_____________________________________________________________________________
_____________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission Registrant; State of Incorporation; IRS Employer
File Number Address; and Telephone Number Identification No.
- ----------- ----------------------------------- ------------------
1-11337 WPS RESOURCES CORPORATION 39-1775292
(A Wisconsin Corporation)
700 North Adams Street
P. O. Box 19001
Green Bay, WI 54307-9001
920-433-4901
1-3016 WISCONSIN PUBLIC SERVICE CORPORATION 39-0715160
(A Wisconsin Corporation)
700 North Adams Street
P. O. Box 19001
Green Bay, WI 54307-9001
920-433-4901
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
WPS Resources Corporation Yes [x] No [ ]
Wisconsin Public Service Corporation Yes [x] No [ ]
Indicate the number of shares outstanding of each of the issuers' classes of
common stock, as of the latest practicable date:
WPS RESOURCES CORPORATION Common stock, $1 par value,
26,831,172 shares outstanding at
November 1, 1999
WISCONSIN PUBLIC SERVICE CORPORATION Common stock, $4 par value,
23,896,962 shares outstanding at
November 1, 1999
_____________________________________________________________________________
_____________________________________________________________________________
<PAGE>
WPS RESOURCES CORPORATION
AND
WISCONSIN PUBLIC SERVICE CORPORATION
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1999
CONTENTS
Page
FORWARD-LOOKING STATEMENTS 4
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
WPS RESOURCES CORPORATION
Consolidated Statements of Income, Comprehensive
Income, and Retained Earnings 5
Consolidated Balance Sheets 6
Consolidated Statements of Capitalization 7
Consolidated Statements of Cash Flows 8
WISCONSIN PUBLIC SERVICE CORPORATION
Consolidated Statements of Income and
Comprehensive Income 9
Consolidated Balance Sheets 10
Consolidated Statements of Capitalization 11
Consolidated Statements of Cash Flows 12
Consolidated Statements of Retained Earnings 13
CONDENSED NOTES TO FINANCIAL STATEMENTS OF
WPS Resources Corporation and
Wisconsin Public Service Corporation 14 - 16
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations for
WPS Resources Corporation 17 - 30
Wisconsin Public Service Corporation 31 - 36
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 36
PART II. OTHER INFORMATION
Item 5. Other Information 37
Item 6. Exhibits and Reports on Form 8-K 38
Signatures 39 - 40
EXHIBIT INDEX 41
Exhibit 12 Ratio of Earnings to Fixed Charges and Ratio of Earnings
to Fixed Charges and Preferred Dividends
-2-
<PAGE>
Exhibit 27 Financial Data Schedule
WPS Resources Corporation
Wisconsin Public Service Corporation
-3-
<PAGE>
FORWARD-LOOKING STATEMENTS
This report contains statements which are forward-looking. You can identify
these statements by the fact that they do not relate strictly to historical
or current facts and often include words such as "anticipate," "believe,"
"estimate," "expect," "intend," "plan," "project," and other similar words.
Although we believe we have been prudent in our plans and assumptions, there
can be no assurance that indicated results will be realized. Should known or
unknown risks or uncertainties materialize, or should underlying assumptions
prove inaccurate, actual results could vary materially from those
anticipated.
We undertake no obligation to publicly update any forward-looking statements,
whether as a result of new information, future events, or otherwise. We
recommend that you consult any further disclosures we make on related
subjects in our 10-Q, 8-K, and 10-K reports to the Securities and Exchange
Commission.
The following is a cautionary list of risks and uncertainties that may affect
the assumptions which form the basis of forward-looking statements relevant
to our business. These factors, and other factors not listed here, could
cause actual results to differ materially from expected and historical
results.
