
would delay the Phase II Date of Commercial
Operation to a date after the Phase II
Commercial Operation Deadline, the Company
shall have the option to:
(a) Terminate this Agreement pursuant to Section
11.1 with respect to the Incremental Capacity
of the Facility; provided, however, that the
rights and obligations of the Parties with
respect to Phase I of the Facility shall be
unaffected by such termination, in which case
the Company shall not be entitled to any
damages or other compensation with respect to
such termination.
-121-
<PAGE>
Page 17 of 82
---- ----
(b) Grant Seller a day-for-day extension of the
Phase II Commercial Operation Deadline equal
to the duration of the Force Majeure or good-faith
invocation of the Dispute Resolution
Process, up to a maximum of one hundred and
eighty-three (183) days, in which case, the
Company shall be entitled to purchase the
Facility in accordance with Section 11.4.1.3
in the event that the Phase II Date of
Commercial Operation has not occurred by the
Phase II Commercial Operation Deadline, as so
extended.
2.8 Seller's Responsibility for Design and Construction
Actions or inactions by the Company, or rights of the Company
under this Agreement, to review, comment upon or approve the
design, vendors, contractors or construction of the Facility
shall not constitute a warranty or representation by the
Company that a design, vendor, contractor or mode of
construction consistent with such comments or lack of
comments shall cause the Facility to operate in conformance
with the requirements of this Agreement and no action or
inaction by the Company regarding its rights to review,
comment upon or approve designs, specifications, vendors or
contractors shall operate to diminish in any respect the
obligation of Seller, and the liability of Seller established
otherwise under this Agreement, to provide Capacity and
Energy consistent with the terms of this Agreement.
2.9 Significant Technological Modifications
During the Term of this Agreement, developments in electric
generation technology may permit a modification to the
Facility which would cause it to operate in a materially more
efficient manner, i.e., which would increase the efficiency
of converting BTUs of fuel into KWH of electricity by more
than three (3) percent (%) (herein "Technological
Modification"), provided, however, that the implementation of
Phase II of the Facility shall not itself be considered to be
a Technological Modification for purposes of this paragraph,
but pursuant to Section 2.3.2 hereof, the Company may request
a Technological Modification to Phase II. Seller shall not
make any material modification to the Facility, including a
modification in the nature of a Technological Modification to
the Facility without the prior consent of the Company, which
consent shall not be unreasonably withheld. If the
modification constitutes a Technological Modification, the
Company shall have a right to have the terms of this
Agreement revised to require Seller to make the Technological
Modification to the Facility under such terms as will assure
Seller the recovery of its costs for the Technological
Modification and as will hold Seller harmless from any
additional risks or operating costs associated with the
modification, and as will achieve an equitable sharing
between the Parties of the benefits of the Technological
Modification. The Company shall have the right to propose a
Technological Modification for the Facility which Seller
agrees to consider in good faith. The Parties agree to
pursue good-faith negotiations to accomplish revisions to the
terms of this Agreement to ensure Seller's recovery of its
costs and to achieve an equitable sharing of the enhanced
benefits of the proposed Technological Modification, as set
forth above. If the Parties are unable to reach mutual
agreement, the Company shall have the right to invoke the
Dispute Resolution Process of Article XIX of this Agreement.
-122-
<PAGE>
Page 18 of 82
---- ----
2.10 Application of Confidentiality Provisions
The confidentiality provisions of Article XX shall apply to
all information provided by either Party to the other Party
under this Article II or any other provisions of this
Agreement.
ARTICLE III: OPERATION OF FACILITY
-----------------------------------
3.1 Dispatchability
In addition to the Company's rights to reduce energy
deliveries pursuant to Section 3.2.4.1 and except during
Scheduled Routine Maintenance, Major Overhauls, and the
Conversion Outage pursuant to Section 3.2.2, the Company
shall have the right, to fully dispatch the Facility second
by second using remote automatic generation control, within
the design limits of the Facility, and subject to the
following notices:
3.1.1 The Company shall provide Seller with the type of
information utilized by the Company for its own
facilities regarding potential scheduling of
operation of the Facility as such information
becomes available.
3.1.2 By the last Friday of each month, the Company will
provide Seller with a projected schedule of
operations for the following month.
3.1.3 By Friday of each week, the Company will provide
Seller with a projected schedule of operations for
the following week. This schedule shall include for
each day of the week on an hour-by-hour basis the
periods during which the Company expects to dispatch
the Facility.
3.1.4 By 10:00 a.m. of each day, the Company will provide
Seller with its best estimate of the expected
Facility dispatch schedule for the twenty-four (24)
hours beginning 8:00 a.m. of the following day,
including start time, shutdown time and hourly
generation levels. The Company shall inform Seller
of any changes in the following day's Facility
dispatch schedule as soon as is reasonably
practical.
3.1.5 Notwithstanding any estimated schedule provided by
the Company, the actual dispatch schedule will be
determined by system operating requirements and
economic dispatch considerations, and may differ
substantially from the estimated schedule. In no
event shall the Company be liable to Seller for any
discrepancy between the actual dispatch schedule and
the projected schedule or any Seller costs or
damages arising directly or indirectly therefrom.
3.1.6 The Company will provide Seller with at least two
(2) hours oral notice, followed by written or
electronic confirmation within one (1) hour, of a
request to accomplish start up of the Facility under
normal operating conditions. Under electrical
system emergency conditions, the Company may request
a start up of the Facility as soon as possible. Any
oral notice or request shall be confirmed
electronically or in writing within one (1) hour.
The Seller shall use its reasonable
-123-
<PAGE>
Page 19 of 82
---- ----
best efforts in responding to the Company's request to
expedite the start up of the Facility.
3.1.7 Upon oral notice by the Company of a request to shut
down the Facility, Seller shall shut down the
Facility according to the schedule requested by the
Company, using reasonable shut down ramp rates and
procedures, and in a manner consistent with the
technical capabilities of the Facility and the need
to provide continuity in the supply of steam to
Seller's thermal energy customer consistent with the
time required to bring the auxiliary boiler from a
warm condition to the pressure and temperature
necessary to provide steam from the auxiliary
boiler. Any oral notice or request shall be
confirmed electronically or in writing as soon as is
practical, but in any event within one (1) hour.
3.1.8 Notwithstanding anything in this Section 3.1 to the
contrary, the Company shall not dispatch the
Facility in a manner that would cause it to exceed
the following operating limitations, or such
alternate operating limitations as may be allowed
under Seller's air permit for the Facility, provided
that Seller shall not seek air permits which require
more restrictive operating limits than provided in
(a) and (b) below:
(a) Prior to the Phase II Date of Commercial
Operation, the Facility shall not be operated
more than two thousand (2,000) hours in any
consecutive twelve (12) month period, of which
not more than four hundred (400) hours shall
be at or below fifty percent (50%) of CNDC,
and not more than eight hundred (800) hours
shall be at or below seventy-five percent
(75%) of CNDC.
(b) Following the Phase II Date of Commercial
Operation, the Facility shall not be operated
more than eight thousand, three hundred and
twenty-two (8,322) hours in any consecutive
twelve (12) month period, of which not more
than one thousand, four hundred (1,400) hours
shall be at or below sixty percent (60%) of
CNDC, and not more than three thousand, nine
hundred (3,900) hours shall be at or below
seventy-five percent (75%) of CNDC.
(c) If, as a result of energy sales to third
parties, the Company is unable to dispatch the
Facility without exceeding the limits set
forth in this Section 3.1.8, Seller shall
reimburse the Company for the incremental cost
of energy to replace Energy that the Facility
would have been able to deliver to the Company
if Seller had not delivered energy to a party
other than the Company.
3.1.9 The combustion turbine's primary fuel is to be
natural gas with no. 2 oil (with a maximum sulfur
content of 0.05 percent) to serve as the backup
fuel. Use of no. 2 oil is intended only when
natural gas is not available. Seller shall give the
Company prior notice of its intention to operate the
Facility using no. 2 oil. The Company shall have
the right to supply natural gas to the Facility in
accordance with Section 5.1.3.4.
-124-
<PAGE>
Page 20 of 82
---- ----
3.1.10 Seller shall provide the Company notice as soon as
is reasonably practical of the Seller's schedule for
the delivery of energy to a party other than the
Company. During any hour that the Facility is
delivering Energy to the Company at the Company's
request, Seller shall not deliver energy from the
Facility, other than energy from capacity of the
Facility in excess of the CNDC, to a party other
than the Company without the Company's prior
approval, which approval shall not be unreasonably
withheld.
3.2 Operation of Facility
3.2.1 The Facility shall be operated and maintained by
Seller in accordance with Prudent Electrical
Practices, manufacturers' specifications and
recommendations, and otherwise in a manner to assure
that Capacity and Energy is reliably delivered in
the manner required by this Agreement. Seller shall
establish and at all times maintain operating
procedures and records, of a type which are
consistent with utility record keeping practices for
similar facilities regarding the operation and
maintenance of the Facility. Such records may be
audited by the Company. Seller shall employ
qualified personnel for operating the Facility and
for coordinating operations of the Facility with the
Company system. Seller shall ensure that adequate
personnel to perform its obligations under this
Agreement are on duty at all times, 24 hours a day
and 7 days a week. Other than when the Facility is
unavailable, due to Scheduled Routine Maintenance or
Major Overhauls as established pursuant to Sections
3.2.2.1 and 3.2.2.2, the Facility shall to the
limit of its net capabilities be available all of
the total On-Peak Hours and Off-Peak Hours.
3.2.2 Maintenance
3.2.2.1 Routine Maintenance. Seller shall
-------------------
maintain the Facility in accordance with
Prudent Electrical Practices. The Company
shall inform Seller on or before September
1st of each Calendar Year of the schedule
for Scheduled Routine Maintenance to be
conducted by Seller, which shall include
normal overhauls, for the Facility and
Seller's Interconnection Facilities for
the following Calendar Year; provided,
however, the Company will not schedule,
and Seller may not conduct, Scheduled
Routine Maintenance during On-Peak Months
or On-Peak Hours (if, with respect to
On-Peak Hours, it is practical to
accomplish such Scheduled Routine
Maintenance only during Off-Peak Hours),
unless otherwise agreed to by the Parties
in writing. The schedule for Scheduled
Routine Maintenance of the Facility
proposed by the Company shall be
consistent with the Manufacturer's
Maintenance Requirements.
(a) Either Party may request a change to the
schedule for Scheduled Routine
Maintenance, and the Party receiving such
a request shall not unreasonably refuse to
grant it.
-125-
<PAGE>
Page 21 of 82
---- ----
(b) If the Facility experiences an Unscheduled
Outage during an Off-Peak Month, Seller
may reschedule Scheduled Routine
Maintenance to coincide with the
Unscheduled Outage and treat the
Unscheduled Outage time as if it were
Scheduled Routine Maintenance.
3.2.2.2 Major Overhauls. For the purpose of
---------------
examination and repair of all internal
rotating and stationary components from
the inlet of the combustion turbine to the
exhaust of the combustion turbine,
or other non-routine maintenance required
pursuant to vendors' specifications or
otherwise required under Prudent
Electrical Practices ("Major Overhauls"),
Seller may have up to four-hundred and
ninety-five (495) hours in a 60-month
consecutive period for Major Overhauls,
and not in excess of five (5) Major
Overhaul periods during the Term of this
Agreement, and in any case, Major
Overhauls shall not occur any more
frequently than thirty-six (36) months
between such Major Overhauls. If Major
Overhauls cause the Facility not to be
available for more than 495 hours in a
60-month consecutive period, then such
hours of non-availability shall not in
and of themselves constitute a breach
of this Agreement by Seller but shall
be treated as Forced Outage Hours.
Major Overhauls shall be scheduled by
Seller by September 1 for the Calendar
Year following the notice date, and shall
be scheduled in Off-Peak Months. The
limitations on the scheduling of Major
Overhauls set forth in this
Section 3.2.2.2 are based on the
assumption that the Facility will be
operated as an intermediate load facility,
with no more than 5500 Effective Hours of
Operation annually, following the Phase II
Date of Commercial Operation. If the
Facility is actually operated for more
than 5500 Effective Hours of Operation in
any year, then the limitations on the
scheduling of Major Overhauls set forth in
this Section 3.2.2.2 shall be revised
based on the actual levels of dispatch of
the Facility, Prudent Electrical
Practices, and the Manufacturer's
Maintenance Requirements. To the extent
that the limitations on the scheduling of
Major Overhauls are revised due to the
delivery of energy from the Facility to a
party other than the Company, Seller shall
reimburse the Company for the incremental
cost of replacement power that results
from the revised limitation.
3.2.2.3 Duration of Maintenance. All maintenance
-----------------------
periods shall be of a duration which is no
longer than that reasonably necessary to
carry out the required maintenance
activities. Seller shall provide the
Company with a minimum of four (4) hours
notice of the expected cessation of
maintenance activities and shall promptly
inform the Company of the completion of
such activities.
3.2.2.4 Phase II Conversion Outage. Seller shall
--------------------------
have the one-time right to conduct an
extended conversion outage (the
"Conversion Outage") of up to four (4)
months in duration in order to implement
-126-
<PAGE>
Page 22 of 82
---- ----
conversion of the Facility from Phase I to
Phase II operation. The Conversion Outage
shall be considered a Major Overhaul for
purposes of Sections 3.2.1 and 4.4.1.2,
but shall not be considered a Major
Overhaul for purposes of Section 3.2.2.2.
Seller and the Company shall cooperate to
coordinate the scheduling of the
Conversion Outage.
3.2.3 Coordination. Seller and the Company shall
------------
coordinate the operation and maintenance of the
Facility with the operation of the Company system
and shall cooperate to minimize adverse impacts on
either the Facility or the Company system. As soon
as practical the Parties shall meet to discuss what
procedures are practical to accomplish the foregoing
and shall prepare a manual describing such
procedures to accomplish coordination, including:
3.2.3.1 Communication procedures between operating
personnel.
3.2.3.2 Billing and meter test schedules and
coordination.
3.2.3.3 Access procedures for the Company right of
access to the Facility.
3.2.3.4 Emergency procedures to cover unit trips
and other equipment failures.
3.2.3.5 Access to file information which is, by
the terms of this Agreement, available to
the other Party.
3.2.4 System Emergencies
3.2.4.1 Suspension of Deliveries. The Company
------------------------
shall not be obligated to purchase or
receive Energy and may require Seller to
reduce Energy deliveries or may disconnect
from the Facility at any time, from time
to time, if:
(a) A System Emergency condition or situation
exists; or
(b) The Company reasonably determines that
such reduction or disconnection is
necessary in order to permit the Company
to construct, install, repair, replace,
remove, investigate or inspect any part of
its electrical system that affects the
Facility (herein "Prevention Activities").
3.2.4.2 Timing of Prevention Activities. The
-------------------------------
Company shall make reasonable efforts to
undertake Prevention Activities during
Off-Peak Periods. The Company shall make
all reasonable efforts to notify and
coordinate such reductions or
disconnections with Seller, and, with
respect to Prevention Activities, the
Company shall provide Seller at least 48
hours prior notice. Any reduction or
disconnection required of Seller,
hereunder, shall be implemented in a
manner
-127-
<PAGE>
Page 23 of 82
---- ----
consistent with safe operating procedures,
and shall be for as short a duration as is
reasonably possible. The Company shall
promptly inform Seller of the cessation of
the condition causing the reduction or
disconnection and shall promptly resume
acceptance of Energy deliveries from the
Facility.
3.2.5 Corrective Action.
-----------------
3.2.5.1 In the event that the Company reasonably
determines that any equipment comprising
the Facility is not being operated or
maintained in accordance with this Section
3.2 or Section 3.1, it may so notify
Seller of such failure in writing. Within
7 days of the date of such notification or
within a reasonable time period if more
than 7 days is required for corrective
action, Seller shall either bring its
operating and maintenance practices into
conformity with the operating and
maintenance requirements set forth herein,
or, if Seller disagrees with the Company's
determination, the dispute shall be
submitted to the Dispute Resolution
Process. If the determination of the
Company is affirmed in whole or in part by
the Dispute Resolution Process, Seller
shall modify its operating and maintenance
practices in accordance with the results
of the Dispute Resolution Process within
7 days of the date of notification of the
results of such process, or within a
reasonable time period if more than 7 days
is required for corrective action.
3.2.5.2 In the event that Seller's operating and
maintenance practices are not modified to
the extent required under Section 3.2.5.1,
the Company may, at its sole discretion,
(i) cease making payments for Capacity
and/or accepting deliveries of Energy from
Seller until Seller has modified its
operating and maintenance practices as
provided therein, or (ii) (a) make or
arrange for a third party to make the
necessary changes; (b) manage or arrange
for a third party to manage and operate
the Facility until such time as the
Company receives adequate assurances of
Seller's ability to reassume its
responsibilities hereunder; or, (c) if
Seller refuses to cooperate with (a) or
(b), or if (a) or (b) are attempted and do
not achieve compliance with the operating
or maintenance standards contemplated by
this Agreement, then the Company may
declare Seller in default and exercise the
Company's rights under this Agreement.
The Company's full costs under (a) or (b)
shall be credited against Capacity and
Energy charges due hereunder until
recovered in the immediately following
Billing Cycles and any remaining Capacity
and Energy charges shall be paid to
Seller. During any period when the
Company is exercising its rights under (a)
or (b), it shall (x) operate and maintain
the Facility, or cause the Facility to be
operated and maintained, in accordance
with Prudent Electrical Practices; (y)
exercise, or cause to be exercised, the
same standard of care in the operation and
maintenance of the Facility as is
exercised with respect to
-128-
<PAGE>
Page 24 of 82
---- ----
comparable electric generating facilities
owned by the Company, and (z) perform, or
cause to be performed, all of Seller's
obligations under any permit or legal
regulation or requirement pertaining to
the Facility, and any other agreement
pertaining to the Facility, including, but
not limited to, any thermal energy sale
agreement or fuel supply agreement,
provided, however, that the Company shall
not be obligated to perform any of
Seller's obligations under any agreement
until it has been provided with a copy of
the agreement, and provided further that
any such obligations under any thermal
energy sale agreement (I) do not impose
greater obligations on the Company than
would have been imposed on Seller if it
had continued to perform the agreement,
(II) include pricing provisions for the
energy component of the thermal energy
price which escalate on the basis of
generally accepted indices, and (III)
include pricing provisions for the fixed
component which do not decline over time.
Disputes regarding operation and
maintenance of the Facility shall be
subject to the Dispute Resolution Process.
3.2.6 Company Right of Access to Facility. With three (3)
-----------------------------------
working days' notice, the Company shall have a right
to go onto Seller's premises at the Facility to
review records pursuant to Section 17.2, to ask
reasonable questions, to inspect the Facility or to
review the construction, testing, operation or
maintenance of the Facility. Such entry by the
Company or its agents shall be subject to the
condition that the Company, its agents, contractors,
and employees shall observe and comply with all
applicable safety rules of Seller. Seller shall
provide an orientation presentation for all
personnel of the Company potentially having a need
to enter Seller's premises in accordance with this
Agreement. In addition, Seller may impose
reasonable confidentiality obligations with respect
to Seller's trade secrets upon the Company and its
agents, employees and contractors in accordance with
Article XX, and the Company shall make such
confidentiality obligations conditions of employment
of such employees, agents, and contractors.
3.2.7 Fire Prevention Practices. Throughout the Term,
-------------------------
Seller shall cause the Facility to meet the National
Fire Protection Association Standard No. 850,
"Recommended Practices for Fire Prevention for
Electric Generating Facilities" or its successor
standard.
3.2.8 Steam Contracts.
---------------
3.2.8.1 All contracts between Seller and its
customers for the sale and purchase of
steam from the Facility shall be in a form
which permits the assignment to, or the
assumption by, the Company of the
contracts in the event that the Company
becomes the owner or operator of the
Facility under the terms of this
Agreement.
3.2.8.2 During Phase II, during any period (except
during testing pursuant to Exhibit 7.2)
when (a) the Facility's steam cycle is in
operation at design conditions pursuant to
a dispatch request from the Company
-129-
<PAGE>
Page 25 of 82
---- ----
that does not require the Facility to
curtail steam exports to Nicolet Paper
Mill in order to meet such dispatch
request, and (b) Nicolet Paper Mill is in
operation, but substantially all of the
steam requirements of Nicolet Paper Mill,
up to a maximum of 143,000 pounds per
hour at 175 psig saturated (or an
equivalent quantity of steam), are not
procured from the Facility, the Energy
Payment shall be calculated based upon
a steam export equal to the lesser of
(i) 143,000 pounds per hour at 175 psig
saturated or (ii) Nicolet Paper Mill's
actual total steam demand.
3.2.8.3 During Phase II, during any period when
Section 3.2.8.2 is not applicable and the
Facility's steam cycle is in operation at
design conditions pursuant to dispatch
requests from the Company (except during
testing pursuant to Exhibit 7.2), the
Energy Payment shall be calculated based
upon a steam export equal to 128,000
pounds per hour at 175 psig saturated.
This Section 3.2.8.3 shall terminate
immediately, and for the remainder of the
Term of this Agreement (including renewal
terms), upon Seller's execution of a
contract to supply substantially all of
the steam requirements of Nicolet Paper
Mill, up to at least 143,000 pounds per
hour at 175 psig saturated (or an
equivalent quantity of steam).
3.3 Obligations of the Parties.
3.3.1 Seller's Obligations.
3.3.1.1 Prudent Electrical Practices
The Facility and Seller's Interconnection
Facilities shall be operated and maintained
in accordance with Prudent Electrical
Practices with respect to synchronizing,
voltage and reactive power control.
3.3.1.2 Permits and Approvals
Seller will, at its expense, acquire and
maintain in effect throughout the Term of
this Agreement all permits and approvals, as
required pursuant to Section 8.1 of this
Agreement.
3.3.1.3 Qualification of Facility or Exempt
Wholesale Generator
At all times, the Facility shall meet the
qualifications of a "Qualifying Facility"
within the meaning of PURPA, or the Seller
shall meet the qualifications of an Exempt
Wholesale Generator within the meaning of
PUHCA, and/or any applicable rules and
regulations of the FERC promulgated
thereunder, and Seller will make no
modifications, alterations or other
changes to its Facility or in the
operations of the Facility or other
facilities of Seller which would cause
the Facility to fail
-130-
<PAGE>
Page 26 of 82
---- ----
to meet the criteria for such a
qualification which may be in effect from
time to time during the Term of this
Agreement.
3.3.1.4 Fuel Supply
Seller will procure a supply of fuel
necessary to meet its obligations under
the Agreement in accordance with
Section 8.4. Seller further warrants and
represents that any fuel oil used to
operate the Facility shall not emit more
than .30 pounds of sulfur dioxide per
MMBTU. This Agreement shall not be
construed or interpreted as creating an
obligation on the part of the Company to
arrange for or otherwise supply to Seller
the fuel requirements of Seller except as
otherwise specifically provided in
Section 5.1.3.
3.3.1.5 Steam Contracts
All contracts between Seller and its
customers for the sale and purchase of
steam from the Facility are in a form
which permits the assignment to, or the
assumption by, the Company of the contracts
in the event that the Company becomes the
owner or operator of the Facility under the
terms of this Agreement.
3.3.1.6 Fair Labor Standards Act
Seller is and shall be for the duration of
this Agreement in compliance with all
applicable requirements of the Fair Labor
Standards Act of 1938, as amended, including
without limitation the Regulations and
Orders of the Administrator of the Wage and
Hour Division issued under Section 14.
3.3.2 The Company's Obligations.
3.3.2.1 Prudent Electrical Practices
The Company shall operate and maintain the
Company's Interconnection Facilities in
accordance with Prudent Electrical Practices
with respect to synchronizing, voltage and
reactive power control.
3.3.2.2 Permits and Approvals
The Company will acquire and maintain in
effect throughout the Term of this Agreement
all permits and approvals required to
construct, operate and maintain the
Company's Interconnection Facilities. The
Company further warrants and represents that
it will diligently cooperate with Seller in
providing such information or taking such
actions as may be reasonably required to
support Seller's permit applications
necessary to construct, operate and maintain
the Facility. Seller agrees to reimburse
the Company for its reasonable costs
incurred in carrying out its obligation
-131-
<PAGE>
Page 27 of 82
---- ----
to cooperate to the extent such cooperation
exceeds the Company's existing obligations
as a public utility.
3.3.2.3 Fair Labor Standards Act
The Company is and shall be for the duration
of this Agreement in compliance with all
applicable requirements of the Fair Labor
Standards Act of 1938, as amended, including
without limitation the Regulations and
Orders of the Administrator of the Wage and
Hour Division issued under Section 14
thereof.
ARTICLE IV: SALE OF ENERGY AND CAPACITY
----------------------------------------
4.1 Conditions Precedent to Sale and Purchase
The Company's obligation to commence the purchase of Energy
and Capacity under this Agreement is contingent upon Seller's
submittal to the Company of documents, certificates or other
evidence, at least sixty (60) days before the Date of
Commercial Operation (excluding any item which, by its
nature, is not available sixty (60) days before the Date of
Commercial Operation), demonstrating all of the following:
4.1.1 Seller has the right to operate the Facility and
deliver Capacity and Energy for the Term of the
Agreement.
4.1.2 The Facility, if operated with Prudent Electrical
Practices, can be expected to have a useful life at
least equal to the Term of the Agreement.
4.1.3 Phase I of the Facility is being constructed
pursuant to terms of this Agreement.
4.1.4 The Facility is a Qualifying Facility, the Seller is
an Exempt Wholesale Generator, or the Facility and
the Seller are otherwise not subject to rate
regulation (except, if Seller is an Exempt Wholesale
Generator, wholesale rate regulation pursuant to the
Federal Power Act).
4.1.5 Certificates of Insurance.
4.1.6 Seller has received all necessary permits and
approvals described in Section 8.1.
4.1.7 All information needed for the Company to perform
its interconnection study, and design, construct and
install the Company's Interconnection Facilities in
accordance with Article IX.
4.1.8 Compliance with all requirements of Article VIII,
Pre-Operation Period, in accordance with the
schedule set forth therein.
4.1.9 Seller has provided all rights-of-way and easements
required pursuant to Section 12.2.7.
-132-
<PAGE>
Page 28 of 82
---- ----
4.1.10 Compliance with Environmental Laws.
4.2 Energy Sale and Purchase
4.2.1 Seller agrees to make available and sell to the
Company and the Company agrees to accept and
purchase from Seller the Energy output of the
Facility up to, but not to exceed the CNDC at the
price, subject to dispatch and curtailment rights
and to the other terms and conditions, set forth in
this Agreement, commencing with the Date of
Commercial Operation and ending upon termination of
the Agreement.
4.2.2 During any Billing Cycle after the Phase II
Commercial Operation Date in which Seller sells
energy or capacity from the Facility to any party
other than the Company during periods when the
Facility is not dispatched by the Company, Seller
agrees to compensate the Company for the impact on
the Company resulting from such sale by reducing the
Company's Capacity Payment in accordance with the
following formula:
RCP = OCP x [1 - (MWS divided by TMWH)]
Where:
RCP = the revised Capacity Payment for the
Billing Cycle.
OCP = the original Capacity Payment for the
Billing Cycle.
MWS = MWH sold to a third party during the
Billing Cycle.
TMWH = the total number of net MWH generated by
the Facility during the Billing Cycle.
4.3 Capacity Sale and Purchase
Seller agrees to sell and the Company agrees to purchase
Capacity equal to the CNDC as determined pursuant to Exhibit
7.2, subject to terms and conditions of this Agreement,
commencing with the Date of Commercial Operation and ending
upon termination of the Agreement. Seller shall not sell
Capacity from the Facility to a third party except in excess
of one hundred and five percent (105%) of INDC. Seller
agrees it will not sell Capacity in excess of one hundred
and five percent (105%) of INDC without first offering such
Capacity to the Company on the same terms and conditions as
provided in this Agreement.
4.4 Performance Standards
4.4.1 Availability
4.4.1.1 In the event that the Availability of the
Facility is less than ninety-three percent
(93%) during any Calendar Year during
Phase I or Phase II or greater than
ninety-five percent (95%) during any
Calendar Year during Phase II, the
Capacity Payment that would
-133-
<PAGE>
Page 29 of 82
---- ----
otherwise be due under this Agreement for
the following Calendar Year shall be
multiplied by an adjustment factor
determined by one of the following
formula:
(a) In the event the Availability is greater
than ninety-five percent (95%) during any
Calendar Year during Phase II,
Adjustment Factor = 1.0753 x Availability
(b) In the event the Availability is less than
ninety-three percent (93%) and greater
than or equal to ninety percent (90%)
during any Calendar Year during Phase I or
Phase II,
Adjustment Factor = 1.0753 x Availability
(c) In the event the Availability is less than
ninety percent (90%) and greater than or
equal to eighty-five percent (85%) during
any Calendar Year during Phase I or
Phase II,
Adjustment Factor = (2.355 x Availability)
- 1.152
(d) In the event the Availability is less
than eighty-five percent (85%) and greater
than seventy percent (70%) during any
Calendar Year during Phase I or Phase II,
Adjustment Factor = (5.670 x Availability)
- 3.967
(e) In the event that the Availability of the
Facility is less than or equal to seventy
percent (70%) during any Calendar Year
during Phase I or Phase II, the Capacity
Payment that would otherwise be due under
this Agreement for the following Calendar
Year shall be reduced to zero.
4.4.1.2 Availability is defined as total hours in
the twelve (12) month period less hours of
outages due to an event of Force Majeure,
Scheduled Routine Maintenance hours, Major
Overhaul hours, and Forced Outage Hours in
the twelve (12) month period, divided by
the total hours in the twelve (12) month
period less hours of outages due to an
event of Force Majeure and Major Overhaul
hours, and is expressed in the following
formula:
A = (HR - FMH - MOH - SRMH - FOH) divided by
(HR - FMH - MOH)
Where:
------
A = Availability
HR = Hours in the year
FMH = Force Majeure hours
-134-
<PAGE>
Page 30 of 82
---- ----
MOH = Major Overhaul hours
SRMH = Scheduled Routine Maintenance hours
FOH = Forced Outage Hours
4.4.1.3 In the event that Seller fails to maintain
a minimum Availability equal to
eighty-five percent (85%) (a) during any
two (2) Calendar Years during any five (5)
Calendar Year period, or (b) during any
five (5) Calendar Years during the initial
Term of this Agreement, the Company may
declare the Seller to be in default under
this Agreement. For purposes of this
Section 4.4.1.3, in calculating the
Availability of the Facility during any
Calendar Year in which the Facility is
unavailable as of the beginning of the
Calendar Year due to a Forced Outage which
commenced during the preceding Calendar
Year, hours during the subsequent Calendar
Year during which the Forced Outage
continues shall be included in the
calculation for the preceding Calendar
Year, and shall be excluded from the
calculation for the subsequent Calendar
Year. In such a case, the formula set
forth in Section 4.4.1.2 shall be
calculated by including the hours during
which such Forced Outage continues in the
calculation of HR and FOH for the
preceding Calendar Year, and by excluding
such hours from the calculation of HR and
FOH for the subsequent Calendar Year.
4.4.1.4 When calculating Availability, any partial
derating of the plant from the CNDC shall
be accounted for by converting the number
of hours of partial derating to an
equivalent number of Forced Outage Hours.
The equivalent number of Forced Outage
Hours will be determined by multiplying
the derated operating time (in hours) by
the percentage derating from CNDC.
4.4.1.5 Seller shall report Availability daily to
the Company and maintain appropriate logs
and records sufficient to permit the
calculations required by this Section.
4.4.2 Seller shall be obligated to maintain a minimum
Facility Starting Reliability in accordance with
this Section.
4.4.2.1 Starting with the two hundred and eleventh
(211th) Facility start, and continuing
thereafter, Seller shall be obligated to
maintain a minimum Starting Reliability of
ninety percent (90%), based on the
two hundred (200) most recent Facility
starts. In the event that the Starting
Reliability during such period is less
than ninety percent (90%), Seller shall
have six (6) months in which to increase
the Starting Reliability of the Facility
to ninety percent (90%), based on the
previous one hundred (100) Facility
starts, plus the next one hundred (100)
Facility starts. Provided that the
Company has requested no less than one
hundred (100) Facility starts during such
period, the Company may declare the Seller
to be in default in the
-135-
<PAGE>
Page 31 of 82
---- ----
event that it has not increased the
Starting Reliability of the Facility to
ninety percent (90%) by the end of such
six (6) month period, or such longer
period as is required for the Company to
request one hundred (100) Facility starts.