- General economic, business, and regulatory conditions
- Legislative and regulatory initiatives regarding deregulation and
restructuring of the utility industry which could affect costs and
investment recovery
- State and federal rate regulation
- The extent and timing of new business development and additional
competition in the markets of subsidiary companies
- The performance of projects undertaken by subsidiary companies
- Business combinations among our competitors and customers
- Energy supply and demand
- Financial market conditions, including availability, terms, and use
of capital
- Nuclear and environmental issues
- Weather and other natural phenomena
- Commodity price and interest rate risk
- Year 2000 readiness.
-4-
<PAGE>
<TABLE>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
WPS RESOURCES CORPORATION
<CAPTION>
=============================================================================================================
CONSOLIDATED STATEMENTS OF INCOME, COMPREHENSIVE INCOME, Three Months Ended Nine Months Ended
AND RETAINED EARNINGS September 30 September 30
(Thousands, except per share amounts) 1999 1998 1999 1998
=============================================================================================================
<S> <C> <C> <C> <C>
Operating revenues
Electric utility $162,952 $146,007 $442,270 $410,721
Gas utility 30,529 25,890 133,384 115,762
Nonregulated energy and other 57,524 76,031 226,737 244,725
- -------------------------------------------------------------------------------------------------------------
Total operating revenues 251,005 247,928 802,391 771,208
=============================================================================================================
Operating expenses
Electric production fuels 33,413 31,499 86,528 84,052
Purchased power 25,368 14,372 59,819 41,949
Gas purchased for resale 21,674 17,235 82,645 73,234
Nonregulated energy cost of sales 51,080 74,313 214,081 239,008
Other operating expenses 46,821 44,562 136,683 125,655
Maintenance 15,478 9,313 46,323 36,259
Depreciation and decommissioning 21,349 21,229 62,104 64,144
Taxes other than income 8,262 7,798 25,123 24,167
- -------------------------------------------------------------------------------------------------------------
Total operating expenses 223,445 220,321 713,306 688,468
=============================================================================================================
Operating income 27,560 27,607 89,085 82,740
- -------------------------------------------------------------------------------------------------------------
Other income and (deductions)
Allowance for equity funds used during construction (15) 68 487 136
Other, net 1,366 (1,006) 6,974 3,218
- -------------------------------------------------------------------------------------------------------------
Total other income and (deductions) 1,351 (938) 7,461 3,354
=============================================================================================================
Income before interest expense 28,911 26,669 96,546 86,094
- -------------------------------------------------------------------------------------------------------------
Interest on long-term debt 6,448 5,664 19,189 18,386
Other interest 3,199 1,500 5,180 3,453
Allowance for borrowed funds used during construction (1,532) (57) (1,957) (95)
- -------------------------------------------------------------------------------------------------------------
Total interest expense 8,115 7,107 22,412 21,744
=============================================================================================================
Distributions - preferred securities of subsidiary trust 875 613 2,625 613
=============================================================================================================
Income before income taxes 19,921 18,949 71,509 63,737
Income taxes 5,325 6,547 22,827 21,566
Minority interest - (180) (263) (395)
Preferred stock dividends of subsidiaries 777 783 2,333 2,350
- -------------------------------------------------------------------------------------------------------------
Net income 13,819 11,799 46,612 40,216
- -------------------------------------------------------------------------------------------------------------
Other comprehensive income - - - -
- -------------------------------------------------------------------------------------------------------------
Comprehensive income 13,819 11,799 46,612 40,216
=============================================================================================================
Retained earnings at beginning of period 341,647 342,857 335,154 339,508
Cash dividends on common stock 13,408 12,773 39,708 37,841
- -------------------------------------------------------------------------------------------------------------
Retained earnings at end of period $342,058 $341,883 $342,058 $341,883
=============================================================================================================
Average shares of common stock 26,682 26,509 26,602 26,513
Basic and diluted earnings per average share of
common stock $0.52 $0.45 $1.75 $1.52
Dividend per share of common stock $0.505 $0.495 $1.495 $1.465
=============================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
-5-
<PAGE>
<TABLE>
WPS RESOURCES CORPORATION
<CAPTION>
=================================================================================================
CONSOLIDATED BALANCE SHEETS September 30 December 31
(Thousands) 1999 1998
=================================================================================================
<S> <C> <C>
ASSETS
- -------------------------------------------------------------------------------------------------
Utility plant
Electric $1,775,276 $1,715,882
Gas 282,956 267,892
Property under capital lease 74,130 -
- -------------------------------------------------------------------------------------------------
Total 2,132,362 1,983,774
Less - Accumulated depreciation and decommissioning 1,261,858 1,206,123
- -------------------------------------------------------------------------------------------------
Total 870,504 777,651
Nuclear decommissioning trusts 182,120 171,442
Construction in progress 65,668 42,424
Nuclear fuel, less accumulated amortization 15,361 18,641
- -------------------------------------------------------------------------------------------------
Net utility plant 1,133,653 1,010,158
=================================================================================================
Current assets
Cash and equivalents 6,624 7,134
Customer and other receivables, net of reserves 92,400 117,206
Accrued utility revenues 23,762 34,175
Fossil fuel, at average cost 13,230 13,152
Gas in storage, at average cost 30,306 20,795
Materials and supplies, at average cost 23,494 21,788
Prepayments and other 24,007 26,462
- -------------------------------------------------------------------------------------------------
Total current assets 213,823 240,712
=================================================================================================
Regulatory assets 62,000 70,041
Net nonutility and nonregulated plant 76,375 41,235
Pension assets 63,926 60,018
Investments and other assets 75,738 88,223
=================================================================================================
Total $1,625,515 $1,510,387
=================================================================================================
CAPITALIZATION AND LIABILITIES
- -------------------------------------------------------------------------------------------------
Capitalization
Common stock equity $ 533,931 $ 517,190
Preferred stock of subsidiary with no mandatory redemption 51,195 51,200
Company-obligated mandatorily redeemable trust preferred
securities of subsidiary trust holding solely WPSR
7.00% subordinated debentures 50,000 50,000
Capital lease obligation 73,765 -
Long-term debt 340,784 343,037
- -------------------------------------------------------------------------------------------------
Total capitalization 1,049,675 961,427
=================================================================================================
Current liabilities
Current portion of long-term debt and capital lease obligat 1,069 884
Notes payable 10,100 12,703
Commercial paper 96,625 47,590
Accounts payable 83,250 115,490
Accrued taxes 7,763 2,838
Accrued interest 6,470 7,594
Other 14,498 9,095
- -------------------------------------------------------------------------------------------------
Total current liabilities 219,775 196,194
=================================================================================================
Long-term liabilities and deferred credits
Accumulated deferred income taxes 122,385 122,642
Accumulated deferred investment tax credits 26,194 27,150
Regulatory liabilities 48,849 50,474
Environmental remediation liabilities 39,928 40,478
Other long-term liabilities 118,709 112,022
- -------------------------------------------------------------------------------------------------
Total long-term liabilities and deferred credits 356,065 352,766
=================================================================================================
Total $1,625,515 $1,510,387
=================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
-6-
<PAGE>
<TABLE>
WPS RESOURCES CORPORATION
<CAPTION>
===============================================================================================
CONSOLIDATED STATEMENTS OF CAPITALIZATION September 30 December 31
(Thousands, except share amounts) 1999 1998
===============================================================================================
<S> <C> <C>
Common stock equity
Common stock, $1 par value, 100,000,000 shares authorized;
26,749,075 and 26,551,405 shares outstanding
at September 30, 1999 and December 31, 1998, respectively $ 26,749 $ 26,551
Premium on capital stock 171,133 163,438