4.4.2.2 Starting with the thirty-first (31st)
Facility start, Seller's Capacity Payment
shall be subject to reduction in
accordance with the following paragraphs,
provided, however, that if more than one
such paragraph is applicable, only the
paragraph which results in the greatest
reduction shall be applied.
(a) Starting with the thirty-first (31st)
Facility start, in the event that the
Starting Reliability for the twenty (20)
most recent Facility starts during such
period is less than seventy-five percent
(75%), the Capacity Payment that would
otherwise be due under this Agreement for
the period shall be multiplied by a
fraction, the denominator of which is
seventy-five percent (75%), and the
numerator of which is the Starting
Reliability of the Facility during such
period. The reduction shall be applicable
to Capacity Payments for the period
commencing with the first Facility start
that causes the Starting Reliability to be
reduced below seventy-five percent (75%),
and shall continue until the first
Facility start that causes the Starting
Reliability to be increased to or above
seventy-five percent (75%). If the
Starting Reliability changes during any
month in a manner that affects Capacity
Payments pursuant to this paragraph,
Capacity Payments for such month shall be
prorated accordingly.
(b) Starting with the fifty-first (51st)
Facility start, in the event that the
Starting Reliability for the forty (40)
most recent Facility starts during such
period is less than eighty-five percent
(85%), the Capacity Payment that would
otherwise be due under this Agreement for
the period shall be multiplied by a
fraction, the denominator of which is
eighty-five percent (85%),and the
numerator of which is the Starting
Reliability of the Facility during such
period. The reduction shall be applicable
to Capacity Payments for the period
commencing with the first Facility start
that causes the Starting Reliability to be
reduced below eighty-five percent (85%),
and shall continue until the first
Facility start that causes the Starting
Reliability to be increased to or above
eighty-five percent (85%). If the
Starting Reliability changes during any
month in a manner that affects Capacity
Payments pursuant to this paragraph,
Capacity Payments for such month shall be
prorated accordingly.
(c) Starting with the one hundred and eleventh
(111th) Facility start, in the event that
the Starting Reliability for the one
hundred (100) most recent Facility starts
during such period is less than ninety
percent (90%), the Capacity Payment that
would otherwise be due under this
Agreement for the period shall be
multiplied by a fraction, the
-136-
<PAGE>
Page 32 of 82
---- ----
denominator of which is ninety percent
(90%), and the numerator of which is the
Starting Reliability of the Facility
during such period. The reduction shall
be applicable to Capacity Payments for the
period commencing with the first Facility
start that causes the Starting Reliability
to be reduced below ninety percent (90%),
and shall continue until the first
Facility start that causes the Starting
Reliability to be increased to or above
ninety percent (90%). If the Starting
Reliability changes during any month in a
manner that affects Capacity Payments
pursuant to this paragraph, Capacity
Payments for such month shall be prorated
accordingly.
(d) Starting with the two hundred and eleventh
(211th) Facility start, in the event that
the Starting Reliability for the two
hundred (200) most recent Facility starts
during such period is less than
ninety-five percent (95%), the Capacity
Payment that would otherwise be due under
this Agreement for the period shall be
multiplied by a fraction, the denominator
of which is ninety-five percent (95%), and
the numerator of which is the Starting
Reliability of the Facility during such
period. The reduction shall be applicable
to Capacity Payments for the period
commencing with the first Facility start
that causes the Starting Reliability to be
reduced below ninety-five percent (95%),
and shall continue until the first
Facility start that causes the Starting
Reliability to be increased to or above
ninety-five percent (95%). If the
Starting Reliability changes during any
month in a manner that affects Capacity
Payments pursuant to this paragraph,
Capacity Payments for such month shall be
prorated accordingly.
4.4.2.3 Seller shall maintain appropriate logs and
records sufficient to permit the
calculations required by this Section.
4.4.3 The reduction in Capacity Payments and right to
declare Seller in default as provided in this
Section 4.4 shall be the Company's sole and
exclusive remedy for Seller's failure to maintain
Availability or Starting Reliability in the
operation of the Facility.
4.5 Power Characteristics
The Energy to be made available under this Agreement shall be
three-phase, 60 hertz, alternating current, and shall be made
available at the Interconnection Point at a nominal voltage
of 138 KV.
4.6 Parallel Operation
Seller shall operate the Facility with its speed governors,
all applicable protective apparatus, and voltage regulators
in service whenever the Facility is connected to or operated
in parallel with the electric system of the Company. Seller
shall not, in response to the Company system frequency
deviations, cause the Facility to automatically or
instantaneously
-137-
<PAGE>
Page 33 of 82
---- ----
disconnect with the Company system or trip any generating
unit comprising the Facility unless the frequency of the
Company system is below 58.3 hertz or above 63.0 hertz.
4.7 Power Purchases by Seller
4.7.1 All Station Use and losses between the Facility and
the Metering Point shall be generated by the
Facility at all times the Facility is generating
Energy for sale to the Company.
4.7.2 The energy flowing into the Facility (e.g. Back-up
Power, Maintenance Power, and Supplementary Power)
through the Interconnection Point during periods
when the Facility is not generating energy for sale
to the Company shall be a subtraction from Net
Energy Output as recorded at the Metering Point if
the Company was not providing fuel to the Facility
immediately before such period.
4.7.3 The energy flowing into the Facility (e.g. Back-up
Power, Maintenance Power, and Supplementary Power)
through the Interconnection Point during periods
when the Facility is not generating energy for sale
to the Company shall be credited to the Company, at
Seller's option, at either (i) the Company's
applicable electric tariff, or (ii) the displaced
fuel cost, in either case if the Company was
providing fuel to the Facility immediately before
such period. Seller shall notify the Company at the
end of each Billing Cycle which option pursuant to
the preceding sentence is applicable during such
Billing Cycle. For purposes of this Section, the
displaced fuel cost shall be determined in
accordance with the following formula:
DFC = KWH x HRT100 x DFPP
Where:
DFC = displaced fuel cost
KWH = KWH flowing into the Facility during such
period
HRT100 = Tested Plant Heat Rate (as defined in
Exhibit 5.1) at 100% of the CNDC,
expressed in BTU/KWH at the Higher Heating
Value.
DFPP = The Delivered Price of Primary Fuel (as
defined in Exhibit 5.1), expressed in
dollars per BTU.
ARTICLE V: RATES FOR PURCHASE
------------------------------
5.1 Rates for Purchases
The rates to be paid by the Company for purchases of Energy
and Capacity shall be determined as follows:
-138-
<PAGE>
Page 34 of 82
---- ----
5.1.1 Capacity Payment. The Capacity Payment per Billing
----------------
Cycle shall be determined under Exhibit 5.1.
5.1.2 Energy Payment. The Energy Payment per Billing
--------------
Cycle shall be determined under Exhibit 5.1.
Exhibit 5.1 is based upon the assumption that Seller
shall be responsible for the fuel supply for the
Facility. Seller shall procure a source of fuel
necessary to meet its obligations under this
Agreement in accordance with Section 8.4 of this
Agreement.
5.1.3 Fuel Supply.
-----------
5.1.3.1 At any time up to ninety (90) days after
receipt of the CPCN by Seller, the Company
may elect to supply the total fuel
requirements of the Facility for the Term
of this Agreement by providing Seller a
binding written commitment to supply such
fuel.
5.1.3.2 At any time prior to Seller entering into
any contract with a term of one (1) year
or more for the supply of fuel to the
Facility, the Company shall have an
exclusive right to supply the total fuel
requirements of the Facility for the Term
of this Agreement. Seller shall provide
the Company with written notice at least
fifteen (15) days prior to entering into
any such contract. If the Company elects
to exercise its right to supply such fuel,
it shall provide Seller with a binding
written commitment within ten (10) days
from the receipt of Seller's notice to the
Company.
5.1.3.3 Upon providing a binding written
commitment to the Seller, the Company
shall have the right to supply the total
fuel requirements of the Facility for the
remainder of the Term of this Agreement
commencing from the date Seller's fuel
supply contract having the longest
remaining term at the time such notice is
given, expires.
5.1.3.4 The Company shall have the option to
supply natural gas to Seller at any time
that Seller proposes to utilize No. 2 oil
as a fuel in the Facility if the Company
provides Seller with a commitment to
supply natural gas to the Facility for the
term during which Seller had intended to
use No. 2 oil. Any time that Seller
intends to use No. 2 oil as a fuel in the
Facility, it shall provide the Company
with as much advance notice of such intent
as is practicable under the circumstances.
In the event that the Company exercises
its right to supply natural gas to Seller,
Seller shall cease the use of No. 2 oil as
soon as possible after the supply of
natural gas commences.
5.1.3.5 During any period when the Facility is
utilizing fuel supplied by the Company,
the Energy Payment shall be based upon the
price the Seller pays the Company for fuel
supplied by the Company.
5.1.3.6 Fuel Delivery Facilities.
------------------------
-139-
<PAGE>
Page 35 of 82
---- ----
(a) Notwithstanding the Company's election to
supply the total fuel requirements of the
Facility, Seller shall remain obligated to
provide for the permitting, design,
installation, operation and maintenance of
any new facilities required to be
installed for the delivery of natural gas
to the Facility.
(b) Notwithstanding the foregoing, the Company
shall have an exclusive option to build or
purchase, own, operate and maintain any
facilities required to deliver natural gas
to the Facility. Seller shall provide the
Company with written notice at least one
hundred and twenty (120) days prior to
entering into any contract or other
arrangement to build such facilities, and
Seller shall notify the Company of the
Seller's projected cost to build such
facilities. If Seller builds the natural
gas delivery facilities, it shall build
such facilities to natural gas industry
standards; provided, however, that the
Company shall have the option to require
Seller to build such facilities to Company
standards if the Company reimburses
Seller, without a corresponding decrease
in the Capacity Payment, for the
difference in cost between the cost of
building to Company standards and the cost
of building to natural gas industry
standards.
(c) If the Company elects to own, operate and
maintain such facilities and if Seller's
cost to build such facilities is greater
than $1,000,000 escalated using the GDPIPD
from January 1, 1995 to the date of the
Company's exercise of its election
pursuant to this Section, the Company
shall build such facilities, and the
Capacity Payment shall be reduced in
accordance with Exhibit 5.1 based on a Gas
Connection Cost of $1,000,000 escalated as
aforesaid. If the Company elects to own,
operate and maintain such facilities and
if Seller's cost to build such facilities
is less than $1,000,000 escalated as
aforesaid, the Company shall retain Seller
as its general contractor to build such
facilities and the Capacity Payment shall
be reduced in accordance with Exhibit 5.1
based on a Gas Connection Cost equal to
the amount paid to Seller by the Company
for the construction of such facilities.
In the event the Company exercises its
option to own, operate and maintain such
facilities, the Company shall ensure that
the Facility and any equipment providing
steam for Nicolet Paper Mill receive
service that is at least as favorable in
all respects as if Seller had provided
such facilities.
(d) If the Company does not elect to supply
the total fuel requirements of the
Facility, or, at any time, the Company is
in breach of its obligations to supply
fuel to the Facility, Seller shall have
unrestricted access to the natural gas
delivery facilities.
5.1.4 Prepayment of Capacity Payment. Upon twelve (12)
------------------------------
months prior written notice to Seller, the Company
may at any time after the Date of Commercial
Operation, prepay the Capacity Payments for a period
of up to one-half of the then remaining
-140-
<PAGE>
Page 36 of 82
---- ----
Term of this Agreement. Such prepayment shall be
equal to the present value of the Capacity Payments
for the period being prepaid, determined using the
Discount Rate. The balance of the Capacity Payments
shall be paid ratably over the remainder of the Term
of this Agreement in a manner that will maintain the
same present value of the Capacity Payments at the
Discount Rate, measured from the Date of Commercial
Operation, as would have been achieved if there had
been no prepayment.
ARTICLE VI: METERING, INSTRUMENTATION AND BILLING
--------------------------------------------------
6.1 Metering and Instrumentation Devices
6.1.1 The Company shall select, own, install and maintain
all meters, telemeters and associated equipment
necessary for measuring energy deliveries, for
determining payments by the Company to Seller and
for evaluating performance criteria set forth in
this Agreement. Seller may also install remote
check meters, as appropriate, within Seller's
Facility.
6.1.2 The costs associated with the purchase, installation
and maintenance of such metering and measuring
equipment shall be borne by Seller.
6.1.3 The Company shall inspect, test, and calibrate its
equipment at regular intervals as specified within
its rates and regulations on file with the
Commission, and any inaccuracy disclosed by such
tests shall be promptly corrected. Any Party shall
have the right to have any Metering Device tested at
any time at its expense; provided, however, that if
the Metering Device is found to be inaccurate by
more than two (2) percent (%), the Company shall pay
the cost of the test. Representatives of the
Parties shall be afforded a reasonable opportunity
to be present at Metering Device inspections and
tests. If at any time a Metering Device is found
inaccurate by more than two (2) percent (%), an
adjustment shall be made in settlements between the
Parties to compensate for the effect of such
inaccuracy over the thirty (30) days preceding
removal or testing of the Metering Device or over
any shorter period during which such inaccuracy is
determined to have existed. Such adjustments shall
be in accordance with Section 6.1.5 below. If at
any time a Metering Device should fail to register
or its registration should be so erratic as to be
meaningless, the quantities such Metering Device was
intended to record shall be determined from check
meters if available, or otherwise from the best
obtainable data. The Company shall read its meters
on the Date of Commercial Operation and thereafter
at the end of each Billing Cycle as determined by
the Company. Seller shall provide the Company
access to the metering and measuring equipment at
reasonable times for the purposes of reading,
inspecting, testing, and adjusting such equipment.
6.1.4 Seller shall have, upon reasonable notice, the right
of access during the normal working hours of the
Company to all log books and metering records of
power purchases from Seller. Seller shall have the
right, at its expense, to make copies of such books
and records.
-141-
<PAGE>
Page 37 of 82
---- ----
6.1.5 In the event adjustments to billing statements are
required as a result of the correction of
measurements made by inaccurate meters, the Parties
shall use the corrected measurements described in
Section 6.1.3 to compute the amounts due from or to
the Company for the Energy delivered during the
period of inaccuracy. If the total amount, as
computed, due from a Party for the period of
inaccuracy varies from the total amount due as
previously computed, and the payment of the
previously computed amount has been made, the
difference in the amounts shall be paid to the Party
entitled to it within thirty (30) calendar days
after the paying Party is notified of the
recomputation. Alternatively, upon agreement
between the Parties, the Company may credit or debit
subsequent payments to Seller for Energy purchased
from Seller until the adjustment amount is
eliminated.
6.2 Billing and Payment
6.2.1 The Company shall read Seller's meters monthly
during the first three business days of the month,
and shall send a statement, and make a payment to
Seller on or before the fifteenth (15th) calendar
day after the meter is read. If a monthly meter
reading cannot be made, the Company shall estimate
deliveries to the Company for that month, tender
payment accordingly, and make an adjustment for
actual purchases in the next month's statement. The
billing statement will show the kilowatt-hours of
Energy delivered at the Interconnection Point, any
adjustments to the Capacity Payment pursuant to
Sections 4.2.2, 4.4.1.1, 4.4.2.2 and 5.1.4, the
price for such Energy as provided in Article V
herein, the amounts due Seller, and the data
reasonably pertinent to the calculation of the
payment to Seller. Late payments shall carry an
interest charge of one (1) percent (%) per month
calculated from the date the meter is read.
6.2.2 Neither the Company nor Seller shall have the right
to challenge any monthly statement rendered or
received hereunder, to invoke the Dispute Resolution
Process questioning the propriety of any monthly
statement after a period of one (1) year from the
date such monthly statement was rendered. In the
event that any such monthly statement depends in
whole or in part upon estimated data, this one (1)
year limitation period shall be deemed to begin in
the billing month in which such estimated data is
adjusted to actual.
ARTICLE VII: TESTING AND CAPACITY RATINGS
------------------------------------------
7.1 Notice of Projected Rating
Within six (6) months of the Effective Date, the Seller shall
provide the Company with preliminary design information
specifying the latest projected Nameplate Rating for the
Facility during Phase I and Phase II, the manufacturer (or
alternative manufacturers) of the Critical Components of the
Facility, and the principal operating characteristics of the
Facility. The Seller shall provide updated design
information to the Company as it becomes available.
-142-
<PAGE>
Page 38 of 82
---- ----
7.2 Test of Capability
7.2.1 Seller shall be obligated during Phase I to
establish by test the Net Demonstrated Heat Rates
and verify that the Initial Net Demonstrated
Capability (INDC) is within ten (10) percent (%) of
the Design Rating of Phase I, which is equal to
178,885 KW, as tested and adjusted as provided in
Exhibit 7.2. The testing of the INDC of the
Facility shall be held within the sixty (60) day
period prior to the Date of Commercial Operation.
The Seller shall also be obligated during Phase I to
establish by test, as set forth in Exhibit 7.2, that
the Current Net Demonstrated Capability (CNDC) is
within five (5) percent (%) of the INDC. Payment of
the Capacity Payment for Phase I of the Facility
shall commence with respect to periods after the
Date of Commercial Operation.
7.2.2 Seller shall be obligated during Phase II to
establish by test the Net Demonstrated Heat Rates
and verify that the Phase II Initial Net
Demonstrated Capability (Phase II INDC) is within
ten (10) percent (%) of the Design Rating of Phase
II, which is equal to 231,675 KW, as tested and
adjusted as provided in Exhibit 7.2. The testing of
the Phase II INDC of the Facility shall be held
within the sixty (60) day period prior to the Phase
II Date of Commercial Operation. Following the
establishment of the Phase II INDC, Seller shall
also be obligated to establish by test, as set forth
in Exhibit 7.2, that the Current Net Demonstrated
Capability (CNDC) is within five (5) percent (%) of
the Phase II INDC. Payment of the Capacity Payment
for Phase II of the Facility shall commence with
respect to periods after the Phase II Date of
Commercial Operation.
7.3 Method of Testing and Results
The procedures to establish the Net Demonstrated Heat Rates
and Net Demonstrated Capability, including the Initial Net
Demonstrated Capability, are set forth in Exhibit 7.2
7.4 Notification of Testing
Seller shall notify the Company in writing ten (10) days
prior to any test of the Net Demonstrated Capability or the
Net Demonstrated Heat Rate, and shall permit the witnessing
of such test by Company representatives if so requested.
Furthermore, Seller shall provide sufficient metering records
to document the test and shall provide copies of such records
to the Company upon request.
-143-
<PAGE>
Page 39 of 82
---- ----
ARTICLE VIII: PRE-OPERATION PERIOD
-----------------------------------
8.1 Permits and Approvals
8.1.1 Prior to the Date of Commercial Operation, Seller
shall, at its expense, acquire and maintain in
effect throughout the Term of this Agreement all
permits and approvals, whether now or hereafter
required, of any local, state or federal
governmental authority or regulatory agency, as
necessary conditions for the lawful construction,
operation and maintenance of the Facility, Seller's
Interconnection Facilities, and the natural gas
delivery facilities, excluding any permit or
approval which, by its nature, is not available
prior to the Date of Commercial Operation. Copies
of said permits and approvals shall be made
available for Company review. Notwithstanding the
foregoing, in the event that the Company exercises
its option pursuant to Section 5.1.3.6 to build,
own, operate and maintain the natural gas delivery
facilities, from the date that the Company exercises
such option, the Company shall be responsible for
maintaining in effect all such permits and approvals
necessary for the natural gas delivery facilities.
8.1.2 The Company shall not be liable for any violation by
Seller of any permit or approval required to be
obtained and maintained by Seller pursuant to this
section.
8.1.3 The Company acknowledges that Seller's ability to
obtain certain permits required pursuant to this
Section may be contingent upon Seller's
demonstration of acceptable environmental impact
associated with the Company's Interconnection
Facilities. The Company agrees to support Seller by
providing, without limitation, information, data,
and analyses regarding proposed and alternate
Company Interconnection Facilities and expected
environmental impacts associated with their
construction and operation. Any delays in the
receipt of Seller's required permits attributable to
the Company's Interconnection Facilities shall
provide an extension in all dates in the
Construction Milestone Schedule, and of the
Commercial Operation Deadline and the Phase II
Commercial Operation Deadline to the extent
necessary to reflect the delay.
8.1.4 The Parties acknowledge that Seller is responsible
for filing the application for the natural gas
delivery facilities and the Company is responsible
for filing the application for a CPCN for the
Company's Interconnection Facilities. The Parties
agree to use their reasonable best efforts to file
such applications in a timely manner so as to permit
the consolidation of such applications with the
Seller's application for the CPCN for the Facility.
8.1.5 Whenever a Party is obligated to obtain a CPCN in
order to perform its obligations pursuant to this
Agreement, that Party shall use its reasonable best
efforts to promptly file and diligently pursue the
receipt of such CPCN.
-144-
<PAGE>
Page 40 of 82
---- ----
8.2 Schedule, Reports and Inspection
Seller shall submit for the Company's review its schedule,
showing all planned design, licensing and construction
activities, within sixty (60) days of the Effective Date and
a start-up and test schedule for the Facility thirty (30)
days prior to start-up and testing of the Facility. Seller
shall submit progress reports in a form reasonably
satisfactory to the Company on the first (1st) day of every
quarter commencing on the Effective Date and ending on the
Commencement of Construction, and every month thereafter
until the Date of Commercial Operation and notify the Company
of any changes to such schedules in a timely manner. The
Company shall have the right to monitor and observe the
construction, start-up and testing of the Facility and Seller
shall comply with all reasonable requests consistent with
Prudent Electrical Practices resulting therefrom, subject to
the Dispute Resolution Process. Seller shall cooperate in
such physical inspections of the Facility as may be
reasonably required by the Company during and after
completion of construction. The Company's technical review
and inspection of the Facility shall not be construed as
endorsing the design thereof nor as any warranty of the
safety, durability or reliability of the Facility.
8.3 Facility Design Data
8.3.1 Seller shall provide the Company with the generator
manufacturer's capability curves and relay types for
Phase I for review and inspection by the Company no
later than three hundred and sixty (360) days before
the Scheduled Date of Commercial Operation. Seller
shall supply the Company with proposed relay
settings ninety (90) days prior to the Contemplated
Energizing Date. Within sixty (60) days of
receiving such information, the Company shall inform
Seller, in writing, if the proposed relay types and
relay settings are acceptable. If these are not
found to be acceptable to the Company, Seller agrees
to comply with any reasonable requests by the
Company, to provide acceptable relay types and relay
settings, subject to the Dispute Resolution Process.
All information must be submitted in a manner
reasonably acceptable to the Company, particularly
the turbine generator data, which shall be used for
the Company's inspections and transient stability
analysis. Turbine generator data for Phase I must
be completely submitted at least one hundred and
twenty (120) days prior to the Scheduled Date of
Commercial Operation.
8.3.2 Seller shall provide the Company with the generator
manufacturer's capability curves and relay types for
Phase II for review and inspection by the Company no
later than three hundred and sixty (360) days before
the Phase II Scheduled Date of Commercial Operation.
Seller shall supply the Company with proposed relay
settings ninety (90) days prior to the Phase II Date
of Commercial Operation. Within sixty (60) days of
receiving such information, the Company shall inform
Seller, in writing, if the proposed relay types and
relay settings are acceptable. If these are not
found to be acceptable to the Company, Seller agrees
to comply with any reasonable requests, by the
Company, to provide acceptable relay types and relay
settings, subject to the Dispute Resolution Process.
All information must be submitted in a manner
reasonably acceptable to the Company, particularly
the turbine generator data, which shall be used for
the Company's inspections and
-145-
<PAGE>
Page 41 of 82
---- ----
transient stability analysis. Turbine generator
data for Phase II must be completely submitted at
least one hundred and twenty (120) days prior to the
Phase II Scheduled Date of Commercial Operation.
8.4 Fuel Supply
8.4.1 Prior to Commencement of Construction Seller shall
provide the Company with its fuel supply plan
showing Seller's proposed fuel supply and
transportation arrangements.
8.4.2 Twelve (12) months prior to the Scheduled Date of
Commercial Operation, and annually thereafter,
Seller will provide the Company with an updated fuel
supply plan.
8.4.3 In addition to the foregoing, Seller agrees to
maintain at all times during the Term of this
Agreement dual fuel capability for the Facility and
agrees that at all times it will be able to operate
the Facility in accordance with this Agreement under
either alternative form of fuel (subject to the
availability of natural gas). Seller further agrees
to obtain, at its expense, all necessary permits,
approvals, and licenses necessary for such dual fuel
capability.
8.5 Water Rights
Prior to the Date of Commercial Operation Seller shall, at
its expense, acquire and maintain in effect throughout the
Term of this Agreement the rights to divert, and use
sufficient water to permit operation of the Facility at its
maximum level of operation, which rights shall be assignable.
8.6 Voltage Schedule
The Company will prepare and submit to Seller a written
voltage schedule no later than thirty (30) days prior to the
Date of Commercial Operation, except that the Company may
change such voltage schedule upon thirty (30) days prior
written notice. Seller shall use such voltage schedule in
the operation of the Facility. This voltage schedule shall
be based on the normally expected operating conditions for
the Facility and the reactive power requirements of the
Company system.
8.7 Notice of Initial Energizing
Unless notified to the contrary by Seller, the Company shall
have the Company's Interconnection Facilities prepared for
the initial energizing at the Interconnection Point four (4)
months before the Scheduled Date of Commercial Operation (the
"Contemplated Energizing Date"). In any case, Seller agrees,
if there is no Date of Commercial Operation, and no
Energizing Date, because Seller either terminates the
Agreement or is in default of the Agreement, to hold the
Company harmless and indemnify the Company against any and
all costs reasonably incurred by the Company in designing,
constructing or purchasing the Company's Interconnection
Facilities, and for and against any and all costs of
obtaining necessary regulatory approvals for such project;
provided, however, in the event the
-146-
<PAGE>
Page 42 of 82
---- ----
Company should subsequently, within eighteen (18) months
after termination of this Agreement, use the Company's
Interconnection Facilities for the benefit of a third party,
the Company shall return to Seller such portion of the amount
paid to the Company pursuant to this indemnification as
equals that portion of the Company's Interconnection
Facilities used for the benefit of such third party. Seller
shall notify the Company in writing thirty (30) calendar days
prior to the expected date of: (a) the initial energizing at
the Interconnection Point; (b) the initial parallel operation
with the Company system; and (c) the initial testing of the
Facility and Interconnection Facilities. The Company and
Seller shall have the right to have a representative present
at the time of such energizing, parallel operation and
testing.
8.8 Energy Delivered During Testing
Seller may conduct such tests of the Facility from
time-to-time prior to the Date of Commercial Operation as
Seller in its discretion may deem appropriate. Subject to
the limitations expressed in Section 8.9, if Seller desires
the Company to accept at the Interconnection Point the Energy
generated by the Facility during any proposed test, Seller
shall so notify the Company in writing within a reasonable
time not less than two (2) days prior to such test, and the
Company shall purchase the Energy delivered. Seller's notice
to the Company shall, at a minimum, include a description of
the approximate time and duration of the test and approximate
amount of the output intended to be delivered to the Company
as a result of such test. For Energy delivered to the
Company during start-up and testing, the Company shall pay
Seller at a rate per KWH equal to the Company's marginal
energy cost at the time of delivery, which rate shall be
computed by the Company as soon as reasonably possible after
such deliveries.
8.9 Preliminary Notice of Commercial Operation
8.9.1 Seller shall notify the Company in writing sixty
(60) days prior to the date of Seller's preliminary
expected Date of Commercial Operation. The Company
shall accept and pay for Energy deliveries during
start-up and testing, and Commercial Operation
unless, in the Company' good faith judgment, any
portion of Seller's Interconnection Facilities which
Seller is responsible for constructing is not
sufficient to accept or meter such deliveries or if
such Facilities are not sufficient to protect the
Company's system, employees or customers from damage
or injury arising out of, or in connection with,
operation of the Facility. In the event the Company
reasonably determines such facilities are not
sufficient to accept or meter such deliveries, the
Company shall give Seller prompt written notice
which shall include a detailed explanation for its
determination.
8.9.2 Seller shall notify the Company in writing sixty
(60) days prior to the expected Phase II Date of
Commercial Operation.
8.10 Notice of Compliance and Verification Prior to Commercial
Operation
Seller shall give the Company written notice no later than
ten (10) days before Seller's expected Date of Commercial
Operation that Seller has complied with all of the
requirements of this Article VIII and all other terms and
conditions of this Agreement
-147-
<PAGE>
Page 43 of 82
---- ----
required to be performed by Seller prior to the Date of
Commercial Operation. In order for the Company to verify
such compliance, Seller shall provide the Company access to
all permits, approvals, contracts, records, studies and other
documents of Seller respecting the design, construction,
operation and maintenance of the Facility and Seller's
Interconnection Facilities, and shall provide all documents
and other requirements specified in Section 8.3 hereof.
Unless the Company reasonably determines and notifies the
Seller in writing within ten (10) days after receiving
Seller's notice of compliance hereunder that Seller has not
complied with all of the requirements of this Article VIII
and all the other terms and conditions of this Agreement
required to be performed by Seller prior to the
Date of Commercial Operation, Commercial Operation may
commence on the date specified in Seller's notice of
compliance.
ARTICLE IX: DESIGN, INSTALLATION, OPERATION
AND MAINTENANCE OF INTERCONNECTION FACILITIES
---------------------------------------------
The Company and Seller shall design, install, maintain, and operate
the Interconnection Facilities as required by the Facility in
accordance with the provisions of Exhibit 9.1. In the event of a
conflict between the provisions of Exhibit 9.1 and the provisions
of this Agreement, the provisions of Exhibit 9.1 will apply. The
Company shall have the same rights and remedies to Seller's
Interconnection Facilities as it does with respect to the Facility
under this Agreement.
ARTICLE X: FORCE MAJEURE
-------------------------
10.1 Conditions of Excuse From Performance
If as a result of Force Majeure a Party hereto is rendered
wholly or partly unable to perform its obligations under this
Agreement, that Party shall be excused, except as
specifically provided elsewhere in this Agreement, from
whatever performance is affected by the Force Majeure to the
extent so affected, provided that:
10.1.1 The Party claiming relief gives the other Party
immediate written notice describing the particulars
of the Force Majeure;
10.1.2 The permitted suspension of performance is of no
greater scope and of no longer duration than is
required by the Force Majeure;
10.1.3 No obligations of a Party hereto under this
Agreement which arose before the Force Majeure are
excused as a result of the Force Majeure; and
10.1.4 If Seller is the Party claiming Force Majeure
(except a Force Majeure resulting from the Company's
non-delivery to Seller of fuel purchased from the
Company or transported by the Company), or during a
period of Force Majeure resulting from any damage to
the Company's transmission system which is dedicated
in its use to interconnecting the Company's
transmission system to the Facility, the Company
shall be excused from any requirement that it take
or pay for any Capacity or Energy to the extent of
the restriction on or access to Capacity of the
Facility caused by the Force Majeure. With respect
to a Force Majeure claimed by the Company due to the
Company's transmission system, Seller shall have the
-148-
<PAGE>
Page 44 of 82
---- ----
option to deem such period, or any portion of such
period, of time to be Forced Outage Hours.
10.1.5 A Force Majeure may continue only so long as the
Party claiming Force Majeure is exercising its best
efforts to eliminate the Force Majeure condition.
10.2 Time Limits
The non-performing Party shall undertake all reasonable
efforts consistent with Prudent Electrical Practices to
remedy its inability to perform as a result of the Force
Majeure.
10.2.1 If at any time during the period of Force Majeure
the non-performing Party fails to undertake or
ceases undertaking all reasonable efforts to
remedy its inability to perform, then the
non-performing Party shall no longer be excused
from its performance pursuant to Section 10.1.
10.2.2 If the Force Majeure shall continue for a period
greater than six (6) months, then the
non-performing Party shall no longer be excused
from its performance pursuant to Section 10.1;
provided, however, that if the non-performing
Party is continuing in good faith to make all
reasonable efforts to remedy the inability to
perform, the non-performing Party shall be
granted an additional six (6) months (or if the
Force Majeure requires major reconstruction of
the Facility, twelve (12) months during Phase I
or sixteen (16) months during Phase II), before
the termination of the Force Majeure excuse will
be effective. If the event of Force Majeure
nevertheless is not remedied upon the completion
of the extension period granted under this
Section 10.2.2, the Party not claiming Force
Majeure shall be entitled to all damages and
rights provided under this Agreement for injury
or damages experienced during that extension
period. This Section 10.2.2 shall not apply with
respect to a Force Majeure affecting Seller and
based on the Company's non-delivery of natural
gas or No. 2 oil during any period when the
Company is obligated to provide natural gas or
No. 2 oil to Seller.
10.2.3 In no event shall a condition of Force Majeure
extend the Term of this Agreement except to the
extent required to accomplish payment of any
Capacity Payment suspended under Section 10.1.4.
ARTICLE XI: EVENTS OF DEFAULT; REMEDIES
----------------------------------------
11.1 List of Default Events
Except as otherwise provided in this Agreement, this
Agreement may be terminated and/or a Party may be entitled to
Liquidated Damages following written notice, effective upon
receipt, from a non-defaulting Party to the defaulting Party,
upon the occurrence of any of the following events:
-149-
<PAGE>
Page 45 of 82
---- ----
11.1.1 The failure of a Party to make any undisputed
payment due hereunder and such failure shall
continue for ten (10) days after notice demanding
such payment is given;
11.1.2 In the event a Party shall cease doing business
as a going concern, shall generally not pay its
debts as they become due or admit in writing its
inability to pay its debts as they become due,
shall file a voluntary petition in bankruptcy or
shall be adjudicated a bankrupt or insolvent, or
shall file any petition or answer seeking any
reorganization, arrangement, composition,
readjustment, liquidation, dissolution or similar
relief under the present or any future federal
bankruptcy code or any other present or future
applicable federal, state or other statute or
Law, or shall seek or consent to or acquiesce in
the appointment of any trustee, receiver,
custodian or liquidator of said Party or of all
or any substantial part of its properties or its
interest in the Facility or the Interconnection
Facilities, or shall make an assignment for the
benefit of creditors, or said Party shall take
any corporate action to authorize or that is in
contemplation of the actions set forth above in
this Section 11.1.2;
11.1.3 In the event that within ninety (90) days after
the commencement of any proceeding against either
Party seeking any reorganization, arrangement,
composition, readjustment, liquidation,
dissolution or similar relief under the present
or any future federal bankruptcy code or any
other statute or Law, such proceeding shall not
have been dismissed, or if, within ninety (90)
days after the appointment without the consent or
acquiescence of said Party of any trustee,
receiver, custodian or liquidator of said Party
or of all or any substantial part of its
properties or of its interest in the Facility or
the Interconnection Facilities, such appointment
shall not have been vacated or stayed on appeal
or otherwise, or if, within ninety (90) days
after the expiration of any such stay, such
appointment shall not have been vacated;
11.1.4 The cancellation or permanent abandonment of
Phase I of the Facility by Seller prior to the
Scheduled Date of Commercial Operation or the
failure, for any reason including Force Majeure,
of the Scheduled Date of Commercial Operation to
occur by the Commercial Operation Deadline;
11.1.5 The cancellation or permanent abandonment of
Phase II of the Facility by Seller prior to the
Phase II Scheduled Date of Commercial Operation
or the failure, for any reason including Force
Majeure, of the Phase II Date of Commercial
Operation to occur by the Phase II Commercial
Operation Deadline shall constitute a default of
the Phase II provisions of this Agreement
associated with Incremental Capacity and shall
permit the non-defaulting Party to terminate this
Agreement with respect to the Incremental
Capacity of the Facility; provided, however, that
the rights and obligations of the Parties with
respect to Phase I of the Facility shall be
unaffected by such termination;
-150-
<PAGE>
Page 46 of 82
---- ----
11.1.6 The failure of Seller to provide the Company with
Seller's fuel supply plan as required by Section
8.4 unless, within thirty (30) days after written
notice from the Company notifying Seller of such
failure, Seller cures such failure;
11.1.7 The failure of Seller to adhere to the
Construction Milestone Schedule for Phase I of
the Facility. However, Seller may extend the
Scheduled Date of Commercial Operation as set
forth in Section 15.1.1.2, in which case all
other dates in the Construction Milestone
Schedule shall be adjusted accordingly;
11.1.8 The failure of Seller to adhere to the
Construction Milestone Schedule for Phase II
shall constitute a default of the Phase II
provisions of this Agreement associated with
Incremental Capacity and shall permit the
non-defaulting Party to terminate this Agreement
with respect to the Incremental Capacity of the
Facility; provided, however, that the rights and
obligations of the Parties with respect to Phase
I of the Facility shall be unaffected by such
termination. However, Seller may extend the
Phase II Scheduled Date of Commercial Operation
as set forth in Section 15.1.1.5, in which case
all other dates in the Construction Milestone
Schedule shall be adjusted accordingly;
11.1.9 The failure of Seller to adhere to the provisions
of Section 8.1 through 8.7 unless, within thirty
(30) days after written notice from the Company
specifying the nature of such failure, Seller
cures such failure;
11.1.10 Any of a Party's representations and warranties
contained in Article XII hereof was false or
misleading in any material respect when made,
unless (i) the fact, circumstance or condition
that is the subject of such representation or
warranty is made true within thirty (30) days
after the non-defaulting Party has given notice
thereof to the defaulting Party; provided,
however, that if the fact, circumstance or
condition that is the subject of such
representation or warranty cannot reasonably be
corrected within such thirty (30) day period
and if the defaulting Party within such period
of thirty (30) days commences, and thereafter
proceeds with all due diligence, to correct the
fact, circumstance or condition that is the
subject of such representation or warranty,
said period shall be extended for such further
period not to exceed ninety (90) days as shall
be reasonably necessary for the defaulting
Party to correct the same with all due
diligence, and (ii) such cure removes any adverse
affect on the non-defaulting Party of such fact,
circumstance or condition being otherwise than as
first represented, or such fact, circumstance or
condition being otherwise than as first
represented does not materially adversely
affect the non-defaulting Party;
11.1.11 The failure of Seller to provide the Company's
employees, agents, and other representatives
reasonable access to test, examine or repair
Seller's Interconnection Facilities or metering
devices after receiving notice to do so by the
Company as required under this Agreement unless,
within thirty (30) days after written notice
from the Company specifying the nature of such
failure, Seller cures such failure;
-151-
<PAGE>
Page 47 of 82
---- ----
11.1.12 The failure of Seller to comply with the
operating and maintenance requirements under
Section 3.2.5.2 hereof, and the Company's
election to exercise its rights under
Section 3.2.5.2(c), unless, within thirty (30)
days after written notice from the Company
specifying the nature of such failure, Seller
cures such failure or, if such cure cannot
reasonably be completed within thirty (30) days
and if Seller within such thirty (30) day period
commences, and thereafter proceeds with all due
diligence, to cure such failure, said period shall
be extended for such further period not to exceed
ninety (90) days as shall be necessary for Seller
to cure such failure with all due diligence;
11.1.13 A material default in performance or observance
of any agreement, undertaking, covenant or other
material obligation contained in this Agreement
unless, within thirty (30) days after written
notice from the non-defaulting Party specifying
the nature of such material default, the
defaulting Party cures such default or, if such
cure cannot reasonably be completed within thirty
(30) days and if the defaulting Party within such
thirty (30) day period commences, and thereafter
proceeds with all due diligence, to cure such
default, said period shall be extended for such
further period as shall be necessary for
defaulting Party to cure such default with all
due diligence, provided that the extended cure
period shall not exceed ninety (90) days unless
the defaulting Party's cure does not materially
increase the cost or the obligations of the
non-defaulting Party, or, if the cure causes such
an increase, the defaulting Party makes the
non-defaulting Party whole for any such increase;
11.1.14 Any governmental authority having jurisdiction
takes an administratively final action associated
with the Qualified Facility status of the
Facility or the Exempt Wholesale Generator status
of the Seller in a manner that affects any
material provision of this Agreement to the
material detriment of a Party, unless the terms
of the Agreement are modified by the Parties in
a manner that holds the Party suffering such
material detriment harmless from the detrimental
effects of such action; provided, however, that
the rights provided under Section 11.1 with
respect to this Section 11.1.14 may only be
exercised by the Party suffering such material
detriment;
11.1.15 A default by Seller under Section 4.4.1.3 or
Section 4.4.2.1; or
11.1.16 Notwithstanding the occurrence of any event of
default described in Section 11.1 or the
expiration or unavailability of any cure period
provided herein, the non-defaulting Party shall
not be entitled to terminate this Agreement if,
prior to the defaulting Party's receipt of a
notice of such termination, the defaulting
Party shall have cured the event of default.
-152-
<PAGE>
Page 48 of 82
---- ----
11.2 Company Right to Suspend Performance
At the Company's option, as an alternative to pursuing any
other remedies available to it under generally applicable
Laws or under this Agreement, including Section 3.2.5,
Corrective Action, and Section 11.4 hereof, Liquidated
Damages, the Company shall have the right to disconnect the
Facility and suspend the purchase of Capacity and Energy from
Seller (all payments during the period of such suspension
being forgiven) and discontinue the performance of any of its
duties and obligations hereunder upon the occurrence and
during the continuance of any of the following:
11.2.1 Seller fails to comply with any of the material
terms and conditions of this Agreement including
the installation, construction, maintenance or
operation of the Facility or adherence to any
Exhibit to this Agreement that has or can
reasonably be expected to have a material,
adverse effect on the Company or the Company
system, or fails to comply with any
representation or warranty made by Seller
hereunder in a manner that has or can reasonably
be expected to have a material, adverse effect on
the Company or the Company system and, in such
case, does not cure such failure within thirty
(30) days after written notice of such failure
from the Company or, if such cure cannot
reasonably be completed within thirty (30) days,
if Seller has not commenced efforts to cure such
failure and/or is not diligently pursuing such
cure, or if Seller has not cured such failure
within ninety (90) days; or
11.2.2 Seller fails to conduct regular and required
maintenance or testing of the Facility and
associated equipment pursuant to Section 3.2.2
and Section 7.2 hereof where such failure may
have a material adverse effect on the Company or
the Company system and, in such case, does not
cure such failure within thirty (30) days after
written notice of such failure from the Company
or, if such cure cannot reasonably be completed
within thirty (30) days, if Seller has not
commenced efforts to cure such failure and/or is
not diligently pursuing such cure, or if Seller
has not cured such failure within ninety (90)
days; or
11.2.3 Seller fails to allow the Company employees
reasonable access to test, examine or repair the
Company's Interconnection Facilities or metering
equipment after reasonable notice by the Company
of the need to do so and, in such case, does not
cure such failure within ten (10) days; or
11.2.4 Seller violates any code, regulation or statute
applicable to the construction, installation,
maintenance or operation of the Facility where
such violation may materially threaten the
continued operation of the Facility as required
under this Agreement or may have a material,
adverse effect on the Company or the Company
system and, in such case, Seller does not correct
such violation within thirty (30) days of notice
hereof; or if such violation cannot reasonably be
corrected in such period, if Seller has not
commenced efforts to correct and/or is not
diligently pursuing such correction, or if Seller
has not corrected such violation within ninety
(90) days.
11.3 Seller's Right to Suspend Performance
-153-
<PAGE>
Page 49 of 82
---- ----
At Seller's option, as an alternative to pursuing any other
remedies that may be available to it under generally
applicable Laws or under this Agreement, Seller shall have
the right to suspend deliveries of Energy from the Facility
to the Company and discontinue the performance of any of its
duties and obligations hereunder upon the occurrence but only
so long as the continuance of any of the following:
11.3.1 The Company fails to read the meters necessary
for determining the payments to Seller for two
(2) consecutive months and, in such case, does
not cure such failure within ten (10) days after
written notice of such failure from the Seller
or, if such cure cannot reasonably be completed
within ten (10) days, if the Company has not
commenced efforts to cure such failure and/or is
not diligently pursuing such cure, or if the
Company has not cured such failure within thirty
(30) days; or
11.3.2 The Company fails to make an undisputed payment
due hereunder and such failure continues for ten
(10) days after notice demanding such payment is
given; or
11.3.3 The Company fails to comply with any of the
material terms and conditions of this Agreement
in a manner that has a material, adverse effect
on Seller, or fails to comply with any
representation or warranty made by the Company
hereunder in a manner that has a material adverse
effect on Seller and, in either case, does not
cure such failure within thirty (30) days after
written notice from the Seller or, if such cure
cannot reasonably be completed within thirty (30)
days, if the Company has not commenced efforts to
cure such failure and/or is not diligently
pursuing such cure, or if the Company has not
cured such failure within ninety (90) days.
11.4 Liquidated Damages
If Seller fails to deliver Energy and Capacity as determined
in Article VII herein, or if Seller is in default of this
Agreement under Section 11.1, then the Company and Seller
agree that the Company may suffer actual damages which, as a
result of the dependence of the Company upon the delivery of
Energy and Capacity by Seller in the quantities originally
promised, the Company would be unable to mitigate fully. The
Company and Seller agree that the amount of the actual
damages suffered by the Company would be difficult or
impossible to measure under the circumstances. Therefore,
the Company and Seller agree that Seller shall pay the
Company Liquidated Damages calculated in accordance with the
following procedures, which Liquidated Damages, together with
the reduction of Capacity and Energy Payments, if provided
for under this Agreement, shall be the Company's sole and
exclusive monetary remedy for damages associated with
purchases by the Company of alternative Capacity and Energy:
-154-
<PAGE>
Page 50 of 82
---- ----
11.4.1 Capacity Shortfall
11.4.1.1 In the event that, at any time after the
Date of Commercial Operation and before
the Phase II Date of Commercial Operation,
the CNDC is reduced below 95% of the INDC
determined pursuant to Section 7.2.1,
then, as Liquidated Damages, Seller will
pay the Company $50 per kilowatt of the
difference between 95% of the original
INDC and the CNDC. This amount shall be
escalated monthly using the Gross Domestic
Product Implicit Price Deflator ("GDPIPD")
beginning with the Effective Date. In the
event that Seller pays Liquidated Damages
pursuant to this Section, the INDC
determined pursuant to Section 7.2.1 shall
be reduced to the level of 105.263% of the
CNDC upon which the Liquidated Damages
assessment has been based for purposes of
subsequent Liquidated Damages assessments
pursuant to this Section and Section
11.4.2. Additionally, the Design Rating
for Phase II, as set forth in Section
7.1 and Section 7.2.2 shall be reduced by
the percentage difference between the
Phase I INDC and the CNDC upon which
Liquidated Damages have been assessed
pursuant to this Section. Notwithstanding
anything herein to the contrary, Seller
may, upon twelve (12) month's prior
written notice to the Company, which
notice must be provided at any time up to
two (2) years after Seller becomes
obligated to pay Liquidated Damages
pursuant to this Section, reinstate the
CNDC of the Facility up to the INDC, and
such reinstated CNDC shall be the CNDC for
the purposes of calculating Capacity
Payments and subsequent Liquidated Damages
assessments pursuant to this Section.
11.4.1.2 In the event that, on or after the
Phase II Date of Commercial Operation, the
CNDC is reduced below 95% of the Phase II
INDC determined pursuant to Section 7.2.2,
then, as Liquidated Damages, Seller will
pay the Company $65 per kilowatt of the
difference between 95% of the original
Phase II INDC and the CNDC. This amount
shall be escalated monthly using the
GDPIPD beginning with the Effective Date.
(a) In the event that Seller pays Liquidated
Damages pursuant to this Section, the
Phase II INDC determined pursuant to
Section 7.2.2 shall be reduced to the
level of 105.263% of the CNDC upon which
the Liquidated Damages assessment has been
based for purposes of subsequent
Liquidated Damages assessments pursuant to
this Section.
(b) Notwithstanding anything herein to the
contrary, Seller may, upon twelve (12)
month's prior written notice to the
Company, which notice must be provided at
any time up to two (2) years after Seller
becomes obligated to pay Liquidated
Damages pursuant to this Section,
reinstate the CNDC of the Facility up to
the Phase II INDC, and such reinstated
CNDC shall be the CNDC for the purposes of
calculating Capacity Payments and
subsequent Liquidated Damages assessments
pursuant to this Section.
-155-
<PAGE>
Page 51 of 82
---- ----
11.4.1.3 Option to Purchase
(a) In the event that Phase II is canceled or
permanently abandoned prior to the
Phase II Scheduled Date of Commercial
Operation or the Phase II Date of
Commercial Operation does not occur by the
Phase II Commercial Operation Deadline, or
in the event that the Company is entitled
to purchase the Facility pursuant to
Section 2.7.1.4, then the Company shall
have the option to purchase the Facility.
(b) The purchase price shall be the greater of
(i) the Outstanding Debt at the time of
the closing of the purchase of the
Facility, or (ii) the present value of the
remaining Capacity Payments for Phase I
(including one half of the remaining Fixed
Operation and Maintenance Payments for
Phase I) at the time of the closing of the
purchase of the Facility, determined using
the Discount Rate.
(c) The Company may exercise the option by
providing written notice to Seller within
six (6) months following the occurrence of
an event described in Paragraph (a). In
the event that notice has not been
provided within the time allowed, the
option shall terminate.
(d) In the event that the Company exercises
its option to purchase the Facility, it
shall close the acquisition of the
Facility within three (3) months after the
delivery of the notice pursuant to
Paragraph (c). During the period between
the receipt of the Company's notice
pursuant to Paragraph (c) and the closing,
Seller shall not increase the principal
amount of any Outstanding Debt without the
consent of the Company, which consent
shall not be unreasonably withheld.
(e) The option granted pursuant to this
Section shall be subject to any purchase
option held by International Paper
Company.
(f) The option granted pursuant to this
Section shall be the Company's sole and
exclusive remedy for the events described
in Paragraph (a).
11.4.1.4 In the event that Seller makes the
payments required under this Section,
Seller shall not be in default under
Section 11.1 for any reduction in the CNDC
for Phase I or Phase II of the Facility,
or for the cancellation or permanent
abandonment of Phase II of the Facility.
11.4.2 Termination of Agreement
If (a) Seller terminates this Agreement other than
because of default of the Company or (b) the Company
terminates this Agreement as permitted by its terms
(other than pursuant to Section 12.1.5 or
Section 16.4, or pursuant to Section 11.1 following
the expiration of a period of Force Majeure as
provided in Section 10.2.2), then Seller shall pay the
Company Liquidated Damages as set forth below
-156-
<PAGE>
Page 52 of 82
---- ----
in addition to any extension payments, penalties, or
other Liquidated Damages required by other provisions
of this Agreement.
11.4.2.1 If this Agreement is terminated prior to
the Scheduled Date of Commercial
Operation, Seller shall pay Liquidated
Damages of:
(a) $10 per KW, plus $1 per KW per month from
the Effective Date to the date of
termination or event of default up to a
maximum of $35 per KW, based on the Design
Rating of Phase I, plus
(b) An additional $2 per KW per month from
15 months prior to the Scheduled Date of
Commercial Operation through the Date of
Commercial Operation, up to a maximum of
$30 per KW (maximum total $65 per KW
including $35 per KW above), based on the
Design Rating of Phase I.
11.4.2.2 If this Agreement is terminated after the
Scheduled Date of Commercial Operation,
Seller shall pay Liquidated Damages of
$50 per KW, based on the most recent CNDC,
escalated using the GDPIPD from the
Effective Date, but not in any event to
exceed the present value of the Capacity
Payments for the remainder of the Term,
determined using the Discount Rate.
11.4.3 Security
11.4.3.1 Seller shall provide security for
compliance with Section 11.4 which shall
consist of an unconditional and
irrevocable direct pay letter of credit
issued by a bank acceptable to the Company
in a form substantially similar to
Exhibit 11.4.
11.4.3.2 Security shall be made available by Seller
in the form of an irrevocable letter of
credit in accordance with the following
events and in the following amounts:
(a) $10/KW, based on the Design Rating of
Phase I, which shall be submitted as the
CPCN Development Deposit within thirty
(30) days after the Effective Date and
shall remain in effect until thirty (30)
days after the issuance of the CPCN, at
which time it shall, at Seller's option,
either be refunded to Seller or credited
against the security required under
subparagraph (b) below.
(b) $65/KW as a Contract Development Deposit,
based on the Design Rating of Phase I.
The Contract Development Deposit shall be
due on the later of the thirtieth (30th)
day after the issuance of the CPCN or the
date on which the CPCN Development Deposit
is refunded or credited pursuant to
subparagraph (a), provided, however, that
the Contract Development Deposit shall not
be required to be in effect until the CPCN
Development Deposit has been released.
The
-157-
<PAGE>
Page 53 of 82
---- ----
Contract Development Deposit shall
remain in effect until the Date of
Commercial Operation, at which time it
shall, at Seller's option, either be
refunded to Seller or credited against the
security required under subparagraph (c)
below.
(c) $50/KW as a Contract Performance Deposit,
based on the Initial Net Demonstrated
Capability of the Facility but not in any
event to exceed the present value of the
Capacity payments for the remainder of the
Term, determined using the Discount Rate.
The Contract Performance Deposit shall be
due on the later of the thirtieth (30th)
day after the Date of Commercial Operation
or the date on which the Contract
Development Deposit is refunded or
credited pursuant to subparagraph (b),
provided, however, that the Contract
Performance Deposit shall not be required
to be in effect until the Contract
Development Deposit has been released, and
shall remain in effect until the Phase II
Date of Commercial Operation, at which
time it shall, at Seller's option, either
be refunded to Seller or credited against
the security required under subparagraph
(d) below. In the event that the level of
the security previously provided by Seller
is not equal to the amount required under
this paragraph, the level of the Letter of
Credit shall be adjusted within thirty
(30) days to reflect the revised level of
security. In the event that this Agreement
is terminated for any reason, the security
shall be returned following payment in
full of any amounts due from Seller to the
Company.
(d) $65/KW as a Phase II Contract Performance
Deposit, based on the Phase II Initial Net
Demonstrated Capability of the Facility
but not in any event to exceed the present
value of the Capacity payments for the
remainder of the Term, determined using
the Discount Rate. The Phase II Contract
Performance Deposit shall be due on the
later of the thirtieth (30th) day after
the Phase II Date of Commercial Operation
or the date on which the Contract
Performance Deposit is refunded or
credited pursuant to subparagraph (c),
provided, however, that the Phase II
Contract Performance Deposit shall not be
required to be in effect until the
Contract Performance Deposit has been
released. In the event that the level of
the security previously provided by Seller
is not equal to the amount required under
this paragraph, the level of the Letter of
Credit shall be adjusted within thirty
(30) days to reflect the revised level of
security. In the event that this Agreement
is terminated for any reason, the security
shall be returned following payment in
full of any amounts due from Seller to the
Company.
11.5 Limit on Remedy
Notwithstanding anything in this Agreement to the contrary,
the Company's sole remedy for a default as described in
Section 11.1.5 and 11.1.8 shall be (a) to terminate the
Agreement with respect to the Incremental Capacity of the
Facility; provided, however, that
-158-
<PAGE>
Page 54 of 82
---- ----
the rights and obligations of the Parties with respect to
Phase I of the Facility shall be unaffected by such
termination, or (b) to purchase the Facility as provided
in Section 11.4.1.3.
11.6 No Consequential Damages
In actions arising under Section 11.1 of this Agreement, and
in all other claims arising under this Agreement by either
Party against the other Party, neither Seller nor the Company
shall be liable to the other for indirect, special or
consequential damages.
ARTICLE XII: CONDITIONS, REPRESENTATIONS AND WARRANTIES
--------------------------------------------------------
12.1 Conditions
12.1.1 Commission Approval. If the Commission issues a
-------------------
negative determination in stage two of the CPCN
process for the Facility, and if the Commission
directs that the Parties renegotiate the Agreement,
the Company agrees to use good faith efforts for a
period up to that period required by the Commission,
but not to exceed six (6) months, to renegotiate the
Agreement with Seller to alleviate the concerns
raised by the Commission in stage two of the CPCN
process. Such a renegotiated Agreement shall not,
in any case, exceed in its costs to the ratepayers
of the Company the effective costs of this Agreement
or the bid provided by Seller to the Company in
stage one of the CPCN process. If the Parties are
successful in their efforts to renegotiate the
Agreement, the new agreement shall be submitted to
the Commission for its approval.
12.1.2 Company's Right to Delay Phase I.
--------------------------------
12.1.2.1 Before the Commencement of Construction
after granting of the CPCN by the
Commission, the Company shall have the
right to delay the Scheduled Date of
Commercial Operation by the lesser of
(i) twenty-four (24) months, or
(ii) such period as shall not cause Seller
to lose its air permit or any other permit
required for the Facility. The Company
may request delays in excess of the period
allowed pursuant to the preceding
sentence, provided, however, that Seller
may grant or deny such additional delays
in its sole and exclusive discretion.
12.1.2.2 In exchange for obtaining delays pursuant
to this Section, the Company shall be
required to pay Seller an amount
equivalent to the present value of the
escalation of Capacity Payments,
escalated by the change in the specific
index entitled Other Production Plant -
Gas Turbogenerators as published in the
Handy Whitman Bulletin No. 138 under Cost
Trends of Electric Utility Construction
North Central Region for the period of
delay, levelized over the Term of this
Agreement, and for its reasonable
additional non-inflation related
costs associated with such delays,
determined using the Discount Rate (see
Exhibit 12.1.2 for a sample calculation).
In addition, if, on the date that would be
the Scheduled Date of Commercial Operation
but for the exercise of the Company's
rights
-159-
<PAGE>
Page 55 of 82
---- ----
under this Section, Seller has entered
into a thermal energy purchase
agreement with International Paper
Company or the then current owner or
operator of the Nicolet Paper Mill, the
Company shall pay International Paper
Company or such then current owner or
operator five hundred thousand dollars
($500,000) for each year of delay pursuant
to this Section, prorated on a daily basis
for partial years, and escalated using the
GDPIPD for the period of such delay.
12.1.2.3 The Company shall exercise its option to
delay by providing written notice to
Seller, provided, however, that the
Company's notice must be provided no later
than six months prior to the financial
closing for the construction financing for
the Facility. Seller shall provide the
Company with its schedule for financial
closing at least seven months prior to the
projected date for financial closing, and
shall revise the schedule from time to
time to reflect any delays in the
projected date for financial closing.
12.1.2.4 Any delays pursuant to this Section shall
result in a corresponding extension of the
dates in the portion of the Construction
Milestone Schedule pertaining to Phase I
and a corresponding adjustment in the
Commercial Operation Deadline. In
addition, if the delay results in the need
for additional extensions due to
circumstances such as seasonal
constraints on construction, an additional
adjustment shall be made to the dates in
the portion of the Construction Milestone
Schedule pertaining to Phase I and the
Commercial Operation Deadline.
12.1.3 Company's Right to Delay Phase II.
---------------------------------
12.1.3.1 Before the Phase II Commencement of
Construction, the Company shall have the
right to delay the Phase II Scheduled Date
of Commercial Operation by the lesser of
(a) twenty-four (24) months, or (b) such
period as shall not cause Seller to lose
its air permit or any other permit
required for the Facility, by giving
Seller written notice of the required
delay. The Company may request delays in
excess of the period allowed pursuant to
the preceding sentence, provided,
however, that Seller may grant or deny
such additional delays in its sole and
exclusive discretion.
12.1.3.2 In exchange for obtaining delays pursuant
to this Section, the Company shall be
required to pay Seller an amount
equivalent to the present value of the
escalation of Capacity Payments,
escalated by the change in the specific
index entitled Steam Production Plant -
Total Steam Production Plant, as published
in the Handy Whitman Bulletin No. 138
under Cost Trends of Electric Utility
Construction North Central Region, for the
period of the delay, levelized over the
Term of this Agreement, and for its
reasonable additional non-inflation
related costs associated with such delays,
determined using the Discount Rate (see
Exhibit 12.1.3 for a sample calculation).
In addition, if, on the date that would be
the Phase II Scheduled Date of Commercial
Operation but for the exercise of the
-160-
<PAGE>
Page 56 of 82
---- ----
Company's rights under this Section,
Seller has entered into a thermal energy
purchase agreement with International
Paper Company or the then current owner or
operator of the Nicolet Paper Mill, the
Company shall pay International Paper
Company or such then current owner or
operator one million dollars ($1,000,000)
for each year of delay pursuant to this
Section, prorated on a daily basis for
partial years, and escalated using the
GDPIPD for the period of such delay.
12.1.3.3 The Company shall exercise its option to
delay by providing written notice to
Seller, provided, however, that the
Company's notice must be provided no later
than six months prior to the financial
closing for the construction financing for
Phase II of the Facility. Seller shall
provide the Company with its schedule for
financial closing at least seven months
prior to the projected date for financial
closing, and shall revise the schedule
from time to time to reflect any delays in
the projected date for financial closing.
12.1.3.4 Any delays pursuant to this Section shall
result in a corresponding extension of the
dates in the portion of the Construction
Milestone Schedule pertaining to Phase II
and a corresponding adjustment in the
Phase II Commercial Operation Deadline.
In addition, if the delay results in the
need for additional extensions due to
circumstances such as seasonal constraints
on construction, an additional adjustment
shall be made to the dates in the portion
of the Construction Milestone Schedule
pertaining to Phase II and the Phase II
Commercial Operation Deadline.
12.1.4 Limit on Right to Delay.
-----------------------
The Company's right to delay Phase I or Phase II of
the Facility shall be limited to the extent that such
delay could result in material additional delays,
unreimbursed costs, or a risk of cancellation of
Phase I or Phase II of the Facility. Within thirty
(30) days after Seller's receipt of the Company's
notice pursuant to Section 12.1.2.2 or Section
12.1.3.2, Seller shall provide the Company with a
statement indicating whether it believes that the
exercise of the right to delay will cause material
additional delays, unreimbursed costs, or a risk of
cancellation. If the Company does not agree with
Seller's statement, it may exercise its right to
delay, provided, however, that the Company shall
reimburse Seller for any such material unreimbursed
costs, or for the consequences of any such
cancellation or additional delay. If the Parties are
unable to agree upon the effect on Seller of any such
delay, the dispute shall be submitted to Dispute
Resolution.
12.1.5 Receipt of CPCN.
---------------
12.1.5.1 Either Party may terminate the Agreement
without any liability whatever to the
other Party if a CPCN for Phase I of the
Facility has been denied
-161-
<PAGE>
Page 57 of 82
---- ----
or has not been received within thirty-six
(36) months of the Effective Date and any
deposits made by Seller under Section
11.4.3(a) shall be refunded.
12.1.5.2 Either Party may terminate the Agreement
with respect to the Incremental Capacity
of the Facility without any liability
whatever to the other Party if a CPCN for
Phase II of the Facility has been denied
or has not been received within
twenty-four (24) months prior to the
Phase II Scheduled Date of Commercial
Operation; provided, however, that the
rights and obligations of the Parties with
respect to Phase I of the Facility shall
be unaffected by such termination.
12.2 Seller's Warranties and Representations
Seller hereby warrants and represents that:
12.2.1 Organization of Seller
Seller is a limited liability company, duly organized,
validly existing and in good standing under the Laws
of the State of Wisconsin and is duly qualified to do
business in such state. Seller has full power and, to
the knowledge of the Seller, all necessary permits,
licenses, approvals, authorizations, franchises and
registrations to carry on its business as it is now
being conducted.
12.2.2 Authorization; Enforceability
The execution, delivery and performance of this
Agreement by Seller and all of the documents and
instruments required by this Agreement to be executed
by Seller are within the power of Seller and have been
duly authorized by all necessary action by Seller.
This Agreement is, and the other documents and
instruments required by this Agreement to be executed
and delivered by Seller will be, when executed and
delivered by Seller, the legal, valid and binding
obligations of Seller enforceable against Seller in
accordance with their respective terms.
12.2.3 No Violation or Conflict
The execution, delivery and performance of this
Agreement by Seller do not conflict with or violate
any Law applicable to Seller, the Articles of
Organization or Bylaws of Seller or any contract or
agreement to which Seller is a Party or by which it is
bound, including any agreement relating to Seller's
financing of the Facility.
12.2.4 Disclosure
There are no material untrue statements of fact by
Seller contained in this Agreement, nor has Seller
failed to state a material fact in this Agreement
necessary in order to make any other material
statement of fact by Seller in this Agreement not
misleading.
-162-
<PAGE>
Page 58 of 82
---- ----
12.2.5 Litigation
To the knowledge of Seller, there are no actions,
suits or proceedings against Seller by any person
which question the legality, validity or propriety of
the transaction contemplated by this Agreement.
12.2.6 Data and Projections
To the knowledge of Seller, all data and factual
material provided in writing by Seller to the Company
pursuant to this Agreement and relating to the
Facility are correct in material respects. All
estimates or projections so provided were consistent
with estimates or projections contemporaneously used
by Seller at the time the projection or estimate was
delivered to the Company. The Company acknowledges
that such estimates or projections are inherently
difficult to quantify and are subject to change under
a variety of circumstances, many of which are not in
the control of the Seller.
12.2.7 Title to Property
At the time of the execution of this Agreement, to the
best of Seller's knowledge and information, Seller
has, or will be able to obtain for all property
acquired after the Effective Date, good and marketable
title to, or the right to lease or occupy: (a) all
property, real and personal, comprising the Facility,
the Site and the Seller's Interconnection Facilities,
free and clear of all mortgages and of any other liens
and encumbrances except for liens for taxes and
charges incident to construction not yet due and
payable and the easements, conditions and restrictions
and (b) all easements, rights-of-way and other
interests related to that property, which materially
affect Seller's performance under this Agreement.
12.2.8 Representations Regarding the Site and Facility
Seller has received no written notice of any building
code violation or violation of any other Law affecting
the Site or the Facility or of any claim, action, suit
or other proceeding relating to the Site or Facility.
12.2.9 Environmental Matters
As of the Effective Date, Seller has no knowledge,
after due inquiry, that: (a) any hazardous or toxic
substance or hazardous or toxic waste as defined in
any applicable Law has been placed, used, stored,
deposited, treated, recycled or disposed of on, under,
or in the Site which if known to be present would
require cleanup, removal or some other remedial action
under any applicable Environmental Laws; (b) there has
been any prior disposal or deposition in any fashion
on the Site by any prior owner or person using the
Site, whether with or without authorization, of any
hazardous or toxic substances or hazardous or toxic
waste as defined in any applicable Law; (c) the Site
contains asbestos, polychlorinated biphenyl compounds
(PCBs) or underground storage tanks; and (d) there are
any conditions currently existing at the Site which
would subject its owner
-163-
<PAGE>
Page 59 of 82
---- ----
to any damages, penalties, injunctive relief or
cleanup costs in any governmental or regulatory action
or third party claim relating to any hazardous or
toxic substance or hazardous or toxic waste. Seller
further warrants and represents that it is not subject
to any court or administrative proceeding, judgment,
decree, order or citation relating to any hazardous or
toxic substance or hazardous or toxic waste at the
Site. Seller further warrants and represents that in
all material respects as of the Effective Date and
during the Term of this Agreement, it is employing,
and will employ, its reasonable best efforts in
accordance with Prudent Electrical Practices to remain
in material compliance with all applicable
Environmental Laws both as to on-site activities and
as to any substances generated or discharged at the
Facility or on the Facility Site and transported
elsewhere. For purposes of this paragraph, the Site
includes the ground water, surface water, air and any
improvements on, under or above the Site. Seller
further warrants and represents that any permits or
licenses necessary or required to generate, store or
use any hazardous or toxic substance or hazardous or
toxic waste at, in, under, about or in connection with
the Facility will be obtained and be in full force and
effect throughout the Term of this Agreement, and will
be complied with.
12.3 The Company Warranties and Representations
The Company hereby warrants and hereby represents that:
12.3.1 Organization of the Company
The Company is a corporation duly organized, validly
existing and in good standing under the Laws of the
State of Wisconsin and is duly qualified to do
business in such state. The Company has full
corporate power and, to the knowledge of the Company,
all necessary permits, licenses, approvals,
authorizations, franchises and registrations to carry
on its business as it is now being conducted.
12.3.2 Authorization; Enforceability
The execution, delivery and performance of this
Agreement by the Company and all of the documents and
instruments required by this Agreement to be executed
by the Company are within the corporate power of the
Company and have been duly authorized by all necessary
corporate action by the Company. This Agreement is,
and the other documents and instruments required by
this Agreement to be executed and delivered by the
Company will be, when executed and delivered by the
Company, the legal, valid and binding obligations
of the Company enforceable against the Company in
accordance with their respective terms.
-164-
<PAGE>
Page 60 of 82
---- ----
12.3.3 No Violation or Conflict
The execution, delivery and performance of this
Agreement by the Company do not conflict with or
violate any Law applicable to the Company, the
Articles of Incorporation or Bylaws of the Company or
any contract or agreement to which the Company is a
party or by which it is bound.
12.3.4 Disclosure
There are no material untrue statements of fact by the
Company contained in this Agreement, nor has the
Company failed to state a material fact necessary in
order to make other statements by the Company not
misleading.
12.3.5 Litigation
To the knowledge of the Company, there are no actions,
suits or proceedings against the Company by any person
which question the legality, validity or propriety of
the transaction contemplated by this Agreement.
12.3.6 Data and Projections
To the knowledge of the Company, all data and factual
material provided by the Company to Seller, including
that with respect to the Company's avoided costs, were
correct in material respects at the time so submitted.
All estimates or projections so provided to Seller
were consistent with estimates or projections
contemporaneously used by the Company at the time the
projection or estimate was delivered to Seller except
with respect to assumptions utilized which were
requested by Seller or, in certain cases, which
reflect sensitivity analyses using a range of stated
assumptions. Seller acknowledges that such estimates
or projections are inherently difficult to quantify
and are subject to change under a variety of
circumstances, many of which are not in the control of
the Company.
12.4 Opinions of Counsel
The Parties hereto warrant and represent that each of them
shall provide to the other, upon reasonable request, an
opinion of independent legal counsel, in form and substance
reasonably satisfactory to the other Party and its legal
counsel, confirming, to the extent known, the accuracy of any
legal matter addressed in any warranty and representation
made in this Agreement.
ARTICLE XIII: INDEMNITY AND LIMITATION OF LIABILITY
----------------------------------------------------
13.1 Indemnification by Seller
13.1.1 Seller hereby agrees to defend, indemnify and hold
harmless the Company and its officers, directors,
employees and agents from and against any liability,
claim, injury (including death resulting therefrom),
property damage, cost or expense, fine, penalty or
assessment by any public agency, including
reasonable attorneys'
-165-
<PAGE>
Page 61 of 82
---- ----
fees and defense fees, but not including consequential
damages, directly or indirectly related to, associated
with, or arising from any claims against the Company
arising from the failure of Seller to fulfill its
obligations under this Agreement.
13.1.2 Seller hereby agrees to defend, indemnify and hold
the Company harmless for, and assumes all risk of,
damage to the Facility and Seller's Interconnection
Facilities caused by Seller's operation of said
Facility and Seller's Interconnection Facilities.
13.1.3 Seller agrees to indemnify and hold harmless the
Company, its officers, directors, agents, and
employees against all loss, damage, expense, costs
and liability, including reasonable attorneys' fees,
for injury to or death of persons or injury to
property, occurring on Seller's side of the
Interconnection Point proximately caused by Seller's
negligence or willful misconduct in the
construction, ownership, operation, or maintenance
of the Facility and Seller's Interconnection
Facilities.
13.1.4 Seller agrees to indemnify and hold harmless the
Company from and against all losses, liabilities,
claims, injuries (including death resulting
therefrom), property damage, cost, expense, or
obligation arising out of any violation or claimed
violation of any provision of Environmental Law, on
the part of Seller and its employees. This
indemnity shall include but not be limited to any
and all claims, fines, penalties, or assessments by
any public agency or by third parties arising under
any Environmental Law.
13.1.5 Notwithstanding any language to the contrary in this
Agreement, the Company shall have no liability to
Seller with respect to provision of advice,
consultation, proposals or recommendations of the
Company personnel or representatives to Seller
whether occasioned by comments or requests or by the
negligent acts or omissions of employees or
representatives of the Company or otherwise, and
Seller shall indemnify the Company and hold harmless
the Company from and against all such losses,
damages, costs or liabilities.
13.2 Indemnification by the Company
13.2.1 The Company hereby agrees to defend, indemnify and
hold harmless Seller and its officers, directors,
employees and agents from and against any liability,
claim, injury (including death resulting therefrom),
property damage, cost or expense, fine, penalty or
assessment by any public agency, including
reasonable attorneys' fees and defense fees, but not
including consequential damages, directly or
indirectly related to, associated with, or arising
from any claims against Seller arising from the
failure of the Company to fulfill its obligations
under this Agreement.
13.2.2 The Company agrees to indemnify and hold harmless
Seller, its officers, directors, agents, and
employees against all loss, damage, expense, costs
and liability, including reasonable attorneys' fees,
for injury to or death of persons or injury to
property, occurring at the Facility proximately
caused by a negligent act or
-166-
<PAGE>
Page 62 of 82
---- ----
omission or willful misconduct of the Company or its
agents while on the Seller's premises at the Facility.
13.2.3 The Company agrees to indemnify and hold harmless
Seller from and against all losses, liabilities,
claims, injuries (including death resulting
therefrom), property damage, cost, expense, or
obligation arising out of any violation or claimed
violation of any provision of Environmental Law, on
the part of the Company and its employees. This
indemnity shall include but not be limited to any
and all claims, fines, penalties, or assessments by
any public agency or by third parties arising under
any Environmental Law.
13.3 Worker's Compensation
Nothing contained in this Agreement is intended or shall be
construed as a waiver, either expressed or implied, of any
provision of the Worker's Compensation Laws of the State of
Wisconsin (Chapter 102, Wis. Stats.) and any successor
statutes or as an assumption by contract, expressed or
implied, of any responsibility or liability greater than that
imposed by said Laws or, in particular, inconsistent with the
exclusive remedy provisions of said Law.
13.4 Joint Negligence
In the case of joint or concurring negligence of the Parties
giving rise to a loss or claim against either one or both,
each shall have rights or contribution against the other
Party in proportion to their comparative negligence as
determined by the court or arbitrators trying or arbitrating,
as the case may be, the matter in dispute. Each Party shall
promptly notify the other Party of the assertion of any claim
against which such other Party may be required to provide
indemnity hereunder and shall give the other Party an
opportunity to defend such claim. These indemnification
provisions are for the protection of the Parties hereto only
and shall not establish, of themselves, any liability to
third parties.
13.5 No Partnership
The Parties do not by this Agreement effect a joint
undertaking and do not intend to create any joint or several
obligations to third parties. Neither this Agreement nor any
grant or license related thereto, shall be construed to
create a new entity, such as a partnership or a joint
venture, or constitute an agency relationship. Neither Party
shall be under control of or be deemed to control the other
Party and no Party shall have the right or power to bind any
other Party.
13.6 Responsibility for Employees
The Parties agree that, as between themselves, each Party
shall be responsible for the acts and omissions of, and any
claims by, its employees and agents, irrespective of any
limitation on the amount or type of damages, compensation or
benefits payable by or for such Party under workers' or
workmen's compensation acts, disability benefit acts or other
employee benefit acts; provided, however, that the foregoing
is not intended to create third party beneficiary rights in
any party not a Party to this Agreement. Each Party shall
indemnify
-167-
<PAGE>
Page 63 of 82
---- ----
the other Party from and against all liabilities, claims,
damages, suits, fines or judgments for injury or death to
third persons and damage to or destruction of property of
third persons, to the extent caused by such Party's employees
or agents.
ARTICLE XIV: INSURANCE
-----------------------
14.1 Specified Coverages
During the Term of this Agreement, Seller or its contractors
and subcontractors, as applicable, shall procure, pay
premiums for and maintain in full force and effect the
insurance coverages described below. With the exception of
the coverages required by Section 14.1.1 and Section 14.1.6,
all such insurance coverages shall include the Company as an
additional insured and shall be primary in all instances
without regard to like coverage, if any, maintained by the
Company. For all types of coverages set forth below, any
exclusions which are not standard for such coverages, or
which are added by manual endorsements and restrict coverage,
must be approved by the Company, which approval shall not be
unreasonably withheld. In the event that Seller reasonably
determines that any such policy of insurance is no longer
available at commercially reasonable rates, Seller shall not
be obligated to continue to carry such insurance, and shall
use its reasonable best efforts to obtain substitute
insurance which is as nearly identical as possible to the
policy of insurance which it is intended to replace.
Disagreements over the availability of any such policy of
insurance at commercial rates, the extent of Seller's efforts
to obtain substitute insurance and the adequacy of such
substitute insurance shall be subject to Dispute Resolution.
14.1.1 Worker's Compensation Insurance as required by the
Laws of the State of Wisconsin, and Employer's
Liability with limits established by state or
federal Law if applicable.
14.1.2 Occurrence Form Comprehensive General Liability
insurance, including coverage for
(a) premises/operations, (b) independent contractor,
(c) products and completed operation, (d) broad form
contractual liability, (e) broad form property
damage, (f) explosion, collapse and underground
damage exclusion deletion, and (g) personal injury,
all with limits of not less than $25,000,000 each
occurrence and in the aggregate.
14.1.3 Comprehensive Vehicle Liability Insurance, covering
all licensed or unlicensed vehicles and automobiles
whether owned, leased, or rented when used in
connection with performance of the Agreement and
including coverage for Bodily Injury and Property
Damage in an amount not less than $1,000,000 per
person, $2,000,000 per accident.
14.1.4 All Risk Property Coverage and Boiler and Machinery
Coverage against damage to the Facility during the
Term of this Agreement, including without
limitation, damage during the construction or
operation of the Facility, in an amount not less
than the full replacement cost of the Facility and
subject to a deductible not to exceed $500,000.00.
Expediting coverage in an amount of not less than 10
percent (%) of the full replacement cost of the
Facility must also be provided.
-168-
<PAGE>
Page 64 of 82
---- ----
14.1.5 All Risk Builder's Risk Insurance upon the entire
work at the Site to the full insurable value
thereof, insuring against, but not limited to, the
perils of fire, extended coverage, vandalism and
malicious mischief.
14.1.6 Professional Liability/Errors and Omissions
Insurance in the amount of $10,000,000 for the
period from the Commencement of Construction through
the Date of Commercial Operation and for the period
from the Phase II Commencement of Construction
through the Phase II Date of Commercial Operation.
14.2 Insurance Certificates
Seller shall provide certificates of insurance from insurance
companies having a Best rating of A or better that the
insurance coverages required herein are maintained. Such
certificates shall provide, inter alia, that the Company be
listed as an additional insured and be given 30 days written
notice by the insurer of any cancellation or significant
change in any required coverage provided by such insurer as
evidenced by the certificates. If requested by the Company,
Seller will provide the Company with copies of its policies.
14.3 Coverage For Full Term
All required coverages shall remain in full force and effect
during the Term of this Agreement. Seller's liability under
the Agreement shall not be limited to the insurance coverages
contained in this Article XIV.
14.4 Insurance Proceeds
In the event of loss occurring after the termination of the
construction and permanent financing of the Facility, all
insurance proceeds realized as a result therefrom shall be
applied to repair of the Facility unless the Parties agree
otherwise.
ARTICLE XV: TERM
-----------------
15.1 Term
15.1.1 Subject to the terms and conditions of this
Agreement, this Agreement shall commence on the
Effective Date and shall continue in effect through
the 25th anniversary ("Termination Date") of the
Date of Commercial Operation; provided, however, that
the Termination Date shall be extended beyond the 25th
anniversary of the Date of Commercial Operation by an
amount of time equal to the amount of any delay in the
Phase II Date of Commercial Operation requested by the
Company pursuant to Section 12.1.3 or any delay in the
Phase II Date of Commercial Operation purchased by
Seller in accordance with Section 15.1.1.5:
15.1.1.1 If, for any reason, the Date of Commercial
Operation has not occurred by the
Scheduled Date of Commercial Operation,
and the Scheduled Date of Commercial
Operation has not been revised in
accordance with the terms
-169-
<PAGE>
Page 65 of 82
---- ----
of this Agreement, the Company may
terminate the Agreement under the terms
and provisions of Section 11.1.
15.1.1.2 Seller shall be entitled to extend the
Scheduled Date of Commercial Operation by
specifying a revised Scheduled Date of
Commercial Operation and by complying with
the conditions specified below:
(a) By no later than thirty (30) days prior to
the Scheduled Date of Commercial
Operation, Seller shall certify to the
Company its revised Scheduled Date of
Commercial Operation.
(b) With such certification, Seller shall pay
the Company an extension fee. The
extension fee shall equal $30 per kilowatt
divided by 12 multiplied by the number of
months or partial months extended,
multiplied by the Design Rating of
Phase I.
(c) No more than 3 extensions will be allowed
and the final revised Scheduled Date of
Commercial Operation shall be no later
than eighteen (18) months after the
original Scheduled Date of Commercial
Operation.
15.1.1.3 In the event that a revised Scheduled Date
of Commercial Operation is established in
accordance with the terms of this
Agreement, all other dates in the
Construction Milestone Schedule for
Phase I and the Commercial Operation
Deadline shall be adjusted accordingly.
15.1.1.4 If, for any reason, the Phase II Date of
Commercial Operation has not occurred by
the Phase II Scheduled Date of Commercial
Operation, and the Phase II Scheduled Date
of Commercial Operation has not been
revised in accordance with the terms of
this Agreement, then, pursuant to
Section 11.1, the Company may terminate
this Agreement with respect to its
obligation to purchase the Incremental
Capacity of the Facility; provided,
however, that the rights and obligations
of the Parties with respect to Phase I of
the Facility shall be unaffected by such
termination.
15.1.1.5 Seller shall be entitled to extend the
Phase II Scheduled Date of Commercial
Operation by specifying a revised Phase II
Scheduled Date of Commercial Operation and
by complying with the conditions specified
below:
(a) By no later than thirty (30) days prior to
the Phase II Scheduled Date of Commercial
Operation, Seller shall certify to the
Company its revised Phase II Scheduled
Date of Commercial Operation.
(b) With such certification, Seller shall pay
the Company an extension fee. The
extension fee shall equal $30 per kilowatt
divided by 12 multiplied by the number of
months or partial months extended,
multiplied by the Design Rating of
Phase II. The thirty dollar ($30)
-170-
<PAGE>
Page 66 of 82
---- ----
per kilowatt fee shall be escalated
monthly using the GDPIPD from the original
Phase II Scheduled Date of Commercial
Operation to the revised Phase II
Scheduled Date of Commercial Operation.
(c) No more than 3 extensions will be allowed
and the final revised Phase II Scheduled
Date of Commercial Operation shall be no
later than eighteen (18) months after the
original Phase II Scheduled Date of
Commercial Operation.
15.1.1.6 In the event that a revised Phase II
Scheduled Date of Commercial Operation is
established in accordance with the terms
of this Agreement, all other dates in the
Construction Milestone Schedule for
Phase II and the Phase II Commercial
Operation Deadline shall be adjusted
accordingly.
15.1.2 Extensions.
15.1.2.1 The Company shall have the option, upon at
least twelve (12) months written notice
prior to the Termination Date, to extend
this Agreement for one (1) five-year
renewal term. During such renewal term,
the Company shall make Energy Payments and
Capacity Payments in accordance with the
terms and conditions of this Agreement.
15.1.2.2 The Company shall have the option, upon at
least twelve (12) months written notice
prior to the expiration of the renewal
term pursuant to Section 15.1.2.1, to
extend this Agreement for one (1)
additional five-year renewal term.
During such renewal term, the Company
shall make Energy Payments and Capacity
Payments in accordance with the terms and
conditions of this Agreement.
15.1.2.3 During any renewal term pursuant to this
Section, Sections 3.2.8.2 and 3.2.8.3
shall not apply.
ARTICLE XVI: COMPANY'S OPTION TO PURCHASE
------------------------------------------
16.1 Option to Purchase Upon Seller Default
The Company shall have the option, but not the obligation, to
purchase the Facility upon the termination of this Agreement
following the occurrence of a default by Seller under Section
11.1 of this Agreement (other than a default under Section
11.1.5 or Section 11.1.8) which is not cured in accordance
with the provisions of this Agreement. Such option shall be
in addition to all claims the Company may have for Liquidated
Damages or other damages under this Agreement or otherwise by
Law. Notice of exercise of the option must be given by the
Company to Seller within two (2) months of the expiration of
any applicable cure period for Seller's default under this
Agreement or of the termination of this Agreement. The
purchase price for the Facility and the closing date shall be
determined in the same manner as provided in Section 16.1.1.
-171-
<PAGE>
Page 67 of 82
---- ----
16.1.1 The purchase price for the Facility shall be the
present value of the remaining Capacity Payments
(including Fixed Operation and Maintenance Payments,
less personnel costs) at the time of the purchase of
the Facility, determined using the Discount Rate.
Closing of the purchase shall occur within sixty
(60) days of the exercise date.
16.1.2 The Company may not exercise its option pursuant to
this Section if a Project Lender shall have cured
the default pursuant to Section 21.2, or if the
Company has entered into a New Agreement with any
Project Lender or its designee pursuant to Section
21.2.1(e).
16.2 Limit on Option
The right granted pursuant to Section 16.1 shall be subject
to any purchase option held by International Paper Company.
16.3 Right of First Refusal
16.3.1 The Company shall have an exclusive right of first
refusal to purchase any Transfer Interest on the
terms and conditions set forth herein; provided,
however, and subject to the Company's prior written
consent, which may not be unreasonably withheld,
Seller may grant the steam buyer a right of first
refusal to purchase any Transfer Interest, which
right shall be prior to the Company's right of first
refusal. Any such right of first refusal granted to
the steam buyer shall be in form and substance
reasonably satisfactory to the Company and shall
require the steam buyer to continue operating the
Facility in accordance with the provisions of this
Agreement.
16.3.2 If Seller or any of its subsidiaries, affiliates or
other related entities ever desire to dispose of its
or their right, title, or interest in the Facility,
or any part thereof (hereinafter referred to as a
"Transfer Interest"), other than by the mortgage or
sale and leaseback of the Facility to provide
financing for the Facility, or if Seller receives a
bona fide offer to purchase or lease the Facility,
or any part thereof (hereinafter also referred to as
a "Transfer Interest"), which offer Seller is prepared
to accept, it shall give notice thereof in writing to
the Company (the "Notice"). The Notice shall
(a) specify the terms under which Seller is prepared
to dispose of the Transfer Interest, including the
purchase price of the Transfer Interest, or
(b) include a copy of the acceptable offer received by
Seller, as the case may be.
16.3.3 If the steam buyer has been granted a right of first
refusal as set forth above, the Seller shall offer
the Transfer Interest to the steam buyer in
accordance with the terms of the steam buyer's right
of first refusal. If the steam buyer waives its
right with respect to the Transfer Interest or the
steam buyer does not have a right of first refusal,
Seller shall offer the Transfer Interest to the
Company on the terms set forth in the Notice and a
price equal to the lesser of (a) the fair market
value of the Transfer Interest or (b) the price set
forth in the Notice.
-172-
<PAGE>
Page 68 of 82
---- ----
16.3.4 For a period of ninety (90) days after receipt by
the Company of the Notice, or ninety (90) days after
the Company receives notice from the Seller that the
steam buyer has waived its right of first refusal,
whichever is longer, the Company shall have the
right to exercise its right of first refusal with
respect to the Transfer Interest by giving written
notice thereof to Seller.
16.3.5 In the event the Company elects not to exercise its
right of first refusal pursuant to the foregoing
provisions and a sale or lease of the Transfer
Interest is not fully consummated, in accordance
with the terms and conditions set forth in the
Notice, within one year from the date the Company
receives the Notice, Seller agrees that the
Company's right of first refusal to purchase or
lease the Facility, or any part thereof, shall
continue on the terms and conditions contained
herein. Any sale of any Transfer Interest shall not
extinguish the Company's right of first refusal with
respect to any portion of the Facility or the
Seller, as the case may be, not transferred pursuant
to such sale. Any lease of any Transfer Interest
shall not extinguish the Company's right of first
refusal with respect to any extensions of such lease
or with respect to any other leases, sales or other
dispositions of any Transfer Interest.
16.3.6 If the Company elects to exercise its right of first
refusal with respect to the Transfer Interest, the
Parties shall fully consummate the transfer of the
Transfer Interest within sixty (60) days after the
Company exercises its right of first refusal. If a
disagreement arises relating to the fair market
value of the Transfer Interest, the Dispute
Resolution Process shall be used.
16.3.7 The Company's right of first refusal shall apply to
any transfer or sale of any interest in the Seller
(other than a pledge or other assignment of any
interest in the Seller in connection with the
financing for the Facility) if the transfer or sale
is proposed to be made to any entity other than
Allstate Insurance Company, Energy Initiatives,
Inc., or International Paper Company, or an entity
which is, directly or indirectly, controlled by, in
control of, or under common control with, the
Seller, Allstate Insurance Company, Energy
Initiatives, Inc., or International Paper Company,
(hereinafter also referred to as a "Transfer
Interest"). Notwithstanding the foregoing, in the
event of a voluntary or involuntary transfer of an
interest which represents less than one hundred
percent (100%) of the interest in Seller, the
Company agrees not to exercise its right of first
refusal if, but only if, (a) the Company's ownership
of such interest in Seller or the Facility would
cause the loss of the Seller's status as an Exempt
Wholesale Generator under PUHCA or the Facility's
status as a "Qualifying Cogeneration Facility" under
PURPA, and (b) the transfer of such interest shall
be made to a party reasonably acceptable to the
Company.
16.3.8 For so long as Seller is an Exempt Wholesale
Generator under PUHCA, the Company shall not
exercise its right of first refusal with respect to
a Transfer Interest which represents less than one
hundred percent (100%) of the interests in the
Facility or the Seller unless and until the
determinations required under Section 32(k)(2) of
PUHCA have been made and are final and non-appealable.
-173-
<PAGE>
Page 69 of 82
---- ----
16.3.9 The Seller covenants and agrees to sign, execute and
deliver, or cause to be signed, executed and
delivered, and to do or make, or cause to be done or
made, upon the written request of the Company, any
and all agreements, instruments, papers, deeds, acts
or things, supplemental, confirmatory or otherwise,
as may be required by the Company for the purpose of
or in connection with the right of first refusal
established hereby.
16.4 Termination
In the event that the Company purchases the Facility pursuant
to this Agreement, this Agreement shall terminate. In the
event that any thermal energy sale agreement for the sale of
the thermal energy produced by the Facility (a) does not
impose greater obligations on the Company than would have
been imposed on Seller if it had continued to perform the
agreement, and (b) includes pricing provisions for the energy
component of the thermal energy price which escalate on the
basis of generally accepted indices, and pricing provisions
for the fixed component which do not decline over time, the
Company shall assume and perform any obligations of Seller
under such thermal energy sale agreement. In the event that
any thermal energy sale agreement for the sale of the thermal
energy produced by the Facility does not meet the criteria
described in the preceding sentence, the Company shall not be
obligated to perform any obligations of Seller under such
agreement, but the Company shall offer to negotiate in good
faith to enter into a new thermal energy sale agreement with
the thermal energy purchaser under the original thermal
energy sale agreement with the Seller; provided, however,
that the total steam price pursuant to such new agreement
shall not exceed the base steam price, escalated for periods
after the effective date of the new agreement using the
GDPIPD. The base steam price shall be, (i) in the case of
periods on or before the tenth anniversary of the
commencement of service under the thermal energy sale
agreement, the average thermal energy sale price since the
commencement of service under the thermal energy sale
agreement, expressed in constant dollars for the year in
which service commences, or (ii) in the case of periods after
the tenth anniversary of the commencement of service under
the thermal energy sale agreement, the average thermal energy
sale price during the first ten years following the
commencement of service under the thermal energy sale
agreement, expressed in constant dollars for the year in
which service commences, and escalated for periods after the
tenth anniversary at GDPIPD.
ARTICLE XVII: RECORDS
----------------------
17.1 Company Records
The Company shall maintain for a period of not less than five
(5) years from the date of preparation thereof complete and
accurate records of: (a) all interconnection costs incurred
by the Company; (b) all measurements by Metering Devices of
Net Energy Output delivered pursuant to this Agreement, and
(c) all other data and information necessary to calculate
payments as provided in this Agreement, including invoices,
receipts, charts, printouts, and other materials and
documents. Seller or its representatives shall be permitted
to inspect such records upon request during normal business
hours and copies of such records shall be provided, if
requested, within 30 days of Seller's request.
-174-
<PAGE>
Page 70 of 82
---- ----
17.2 Seller Records
17.2.1 Operation & Maintenance
Seller shall maintain for a period of not less than
five (5) years from the date of preparation thereof an
accurate and up-to-date operating log at the Facility
with records of: real and reactive power production
for each hour, changes in operating status, scheduled
outages and any unusual conditions found during
inspections. The Company shall be permitted to
inspect such operating log upon request during normal
business hours and copies of such log shall be
provided, if requested, at the Company's expense,
within 30 days of such request. Except with respect
to such operating log, Seller shall maintain for the
duration of this Agreement, all permits, approvals,
contracts, studies and other documents respecting the
construction, operation and maintenance of the
Facility. The Company shall be permitted to inspect
such documents upon request during normal business
hours and copies of such documents shall be provided,
if requested, at the Company's expense, within 30 days
of such request.
17.2.2 As-Builts
Seller shall at all times cause an accurate and
complete set of the "as-built" plans and
specifications relating to the Facility to be
maintained at the Facility and available for
inspection by Company, which plans and specifications
shall be amended from time to time to reflect on a
current basis all material improvements, additions and
modifications to the Facility.
ARTICLE XVIII: NOTICES
-----------------------
18.1 Certain Notices
18.1.1 Seller, promptly upon obtaining knowledge of any of
the following, shall provide notice to Company of:
18.1.1.1 The occurrence of a material default or
event of default under (i) any agreement
to which the Seller and any lender are
parties, (ii) the lease of the Site and
(iii) any steam purchase agreement;
18.1.1.2 The occurrence of any material default
or event or default under any other
agreement, including any agreement for
the purchase or transportation of fuel;
18.1.1.3 Any litigation, investigation or
proceeding which may exist at any time
between Seller and any governmental
authority;
18.1.1.4 Any material adverse change in the
properties, business, operations,
prospects or financial or other condition
of the Seller and of any change of Law,
rule or regulation which has or could
reasonably be expected to have such a
material adverse effect;
-175-
<PAGE>
Page 71 of 82
---- ----
18.1.1.5 Any loss or damage to the Facility in
excess of $100,000; and
18.1.1.6 Any event constituting, or that could
reasonably be expected to constitute, an
event of Force Majeure.
Each notice pursuant to this Section 18.1 shall be
accompanied by a statement of a senior officer of Seller
setting forth details of the occurrence referred to therein,
the anticipated duration thereof, and stating what action
Seller proposes to take with respect thereto.
Notwithstanding anything to the contrary in this
Section 18.1, Seller agrees to provide the Company with
any notice of default it receives under any agreement
described in Section 18.1.1.1 hereof.
18.2 Notices in Writing
18.2.1 All notices or other communications which are
required or permitted under this Agreement shall be
effective if they are in writing and delivered
personally or by certified mail, postage prepaid,
overnight delivery service, or telecopy or other
confirmable form of electronic delivery, to the
following address:
18.2.1.1 if to Seller:
DePere Energy LLC
c/o Polsky Energy Corporation
Suite 150
Edens Corporate Center
650 Dundee Road
Northbrook, Illinois 60062
Attn: President
18.2.1.2 if to the Company:
Wisconsin Public Service Corporation
700 North Adams
Green Bay, WI 54307-9001
Attn: Senior Vice-President-Power Supply
and Engineering
18.2.1.3 or to such other person or address as the
addressee may have specified in a notice
duly given to the sender as provided
herein.
18.3 Date of Notification
All notices or communications duly delivered or mailed and
postmarked to a Party hereto as provided in Section 18.2
shall be effective as of the date of receipt.
-176-
<PAGE>
Page 72 of 82
---- ----
18.4 Oral Notice in Emergency
Notwithstanding the provisions of Section 18.2, any notice
required hereunder with respect to a System Emergency or
other occurrence requiring prompt attention, may be made
orally, by telephone or otherwise, provided such notice shall
be confirmed in writing immediately thereafter. Seller shall
make such oral notice directly to the System Operating office
at the Company.
18.5 Primary Contact
The Company and Seller shall establish a primary contact to
act for each Party in the implementation of, and the
operation under, the Agreement.
ARTICLE XIX: DISPUTE RESOLUTION
--------------------------------
19.1 Negotiation
In the event of a dispute between the Parties respecting any
of the terms and conditions of this Agreement, the Parties
shall in good faith attempt to resolve such dispute by
negotiations. If a controversy or claim should arise, the
respective Project Managers designated by the Parties, or
their respective successors in the positions they now hold
(herein called the "Project Managers"), will meet at least
once and will attempt to resolve the matter. Either Project
Manager may request the other to meet within seven (7) days,
at a mutually agreed time and place. Such request must be in
the form of a written notice which sets forth the nature of
the controversy or claim. If the matter has not been
resolved within thirty (30) days of their first meeting, the
Project Managers shall refer the matter to Senior Executives,
who shall have authority to settle the dispute (herein called
the "Senior Executives"). There upon, the Project Managers
shall promptly prepare and exchange memoranda stating the
issues in dispute and their positions, summarizing their
negotiations which have taken place and attaching relevant
documents. The Senior Executives will meet for negotiations
within thirty (30) days of the end of the thirty-day period
referred to above, at a mutually agreed time and place.
19.2 Mediation
If the matter in dispute has not been resolved within thirty
(30) days of the meeting of the Senior Executives, the
Parties will attempt in good faith to resolve the controversy
or claim by inviting a single mediator, experienced in the
particular subject matter, to make a recommendation as to
resolution of the dispute.
19.3 Binding Arbitration
In a dispute other than under Section 19.1 and/or if the
matter has not been resolved pursuant to the mediation
procedure set forth in Section 19.2 within sixty (60) days of
commencement of such procedure or if either Party will not
participate in mediation, either Party may elect to have the
dispute resolved by binding arbitration by giving the other
Party written notice of the election setting forth the point
or points in dispute. Such arbitration shall be conducted
before a single arbitrator agreed upon by the Parties. If
the Parties are
-177-
<PAGE>
Page 73 of 82
---- ----
unable to agree upon a single arbitrator, the arbitration
shall be conducted before a panel of three arbitrators, of
whom each Party shall appoint one, with the third arbitrator
to be selected by the first 2 arbitrators from the list
maintained by the American Arbitration Association. The
arbitration shall be conducted in accordance with the
commercial arbitration rules of the American Arbitration
Association. The arbitration shall be governed by the
United States Arbitration Act, 9 U.S.C. Section 1-16, and
judgment upon the award rendered by the arbitrator or
arbitration panel may be recognized and enforced by any court
having jurisdiction thereof. The arbitrator or arbitrators
shall be competent by virtue of education and experience in
the particular subject matter in dispute. The Parties may
utilize discovery to the same extent as afforded by the
Federal Rules of Civil Procedure.
The Parties shall equally share the cost of the fee or
honorarium of the arbitrator or arbitrators. Both Parties
agree to pay their own legal fees, including stenographic
costs and other hearing-related expenses, such as travel,
lodging, and any service charges required by the American
Arbitration Association. The arbitrator shall have
jurisdiction or authority only to interpret or determine
compliance with the provisions of this Agreement in so far as
shall be necessary to the determination of issues properly
appealed to the arbitrators. The arbitrators shall not have
any jurisdiction or authority to add to, detract from, or
alter in any way the provisions of this Agreement. The
arbitrator or arbitrators are not empowered to award
consequential, exemplary or punitive damages. Pending the
final decision of the arbitrator or arbitrators of a dispute
hereunder, both Parties agree to proceed diligently with the
performance of all contractual obligations, including the
payment of all sums required by this Agreement and not in
dispute.
19.4 Deadlines
All deadlines specified in this Article XIX may be extended
by mutual agreement.
19.5 Exclusive Procedure
Subject to Article XI of this Agreement, the procedures
specified in this Article XIX shall be the sole and exclusive
procedure for the resolution of disputes between the Parties
arising out of or relating to this Agreement; provided,
however, that a Party may seek a preliminary injunction or
other preliminary judicial relief if in its judgment such
action is necessary to avoid irreparable damage. Despite
such action the Parties will continue to participate in good
faith in the procedures specified in this Article XIX. All
applicable statutes of limitation shall be tolled while the
procedures specified in this Article XIX are pending. The
Parties will take such action, if any, required to effectuate
such tolling.
19.6 Survival of Procedure
This Article XIX shall survive the termination of this
Agreement and shall operate to resolve any controversy,
claim, counterclaim, dispute, difference or misunderstanding
arising out of or relating to this Agreement subsequent to
the termination of this Agreement.
-178-
<PAGE>
Page 74 of 82
---- ----
19.7 Binding Upon Parties
In the resolution of any controversy or claim pursuant to
this Article XIX, each of the Parties, their Project
Managers, and Senior Executives, and any mediators or
arbitrators designated pursuant hereto, shall give effect to
Article XI of this Agreement.
ARTICLE XX: CONFIDENTIALITY
----------------------------
20.1 Non-Disclosure to Third Parties
Except in any proceeding to enforce this Agreement, Seller
and Company will not disclose to any third party without the
prior written consent of the other Party: (a) the terms or
conditions of this Agreement or any other Agreement required
hereby or referred to herein; or (b) any confidential or
proprietary information or data, whether oral or written,
received from the other Party. Information which is
considered confidential or proprietary in nature must be
identified as such by stamping each page with the word
"Confidential" when such information is in tangible form.
20.2 Disclosure Permitted
Notwithstanding Section 20.1, Seller or Company may disclose:
(a) such information as may be required by any applicable
Law, regulation, or governmental order; (b) such information
as may reasonably be required by independent accountants,
attorneys, other professional consultants, or prospective
lenders or investors, subject to reasonable procedures and
other safeguards to protect the confidentiality of the
information disclosed; (c) any information which is publicly
known, other than by breach of this Agreement;
(d) information which becomes available to one of the Parties
without restriction from a third party; or (e) information
which is at any time developed by the receiving Party
independently of any disclosures hereunder. In addition, the
Company may use the confidential information in connection
with its dealings with the Commission or other regulatory
authorities of competent jurisdiction. In connection with
any such use, the Company agrees to request confidential
treatment of the information.
20.3 Survival of Confidentiality
The provisions of this Article XX shall survive the
Termination Date for a period of five (5) years.
ARTICLE XXI: ASSIGNMENT
------------------------
21.1 Restriction on Assignment
This Agreement shall inure to the benefit of and be binding
upon the Company and Seller and their respective successors.
Neither Seller nor the Company shall assign its rights or
delegate its duties under this Agreement, or any part of such
rights or duties, without the prior written consent of the
other, which consent shall not be unreasonably withheld, and,
in the case of Seller, notification by the Company that its
right of first refusal under Section 16.3 has been waived.
Any such assignment or delegation made without such prior
written
-179-
<PAGE>
Page 75 of 82
---- ----
consent shall be null and void; provided however, the
requirement of written consent to an assignment shall not
apply to either Party if it merges into another entity with
which it is related as a parent, subsidiary or affiliate,
provided that such entity is or at the date of such merger
becomes bound by all of the obligations under this Agreement.
21.2 Finance Assignments
21.2.1 Seller shall have the right to assign this Agreement
to any Project Lender. If Seller shall assign this
Agreement, then so long as any such assignment, or
any consolidation, modification or extension of any
such assignment shall remain outstanding, the
following provisions shall apply:
(a) Provided that the Company shall have received
written notice of such assignment, the Company
shall, upon serving upon Seller any notice
pursuant to Sections 2.3, 3.2.5.1, 11.1 or 11.2,
also serve a copy of such notice upon the
assignee under the assignment, at the address
provided for in the notice referred to above. No
notice issued by the Company pursuant to Sections
2.3, 3.2.5.1, 11.1 or 11.2 shall be deemed to
have been duly given unless and until a copy
thereof shall have been so served.
(b) From and after the date that such notice has been
given to an assignee, said assignee shall have
the same period for remedying or commencing the
remedy of any alleged default, or causing the
same to be remedied, or for taking any other
action required under the notice, as is given to
Seller pursuant to the terms of this Agreement to
remedy, commence remedying, or cause to be
remedied the default specified in any such
notice, or take any other action required in the
notice. The Company shall accept such
performance by or on behalf of such assignee as
if the same had been done by Seller. Neither the
Company nor Seller shall interpose any objection
if any assignee takes such action or enters the
Facility or the Site for such purpose.
(c) The making of an assignment pursuant to this
Section shall not be deemed to constitute an
assignment or transfer of this Agreement, nor
shall any assignee, as such, be deemed to be an
assignee or transferee of this Agreement so as to
require such assignee, as such, to assume the
performance of any of the terms or conditions on
the part of Seller to be performed hereunder; but
the purchaser at any sale of this Agreement in
any proceedings for the foreclosure of any
assignment, or the assignee or transferee of this
Agreement under any instrument of assignment or
transfer in lieu of the foreclosure of any
assignment, shall be deemed to be an assignee or
transferee within the meaning of this Subsection
and shall be deemed to have agreed to perform all
of the terms, covenants and conditions on the
part of Seller to be performed hereunder from and
after the date of such purchase and assignment.
(d) Notwithstanding any other provision of this
Agreement, (i) any sale of this Agreement in any
proceeding for the foreclosure of any assignment,
or the assignment or transfer of this Agreement
in lieu of the foreclosure of any assignment
shall be deemed to be a permitted sale, transfer
or assignment of
-180-
<PAGE>
Page 76 of 82
---- ----
this Agreement, and this Agreement shall continue
in full force and effect following any such sale,
transfer or assignment, and (ii) Section 16.3
shall not apply to any sale of any interest in the
Seller or the Facility in any proceeding for the
foreclosure of any assignment or mortgage of the
Facility or the ownership interests in the Seller,
or the assignment or transfer of any of the
foregoing in lieu of the foreclosure of any such
assignment; provided that the transferee or
assignee in any such case has the experience and
the financial capability to perform the Seller's
obligations under this Agreement.
(e) In the event of the termination of this Agreement
by the Company for any reason, the Company shall,
in addition to providing a copy of the notice
provided pursuant to Section 11.1 as required
above, provide each assignee with written notice
that this Agreement has been terminated, together
with a statement of all sums which would at that
time be due under this Agreement but for such
termination or foreclosure, and of all other
defaults, if any, then known to the Company. The
Company shall enter into a new agreement (the
"New Agreement") with any such assignee or its
designee for the remainder of the Term, effective
as of the date of termination on the same terms
and conditions as this Agreement, provided:
(i) Such assignee or designee shall make
written request upon the Company for such
New Agreement within one hundred and
twenty (120) days after the date such
assignee receives the Company's notice of
termination given pursuant to the
provisions of this Section.
(ii) Such assignee or designee shall pay or
cause to be paid to the Company at the
time of execution and delivery of such New
Agreement, any and all sums which would at
the time of execution and delivery thereof
be due pursuant to this Agreement but for
such termination or foreclosure, and, in
addition thereto, all reasonable expenses,
including reasonable attorneys' fees,
which the Company shall have incurred by
reason of such termination and the
execution and delivery of the New
Agreement and which have not otherwise
been received by the Company from Seller
or any other party in interest under
Seller.
(iii) Such assignee or its designee shall agree
to remedy any of Seller's defaults of which
said assignee was notified by the Company's
notice of termination, and which are
reasonably susceptible of being so cured by
such assignee or its designee.
(iv) If more than one assignee shall request a
New Agreement, the Company shall enter into
such a New Agreement only with the assignee
having the lien most senior in priority.
-181-
<PAGE>
Page 77 of 82
---- ----
(f) Paragraphs (d) and (e) shall not be applicable
unless the Project Lenders shall have first
provided the Company an opportunity to offer to
purchase the Facility or the interest in the
Seller, as the case may be.
(i) In the event that the Company makes an
offer to purchase the Facility or an
interest in the Company, (A) the Company's
offer must remain outstanding for at least
six (6) months, and (B) paragraphs (d) and
(e) shall not apply to any transfer of the
Facility or an interest in the Company to
a transferee other than the Company unless
the Project Lenders determine that the
price and commercial terms of such
transfer, taken as a whole, are more
favorable to the Project Lenders than the
price and commercial terms of the
Company's offer.
(ii) In the event that the six-month period
described in (i) above expires, this
paragraph shall apply to any subsequent
transfer of the Facility or an interest in
the Seller pursuant to Paragraphs (d) and
(e).
(iii) In the event that the Project Lenders
accept the Company's offer, the Company
shall close the acquisition of the Facility
or the interest in the Seller within sixty
(60) days after the acceptance of the
offer.
(iv) The right granted pursuant to this Section
shall be subject to any purchase option
held by International Paper Company.
(g) In the event of any casualty or condemnation with
respect to the Facility, and notwithstanding
anything to the contrary contained in this
Agreement, the provisions of the assignment most
senior in priority shall control with respect to
the use of the Seller's share of such proceeds.
(h) No agreement between the Company and Seller
modifying, amending, canceling or surrendering
this Agreement shall be effective without the
prior written consent of all assignees.
ARTICLE XXII: MISCELLANEOUS
----------------------------
22.1 Lack of Precedent
The provisions set forth in this Agreement are applicable
only to this Agreement and the Capacity and Energy proposed
to be sold and purchased hereunder. The Parties specifically
agree that this Agreement is not intended to set a precedent
or constitute a recommendation: (a) regarding the adoption
of a methodology for determining an avoided cost or a rate
for purchase of power from a qualifying facility, (b) as
evidence of the Parties' position with
-182-
<PAGE>
Page 78 of 82
---- ----
respect to the determination of an avoided cost or a rate for
purchase of power from a qualifying facility, or (c) with
respect to any of the other terms and conditions herein, for
any other contract entered into by the Company, whether it be
with Seller or any other party, or to any amendment that may
be made to this Agreement.
22.2 Compliance with Laws
Each Party shall at all times conform to all applicable Laws.
Each Party shall give all required notices, shall procure and
maintain all necessary governmental permits, licenses and
inspections necessary for its performance of this Agreement,
and shall pay all charges and fees in connection therewith.
22.3 Governing Law
Subject to applicable federal Law, this Agreement shall be
governed by the Laws of the State of Wisconsin.
22.4 Entire Agreement; Amendment
This Agreement and the documents referred to in this
Agreement and to be delivered pursuant to this Agreement
constitute the entire agreement between the Parties
pertaining to the subject matter of this Agreement, and
supersede and terminate any letters of intent and all prior
and contemporaneous agreements, understandings, negotiations
and discussions with the Parties, whether oral or written,
and there are no warranties, representations or other
agreements between the Parties in connection with the subject
matter of this Agreement, except as specifically set forth in
this Agreement. NEITHER PARTY TO THIS AGREEMENT MAKES ANY
REPRESENTATION, WARRANTY OR INDEMNITY, EXPRESS OR IMPLIED, TO
THE OTHER PARTY TO THIS AGREEMENT EXCEPT FOR THE
REPRESENTATIONS, WARRANTIES AND INDEMNITIES EXPRESSLY SET
FORTH IN THIS AGREEMENT. No amendment, supplement,
modification, waiver or termination of this Agreement shall
be binding unless executed in writing by the Party to be
bound thereby. No waiver of any of the provisions of this
Agreement shall be deemed or shall constitute a waiver of any
other provision of this Agreement, whether or not similar,
nor shall such waiver constitute a continuing waiver unless
otherwise expressly provided.
22.5 Modification
This Agreement and any of its terms can only be amended,
supplemented, waived, or modified by an instrument in writing
signed by the Parties.
22.6 No Implied Waiver
The failure or delay of any Party hereto to enforce at any
time any of the provisions of this Agreement, or to require
at any time performance of a Party hereto of any of the
provisions hereof, shall neither be construed to be a waiver
of such provisions nor affect the validity of this Agreement
or any part hereof or the right of such Party thereafter to
enforce each and every such provision.
-183-
<PAGE>
Page 79 of 82
---- ----
22.7 Captions
All indices, titles, subject headings, and similar items are
provided for the purpose of reference and convenience and are
not intended to be construed as interpretations of text.
22.8 Payment of Taxes
Seller shall be responsible for payment of all federal, state
and local taxes applicable to Seller and relating to the
performance of its obligations under this Agreement.
22.9 Severability
If any term or provision of this Agreement or the application
thereof to any person, entity or circumstance shall to any
extent be invalid or unenforceable, the remainder of this
Agreement, or the application of such term or provision to
persons, entities or circumstances other than those as to
which it is invalid or unenforceable, shall not be affected
thereby, and each term and provision of this Agreement shall
be valid and enforceable to the fullest extent permitted by
Law. The Parties agree to negotiate a replacement provision
or provisions in an effort to place the Parties in the same
or similar position reflected in the Agreement when
originally signed.
22.10 No Exclusivity/Dedication of Facilities
This Agreement is not intended to be an exclusive arrangement
between Company and Seller. No undertaking by a Party hereto
to the other Party hereto under any provision of this
Agreement shall constitute the dedication of that Party's
system or any portion thereof to the other Party or to the
public.
22.11 Emission Standards
As may be required by government agencies, the Company will
include emission constituents from the Facility in its
inventory during the Term of this Agreement. Seller will
assure the Company that emissions from the Facility will not
adversely affect the ability of the Company to comply with
the limits imposed by any existing Law.
22.12 Expenses
Except as expressly provided for herein, each Party shall pay
the fees and expenses of its respective counsel, accountants,
brokers, consultants, investment bankers and other experts
incident to the negotiation and preparation of this
Agreement.
22.13 No Reliance
Except for the Parties to this Agreement, and except as
otherwise specifically provided herein with respect to the
Project Lenders and International Paper Company: (a) no other
person is entitled to rely on any of the representations,
warranties and agreements of the Parties contained in this
Agreement; and (b) the Parties assume no liability to any
other
-184-
<PAGE>
Page 80 of 82
---- ----
person because of any reliance on the representations,
warranties and agreements of the Parties contained in this
Agreement.
22.14 Individual Responsibility
This Agreement shall not be construed to create or give rise
to any partnership, joint venture, agency or other
relationship between Seller and the Company other than that
of purchaser and seller. Each Party shall be solely and
individually responsible for its own covenants, obligations
and liabilities as herein provided. The Parties shall not be
liable as partners. Neither this Agreement, nor any grant,
lease or license related thereto, shall create any new entity
nor be construed to create a new entity, such as a
partnership, association or joint venture.
22.15 Exhibits
If a document or matter is incorporated in any Exhibit to
this Agreement, it shall be deemed to be incorporated for all
purposes of this Agreement without the necessity of specific
repetition or cross-reference.
22.16 Further Assurances
22.16.1 The Company agrees to provide such information and
documentation as may be reasonably requested by
any Project Lender or prospective Project Lender,
including (i) financial statements, evidence of
corporate existence, and evidence of incumbency of
persons executing this Agreement; (ii) an opinion
of its counsel confirming the enforceability of
this Agreement against the Company and the
accuracy of the representations set forth in
Section 12.2, and addressing such other matters as
may be requested by any such Project Lender or
prospective Project Lender, (iii) a consent to the
collateral assignment of this Agreement to any
such Project Lender, and (iv) any other consents,
estoppel certificates or other documents
reasonably required in connection with the
financing of the Facility. Seller shall reimburse
the Company for its reasonable expenses incurred
in performing its obligations under this Section
(excluding obligations described in Section 12.5).
22.16.2 In the event that Seller or any Project Lender or
prospective Project Lender determines that any
amendment or modification to this Agreement is
required or as a condition to the financing or
refinancing of the Facility, the Company and
Seller shall negotiate in good faith, and in
consultation with any such Project Lender or
prospective Project Lender, the terms of, any such
amendment or modification; provided, however, that
a failure to agree shall not represent a breach of
this Agreement by either Party.
22.17 Survival
The applicable provisions of this Agreement shall continue in
effect after the expiration of the Term, to the extent
necessary to provide for final billing and adjustment, and to
make other appropriate settlements hereunder. Without
limiting the generality of the foregoing,
-185-
<PAGE>
Page 81 of 82
---- ----
the following provisions shall survive the expiration or
termination of this agreement: Article XIII, Section 12.1.1,
Section 12.1.4, Section 16.4, and Section 21.2.
-186-
<PAGE>
Page 82 of 82
---- ----
IN WITNESS WHEREOF, each of the Parties hereto has caused this
Agreement to be executed on its behalf by its duly authorized
officer on this 8th day of February, 1996.
--- -------- --
DePere Energy LLC
(Seller)
/s/ Mark R. Leaman By: /s/ Michael Polsky
- ----------------------------- ----------------------------
Witness (Title)
The obligations of Wisconsin Public Service Corporation under this
Agreement are conditioned upon the Public Service Commission of
Wisconsin issuing an order explicitly finding that: 1) it is prudent
for the Company to execute the Agreement at this time; 2) the
Commission will be considering evidence for the need for the Facility
at the time it takes up the stage two proceeding for the Certificate
of Public Convenience and Necessity ("CPCN") for the Facility; and
3) the Commission will, when and if a CPCN order is issued, explicitly
include findings that at the time of that order the Facility is
necessary to satisfy the reasonable needs of the public for an
adequate supply of electric energy. The Parties acknowledge that the
Commission has made these three findings in an order and has satisfied
the condition in the preceding sentence.
Wisconsin Public Service
Corporation (Company)
/s/ L. L. Weyers By: /s/ Dan Bollom
- ----------------------------- ----------------------------
Witness (Title)
Accepted and agreed this 8th day
---
of February, 1996.
-------- --
DePere Energy LLC
By: /s/ Michael Polsky
--------------------------
(Title)
-187-
<PAGE>
<PAGE>
EXHIBIT 2.1.A
Site
----
The Site is located on Nicolet Paper Mill property at 200 Main
Avenue in the City of DePere, Brown County, Wisconsin. The
location is shown on attached Figure 2-1. The main plant will be
located in the parking area. It is bounded by the Nicolet Paper
Mill plant to the east, additional parking for the mill to the
north, and vacant Nicolet Paper Mill property to the west. The
Nicolet Paper Mill property extends from the proposed Site, east
and north to the Fox River, and west of the Site where it is
bounded by commercial and residential districts. Auxiliary
structures (cooling tower, etc.) will be located off the main plant
area. No later than one hundred and eighty (180) days after the
Effective Date, Seller shall provide the Company with a complete
legal description of the Site.
-188-
<PAGE>
<PAGE>
FIGURE 2-1
(Map showing the proposed cogeneration facility site location on
Nicolet Paper Mill property at 200 Main Avenue in the City of
De Pere, Wisconsin.)
-189-
PAGE
<PAGE>
EXHIBIT 2.1.B
Description of Facility
-----------------------
A. Plant Design
The Facility will be a dual fuel combined cycle plant
consisting of one combustion turbine/generator set as
the prime mover, steam turbine/generator, heat
recovery steam generator, condenser/cooling tower,
inlet air chilling system, switch gear and the
necessary auxiliary systems. The Facility will be
implemented in two phases. In Phase I, a simple cycle
combustion turbine unit will be installed. In Phase
II, the remaining equipment required to convert to a
combined cycle Facility will be installed.
The Facility to be constructed shall be generally in
accordance with the Facility described in the Seller's
Project Proposal, dated February 14, 1994, taking into
account major technological developments.
B. Phase I
The Facility will consist of the following major
components:
(1) One (1) combustion turbine/generator set complete
with inlet air and exhaust systems
(2) Combustion turbine inlet air chilling system
(3) One No. 2 oil storage facility
(4) Water treatment system (on or off site) and
storage tank
(5) Control building housing the control room,
maintenance area, chillers, water treatment, and
electrical room
(6) One (1) 13.8 KV to 138 KV transformer
(7) Continuous emission monitoring system
(8) Fire protection system
(9) Battery system and UPS
(10) Control system for auxiliary equipment
-190-
<PAGE>
C. Phase II
--------
The Seller will install the following additional
Phase II combined cycle equipment:
(1) One (1) Heat Recovery Steam Generator
(2) One (1) Steam Turbine/Generator
(3) Cooling and Condensing System
(4) Demineralized Water Treatment System
(5) Deaerating and Condensate System
(6) Controls for Phase II Equipment
-2-
-191-
PAGE
<PAGE>
EXHIBIT 2.4
CRITICAL COMPONENTS
-------------------
Phase I - Simple Cycle Operation
- -------
Combustion Turbine and Generator
Main Step-Up Transformer
Control Systems
Inlet Air Chilling Device
Phase II - Combined Cycle Operation
- --------
Heat Recovery Steam Generator
Steam Turbine and Generator
Condenser
Cooling Tower
Control System
-192-
PAGE
<PAGE>
EXHIBIT 2.6
Construction Milestone Schedule
-------------------------------
Pursuant to Section 2.6 of the Agreement, the following is a schedule
of milestones to be completed by Seller by the dates corresponding to
such events as follows:
For Phase I:
Description of Event Date
-------------------- ----
1. Effective Date. [ 11/30/95 ]
-------------
2. Obtain binding commitments for
construction and permanent
financing. [ 9/1/97 *]
-------------
3. Commencement of Construction. [ 11/1/97 *]
-------------
4. Seller's Interconnection Facilities
are ready for energizing. [ 10/1/98 *]
-------------
5. Date of Commercial Operation. [ 2/1/99 *]
-------------
* Milestone dates indicated in the schedule are based on a
CPCN issuance date of 11/1/96. In addition to other delay
provisions in the Agreement, the dates for achieving
milestones subsequent to CPCN issuance shall be advanced or
delayed by a number of days equal to the number of days
between 11/1/96 and the actual date of CPCN issuance.
For Phase II:
Description of Event Date
-------------------- ----
1. File application for CPCN (if
required) and air permit. [ 9/1/2001 ]
-------------
2. Obtain binding commitments for
construction and permanent
financing. [ 7/1/2002 ]
-------------
3. Phase II Commencement of
Construction. [ 9/1/2002 ]
-------------
4. Seller's Interconnection Facilities
are ready for energizing. [10/1/2003 ]
-------------
5. Phase II Date of Commercial
Operation. [ 1/1/2004 ]
-------------
-193-
<PAGE>
<PAGE>
EXHIBIT 5.1
(Twelve Pages)
(This exhibit is confidential. It has been omitted and filed
separately with the SEC.)
-194-
<PAGE>
<PAGE>
EXHIBIT 7.2
Procedure to Establish Net Demonstrated Capability and Net
----------------------------------------------------------
Demonstrated Heat Rate
----------------------
All defined terms herein shall have the same meaning as provided in
the Agreement.
A. Performance Curves
------------------
1. The Design Performance Curves shall include Design Net
Capability Performance Curves and Design Net Heat Rate
Performance Curves for Facility operation under
various load conditions that the Facility is designed to
operate given an expected range of ambient temperatures and
relative humidity levels.
2. The Design Performance Curves shall be developed and provided
to the Company within a reasonable period of time not to
exceed six (6) months after issue of the letter of intent to
purchase from the generation equipment manufacturers. The
Facility's Design Performance Curves shall be developed by
the Seller based on the manufacturers' design information for
the equipment and shall be approved (for reasonableness in
accordance with established industry standards for the type
of equipment installed) by the Parties hereto and shall be
part of this Agreement as the standard for measuring the
Facility's ability to comply with the performance criteria as
set forth in the Agreement. If the Parties cannot agree
within sixty (60) days of Seller's notification to the
Company as to the Design Performance Curves, then the Design
Performance Curves shall be determined through the Dispute
Resolution Process.
3. Upon approval of the Facility's Design Performance Curves by
the Company, the Seller shall not modify the Facility in any
way that will cause the Design Net Capability Performance
Curve or Design Net Heat Rate Performance Curves to change
prior to the Date of Commercial Operation without the
Company's consent, which consent shall not be unreasonably
withheld. The Parties agree that any change, other than a
Technological Modification, in the maximum capability of the
Facility after the Date of Commercial Operation, shall in no
way affect the Design Performance Curves or the Nameplate
Rating as established prior to the Date of Commercial
Operation nor shall any such change alter or affect the basis
of any calculations of the performance criteria under the
Agreement.
4. The Parties agree that Phase II Design Performance Curves
will be created prior to the Phase II Commencement of
Construction and in accordance with substantially similar
terms as described in Sections A.1 through A.3 of this
Exhibit 7.2. The Parties agree that any change, other than a
Technological Modification, in the maximum capability
of the Facility after the Phase II Date of Commercial
Operation shall in no way affect the Nameplate Rating, or
the Phase II Design Performance Curves as established prior
to the Phase II Date of Commercial Operation nor shall
any such change alter or affect the basis of any calculations
of the performance criteria under the Agreement.
-195-
<PAGE>
5. At any time, as the result of testing or actual operating
experience, Seller concludes that any Design Performance
Curve does not accurately depict the variation in the
Facility's performance as a function of ambient temperature
and relative humidity, Seller may submit an Adjusted
Performance Curve for review and approval by the Company
under substantially similar terms to those described in
Section A.2 of this Exhibit 7.2. Upon approval by the
Company, the Adjusted Performance Curve shall replace the
applicable Design Performance Curve as the basis for
measuring the Facility's ability to comply with the
performance criteria as set forth in the Agreement.
B. Net Demonstrated Capability
---------------------------
1. The Design Net Capability Performance Curves for Phases I and
II shall indicate the variation in the Facility's net
electrical output (KW) as a function of ambient temperature
and relative humidity over the expected range of temperature
(including but not limited to 0, 20, 59, and 90 degrees
Fahrenheit) and relative humidity (including but not limited
to 30, 60, and 80%) when the Facility is in its 100% (full
load) baseload mode of operation. The Design Net Capability
Performance Curves will be used to correct the tests of Net
Demonstrated Capability from the actual ambient temperature
and relative humidity during any tests to 90 degrees
Fahrenheit and 60% relative humidity.
2. The tests of Net Demonstrated Capability, to determine the
Initial Net Demonstrated Capability and the Current Net
Demonstrated Capability, shall run for a period of not
less than 4 continuous On-Peak Hours and not more than
24 continuous hours. The Net Demonstrated Capability shall
be calculated as the Facility's Net Energy Output during
the test period divided by the number of hours in the test
period, corrected from the average ambient conditions during
the test period to a temperature of 90 degrees Fahrenheit and
a relative humidity of 60% using the Net Capability
Performance Curve. At the time of testing, all equipment
necessary for the operation of the Facility in accordance
with this Agreement shall be operating in order to deliver
full output baseload electric generation capacity and all
Station Use and losses between the Facility and Metering
Point shall be generated by the Facility. The test of Net
Demonstrated Capability shall take place only when the
Facility is fully available.
3. The Seller shall be obligated to demonstrate by test that the
Initial Net Demonstrated Capability is in compliance with the
requirements of Section 7.2.
4. In the event that the Current Net Demonstrated Capability,
determined by testing pursuant to Section B.2 of this
Exhibit 7.2, is greater than 105% of the Initial Net
Demonstrated Capability, then the Current Net Demonstrated
Capability shall be set equal to 105% of the Initial Net
Demonstrated Capability for the purposes of the Agreement.
5. The Seller shall also be obligated to demonstrate that the
Current Net Demonstrated Capability is in compliance with
Section 7.2 by test every January and July (or if the
-2-
-196-
<PAGE>
Facility is not available in January or July, as soon as
practical thereafter) after the Date of Commercial Operation,
which determination shall be made by application of the
following formula:
CNDC
% of Initial Net Demonstrated Capability = ------ x 100
INDC
where:
CNDC equals the Current Net Demonstrated Capability; and,
INDC equals the Initial Net Demonstrated Capability.
C. Net Demonstrated Heat Rate
1. The Design Net Heat Rate Performance Curves shall indicate
the variation in the Facility's net heat rate (fuel
requirement, in BTU, per net unit output, in KWH) as a
function of ambient temperature and relative humidity over
the expected range of ambient temperatures (including but not
limited to 20, 59 and 90 degrees Fahrenheit) and relative
humidity (including but not limited to 30, 60 and 80%). The
Design Net Heat Rate Performance Curves shall indicate this
variation when the Facility is in its 25%, 60%, 80% and 100%
of full output baseload mode of operation in Phase I and 45%,
60%, 80%, and 100% of full output baseload mode of operation
in Phase II. The Design Net Heat Rate Performance Curves
will be used to correct the tests of Net Demonstrated Heat
Rates from the actual ambient temperature and relative
humidity during any tests to 90 degrees Fahrenheit and 60%
relative humidity.
2. The tests of Net Demonstrated Heat Rate shall be conducted in
substantially the same manner as, and may be conducted in
conjunction with, the tests of Net Demonstrated Capability as
described in Section B.2 of this Exhibit 7.2. During
Phase I, tests shall be conducted at 25%, 60%, 80%, and 100%
of Current Net Demonstrated Capability as limited by Section
B.4 of this Exhibit 7.2. During Phase II, tests shall be
conducted at 45%, 60%, 80%, and 100% of Current Net
Demonstrated Capability as limited by Section B.4 of this
Exhibit 7.2, and shall be conducted while the Facility is
operating in its full condensing (no steam to process) mode
of operation. During the tests, the Net Demonstrated Heat
Rate shall be calculated as the fuel consumption of the
Facility's combustion turbine and HRSG during the test,
divided by the Facility's Net Energy Output during the test,
corrected from the average ambient conditions during the test
period to a temperature of 90 degrees Fahrenheit and a
relative humidity of 60% using the applicable Net Heat Rate
Performance Curve.
-3-
-197-
<PAGE>
3. The results of the Net Demonstrated Heat Rate tests will be
used to establish Heat Rate Adjustment Factors (AFs) for
calculation of the billable fuel consumption pursuant to
Exhibit 5.1. After each test, the following AFs shall be
calculated by dividing the guaranteed 90 degrees
Fahrenheit/60% relative humidity heat rates below (HRG) by
the Net Demonstrated Heat Rate determined by the test for the
applicable load point.
Phase I
AF25 @ 25% of Full Load HRG25 = 17,779 BTU/KWH
AF60 @ 60% of Full Load HRG60 = 12,775 BTU/KWH
AF80 @ 80% of Full Load HRG80 = 12,204 BTU/KWH
AF100 @ 100% of Full Load HRG100 = 11,102 BTU/KWH
Phase II
AF45 @ 45% of Full Load HRG45 = 9,742 BTU/KWH
AF60 @ 60% of Full Load HRG60 = 8,755 BTU/KWH
AF80 @ 80% of Full Load HRG80 = 8,306 BTU/KWH
AF100 @ 100% of Full Load HRG100 = 7,761 BTU/KWH
4. The Seller shall also be obligated to demonstrate by test
prior to the Date of Commercial Operation and prior to the
Phase II Date of Commercial Operation, and each January and
July (or, if the Facility is not available in January or
July, as soon as practical thereafter) after the Date of
Commercial Operation, the Net Demonstrated Heat Rates at the
points in Section C.3 and calculate the AF factors
accordingly.
D. Company's Right to Request Additional Tests
1. Upon the written request of the Company, the Seller shall be
obligated to demonstrate by test (limited to one test between
semi-annual tests without reasonable basis for suspecting
performance degradation) the Net Demonstrated Capability and
the Net Demonstrated Heat Rates for the four load levels in
Section C.3 for Phase I or Phase II. If the additional test
results in heat rates which differ by more than 2% from the
Net Demonstrated Heat Rates established in the last
semi-annual test, then the Net Demonstrated Heat Rates shall
be reset according to the latest test, and adjustments
shall be made to the Energy Payment in accordance with
Exhibit 5.1.
2. The Company will periodically calculate the expected fuel
consumption using the heat rates established in the most
recent demonstration tests. If the expected fuel consumption
varies more than 3% from the metered fuel consumption, the
Company may request and Seller shall perform additional tests
to determine whether performance degradation has occurred.
If such additional tests result in heat rates which differ by
more than 2% from the Net Demonstrated Heat Rates established
in the last semi-annual test, then the Net
-4-
-198-
<PAGE>
Demonstrated Heat Rates shall be reset according to the
latest test, and adjustments shall be made to the Energy
Payment in accordance with Exhibit 5.1.
The Seller shall make available to the Company sufficient
operational data, on a real-time basis, to determine if there
is reasonable justification to suspect performance
degradation (a shift in the Net Heat Rate or Net Fuel
Chargeable to Electric Generation) has occurred. The
operational data shall include, but is not limited to:
- Facility net output (MW)
- Ambient temperature (degrees Fahrenheit)
- Relative humidity (%)
- Fuel flow to combustion turbine/HRSG
- natural gas (cfm)
- No. 2 oil (gpm)
- Process steam to Nicolet Paper Mill
- flow (lbs/hr)
- temperature (degrees Fahrenheit)
- pressure (psig)
- Nicolet Paper Mill process steam demand
- flow (lbs/hr)
- temperature (degrees Fahrenheit)
- pressure (psig)
- Condensate return from Nicolet Paper Mill
- flow (lbs/hr)
- temperature (degrees Fahrenheit)
E. Seller's Right to Perform Additional Tests.
If the Seller is unsatisfied with the results of a test of Net
Demonstrated Capability or Net Demonstrated Heat Rate, the Seller
shall have the right to perform up to two additional tests
establishing the Net Demonstrated Capability or Net Demonstrated
Heat Rate within a twelve month period following the
unsatisfactory test. The Net Demonstrated Capability will be set
according to the results of the unsatisfactory test until an
additional test is performed that is satisfactory to the Seller;
however, Liquidated Damages shall not be paid pursuant to
Section 11.4.1 of this Agreement until a test that is satisfactory
to the Seller is completed or the Seller has exhausted its rights
pursuant to this Section E. Liquidated Damages, if any, shall be
calculated pursuant to Section 11.4.1 of this Agreement based on
the satisfactory test or, if none of the tests are satisfactory to
the Seller and Seller has exhausted its rights pursuant to this
Section E, based on the unsatisfactory test designated by the
Seller. If the Seller elects to perform additional tests,
the Company shall be obligated to pay for energy delivered to the
Company at a rate equal to the Company's actual marginal energy
costs during the tests.
-5-
-199-
<PAGE>
F. Test Procedures
Procedures for the test of Net Demonstrated Capability and Net
Demonstrated Heat Rate shall be developed and approved by the
Parties hereto based on the ASME Gas Turbine Power Plant
Performance Test Codes PTC 22-1985 (with the instrument tolerance
assumed to be zero) and shall be part of the Agreement. The test
procedures shall include a description of test conditions which
will simulate normal operating conditions for various auxiliary
systems (e.g. lighting, CEM, HVAC, etc.). All testing procedures
shall use station instrumentation to the greatest extent possible;
provided that the use of station instrumentation does not
materially increase the cost of testing.
-6-
-200-
<PAGE>
<PAGE>
EXHIBIT 9.1
Interconnection Facilities
--------------------------
1. POINT OF INTERCONNECTION
------------------------
1.1 For each connection between the Facility and the Company's
138 KV switchyard bus, the Interconnection Point shall be at
the bus side of the disconnecting device on Seller's side
located nearest the 138 KV bus, as illustrated in
Figure 9-1.
1.2 The Company agrees to accept delivery of the Net Energy
Output made available under this Agreement between the
Company and Seller at the Interconnection Point at a
nominal phase-to-phase voltage of 138 KV.
1.3 Power and energy flowing into the Interconnection Point from
the Company shall be for Station Use only.
2. TECHNICAL SPECIFICATIONS FOR THE DESIGN OF THE INTERCONNECTION
--------------------------------------------------------------
FACILITIES
----------
2.1 Seller shall design all of the Seller's Interconnection
Facilities, subject to the following requirements:
2.1.1 Seller shall design, construct, operate, and maintain
the Seller's Interconnection Facilities in accordance
with Prudent Electrical Practices.
2.1.2 Seller shall install synchronizing devices in its
Facility or Seller's Interconnection Facilities to
ensure proper synchronization of the energized
Facility to the Company's system when putting
the Facility on line.
2.1.3 Seller shall install automatic control equipment to
allow the Facility to respond appropriately to small
frequency and voltage deviations from nominal for the
purpose of maintaining synchronism and regulating
voltage.
2.1.4 Seller shall install appropriate protective equipment
on its Facility and Seller's Interconnection
Facilities. Seller shall cooperate with the
Company to provide interface information transfer
between protective equipment supplied by one Party
which requires input information (such as relay
inputs) available from equipment installed by
the other Party.
2.1.5 Seller shall design the Facility to provide up to
20 MVAR of reactive power to the Interconnection
Point.
-201-
<PAGE>
2.1.6 Seller's Facility or Seller's Interconnection
Facilities shall not deliver an unreasonable amount
of voltage or current harmonics into the Company's
system.
2.1.7 Seller shall design and operate the Facility and
Seller's Interconnection Facilities so as to limit
voltage unbalance of the three phases at the
Interconnection Point caused by the Facility to no
greater than 2 percent (%).
2.1.8 Seller shall design and operate the Facility and
Seller's Interconnection Facilities so that Seller can
continue to deliver the required real and reactive
power to the Interconnection Point for any voltage at
the Interconnection Point within 10 percent (%) of the
nominal 138 KV interconnection voltage.
2.1.9 Seller shall provide the Company with the necessary
land, easements, and rights of access on Seller's
property for the Company to construct and maintain the
Company's Interconnection Facilities.
3. OWNERSHIP AND OPERATION OF INTERCONNECTION FACILITIES
-----------------------------------------------------
3.1 Seller shall install, maintain, and own all of Seller's
Interconnection Facilities.
3.2 The Company shall install, maintain, and own all of the
Company's Interconnection Facilities, including the
interconnection metering equipment. Seller shall reimburse
the Company for the reasonable costs the Company incurs in
establishing the Company's Interconnection Facilities to
accommodate the delivery of the Net Energy Output from the
Facility. The Company's Interconnection Facilities shall
consist of:
3.2.1 A 138 KV transmission line with circuit breakers,
circuit switchers and other related terminal equipment
required to connect the Facility to the Company's
nearest feasible substation,
3.2.2 Metering Devices at the Interconnection Point, as
described in Section 6.1, and
3.2.3 Remote-terminal communication equipment to transmit
real-time MW, MVAR, and voltage data to the Company's
System Operation Office.
3.3 The Company and Seller shall provide each other with timely
notice of any change (physical or status) in their respective
system which may affect the proper coordination of safety
devices on the 2 systems, and shall notify each other
immediately in the event hazardous or unsafe conditions
associated with operations pursuant to this Agreement
are discovered to exist. The Company and Seller shall
also notify each other of the cessation
-2-
-202-
<PAGE>
of such conditions. Any such changes by Seller must first be
reviewed and approved by the Company.
3.4 Upon reasonable notice appropriate for the circumstances, the
Company shall have access to the Company's Interconnection
Facilities and Metering Devices on the Company's side of the
Interconnection Point for the purposes of conducting
necessary examinations, tests, calibrations, and maintenance
of the Company's Interconnection Facilities and Metering
Devices, provided, however, that the Company shall use its
reasonable efforts not to disrupt or otherwise interfere with
the normal operations of Seller.
3.5 Seller shall annually reimburse the Company for the
reasonable costs the Company incurs in maintaining all of the
Company's Interconnection Facilities shown on Figure 9-1.
3.6 For the purpose of regulating voltage, Seller shall deliver
reactive power (VARS) to the Interconnection Point in
accordance with instructions from remote terminal units
located in the Company's System Operating Office. The
Company could request that Seller deliver as much as 20 MVAR
or as little as 0 MVAR to the Interconnection Point. The
Company will not require Seller to absorb reactive power from
the Company at the Interconnection Point.
4. COMPLIANCE WITH INTERCONNECTION SPECIFICATIONS AND MODIFICATIONS
----------------------------------------------------------------
4.1 Seller shall comply with all reasonable Company requirements
as to: (a) the design, installation, purchase, operation and
maintenance of all of Seller's Interconnection Facilities
necessary to connect the Facility to the Company's system and
(b) the protection of the Company's system, employees and
customers from damage or injury arising out of, or in
connection with, Seller's operation of Seller's
Interconnection Facilities.
4.2 The Company shall construct necessary facilities in a timely
manner consistent with the construction schedule so long as
Seller makes payments in accordance with this Agreement.
4.3 Seller shall submit the specifications for Seller's
Interconnection Facilities for the Company's review and shall
thereafter submit periodic progress reports and will use its
reasonable best efforts to notify the Company of any changes
to such schedules in a timely manner.
4.4 The Company shall have the right to review the specifications
for Seller's Interconnection Facilities, including, without
limitation, improvements, additions, modifications,
replacements or other changes to equipment, electrical
drawings and one-line diagrams, provided, however, that the
Company completes its review of such specifications and
provides comments to Seller within a reasonable time period.
The Company's review of
-3-
-203-
<PAGE>
Seller's specifications, drawings and one-line diagrams shall
not be construed as confirming or endorsing the design of
Seller's Interconnection Facilities, or as a warranty of
safety, durability or reliability thereof.
4.5 Seller shall make payments to the Company for the Company's
Interconnection Facilities provided by the Company as
follows: one-half of the estimated total costs shall be due
within thirty (30) days after the Company sends written
notice that it has begun engineering on the Company's
Interconnection Facilities, and one-half of the estimated
total costs shall be paid within ninety (90) days
after the Company sends written notice that it has begun
construction of the Company's Interconnection Facilities.
In lieu of this payment approach, the Company may grant
Seller the option to pay for the Company's Interconnection
Facilities pursuant to a reasonable amortization schedule
based on the useful life of the Company's Interconnection
Facilities. A reconciliation between the amounts paid by
Seller and the actual costs shall be made upon completion of
construction.
4.6 When Seller no longer needs the Company's Interconnection
Facilities for which it has paid, Seller shall receive
payment for the net salvage value of the Company's
Interconnection Facilities dedicated to the Company's use.
If the Company is able to make use of these facilities to
serve other customers, Seller shall receive the fair
market value of the facilities determined as of the date that
Seller decides no longer to use said facilities. Payments
will be made within a reasonable period.
-4-
-204-
PAGE
<PAGE>
FIGURE 9-1
Interconnection Facilities
Figure 9-1 is a diagram of the substation and interconnecting lines
associated with the DePere Energy Center (DEC). Three lines are
connected to the DEC - two are generator outputs from the plant (one
for Phase 1 and one for Phase 2) and one is an auxiliary feed to the
plant for station loads. The three DEC lines each attach to a
transformer and a circuit breaker/circuit switcher prior to connecting
to the 138 KV bus. The Company's transmission system is attached to
the 138 KV bus, through a circuit breaker, by a line to Red Maple (or
Lost Dauphin) substation and a line, noted as future, to
Ashland substation.
The points of interconnection between the Seller-owned equipment and
the Company-owned equipment are indicated as the ties to the 138 KV
bus for the three lines connected to the DEC.
-205-
PAGE
<PAGE>
EXHIBIT 11.4
[BANK LETTERHEAD]
IRREVOCABLE LETTER OF CREDIT
----------------------------
, 19
--------------- --
Irrevocable Letter of Credit No.
Wisconsin Public Service Corporation
700 North Adams
Green Bay, WI 54307-9001
Dear Sirs:
At the request and on the instruction of our customer, ,
---------------
we hereby establish our irrevocable letter of credit No.
-------------
in your favor for the account of and authorize you to
----------------
draw on Bank an amount not to exceed
----------------------------
Dollars ($ ).
- --------------------- --------------
Funds under this letter of credit are available to you against a sight
draft on us, which must be marked "Drawn under
-----------------------
Bank Irrevocable Letter of Credit No. dated ."
---------- -------------
Each draft must be accompanied by: (1) a written statement by your
duly authorized officer that there is then payable to you from
DePere Energy LLC an amount of Liquidated Damages pursuant to
Section 11.4 of the Power Purchase Agreement between DePere Energy
LLC and Wisconsin Public Service Corporation equal to the amount of
such draft; and (2) the original of this letter of credit which will
be returned to you following notation hereon by the Bank of the amount
of such draft, or, if the amount of the draft is in the full amount of
this letter of credit, the letter of credit will be retained by the
Bank.
Drafts so drawn and accompanied will be honored by this Bank if
presented to our main office in prior to the close
-------------------
of business on the expiration date. The expiration date of this
letter of credit is .
------------------------
Under the payment to you of any amount demanded hereunder, we shall be
fully discharged on our obligation under this letter of credit with
respect to such amount, and we shall not thereafter be
-206-
<PAGE>
obligated to make any further payments under this letter of credit
in respect of such amount to you or to any other person.
This letter of credit sets forth in full our understanding, and such
understanding shall not in any way be modified, amended, amplified or
limited by reference to any document, instrument or agreement referred
to herein.
This letter of credit is subject to the Uniform Customs and Practice
for Documentary Credits, 1983 Revision, ICC Publication No. 400 (the
"Uniform Customs"). This letter of credit shall be deemed to be a
contract made under the Laws of the State of Wisconsin and shall, as
to matters not governed by the Uniform Customs, be governed by and
construed in accordance with the Laws of said State.
Very truly yours,
BANK
- ------------------------------
By:
-----------------------------------
Its:
-----------------------------------
-2-
-207-
PAGE
<PAGE>
EXHIBIT 12.1.2
(One Page)
(This exhibit is confidential. It has been omitted and filed
separately with the SEC.)
-208-
PAGE
<PAGE>
EXHIBIT 12.1.3
(One Page)
(This exhibit is confidential. It has been omitted and filed
separately with the SEC.)
-209-
PAGE
<PAGE>
(WISCONSIN PUBLIC SERVICE CORPORATION LETTERHEAD)
February 18, 1997
DePere Energy LLC
c/o Polsky Energy Corporation
Edens Corporate Center
Suite 150
650 Dundee Road
Northbrook, IL 60062
Attention: President
Gentlemen:
Reference is made to that certain Power Purchase Agreement, dated
November 8, 1995 (the "Agreement"), between DePere Energy LLC
("Seller") and Wisconsin Public Service Corporation ("Company").
Capitalized terms used herein without definition shall have the
meanings ascribed thereto in the Agreement.
Seller and Company hereby agree that, in the event a CPCN with respect
to the Facility is issued by the Commission, the Agreement shall be
deemed amended upon the effective date of that CPCN as follows:
1. Section 11.4.3.2(b). The dollar amount, "$65," in the phrase,
-------------------
"$65/KW as a Contract Development Deposit," in the first sentence
of Section 11.4.3.2(b) of the Agreement, shall be deleted, and in
its place, the dollar amount, "$10," shall be inserted.
2. Section 11.4.3.2(c). The dollar amount, "$50," in the phrase,
-------------------
"$50/KW as a Contract Performance Deposit," in the first sentence
of Section 11.4.3.2(c) of the Agreement, shall be deleted, and in
its place, the dollar amount, "$25," shall be inserted. The
penultimate sentence of Section 11.4.3.2(c) shall be amended to
read:
In the event at any time during the term of this Agreement
that the level of security previously provided by Seller is
not equal to the amount required under this paragraph,
whether because of draws against the security from time to
time to pay liquidated damages or otherwise, the level of
the Letter of Credit shall be adjusted within thirty (30)
days to provide the required level of security.
-210-
<PAGE>
DePere Energy LLC
February 4, 1997
Page 2
3. Section 11.4.3.2(d). The dollar amount,"$65," in the phrase,
-------------------
"$65/KW as a Phase II Contract Performance Deposit," in the
first sentence of Section 11.4.3.2(d) of the Agreement, shall
be deleted and in its place, the dollar amount, "$32.50,"
shall be inserted. The penultimate sentence of Section
11.4.3.2(d) shall be amended to read the same as the
penultimate sentence of Section 11.4.3.2(c) as amended by
paragraph 2 above.
4. Exhibit 5.1. (Exhibit 5.1 is confidential. It has been
omitted and filed separately with the SEC.)
Except as expressly amended by this letter agreement, all of the terms
and conditions of the Agreement shall remain in full force and effect.
All references in the Agreement to "this Agreement" shall be deemed to
refer to the Agreement as amended hereby.
The execution of this letter agreement shall not be deemed to be a
waiver of any default or event of default under the Agreement, whether
or not known to the Company and whether or not existing on the date of
this letter agreement.
This letter agreement may be executed in any number of counterparts,
each of which when so executed and delivered shall be deemed an
original and all of which counterparts, taken together, shall
constitute one and the same instrument.
Please signify your agreement to the foregoing amendments by executing
a duplicate copy of this letter and returning the same to the
undersigned.
Sincerely,
WISCONSIN PUBLIC SERVICE CORPORATION
/s/ L. L. Weyers
Larry L. Weyers
President and Chief Operating Officer
dle
-211-
<PAGE>
<PAGE>
DePere Energy LLC
February 4, 1997
Page 3
Accepted and agreed this 28 day of February, 1997.
--
DEPERE ENERGY LLC
BY: /s/ Michael Polsky
------------------
Name:
Title: /s/ President
-212-
<PAGE>
EXHIBIT 10G-1
WPS RESOURCES CORPORATION
DEFERRED COMPENSATION PLAN
As Amended and Restated Effective January 1, 1998
-213-
PAGE
<PAGE>
WPS RESOURCES CORPORATION
DEFERRED COMPENSATION PLAN
WPS Resources Corporation Deferred Compensation Plan (the "Plan")
has been established effective January 1, 1996 to promote the best interests
of WPS Resources Corporation (the "Company") and the stockholders of the
Company by (1) attracting and retaining well-qualified persons for service as
non-employee directors of the Company and designated subsidiaries or
affiliates; and (2) attracting and retaining key management employees
possessing a strong interest in the successful operation of the Company and
its subsidiaries or affiliates and encouraging their continued loyalty,
service and counsel to the Company and its subsidiaries or affiliates. This
Plan replaces Deferred Compensation Plans 008, 009, 010 and 011 previously
maintained by the Wisconsin Public Service Corporation.
-214-
PAGE
<PAGE>
ARTICLE I. DEFINITIONS AND CONSTRUCTION
Section 1.01. Definitions. The following terms have the meanings
---------------------------
indicated below unless the context in which the term is used clearly
indicates otherwise:
(a) "Account" means the recordkeeping account or accounts maintained
by a Participating Employer for each Participant, including to extent
applicable to any such Participant, Reserve Account A, Reserve Account B
and the Stock Account.
(b) An "Affiliate" of, or a person "affiliated" with, a specified
person is a person that directly, or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common control
with, the person specified and the term "Associate" used to indicate a
relationship with any person, means (i) any corporation or organization (other
than the registrant or a majority-owned subsidiary of the registrant) of which
such person is an officer or partner or is, directly or indirectly, the
beneficial owner of 10 percent or more of any class of equity securities,
(ii) any trust or other estate in which such person has a substantial
beneficial interest or as to which such person serves as trustee or in a
similar fiduciary capacity, and (iii) any relative or spouse of such person,
or any relative of such spouse, who has the same home as such person or who is
a director or officer of the registrant or any of its parents or subsidiaries.
(c) A person shall be deemed to be the "Beneficial Owner" of any
securities:
(i) which such Person or any of such Person's Affiliates
or Associates has the right to acquire (whether such
right is exercisable immediately or only after the
passage of time) pursuant to any agreement, arrangement,
arrangement or understanding, or upon the exercise of
conversion rights, exchange rights, rights, warrants or
options, or otherwise; provided, however, that a Person
-------- -------
shall not be deemed the Beneficial Owner of, or to
beneficially own, (A) securities tendered pursuant to a
tender or exchange offer made by or on behalf of such
Person or any of such Person's Affiliates or Associates
until such tendered securities are accepted for purchase
or (B) securities issuable upon exercise of Rights
pursuant to the terms of the Company's Rights Agreement
with Firstar Trust Company, dated as of December 12,
1996, as amended from time to time (or any successor
to such Rights Agreement) at any time before the
issuance of such securities;
(ii) which such Person or any of such Person's Affiliates
or Associates, directly or indirectly, has the right
to vote or dispose of or has "beneficial ownership"
of (as determined pursuant to Rule 13d-3 of the
General Rules
2
-215-
<PAGE>
and Regulations under the Act), including pursuant
to any agreement, arrangement or understanding;
provided, however, that a Person shall not be deemed
-------- -------
the Beneficial Owner of, or to beneficially own, any
security under this subparagraph (ii) as a result of
an agreement, arrangement or understanding to vote
such security if the agreement, arrangement or
understanding: (A) arises solely from a revocable
proxy or consent given to such Person in response to
a public proxy or consent solicitation made pursuant
to, and in accordance with, the applicable rules and
regulations under the Act and (B) is not also then
reportable on a Schedule 13D under the Act (or any
comparable or successor report); or
(iii) which are beneficially owned, directly or
indirectly, by any other Person with which such
Person or any of such Person's Affiliates or
Associates has any agreement, arrangement or
understanding for the purpose of acquiring, holding,
voting (except pursuant to a revocable proxy as
described in Section 1.01(c)(ii) above) or disposing
of any voting securities of the Company.
(d) "Beneficiary" means the person or entity designated by the
Participant to be his beneficiary for purposes of this Plan. If a valid
designation of Beneficiary is not in effect at time of the death of a
Participant, the estate of the Participant is deemed to be the sole
Beneficiary. If a Beneficiary dies while entitled to receive distributions
from the Plan, any remaining payments shall be paid to the estate of the
Beneficiary. Beneficiary designations shall be in writing, filed with the
Secretary, and in such form as the Secretary may prescribe for this purpose.
(e) "Board" means the Board of Directors of the Company.
(f) "Bonus Deferral" means amounts credited, in accordance with an
Executive's election under Section 8.02(b) of the WPS Resources Corporation
Short-Term Variable Pay Plan, to an Executive's Stock Account in lieu of the
payment of an equal amount as a current cash bonus.
(g) A "Change in Control of the Company" shall be deemed to have
occurred if:
(i) any Person (other than any employee benefit plan of
the Company or of any subsidiary of the Company,
any Person organized, appointed or established
pursuant to the terms of any such benefit plan or
any trustee, administrator or fiduciary of such a
plan) is or becomes the Beneficial Owner of
securities of the Company
3
-216-
<PAGE>
representing at least 30% of the combined voting
power of the Company's then outstanding securities;
(ii) one-half or more of the members of the Board are
not Continuing Directors;
(iii) there shall be consummated any merger,
consolidation, or reorganization of the Company
with any other corporation as a result of which
less than 50% of the outstanding voting securities
of the surviving or resulting entity are owned by
the former shareholders of the Company other than a
shareholder who is an Affiliate or Associate of any
party to such consolidation or merger;
(iv) there shall be consummated (x) any merger of the
Company or share exchange involving the Company in
which the Company is not the continuing or
surviving corporation other than a merger of the
Company in which each of the holders of the
Company's Common Stock immediately prior to the
merger have the same proportionate ownership of
common stock of the surviving corporation
immediately after the merger;
(v) there shall be consummated any sale, lease,
exchange or other transfer (in one transaction or
a series of related transactions) of all, or
substantially all, of the assets of the Company to
a Person which is not a wholly owned subsidiary of
the Company; or
(vi) the shareholders of the Company approve any plan or
proposal for the liquidation or dissolution of the
Company.
(h) "Code" means the Internal Revenue Code of 1986, as interpreted by
regulations and rulings issued pursuant thereto, all as amended and in effect
from time to time.
(i) "Company" means WPS Resources Corporation, a Wisconsin corporation,
or any successor corporation.
(j) "Compensation" means (i) for a Director, the Retainer Fee and (ii)
for an Executive the base salary or wage payable by a Participating Employer
for services performed, including elective contributions to a Section 125, 129
or 401(k) arrangement or Voluntary Deferrals to this Plan, but excluding
extraordinary payments such as overtime, bonuses, meal allowances, reimbursed
expenses, termination pay, moving pay, commuting expenses, Mandatory Deferrals
to this Plan or other non-elective deferred compensation payments or accruals,
stock options, the value of employer-provided fringe benefits or
coverage, and any
4
-217-
<PAGE>
contributions on behalf of the Executive paid by a Participating Employer to a
survivor's income benefit plan or any other employee benefit plan within the
meaning of ERISA, all determined in accordance with such uniform rules,
regulations or standards as may be prescribed by the Compensation Committee.
(k) "Compensation Committee" means the Compensation Committee of the
Board, which functions as the joint Compensation Committee for the Company and
for Wisconsin Public Service Corporation.
(l) "Continuing Director" means (i) any member of the Board of Directors
of the Company who was a member of such Board on May 1, 1997, (ii) any
successor of a Continuing Director who is recommended to succeed a Continuing
Director by a majority of the Continuing Directors then on such Board and
(iii) additional directors elected by a majority of the Continuing Directors
then on such Board.
(m) "Director" means a non-employee director of a Participating Employer
who has been designated by the Compensation Committee as covered under or
being eligible to participate in the Plan.
(n) "ERISA" means the Employee Retirement Income Security Act of 1974,
as interpreted by regulations and rulings issued pursuant thereto, all as
amended and in effect from time to time.
(o) "Executive" means a common law employee of a Participating Employer
who has been designated by the Compensation Committee as covered under or
otherwise being eligible to participate in this Plan.
(p) "Mandatory Deferral" means the amount which may from time to time be
credited to the Stock Account of an Executive in accordance with Section 3.01
and for which the Executive does not receive the option between receiving such
amount as current cash compensation and deferring such amount into the Plan.
(q) "Participant" means either a Director or Executive who is
participating in or eligible to participate in the Plan.
(r) "Participating Employer" means Company and any direct or indirect
subsidiary of the Company that, with the consent of the Compensation
Committee, adopts the Plan for the benefit of one or more Executives or
Directors.
(s) "Person" means any individual, firm, partnership, corporation or
other entity, including any successor (by merger or otherwise) of such entity,
or a group of any of the foregoing acting in concert.
(t) "Retainer Fee" means those fees paid by a Participating Employer to
non-employee directors for services rendered on the Board or any committee of
the Board, or for
5
-218-
<PAGE>
service on the board of directors of a subsidiary or affiliate, including
attendance fees and fees for serving as committee chair.
(u) "Secretary" means the Secretary of the Company (or his delegate).
(v) "Trust" means the WPS Resources Corporation Deferred Compensation
Trust or other funding vehicle which may from time to time be established, as
amended and in effect from time to time.
(w) "Voluntary Deferrals" means amounts (other than Bonus Deferrals)
credited, in accordance with a Participant's election, to his Account in lieu
of the payment of an equal amount of current Compensation.
(x) "WPS Resources Stock" means the common stock, $1.00 par value, of
the Company.
(y) "WPS Resources Stock Units" means the hypothetical shares of common
stock, $1.00 par value, of the Company, that may be credited (i) to the Stock
Account of an Executive as a result of Mandatory Deferrals or Bonus Deferrals,
or (ii) to the Stock Account of either a Director or Executive as a result of
Voluntary Deferrals.
Section 1.02. Construction and Applicable Law. (a) Wherever any words
-----------------------------------------------
are used in the masculine, they shall be construed as though they were used in
the feminine in all cases where they would so apply; and wherever any words
are use in the singular or the plural, they shall be construed as though they
were used in the plural or the singular, as the case may be, in all cases
where they would so apply. Titles of articles and sections are for general
information only, and the Plan is not to be construed by reference to such
items.
This Plan, as applied to Executives, is intended to be a plan of
deferred compensation maintained for a select group of management or highly
compensated employees as that term is used in ERISA, and shall be interpreted
so as to comply with the applicable requirements thereof. In all other
respects, the Plan is to be construed and its validity determined according to
the laws of the State of Wisconsin to the extent such laws are not preempted
by federal law. In case any provision of the Plan is held illegal or
invalid for any reason, the illegality or invalidity will not affect the
remaining parts of the Plan, but the Plan shall, to the extent possible, be
construed and enforced as if the illegal or invalid provision had never been
inserted.
6
-219-
<PAGE>
ARTICLE II. PLAN ACCOUNTS
Section 2.01. Establishment of Accounts. One or more of the following
-----------------------------------------
Accounts (as applicable) will be established in the name of each Participant
who (i) is identified on Schedule A as being eligible to participate in either
the Voluntary Deferral component of the Plan or the Mandatory Deferral
component of the Plan or in both the Voluntary Deferral and Mandatory Deferral
components of the Plan, or (ii) is eligible for and has elected to make Bonus
Deferrals in accordance with the procedures specified in Section 8.02(b) of
the WPS Resources Corporation Short-Term Variable Pay Plan:
(a) Reserve Account A
(b) Reserve Account B
(c) Stock Account.
Section 2.02. Reserve Account A. (a) This Account will be credited
---------------------------------
with the reserve account balance accumulated by a Participant as of December
31, 1995 under the prior deferred compensation program of Wisconsin Public
Service Corporation. Except for attributed earnings as described below, no
further "contributions" or credits of any kind will be made to this Account on
behalf of a Participant.
(b) As of the end of each Plan Year, the Account will be credited with
an interest equivalent on the balance in the Account from time to time during
the year. The annual interest equivalent will be the sum (on a non-compounded
basis) of the attributed earnings for each month during the year based on the
Account balance as of the last day of the month. Unless modified by the
Compensation Committee, the interest equivalent rate for any month will be the
greater of:
(i) one-half of one percent (0.5%); or
(ii) one-twelfth (1/12) of the return on common
shareholders' equity (ROE). For the months of
April through September, ROE means the consolidated
return on equity of the Company and all
subsidiaries for the twelve (12) months ended on
the preceding March 31 as calculated pursuant to
the Company's standard accounting procedure for
financial reporting to shareholders. For the
months October through March, ROE means return on
equity as described above for the twelve (12)
months ended on the preceding September 30.
(c) The Compensation Committee may revise the interest equivalent rate
described in Section 2.02(b) above or the manner in which it is calculated,
but in no event shall the rate
7
-220-
<PAGE>
be less than six percent (6%) per annum. Any such revised rate shall be
effective with the calendar month following such action by the Compensation
Committee.
(d) Notwithstanding Section 2.02(b) and (c), in the event of a Change in
Control, the minimum rate of interest equivalent shall be the greater of
(A) six percent (6%) per annum, or (B) for each month for which attributed
earnings are required to be calculated, a rate equal to two (2) percentage
points above the prime lending rate at Firstar Bank Milwaukee, Milwaukee,
Wisconsin as of the last business day of that month.
Section 2.03. Reserve Account B. (a) This Account shall be credited
---------------------------------
with Voluntary Deferrals made after December 31, 1995 which a Participant
elects to allocate to this Account in accordance with Section 3.02(c)(ii).
(b) As of the end of each Plan Year, the Account will be credited with
an interest equivalent on the balance in the Account from time to time during
the year. The annual interest equivalent will be the sum (on a non-compounded
basis) of the attributed earnings for each month during the year based on the
Account balance as of the last day of each month. Unless modified by the
Compensation Committee, the interest equivalent rate for any month will be the
greater of:
(i) one-half of one percent (0.5%); or
(ii) seventy percent (70%) of one-twelfth (1/12) of the
return on common shareholders equity (ROE). For
the months of April through September, ROE means
the consolidated return on equity of the Company
and all subsidiaries for the twelve (12) months
ended on the preceding March 31 as calculated
pursuant to the Company's standard accounting
procedure for financial reporting to shareholders.
For the months October through March, ROE means
return on equity as described above for the twelve
(12) months ended on the preceding September 30.
(c) The Compensation Committee may revise the interest equivalent rate
described in Section 2.03(b) above or the manner in which it is calculated,
but in no event shall the rate be less than six percent (6%) per annum. Any
such revised rate shall be effective with the calendar month following such
action by the Compensation Committee.
(d) Notwithstanding Section 2.03(b) and (c), in the event of a Change in
Control, the minimum rate of interest equivalent shall be the greater of
(A) six (6%) per annum, or (B) for each month for which attributed earnings
are required to be calculated, a rate equal to two (2) percentage points above
the prime lending rate at Firstar Bank Milwaukee, Milwaukee, Wisconsin as of
the last business day of that month.
Section 2.04. Stock Account. (a) This Account shall be credited
-----------------------------
with (i) all Mandatory Deferrals made after December 31, 1995, (ii) those
Voluntary Deferrals made after
8
-221-
<PAGE>
December 31, 1995 which a Participant, in accordance with Section 3.02(c)(ii),
elects to allocate to this Account, and (iii) all Bonus Deferrals.
(b) As of the end of each month, all Voluntary Deferrals, Mandatory
Deferrals, and Bonus Deferrals made by or on behalf of a Participant during
that month and allocated to the Participant's Stock Account (the "Convertible
Amount") shall be converted, for recordkeeping purposes, into whole and
fractional WPS Resources Stock Units, with fractional units calculated to four
decimal places. The conversion shall be accomplished by dividing each
Participant's Convertible Amount by the average purchase price of all shares
of WPS Resources Stock purchased during that month by or on behalf of the
Trust and the WPS Resources Corporation Stock Investment Plan. Likewise, any
dividends that would have been payable on the WPS Resources Stock Units
credited to a Participant's Stock Account had such Units been actual shares of
WPS Resources Stock shall be converted, for recordkeeping purposes, into whole
and fractional WPS Resources Stock Units based on the average purchase price
of all shares of WPS Resources Stock purchased by or on behalf of the Trust
and the WPS Resources Corporation Stock Investment Plan during the
month in which the dividend is paid.
Section 2.05. Accounts are For Recordkeeping Purposes Only. The Plan
------------------------------------------------------------
Accounts described in this Article II above serve solely as a device for
determining the amount of benefits accumulated by a Participant under the
Plan, and shall not constitute or imply an obligation on the part of a
Participating Employer to fund such benefits. In any event, the Company may,
in its discretion, set aside assets equal to part or all of such account
balances and invest such assets in Company stock, life insurance or any other
investment deemed appropriate. Any such assets, including WPS Resources Stock
and any other assets held under the Trust, shall be and remain the sole
property of the Company and except to the extent that the Trust authorizes a
Participant to direct the trustee with respect to the voting of WPS Resources
Stock held in the Trust, a Participant shall have no proprietary rights of any
nature whatsoever with respect to such assets.
9
-222-
<PAGE>
ARTICLE III. MANDATORY AND VOLUNTARY DEFERRALS
Section 3.01. Mandatory Deferrals. The Compensation Committee may,
-----------------------------------
from time to time, authorize a Mandatory Deferral to be made on behalf of
covered Executives. The authorization of any such contribution, the
Executives entitled to the contribution, and the amount to be credited to each
eligible Executive, shall be determined by the Compensation Committee in its
sole discretion; provided that the maximum Mandatory Deferral for any year
shall not exceed thirty percent (30%) of an Executive's Compensation for the
year. Any Mandatory Deferral will be credited to an eligible Executive's
Stock Account and converted into WPS Resources Stock Units in accordance
with Section 2.04.
Section 3.02. Election to Make Voluntary Deferrals. (a) A
----------------------------------------------------
Participant may elect to make Voluntary Deferrals by submitting a properly
completed and signed election form to the Secretary on or before December 20,
1995. If the Participant so elects, Voluntary Deferrals will commence with
respect to Compensation earned by a Participant on or after January 1, 1996.
Notwithstanding the foregoing, if, as of January 1, 1996, the Participant has
in effect an election under the prior deferred compensation program maintained
by Wisconsin Public Service Corporation and does not file an election with the
Secretary in accordance with this Section 3.02(a), the prior election shall be
deemed the Participant's initial election under this Plan.
(b) If a Director or Executive first becomes eligible to participate in
the Plan following the election period described in Section 3.02(a) above
(such as, for example, a Director who commences service or an Executive who is
newly designated by the Compensation Committee as being eligible) the initial
deferral election may be made within thirty (30) days of the date that such
person first becomes eligible under the Plan, and shall be effective with
respect to Compensation earned by the Participant in the month following the
month during which the deferral election is made.
(c) A Participant's election shall be in such form as the Secretary may
prescribe, and shall specify:
(i) The percentage or dollar amount of Compensation to
be deferred as a Voluntary Deferral. A Director
may elect to defer all or any part of his
Compensation, in whole dollar amounts or in
increments of one percent (1%). An Executive may,
without the consent of the Compensation Committee,
elect to defer a portion of his Compensation, in
whole dollar amounts or in increments of one
percent (1%), provided that the amount or
percentage elected does not exceed thirty percent
(30%) of the Executive's Compensation. An
Executive may elect to defer more than thirty
percent (30%) of Compensation only if the
10
-223-
<PAGE>
Compensation Committee has approved the Executive's
specific deferral percentage or amount.
(ii) Whether the Voluntary Deferrals are to be credited
to the Participant's Reserve Account (Reserve
Account B) or the Participant's Stock Account. If
the Participant desires to allocate Voluntary
Deferrals to both his Reserve and Stock Accounts,
the election must further specify the portion of
the Voluntary Deferrals, in whole dollar amounts or
in increments of one percent (1%), to be allocated
to each Account. Notwithstanding anything to the
contrary herein, Voluntary Deferrals in excess of
thirty percent (30%) of an Executive's Compensation
shall be credited to Reserve Account B, and the
Executive's election under this Section 3.02(c)(ii)
shall not apply to any such amounts.
(d) An election shall be deemed made only when it is received by the
Secretary, and shall remain in effect until modified by the Participant in
accordance with Section 3.03 below or otherwise revoked in accordance with
Plan rules.
Section 3.03. Revision or Modification of Voluntary Deferral Election.
-----------------------------------------------------------------------
(a) A Participant's initial election under Section 3.02 (including an
election not to make Voluntary Deferrals) shall remain in effect from year to
year unless revised or modified by the Participant in accordance with this
Section 3.03 or otherwise revoked in accordance with Plan rules.
(b) A Participant may modify his then current election (including an
election not to make Voluntary Deferrals) by filing a revised election form,
properly completed and signed, with the Secretary. The revised election will
be effective with respect to Compensation earned on and after the first day of
the month that is coincident with or next following the date on which it is
received by the Secretary.
(c) An election shall be deemed revised in accordance with this
Section 3.03 only when the revised election is received by the Secretary, and
once effective, the revised election shall remain in effect until further
revised in accordance with this Section 3.03 or otherwise revoked in
accordance with Plan rules. Revised elections are prospectively effective
with respect to Compensation earned on or after the applicable effective date
described in Section 3.03(b) and (c) above. A revised election does not
operate to modify or otherwise reallocate the amounts deferred prior to the
effective date of the revised election.
Section 3.04. Involuntary Termination of Voluntary Deferral Elections.
-----------------------------------------------------------------------
A deferral election shall be automatically revoked upon termination of service
as a Director (in the case of a Director) or termination of employment (in the
case of an Executive). In addition, an Executive's deferral election shall
terminate on the first day of the Plan Year following the date that the
Compensation Committee determines that the Executive is no longer eligible to
11
-224-
<PAGE>
participate in the Plan, including any such action that may be necessary in
order for the Plan to qualify under ERISA, with respect to Executive
employees, as a plan of deferred compensation for a select group of management
or highly compensated employees.
12
-225-
<PAGE>
ARTICLE IV. DISTRIBUTION OF RESERVE ACCOUNT A,
RESERVE ACCOUNT B AND STOCK ACCOUNTS
Section 4.01. Distribution Election. (a) The distribution election
-------------------------------------
(if any) made by a Participant under the prior deferred compensation program
maintained by Wisconsin Public Service Corporation shall be his distribution
election under this Plan unless and until modified in accordance with Section
4.02 below.
(b) A new Participant shall, at the time he commences participation in
the Plan, make a distribution election with respect to his Account. The
election shall be in such form as the Secretary may prescribe, and shall
specify the distribution commencement date, the distribution period, the
method of distributing earnings credited to the Account, and the distribution
method applicable following the Participant's death. Any such election shall
be consistent with the following rules (or where the Participant fails to make
a selection, in accordance with the default rules set forth below):
(i) Distribution Commencement Date. Unless the
------------------------------
Participant has selected a later commencement date
(which in no event shall be later than the first
distribution period following the Participant's
attainment of age 72), distribution of a
Participant's Accounts will commence within 60 days
following the end of the calendar year in which
occurs the Participant's retirement or termination
of employment or service. For purposes of this
Plan, a participating Executive who is disabled
shall be deemed to have retired or terminated at
the conclusion of benefits under all disability
income plans sponsored by a Participating Employer
or to which a Participating Employer contributes.
Further, a participating Executive who ceases
employment with a Participating Employer in
connection with an early retirement (reduction in
force) program sponsored by the Participating
Employer shall, if a participant in the Wisconsin
Public Service Administrative Employees Retirement
Plan, be deemed to have retired upon commencement
of retirement benefits under such plan.
(ii) Distribution Period. Distributions will be made in
-------------------
1, 3, 6, 9, 12 or 15 annual installments, as
elected by the Participant.
(iii) Method of Calculating Annual Distribution Amount.
------------------------------------------------
Unless the Participant elects the Alternate
Distribution Method, the amount to be distributed
to the Participant
13
-226-
<PAGE>
each year during the distribution period will be
determined under the Regular Distribution Method.
The Regular and Alternate Distribution Methods are
described in more detail in Section 4.03.
(iv) Distribution of Remaining Account Following
-------------------------------------------
Participant's Death. In the event of the
-------------------
Participant's death, the Participant's remaining
undistributed interest will be distributed to the
Beneficiary designated by the Participant in either
a single sum payment or in installments, as elected
by the Participant. If the Participant has elected
that death benefits be paid in a single sum, the
payment shall be made no later than March 1
following the calendar year in which occurs the
Participant's death. If the Participant has
elected that death benefits be paid in
installments, (A) any installments previously
commenced to the Participant shall continue to the
Beneficiary and (B) if installment distributions
had not commenced as of the date of the
Participant's death, payments over the installment
period elected by the Participant shall commence to
the Beneficiary no later than March 1 following the
calendar year in which occurs the Participant's
death.
(c) A distribution election shall be deemed made only when it is
received by the Secretary, and shall remain in effect until modified by the
Participant in accordance with Section 4.02 below or otherwise revoked in
accordance with Plan rules.
Section 4.02. Modified Distribution Election. A Participant may
---------------------------------------------
from time to time modify his distribution election by filing a revised
distribution election, properly completed and signed, with the Secretary.
However, a revised distribution election will be given effect only if the
Participant remains employed by (or in the case of a Director, continues
service on the Board or the board of directors of a Participating Employer)
for twenty-four (24) consecutive months following the date that the revised
election is received by the Secretary.
Section 4.03. Calculation of Annual Distribution Amount. (a) For
--------------------------------------------------------
any Participant whose retirement date was prior to January 1, 1996,
distribution will continue to be calculated under the distribution method
applicable to such Participant at the time his distributions commenced under
the terms of the prior deferred compensation program maintained by Wisconsin
Public Service Corporation.
(b) For any Participant whose retirement date is after December 31,
1995, unless the Participant has selected the Alternate Distribution Option,
the annual distribution amount shall be separately calculated for the
Participant's interest (if any) in Reserve Account A, Reserve Account B and
the Stock Account.
14
-227-
<PAGE>
(i) The annual distribution amount for Reserve Account
A and Reserve Account B shall be determined by
dividing the balance in each Account as of
January 1 of the year for which the distribution is
being made by the number of installment payments
remaining to be made under the distribution period
selected by the Participant. Distributions from
Reserve Account A and Reserve Account B shall be
made in cash. The amount of any distribution under
this Section 4.03(b)(i) will be charged pro-rata
against the Participant's interest in Reserve
Account A and B.
(ii) The annual distribution amount for the Stock
Account shall be determined on a share basis by
dividing the number of WPS Resources Stock Units
credited to the Participant's Stock Account as of
January 1 of the year for which the distribution is
being made by the number of installment payments
remaining to be made under the distribution period
selected by the Participant, and then rounding the
quotient obtained for all but the final installment
to the next lowest whole number of WPS Resources
Stock Units. The Committee will then distribute to
the Participant shares of WPS Resources Stock
and/or cash equal to the annual distribution
amount. For any portion of the distribution that
the Committee elects to satisfy by making a cash
payment to the Participant, the cash payment shall
be determined by multiplying the annual
distribution amount (or the portion of the annual
distribution amount being satisfied in cash) by the
closing price of WPS Resources Stock on January 21
of the year in which the distribution is being
made, as such share price is reported in the
Wall Street Journal's New York Stock Exchange
Composite Transactions listing. If January 21
falls on a Saturday, Sunday or holiday, the
calculation of the cash portion of the
distributions will be made based upon the closing
price as reported for the immediately preceding
business day.
(c) For any Participant whose retirement date is after December 31, 1995
and who has selected the Alternate Distribution Method, the annual
distribution amount shall be separately calculated for the Participant's
interest (if any) in Reserve Account A, Reserve Account B and the Stock
Accounts of January 1 of the year in which distributions commence. The annual
distribution amounts, once calculated, shall not thereafter be recalculated.
15
-228-
<PAGE>
(i) For the year in which distribution commences, the
annual distribution amount for Reserve Account A
and Reserve Account B shall be determined by
dividing the balance in each Account as of
January 1 of the year in which distribution
commences by the number of installment payments
selected by the Participant. For each succeeding
distribution year, the Participant shall be
entitled to a distribution equal to the annual
distribution amount calculated in accordance with
the preceding sentence, plus all interest
equivalent credited to the Account during the
preceding calendar year. Distributions from
Reserve Account A and Reserve Account B shall be
made in cash. The amount of any distribution under
this Section 4.03(c)(i) will be charged pro-rata
against the Participant's interest in Reserve
Account A and B.
(ii) For the year in which distribution commences, the
annual distribution amount for the Stock Account
shall be determined on a share basis by dividing
the number of WPS Resources Stock Units credited to
the Participant's Stock Account as of January 1 of
the year in which distribution commences by the
number of installment payments selected by the
Participant, and then rounding the quotient
obtained for all but the final installment to the
next lowest whole number of WPS Resources Stock
Units. For each succeeding distribution year, the
Participant shall be entitled to distribution of
the number of WPS Resources Stock Units determined
in accordance with the preceding sentence, plus all
additional WPS Resources Stock Units credited to
the Stock Account during the preceding calendar
year on account of the assumed reinvestment of
dividends, disregarding for all but the final
installment any fractional WPS Resources Stock
Units. The Committee will then distribute to the
Participant shares of WPS Resources Stock and/or
cash equal to the number of WPS Resources Stock
Units required to be distributed for that year.
For any portion of the distribution that the
Committee elects to satisfy by making a cash
payment to the Participant, the cash payment shall
be determined by multiplying the distribution
amount (or the portion of the distribution amount
being satisfied in cash) by the closing price of
WPS Resources Stock on January 21 of the year in
which the distribution is being made, as such share
price is
16
-229-
<PAGE>
reported in the Wall Street Journal's New York
Stock Exchange Composite Transactions listing. If
January 21 falls on a Saturday, Sunday or holiday,
the calculation of the cash portion of the
distributions will be made based upon the closing
price as reported for the immediately preceding
business day.
Section 4.04. Time of Distribution. WPS Resources Stock distributed
------------------------------------
to a Participant shall be distributed on January 22 (or if January 22 falls on
a Saturday, Sunday or holiday, the immediately following business day). For
distribution and tax reporting purposes, the value of WPS Resources Stock
distributed shall equal the number of shares distributed multiplied by the
closing price of WPS Resources Stock on January 21 (or if January 21 falls on
a Saturday, Sunday or holiday, the immediately preceding business day) of the
year in which the distribution is being made as reported in the Wall Street
Journal's New York Stock Exchange Composite Transaction listing. The cash
portion of any distribution will be made no later than March 1 of the year for
which the distribution is being made.
Section 4.05. Other Distribution Rules. (a) Subject to adjustment
----------------------------------------
as provided in paragraph (c) of this Section 4.05, the total number of
authorized but previously unissued shares of WPS Stock which may be
distributed to Participants pursuant to the Plan shall be one hundred thousand
(100,000), which number shall not be reduced by or as a result of (i) any cash
distributions pursuant to the Plan or (ii) the distribution to Participants
pursuant to the Plan of any outstanding shares of WPS Stock purchased by or on
behalf of the Trust.
(b) The amount actually distributed to the Participant will be reduced
by applicable income tax withholding. Unless the Participant has made a
contrary election, income tax on the entire annual distribution amount will be
withheld from the cash portion of the distribution, and WPS Resources Stock
will be used to satisfy withholding obligations only to the extent that the
cash portion of the distribution is insufficient for this purpose.
(c) In the event of any merger, reorganization, consolidation,
recapitalization, separation, liquidation, stock dividend, split-up, share
combination or other change in the corporate structure of the Company or a
Participating Employer affecting WPS Stock, such adjustment shall be made in
the number and class of shares which may be distributed pursuant to the Plan
as may be determined to be appropriate and equitable by the Compensation
Committee in its sole discretion.
17
-230-
<PAGE>
ARTICLE V. SPECIAL DEATH BENEFIT FOR PARTICIPANTS
WHO DIE WHILE MAKING VOLUNTARY AND MANDATORY DEFERRALS
Section 5.01. Eligibility. If an Executive who is identified in
---------------------------
Schedule B (as from time to time amended by the Compensation Committee) dies
prior to attainment of age sixty-five (65) and while employed by a
Participating Employer, and if at the time of the Executive's death Voluntary
or Mandatory Deferrals were being made by or on behalf of the Executive, then
a special death benefit shall be paid to the Executive's Beneficiary. This
special death benefit is in addition to any other death benefit payable under
the Plan.
Section 5.02. Calculation of Special Death Benefit Amount. The special
-----------------------------------------------------------
death benefit shall be an amount equal to the sum of the (a), (b), (c) and (d)
below.
(a) The difference between (i) the amount of Voluntary and Mandatory
Deferrals that would have been made by or on behalf of the Executive during
the month in which occurs the Executive's death, assuming, for this purpose
that the Executive had lived, and (ii) the amount of Voluntary and Mandatory
Deferrals actually made during such month;
(b) The product obtained by multiplying (i) the amount of Voluntary and
Mandatory Deferrals made by or on behalf of the Executive during the month
prior to the month in which occurs the Executive's death, and (ii) the number
of full calendar months, inclusive, from the month following the month in
which occurs the Executive's death to the month preceding the month in which
the Executive would have attained age sixty-five (65) had he lived;
(c) In the event the Executive's birthday is other than the first day of
a calendar month, for the month in which the Executive would have attained age
sixty-five (65), the product obtained by multiplying (i) the amount of
Voluntary and Mandatory Deferrals made by or on behalf of the Executive during
the month prior to the month in which occurs the Executive's death, and (ii) a
fraction, the numerator of which is the number of days in such month prior to
the Executive's sixty-fifth (65th) birthday and the denominator of which
is the total number of days in the month;
(d) A projected earnings factor equal to the amount of interest
equivalent that would have accumulated on the amounts described in (a), (b)
and (c) above. The projected earnings factor shall be calculated using the
interest equivalent rate that was in effect under Reserve Account B for the
month prior to the month in which occurs the Executive's death. The
calculation shall assume that the Voluntary and Mandatory Deferrals described
in (a), (b) and (c) above were credited to Reserve Account B on a monthly
basis assuming that the Executive had lived and continued to make Voluntary
and Mandatory Deferrals. The interest equivalent shall be compounded in the
same manner as the Executive's actual Reserve Account balance, i.e., the
annual interest equivalent calculated as of the end of each Plan Year, will be
the sum (on a non-compounded basis) of the attributed earnings for each month
during the year based on the Account balance as of the last day of the month.
18
-231-
<PAGE>
Section 5.03. Payment of Special Death Benefit. (a) The special
------------------------------------------------
death benefit calculated in accordance with Section 5.02 above shall be paid
to the Executive's Beneficiary in fifteen (15) annual installments, with the
first installment commencing within sixty (60) days of the Executive's death.
The benefit calculated under Section 5.02 is a fixed amount which does not
accrue earnings or interest equivalent on the undistributed balance.
19
-232-
<PAGE>
ARTICLE VI. SUPPLEMENTAL RETIREMENT BENEFIT
Section 6.01. Supplemental Retirement Benefit. In the case of an
-----------------------------------------------
Executive who is identified in Schedule C (as from time to time amended by the
Compensation Committee), the Executive shall be entitled to a supplemental
retirement benefit if the Executive retires from the Participating Employer
either:
(a) on or after attainment of age fifty-eight (58) or such other early
retirement age specified under the Wisconsin Public Service Corporation
Administrative Employees' Retirement Plan (collectively, "early retirement
age"); or
(b) prior to such early retirement age with the written approval of the
Compensation Committee.
Section 6.02. Amount of Supplemental Benefit. (a) An Executive who
----------------------------------------------
qualifies for the supplemental retirement benefit under Section 6.01 above a
monthly amount equal to the "applicable percentage" of the Executive's
"average monthly compensation".
(b) The "applicable percentage" shall be twenty percent (20%) in the
case of an Executive identified in Part I of Schedule C and ten percent (10%)
in the case of a Participant identified in Part II of Schedule C.
(c) The Executive's "average monthly compensation" is the Executive's
compensation", expressed on a monthly basis, during whichever period of
thirty-six (36) consecutive months of employment produces the highest average.
For this purpose, "compensation" shall have the same meaning as under the
Wisconsin Public Service Corporation Administrative Employees' Retirement Plan
with the exception that (i) Voluntary Deferrals and Mandatory Deferrals made
by or on behalf of the Executive during the relevant period will be included
in the Executive's compensation and (ii) the compensation limitation specified
in Section 401(a)(17) of the Internal Revenue Code shall not apply.
Section 6.03. Commencement and Duration of Supplemental Retirement
-------------------------------------------------------------------
Benefits. Monthly payments calculated in accordance with Section 6.02 above
- ---------
will commence to the Executive with a payment for the month following the
month in which the Executive retires and shall continue until the earlier to
occur of (a) the Executive's death, or (b) one hundred twenty (120) monthly
payments have been made.
Section 6.04. Death Prior to Receipt of 120 Monthly Payments. If the
--------------------------------------------------------------
Executive dies after retirement but before receipt of 120 payments, shall
receive the Participant's surviving spouse monthly payments equal to fifty
percent (50%) of the amount of the benefit that was being paid to the
Executive. This benefit will commence with a payment for the month following
the month in which occurs the death of the Executive and shall continue until
the earlier to occur of (a) the month in which occurs the death of the
surviving spouse, or (b) a total of one hundred twenty (120) monthly payments
have been made to either the Executive or the surviving spouse.
20
-233-
<PAGE>
Section 6.05. Death Prior to Retirement. If the Executive dies prior
-----------------------------------------
to retirement, the Participant's surviving spouse shall receive monthly
payments equal to fifty percent (50%) of the amount that would have been paid
to the Executive had he lived, but calculated without assuming any salary
increases. This benefit will commence with a payment for the month following
the month in which occurs the death of the Executive and shall continue until
the earlier to occur of (a) the month in which occurs the death of the
surviving spouse, or (b) one hundred twenty (120) monthly payments have been
made.
Section 6.06. Special Rules Applicable Upon a Change in Control. In
-----------------------------------------------------------------
the event of a Change in Control, an Executive who is identified in Schedule C
shall become immediately vested in the supplemental retirement benefit,
whether or not the Executive retires from the Company in accordance with the
eligibility conditions set forth in Section 6.01. The supplemental retirement
benefit shall commence to the Executive with a payment for the month following
the month in which the Executive retires or otherwise terminates employment
following the Change in Control, and shall continue until the earlier to occur
of (a) the Executive's death, or (b) one hundred twenty (120) monthly payments
have been made. If the Executive dies prior to receiving one hundred twenty
(120) monthly payments, the provisions of Section 6.04 shall apply.
21
-234-
<PAGE>
ARTICLE VII. PROTECTION OF QUALIFIED RETIREMENT PLAN BENEFIT
Section 7.01. Retirement Plan Supplement. (a) In the case of an
------------------------------------------
Executive who is identified on Schedule D (as from time to time amended by the
Compensation Committee) and who participates in the Wisconsin Public Service
Corporation Administrative Employees' Retirement Plan ("Retirement Plan"), a
monthly benefit shall be paid to the Executive during his lifetime, and if
applicable, to his surviving spouse following the Executive's death, a monthly
amount equal to the difference between:
(i) The monthly benefit that would have been payable to
or on behalf of the Participant under the
Retirement Plan had the Participant's
(A) compensation for Retirement Plan purposes been
calculated prior to reduction for Voluntary and
Mandatory Deferrals made to this Plan and without
regard to the compensation limitation described in
Section 401(a)(17) of the Code, and (B) benefit
been calculated without regard to the maximum
benefit limitation described in Section 415 of the
Internal Revenue Code; and
(ii) The monthly benefit actually payable to or on
behalf of the Executive under the Retirement Plan.
(b) Payments under this Section 7.01 shall cease when all benefits
payable to or on behalf of the Executive under the Retirement Plan are
discontinued.
22
-235-
<PAGE>
ARTICLE VIII. RULES WITH RESPECT TO WPS RESOURCES STOCK
AND WPS RESOURCES STOCK UNITS
Section 8.01. Transactions Affecting WPS Resources Stock. In the
----------------------------------------------------------
event of any merger, share exchange, reorganization, consolidation,
recapitalization, stock dividend, stock split or other change in corporate
structure affecting WPS Resources Stock, appropriate adjustments shall be made
to the WPS Resources Stock Units (if any) credited to the Stock Account of
each Participant.
Section 8.02. No Shareholder Rights With Respect to WPS Resources
------------------------------------------------------------------
Stock Units. Participants shall have no rights as a stockholder pertaining to
- ------------
WPS Resources Stock Units credited to their Stock Account. No WPS Resources
Stock Unit nor any right or interest of a Participant under the Plan in any
WPS Resources Stock Unit may be assigned, encumbered, or transferred, except
by will or the laws of descent and distribution. The rights of a Participant
hereunder with respect to any WPS Resources Stock Unit are exercisable during
the Participant's lifetime only by him or his guardian or legal
representative.
23
-236-
<PAGE>
ARTICLE IX. PARTICIPATING EMPLOYERS
Section 9.01. Responsibility for Benefits. Each Participating Employer
-------------------------------------------
shall be responsible for providing all benefits under the Plan that became
payable to a Participant who is or was employed by (or serves or served on the
board of directors of) that Participating Employer. To the extent that a
Participant is or was employed by two or more Participating Employers, each
such Participating Employer shall be responsible for providing the portion of
the Participant's benefits accrued while in the employ of that employer.
24
-237-
<PAGE>
ARTICLE X. PROVISIONS
Section 10.01. Administration. The Compensation Committee shall
-------------------------------
administer and interpret the Plan and supervise preparation of Participant
elections, forms, and any amendments thereto. To the extent necessary to
comply with applicable conditions of Rule 16b-3, the Compensation Committee
shall consist of not less than two members of the Board, each of whom is also
a director of Parent and qualifies as a "non-employee director" for purposes
of Rule 16b-3. If at any time the Compensation Committee shall not be in
existence or not be composed of members of the Board who qualify as
"non-employee directors", then all determinations affecting Participants who
are subject to Section 16 of the Securities Exchange Act of 1934 (the
"Exchange Act") shall be made by the full Board. The Board may, in its
discretion, delegate to the Secretary or another committee of the Board any or
all of the authority and responsibility of the Compensation Committee with
respect to participation by Participants other than Participants who are
subject to Section 16 of the Exchange Act at the time any such delegated
authority or responsibility is exercised. Interpretation of the Plan shall be
within the sole discretion of the Compensation Committee and shall be final
and binding upon each Participant and Beneficiary. The Compensation
Committee, and the Secretary with respect to matters assigned to him under
this Plan or delegated to him by the Compensation Committee, may adopt and
modify rules and regulations relating to the Plan as it deems necessary or
advisable for the administration of the Plan. If the Secretary shall also be
a Participant or Beneficiary, any determinations affecting the Secretary's
participation in the Plan shall be made by the Compensation Committee.
Section 10.02. Compliance With Securities Exchange Act. Transactions
--------------------------------------------------------
under the Plan are intended to comply with all applicable conditions of
Rule 16b-3 or its successor under the Exchange Act. The Plan shall be
administered by the Compensation Committee so that transactions under the
Plan will be exempt from Section 16 of the Exchange Act pursuant to
regulations and interpretations issued from time to time by the Securities and
Exchange Commission.
Section 10.03. Participant Rights Unsecured. (a) The right of a
---------------------------------------------
Participant or his Beneficiary to receive a distribution hereunder shall be an
unsecured claim, and neither the Participant nor any Beneficiary shall have
any rights in or against any amount credited to his Account or any other
specific assets of a Participating Employer. The right of a Participant or
Beneficiary to the payment of benefits under this Plan shall not be assigned,
encumbered, or transferred, except by will or the laws of descent and
distribution. The rights of a Participant hereunder are exercisable during
the Participant's lifetime only by him or his guardian or legal
representative.
(b) The Company may authorize the creation of a trust or other
arrangements to assist in meeting the obligations created under the Plan.
However, any liability to any person with respect to the Plan shall be based
solely upon any contractual obligations that may be created pursuant to the
Plan. No obligation of a Participating Employer shall be deemed to be secured
by any pledge of, or other encumbrance on, any property of a Participating
Employer.
25
-238-
<PAGE>
Nothing contained in this Plan and no action taken pursuant to its terms shall
create or be construed to create a trust of any kind, or a fiduciary
relationship between a Participating Employer and any Participant or
Beneficiary, or any other person.
Section 10.04. Income Tax Withholding. Subject to Section 4.04(c),
---------------------------------------
no later than the date as of which an amount first becomes includible in the
gross income of the Participant for Federal income tax purposes, the
Participant shall pay or make arrangements satisfactory to the Compensation
Committee regarding the payment of, any Federal, state, local or foreign taxes
of any kind required by law to be withheld with respect to such amount.
Section 10.05. Establishment, Amendment or Termination of Plan.
----------------------------------------------------------------
(a) The Plan will become effective on January l, 1996 subject to approval by
a majority of the votes cast at a duly held meeting of the Company's
stockholders at which a quorum representing a majority of all outstanding
voting stock is, either in person or by proxy, present and voting on the Plan.
(b) There shall be no time limit on the duration of the Plan. The Board
(or where specified herein, the Compensation Committee) may, at any time,
amend or terminate the Plan without the consent of the Participants or
Beneficiaries, provided, however, that no amendment or termination may reduce
any Account balance accrued on behalf of a Participant based on deferrals
already made, or divest any Participant of rights to which he would have been
entitled if the Plan had been terminated immediately prior to the effective
date of such amendment. This Section shall not, however, restrict the right
of the Board to cause all Accounts to be distributed in the event of Plan
termination.
Section 10.06. Administrative Expenses. Costs of establishing and
----------------------------------------
administering the Plan will be paid by the Participating Employers.
Section 10.07. Effect on Other Employee Benefit Plans. Voluntary
-------------------------------------------------------
Deferrals, Mandatory Deferrals and Bonus Deferrals credited to a Participant's
Account under this Plan shall not be considered "compensation" for the purpose
of computing benefits under any qualified retirement plan maintained by a
Participating Employer, but shall be considered compensation for welfare
benefit plans, such as life and disability insurance programs sponsored by a
Participating Employer.
Section 10.08. Successor and Assigns. This Plan shall be binding
--------------------------------------
upon and inure to the benefit of the Company and Participating Employers,
their successors and assigns and the Participants and their heirs, executors,
administrators, and legal representatives.
26
-239-
<PAGE>
EXHIBIT 10G-3
WPS RESOURCES CORPORATION
SHORT-TERM VARIABLE PAY PLAN
Effective January 1, 1998
-240-
<PAGE>
WPS RESOURCES CORPORATION
SHORT-TERM VARIABLE PAY PLAN
1. Purpose.
The WPS Resources Corporation Short-Term Variable Pay Plan
(the "Plan") has been established effective January 1, 1998 to promote
the best interests of WPS Resources Corporation ("Company") and the
stockholders of the Company by (a) attracting and retaining key
employees possessing a strong interest in the above-average
performance of the Company and its subsidiaries and (b) encouraging
their continued loyalty, service and counsel.
2. Administration.
(a) The Plan will be administered by the Compensation
Committee of the Board of Directors of the Company (the "Committee").
The Committee shall have full and final authority and discretion to
conclusively interpret the provisions of the Plan and to decide all
questions of fact arising under the Plan, including the authority and
discretion to:
(1) determine those employees who are eligible to
participate in the Plan for any year;
(2) review and from time to time revise the tables
and other factors on which incentive
compensation awards may be based;
(3) determine the amount (if any) awarded or to be
awarded under the Plan to any employee for any
year; and
(4) to make all other determinations respecting the
administration, operation and interpretation of
the Plan that the Committee, in its sole
discretion, determines to be necessary or
appropriate.
(b) An employee's participation in the Plan in any year,
and any amounts awarded to the employee under the Plan for any such
year, does not imply that the employee is entitled to participate in
or receive an award under the Plan for any subsequent year.
3. Designation of Participating Employees.
For each calendar year for which this Plan is in effect, the
Committee shall designate:
(a) those employees of the Company and its subsidiaries who
are eligible to participate in the Plan for such year
("Participants");
(b) the Target Award applicable to each Participant for
such year (see Section 7); and
-2-
-241-
<PAGE>
(c) whether each Participant is a Utility Participant or a
Non-Utility Participant.
4. Award of Incentive Compensation.
A Participant shall not have any right to an amount under
this Plan until such amount has been awarded by the Committee to the
Participant. The incentive compensation (if any) awarded to a
Participant with respect to any calendar year will be an amount
determined by the Committee based on the all of the facts and
circumstances surrounding the Participant's employment, the Company's
financial performance, and the quality of the Company's non-financial
performance (e.g., customer satisfaction, response to customer
complaints and such other quality-based measurables or factors as the
Committee may in its discretion consider). In determining the amount
of any incentive compensation to be awarded, the Committee may take
into account the amounts determined under two non-binding target
awards known as the Utility Performance Award and the Non-Utility
Performance Award. In no event will the Committee make an award to a
Participant unless the Participant was employed on December 31 of the
year to which the award relates.
5. Utility Performance Award.
(a) A Participant's Utility Performance Award for any year
equals:
(1) the Participant's Target Award for such year
multiplied by
(2) 0.75 (if the Participant has been designated as
a Utility Participant) or 0.25 (if the
Participant has been designated as a Non-Utility
Participant), multiplied by
(3) the factor determined in accordance with Section
5(d) based upon Wisconsin Public Service
Corporation's Earned Rate of Return on Equity
in relation to its Allowed Rate of Return on
Equity.
(b) The Committee, in its sole discretion, may adjust the
0.75 and 0.25 factors specified in Section 5(a)(ii) above.
(c) Definitions.
(1) "Allowed Rate of Return on Equity" means, with
respect to any calendar year, Wisconsin Public
Service Corporation's authorized return on
common shareholders equity as established by
the State of Wisconsin Public Service
Commission's most recent rate order applicable
to such year.
(2) "Earned Rate of Return on Equity" means, with
respect to any calendar year, the net income of
Wisconsin Public Service Corporation for the
calendar year as determined in accordance
with generally accepted accounting principles
(GAAP) divided by the
-3-
-242-
<PAGE>
twelve month average common stock equity of
Wisconsin Public Service Corporation as of
December 31 of such year. Earned Rate of
Return on Equity shall be stated as a
percentage to the nearest one one-hundredth
(1/100) of one percent. For this purpose,
Wisconsin Public Service Corporation's net
income and common stock equity shall be adjusted
in accordance with Wisconsin Public Service
Corporation's historic internal financial
reporting practices to calculate a return on
equity which is comparable to the "Allowed Rate
of Return on Equity" established by the State of
Wisconsin Public Service Commission.
Accordingly, and without limitation, the "net
income" of Wisconsin Public Service Corporation
shall be adjusted to exclude earnings generated
on Deferred Investment Tax Credit (DITC)
balances and the "common stock equity" of
Wisconsin Public Service Corporation shall be
increased by treating ESOP loan guarantees as
outstanding indebtedness. The Committee may
also adjust the "net income" of Wisconsin Public
Service Corporation to exclude the effects of
extraordinary or non-recurring items.
(d) The factor applicable for any year under Section
5(a)(iii) is determined from the following table (or any successor
table as adopted by the Committee) based upon the difference obtained
by subtracting the Company's Allowed Rate of Return on Equity for the
year from the Company's Earned Rate of Return on Equity for that year.
Earned Rate of Return on Equity
Minus Allowed Rate of Return on Equity Factor for Section 5(a)(iii)
- -------------------------------------- ----------------------------
Less than (0.15)* 0.00
(0.15)* - (0.01)* 0.60
0.00 - 0.14 0.80
0.15 - 0.29 1.00
0.30 - 0.44 1.05
0.45 - 0.59 1.10
0.60 - 0.74 1.15
0.75 and greater 1.20
- -----------------------
* Numbers in parenthesis represent negative numbers, i.e. Earned
Rate of Return on Equity is less than Allowed Rate of Return on
Equity.
6. Non-Utility Performance Award.
(a) A Participant's Non-Utility Performance Award for any
year equals:
-4-
-243-
<PAGE>
(1) the Participant's Target Award for such year
multiplied by
(2) 0.25 (if the Participant has been designated
as a Utility Participant) or 0.75 (if the
Participant has been designated as a Non-Utility
Participant), multiplied by
(3) the factor determined in accordance with
Section 6(d) based upon the ability of the
Company's non-utility businesses to meet or
exceed earnings per share and account
retention/growth goals.
(b) The Committee, in its sole discretion, may adjust the
0.25 and 0.75 factors specified in Section 6(a)(ii) above.
(c) Definitions.
(1) "EPS Impact" means, with respect to any calendar
year, the fully diluted earnings per share of
the Company taking into account only the net
earnings of WPS Energy Services, Inc. and
WPS Power Development, Inc., as calculated to
the nearest one-tenth of one cent in accordance
with FASB 128 or any successor pronouncement and
in a manner consistent with the methodology used
by the Company and its consolidated subsidiaries
for the purpose of reporting earnings per share
information generally. For purposes of this
calculation, the Committee may adjust the
earnings taken into account to exclude the
effects of extraordinary or non-recurring items.
(2) "Account Retention" means, with respect to any
calendar year, the percentage of "Accounts"
actively served on January 1 of the calendar
year that the Company or its non-utility
subsidiaries continue to serve on December 31 of
the same calendar year, rounded to the nearest
one-tenth (1/10) of one percent.
(3) "Account" means an actively served customer
account entered into by an agent or employee of
the customer who has the authority to contract
with WPS Energy Services, Inc. or WPS Power
Development, Inc. with respect to all or a
portion of the customer's business. Where a
customer has multiple contracts with WPS Energy
Services, Inc. and/or WPS Power Development,
Inc., such contracts, although originating with
the same customer, may be considered separate
Accounts for purposes of this Plan to the extent
that the contracts are entered into or
authorized by different contacts at the customer
each of whom has independent authority to
contract with WPS Energy Services, Inc. and/or
WPS Power Development, Inc.
-5-
-244-
<PAGE>
(4) "Account Growth" means, with respect to any
calendar year, (i) the total number of Accounts
on December 31 of the calendar year minus the
total number of Accounts on January 1 of the
calendar year, this amount divided by (ii) the
total number of Accounts on January 1 of the
calendar year. This quotient shall be rounded
to the nearest one-tenth (1/10) of one percent.
(d) The factor applicable for any year under Section
6(a)(iii) is equal to the sum of the amounts determined from the
tables in Sections 6(d)(i) and 6(d)(ii) below (or any successor table
or tables as adopted by the Committee); provided that the table set
forth in Section 6(d)(ii) below shall not apply unless the EPS Impact
for the calendar year is at least $0.01.
(1) EPS Impact Table
EPS Impact Factor for Section 6(a)(iii)
---------- ----------------------------
Less than $0.01 0.00
$0.01 - $0.019 0.20
$0.02 - $0.029 0.40
$0.03 - $0.039 0.60
$0.04 - $0.049 0.80
$0.05 - $0.059 1.00
$0.06 - $0.069 1.10
$0.07 - greater 1.20
(2) Account Growth/Retention Table
Account Growth
<5% 5 - 9.9% 10 - 14.9% 15 - 19.9% > 20%
--- -------- ---------- ---------- -----
Account
Retention
>96% 0 0.05 0.10 0.15 0.20
92.1% - 96% (0.05) 0 0.05 0.10 0.15
88.1% - 92% (0.10) (0.05) 0 0.05 0.10
84.1% - 88% (0.15) (0.10) (0.05) 0 0.05
< 84% (0.20) (0.15) (0.10) (0.05) 0
-
7. Target Award
(a) The Target Award applicable to each Participant is
based upon the "Level" to which the Committee has assigned the
Participant:
-6-
-245-
<PAGE>
Level Target Award
----- ------------
1 35% of Base Salary
2 25% of Base Salary
3 20% of Base Salary
4 15% of Base Salary
(b) The Committee, in its sole discretion, may modify the
number of Levels or the Target Award that is applicable to a
particular Level. The Target Award assigned to a particular Level is
relevant solely for purposes of the calculations described in Sections
5 and 6 above. The establishment of a Target Award with respect to
any Participant does not imply that the Participant is or will become
entitled to incentive compensation in the amount of the Target Award.
(c) "Base Salary" means base salary paid to the Participant
by the Company and/or a consolidated subsidiary of the Company for
services performed by the Participant during the applicable calendar
year for which he or she has been designated as a Participant in the
Plan. Base Salary shall include amounts that would have been paid to
the Participant as base salary but for the fact that the Participant
elected to defer such amounts as an elective contribution under a
Section 125, 129 or 401(k) arrangement or as a Voluntary Deferral
under the WPS Resources Corporation Deferred Compensation Plan. Base
Salary shall not include extraordinary payments made to or on behalf
of the Participant, such as overtime, bonuses, meal allowances,
reimbursed expenses (including any tax "gross-up" payments),
termination pay, moving pay, commuting expenses, Mandatory Deferrals
under the WPS Resources Corporation Deferred Compensation Plan or
other non-elective deferred compensation payments or accruals, stock
options, the value of employer-provided fringe benefits or coverage,
any contributions on behalf of the Participant to a survivor's income
benefit plan or any other employee benefit plan within the meaning of
ERISA, all as determined in accordance with such uniform rules,
regulations or standards as may be prescribed by the Committee. In
the case of an employee who is designated as a Participant after the
first day of the calendar year, the Committee may elect to apply the
foregoing definition with respect to the Base Salary received by the
Participant on and after the effective date of his or her
participation.
8. Distribution.
(a) Unless deferred in accordance with Section 8(b) below,
incentive compensation amounts awarded under this Plan shall be paid
to the eligible Participant (less applicable withholding) as soon as
practicable following the date on which such payment has been
authorized by the Committee.
(b) A Participant may, but need not, elect to defer the
receipt of all or any portion of the incentive compensation amounts
awarded to the Participant under this Plan. If the Participant so
elects, the deferred portion of the Participant's incentive
compensation award will
-7-
-246-
<PAGE>
be credited to the Participant's Stock Account under the
WPS Resources Corporation Deferred Compensation Plan ("Deferred
Compensation Plan") for later distribution in accordance with the
terms of the Deferred Compensation Plan and the Participant's
elections under that plan. A Participant's election to defer all or
a portion of his award under this Plan for any year shall be given
effect only if the Participant's executed deferral election is
received by the Committee or its delegate prior to January 1 of the
calendar year during which the incentive compensation will be earned,
e.g., prior to January 1, 1999 for deferral of incentive compensation
amounts that may be earned in 1999. Notwithstanding the foregoing,
(i) a Participant's deferral election with respect to the initial
(1998) calendar year may be made within 30 days of the date on which
the Plan document is approved by the Board of Directors, and (ii) in
the case of a Participant who is designated by the Committee as being
eligible to participate with respect to a particular calendar year
after the beginning of such year, the Participant's deferral election
for such year may be made within 30 days of the date on which the
Committee designates the Participant as being eligible to participate
in the Plan.
9. Amendment or Termination.
The Committee may amend, modify or terminate the Plan at any
time and for any reason, including, without limitation, the authority
to alter at any time during the calendar year the amount of incentive
compensation that is available or potentially available to
Participants with respect to the calendar year or the terms and
conditions under which such incentive compensation is or will become
payable.
10. Participant Rights Unsecured.
The right of a Participant to receive a distribution of
incentive compensation awarded hereunder shall be an unsecured claim,
and the Participant shall not have any rights in or against any
specific assets of the Company or any of its subsidiaries. The right
of a Participant to the payment of incentive compensation that has
been awarded or may be awarded under this Plan may not in any manner
be subject to anticipation, alienation, sale, transfer, assignment,
pledge, encumbrance, attachment or garnishment; provided that any
benefits awarded to the Participant but unpaid as of the date of the
Participant's death shall be paid to the Participant's estate.
11. Successor and Assigns.
This Plan, with respect to any amount awarded to a
Participant by the Committee in accordance with Section 4, shall be
binding upon and inure to the benefit of the Company and its
subsidiaries, their successors and assigns and to the Participant and
the executor, administrator or legal representative of the
Participant's estate.
12. Governing Law.
This Plan shall be governed by and construed in accordance
with the law of the State of Wisconsin.
-8-
-247-
<TABLE>
EXHIBIT 11
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
WPS RESOURCES CORPORATION
<CAPTION>
============================================================================================================
INFORMATION WITH RESPECT TO THE COMPUTATION
OF EARNINGS PER SHARE OF COMMON STOCK Three Months Ended Twelve Months Ended
(Thousands) December 31 December 31
1997 1996 1997 1996
============================================================================================================
<S> <C> <C> <C> <C>
Shares of common stock at beginning of period 23,867 23,887 23,883 23,897
Shares of common stock purchased for deferred
compensation trust -
Date of deferred Number
compensation trust purchase of Shares
- --------------------------- ---------
January 20, 1997 2 2
February 20, 1997 1 1
March 20, 1997 2 2
April 21, 1997 2 2
May 20, 1997 2 2
June 20, 1997 2 2
July 21, 1997 2 2
August 20, 1997 1 1
September 23, 1997 2 2
October 21, 1997 1 1 1
November 20, 1997 1 1 1
December 22, 1997 1 1 1
January 22, 1996 1 1
February 20, 1996 1 1
March 21, 1996 1 1
April 22, 1996 1 1
May 20, 1996 1 1
June 20, 1996 1 1
July 22, 1996 1 1
August 22, 1996 2 2
September 24, 1996 1 1
October 22, 1996 1 1 1
November 20, 1996 1 1 1
December 20, 1996 2 2 2
- ------------------------------------------------------------------------------------------------------------
Shares of common stock at end of period 23,864 23,883 23,864 23,883
============================================================================================================
Computation of daily weighted average
shares:
Shares of common stock at
beginning of period -
Number Number
of of
Days Shares
------ ------
December 31, 1996 21 23,887 501,627
December 31, 1996 21 23,897 501,837
December 31, 1997 20 23,867 477,340
December 31, 1997 19 23,883 453,777
Shares of common stock after
purchase for deferred compensation trust -
Number Number
of of
Days Shares
------ ------
December 31, 1996 29 23,896 692,984
December 31, 1996 10 23,895 238,950
December 31, 1996 20 23,895 477,900
December 31, 1996 32 23,894 764,608
December 31, 1996 28 23,893 669,004
December 31, 1996 18 23,892 430,056
December 31, 1996 13 23,892 310,596
December 31, 1996 32 23,891 764,512
December 31, 1996 31 23,890 740,590
December 31, 1996 33 23,888 788,304
December 31, 1996 28 23,887 668,836
December 31, 1996 29 23,886 692,694 692,694
December 31, 1996 30 23,884 716,520 716,520
December 31, 1996 12 23,883 286,596 286,596
December 31, 1997 31 23,881 740,311
December 31, 1997 28 23,879 668,612
December 31, 1997 32 23,877 764,064
December 31, 1997 29 23,876 692,404
December 31, 1997 31 23,874 740,094
December 31, 1997 31 23,872 740,032
December 31, 1997 30 23,870 716,100
December 31, 1997 34 23,869 811,546
December 31, 1997 28 23,867 668,276
December 31, 1997 30 23,866 715,980 715,980
December 31, 1997 32 23,865 763,680 763,680
December 31, 1997 10 23,864 238,640 238,640
- ------------------------------------------------------------------------------------------------------------
Total days - weighted 2,195,640 2,197,437 8,713,516 8,743,987
============================================================================================================
Average number of shares of common
stock based on daily
weighted average computations 23,866 23,885 23,873 23,891
============================================================================================================
Earnings on common stock, as set forth
in statements of income $13,033 $3,730 $53,742 $47,755
============================================================================================================
Earnings per share of common stock based on
weighted average shares $0.55 $0.17 $2.25 $2.00
============================================================================================================
</TABLE>
-248-
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Status as of
Name Incorporation December 31, 1997
- -------------------------- ------------- -----------------
Wisconsin Public Service
Corporation (1) Wisconsin Active
WPS Leasing, Inc. (2) Wisconsin Active
WPS Energy Services, Inc. (1) Wisconsin Active
WPS Power Development, Inc. (1) Wisconsin Active
WPS Visions, Inc. (1) Wisconsin Active
PDI Operations, Inc. (3) Wisconsin Active
PDI Stoneman, Inc. (4) Wisconsin Active
- ----------------
(1) Wholly-owned subsidiary of WPS Resources Corporation.
(2) WPS Leasing, Inc. is a wholly-owned subsidiary of Wisconsin Public
Service Corporation.
(3) PDI Operations, Inc. (formerly known as PDI Stoneman Operations, Inc.)
is a wholly-owned subsidiary of WPS Power Development, Inc.
(4) PDI Stoneman, Inc. is a wholly-owned subsidiary of WPS Power
Development, Inc.
-249-
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our reports included in this Form 10-K into WPS Resources Corporation's
previously filed Registration Statement Files No. 33-35050, No. 33-47172,
No. 33-61991, No. 33-65167, and No. 333-34401.
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin
March 6, 1998
-250-
EXHIBIT 24
POWER OF ATTORNEY
WHEREAS, WPS RESOURCES CORPORATION, a Wisconsin corporation
(hereinafter referred to as "WPSR") and WISCONSIN PUBLIC SERVICE CORPORATION,
a Wisconsin corporation (hereinafter referred to as "WPSC"), will file on or
before the due date of March 30, 1998 with the Securities and Exchange
Commission, under the provisions of the Securities Exchange Act of 1934, a
combined annual report on Form 10-K, and
WHEREAS, the undersigned is a Director of WPSR and WPSC;
NOW, THEREFORE, the undersigned hereby constitutes and appoints
L. L. Weyers, P. D. Schrickel, and F. J. Kicsar or any one of them, as
attorney, with full power to act for the undersigned and in the name, place
and stead of the undersigned, to sign the name of the undersigned as Director
to said annual report on Form 10-K and any and all amendments to said annual
report, hereby ratifying and confirming all that said attorney may or shall
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this document this
6th day of March, 1998.
(SEAL)
/s/ A. Dean Arganbright
------------------------
Director
-251-
PAGE
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
WHEREAS, WPS RESOURCES CORPORATION, a Wisconsin corporation
(hereinafter referred to as "WPSR") and WISCONSIN PUBLIC SERVICE CORPORATION,
a Wisconsin corporation (hereinafter referred to as "WPSC"), will file on or
before the due date of March 30, 1998 with the Securities and Exchange
Commission, under the provisions of the Securities Exchange Act of 1934, a
combined annual report on Form 10-K, and
WHEREAS, the undersigned is a Director of WPSR and WPSC;
NOW, THEREFORE, the undersigned hereby constitutes and appoints L. L.
Weyers, P. D. Schrickel, and F. J. Kicsar or any one of them, as attorney,
with full power to act for the undersigned and in the name, place and stead of
the undersigned, to sign the name of the undersigned as Director to said
annual report on Form 10-K and any and all amendments to said annual report,
hereby ratifying and confirming all that said attorney may or shall lawfully
do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this document this
6th day of March, 1998.
(SEAL)
/s/ Michael S. Ariens
------------------------
Director
-252-
PAGE
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
WHEREAS, WPS RESOURCES CORPORATION, a Wisconsin corporation
(hereinafter referred to as "WPSR") and WISCONSIN PUBLIC SERVICE CORPORATION,
a Wisconsin corporation (hereinafter referred to as "WPSC"), will file on or
before the due date of March 30, 1998 with the Securities and Exchange
Commission, under the provisions of the Securities Exchange Act of 1934, a
combined annual report on Form 10-K, and
WHEREAS, the undersigned is a Director of WPSR and WPSC;
NOW, THEREFORE, the undersigned hereby constitutes and appoints
L. L. Weyers, P. D. Schrickel, and F. J. Kicsar or any one of them, as
attorney, with full power to act for the undersigned and in the name, place
and stead of the undersigned, to sign the name of the undersigned as Director
to said annual report on Form 10-K and any and all amendments to said annual
report, hereby ratifying and confirming all that said attorney may or shall
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this document this
6th day of March, 1998.
(SEAL)
/s/ R. A. Bemis
------------------------
Director
-253-
PAGE
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
WHEREAS, WPS RESOURCES CORPORATION, a Wisconsin corporation
(hereinafter referred to as "WPSR") and WISCONSIN PUBLIC SERVICE CORPORATION,
a Wisconsin corporation (hereinafter referred to as "WPSC"), will file on or
before the due date of March 30, 1998 with the Securities and Exchange
Commission, under the provisions of the Securities Exchange Act of 1934, a
combined annual report on Form 10-K, and
WHEREAS, the undersigned is a Director of WPSR and WPSC;
NOW, THEREFORE, the undersigned hereby constitutes and appoints
L. L. Weyers, P. D. Schrickel, and F. J. Kicsar or any one of them, as
attorney, with full power to act for the undersigned and in the name, place
and stead of the undersigned, to sign the name of the undersigned as Director
to said annual report on Form 10-K and any and all amendments to said annual
report, hereby ratifying and confirming all that said attorney may or shall
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this document this
6th day of March, 1998.
(SEAL)
/s/ Daniel A. Bollom
------------------------
Director
-254-
PAGE
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
WHEREAS, WPS RESOURCES CORPORATION, a Wisconsin corporation
(hereinafter referred to as "WPSR") and WISCONSIN PUBLIC SERVICE CORPORATION,
a Wisconsin corporation (hereinafter referred to as "WPSC"), will file on or
before the due date of March 30, 1998 with the Securities and Exchange
Commission, under the provisions of the Securities Exchange Act of 1934, a
combined annual report on Form 10-K, and
WHEREAS, the undersigned is a Director of WPSR and WPSC;
NOW, THEREFORE, the undersigned hereby constitutes and appoints
L. L. Weyers, P. D. Schrickel, and F. J. Kicsar or any one of them, as
attorney, with full power to act for the undersigned and in the name, place
and stead of the undersigned, to sign the name of the undersigned as Director
to said annual report on Form 10-K and any and all amendments to said annual
report, hereby ratifying and confirming all that said attorney may or shall
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this document this
6th day of March, 1998.
(SEAL)
/s/ M. Lois Bush
------------------------
Director
-255-
PAGE
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
WHEREAS, WPS RESOURCES CORPORATION, a Wisconsin corporation
(hereinafter referred to as "WPSR") and WISCONSIN PUBLIC SERVICE CORPORATION,
a Wisconsin corporation (hereinafter referred to as "WPSC"), will file on or
before the due date of March 30, 1998 with the Securities and Exchange
Commission, under the provisions of the Securities Exchange Act of 1934, a
combined annual report on Form 10-K, and
WHEREAS, the undersigned is a Director of WPSR and WPSC;
NOW, THEREFORE, the undersigned hereby constitutes and appoints
L. L. Weyers, P. D. Schrickel, and F. J. Kicsar or any one of them, as
attorney, with full power to act for the undersigned and in the name, place
and stead of the undersigned, to sign the name of the undersigned as Director
to said annual report on Form 10-K and any and all amendments to said annual
report, hereby ratifying and confirming all that said attorney may or shall
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this document this
6th day of March, 1998.
(SEAL)
/s/ R. C. Gallagher
------------------------
Director
-256-
PAGE
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
WHEREAS, WPS RESOURCES CORPORATION, a Wisconsin corporation
(hereinafter referred to as "WPSR") and WISCONSIN PUBLIC SERVICE CORPORATION,
a Wisconsin corporation (hereinafter referred to as "WPSC"), will file on or
before the due date of March 30, 1998 with the Securities and Exchange
Commission, under the provisions of the Securities Exchange Act of 1934, a
combined annual report on Form 10-K, and
WHEREAS, the undersigned is a Director of WPSR and WPSC;
NOW, THEREFORE, the undersigned hereby constitutes and appoints
L. L. Weyers, P. D. Schrickel, and F. J. Kicsar or any one of them, as
attorney, with full power to act for the undersigned and in the name, place
and stead of the undersigned, to sign the name of the undersigned as Director
to said annual report on Form 10-K and any and all amendments to said annual
report, hereby ratifying and confirming all that said attorney may or shall
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this document this
6th day of March, 1998.
(SEAL)
/s/ Kathryn Hasselblad-Pascale
-----------------------------
Director
-257-
PAGE
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
WHEREAS, WPS RESOURCES CORPORATION, a Wisconsin corporation
(hereinafter referred to as "WPSR") and WISCONSIN PUBLIC SERVICE CORPORATION,
a Wisconsin corporation (hereinafter referred to as "WPSC"), will file on or
before the due date of March 30, 1998 with the Securities and Exchange
Commission, under the provisions of the Securities Exchange Act of 1934, a
combined annual report on Form 10-K, and
WHEREAS, the undersigned is a Director of WPSR and WPSC;
NOW, THEREFORE, the undersigned hereby constitutes and appoints
L. L. Weyers, P. D. Schrickel, and F. J. Kicsar or any one of them, as
attorney, with full power to act for the undersigned and in the name, place
and stead of the undersigned, to sign the name of the undersigned as Director
to said annual report on Form 10-K and any and all amendments to said annual
report, hereby ratifying and confirming all that said attorney may or shall
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this document this
6th day of March, 1998.
(SEAL)
/s/ James L. Kemerling
------------------------
Director
-258-
<PAGE>
<TABLE> <S> <C>
<ARTICLE> UT
<CIK> 0000107833
<NAME> WISCONSIN PUBLIC SERVICE CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 886360
<OTHER-PROPERTY-AND-INVEST> 2972
<TOTAL-CURRENT-ASSETS> 156670
<TOTAL-DEFERRED-CHARGES> 78544
<OTHER-ASSETS> 109408
<TOTAL-ASSETS> 1233954
<COMMON> 95588
<CAPITAL-SURPLUS-PAID-IN> 73842
<RETAINED-EARNINGS> 287691
<TOTAL-COMMON-STOCKHOLDERS-EQ> 457121
0
51200
<LONG-TERM-DEBT-NET> 307619
<SHORT-TERM-NOTES> 10000
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 15500
<LONG-TERM-DEBT-CURRENT-PORT> 0
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 392514
<TOT-CAPITALIZATION-AND-LIAB> 1233954
<GROSS-OPERATING-REVENUE> 690478
<INCOME-TAX-EXPENSE> 32261
<OTHER-OPERATING-EXPENSES> 578896
<TOTAL-OPERATING-EXPENSES> 611157
<OPERATING-INCOME-LOSS> 79321
<OTHER-INCOME-NET> 11610
<INCOME-BEFORE-INTEREST-EXPEN> 90931
<TOTAL-INTEREST-EXPENSE> 26189
<NET-INCOME> 64742
3111
<EARNINGS-AVAILABLE-FOR-COMM> 61631
<COMMON-STOCK-DIVIDENDS> 55882
<TOTAL-INTEREST-ON-BONDS> 22311
<CASH-FLOW-OPERATIONS> 140597
<EPS-PRIMARY> 0<F1>
<EPS-DILUTED> 0<F1>
<FN>
<F1>All of Wisconsin Public Service Corporation ("WPSC") common
stock is controlled by WPS Resources Corporation which operates
as a holding company. WPSC, as a subsidiary, does not calculate
earnings per share. The earnings per share of WPS Resources
Corporation for 1997 were $2.25 for both basic and diluted
earnings per share calculations.
</FN>
</TABLE>