Retained earnings 342,058 335,154
Shares in deferred compensation trust, 62,935 and 49,477 shares
at average cost of $30.51 and $30.42 per share at
September 30, 1999 and December 31, 1998, respectively (1,920) (1,505)
ESOP loan guarantees (4,089) (6,448)
- -----------------------------------------------------------------------------------------------
Total common stock equity 533,931 517,190
===============================================================================================
Preferred stock - Wisconsin Public Service Corporation
Cumulative, $100 par value, 1,000,000 shares authorized;
with no mandatory redemption
Series Shares Outstanding
------ ------------------
5.00% 131,980 13,196 13,200
5.04% 30,000 2,999 3,000
5.08% 50,000 5,000 5,000
6.76% 150,000 15,000 15,000
6.88% 150,000 15,000 15,000
- -----------------------------------------------------------------------------------------------
Total preferred stock with no mandatory redemption 51,195 51,200
===============================================================================================
Company-obligated mandatorily redeemable trust
preferred securities of subsidiary trust
holding solely WPSR 7.00% subordinated debentures 50,000 50,000
===============================================================================================
Capital lease obligation - Wisconsin Public Service Corporation 74,062 -
Less current portion (297) -
- -----------------------------------------------------------------------------------------------
Net capital lease obligation 73,765 -
===============================================================================================
Long-term debt
First mortgage bonds - Wisconsin Public Service Corporation
Series Year Due
------ --------
7.30% 2002 50,000 50,000
6.80% 2003 50,000 50,000
6-1/8% 2005 9,075 9,075
6.90% 2013 22,000 22,000
8.80% 2021 53,100 53,100
7-1/8% 2023 50,000 50,000
6.08% 2028 50,000 50,000
First mortgage bonds - Upper Peninsula Power Company
Series Year Due
------ --------
7.94% 2003 15,000 15,000
10.0% 2008 6,000 6,000
9.32% 2021 18,000 18,000
Installment sales contract for air pollution control
equipment - Upper Peninsula Power Company
Term Bonds Year Due
---------- --------
6.90% 1999 - 120
- -----------------------------------------------------------------------------------------------
Total 323,175 323,295
Unamortized discount and premium on bonds, net (773) (817)
- -----------------------------------------------------------------------------------------------
Total first mortgage bonds 322,402 322,478
- -----------------------------------------------------------------------------------------------
ESOP loan guarantees 4,089 6,448
Notes payable to bank, secured by nonregulated plant 11,093 10,943
Senior secured note 3,806 3,886
Other long-term debt 166 166
- -----------------------------------------------------------------------------------------------
Total long-term debt 341,556 343,921
Less current portion (772) (884)
- -----------------------------------------------------------------------------------------------
Net long-term debt 340,784 343,037
===============================================================================================
Total capitalization $1,049,675 $961,427
===============================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
-7-
<PAGE>
<TABLE>
WPS RESOURCES CORPORATION
<CAPTION>
============================================================================================
CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended
(Thousands) September 30
1999 1998
============================================================================================
<S> <C> <C>
Cash flows from operating activities
Net income $ 46,612 $ 40,216
Adjustments to reconcile net income to net cash from
operating activities
Depreciation and decommissioning 62,104 64,144
Amortization of nuclear fuel and other 11,176 12,718
Deferred income taxes (2,715) (12,059)
Investment tax credit restored (1,343) (1,598)
Allowance for equity funds used during construction (481) (136)
Pension income (3,908) (6,824)
Postretirement funding 4,847 3,669
Unrealized gains and losses on gas futures contracts 9,069 1,159
Other, net 533 (4,290)
Changes in
Customer and other receivables 24,806 4,411
Accrued utility revenues 10,413 11,609
Fossil fuel inventory (78) 1,010
Gas in storage (9,511) 580
Accounts payable (32,240) (9,063)
Miscellaneous current and accrued liabilities 5,403 (3,002)
Accrued taxes 4,925 (5,156)
Gas refunds - 710
- --------------------------------------------------------------------------------------------
Net cash from operating activities 129,612 98,098
============================================================================================
Cash flows from (used for) investing activities
Construction of utility plant and nuclear fuel expenditures (102,141) (58,032)
Purchase of other property and equipment (39,128) (13,060)
Decommissioning funding (6,818) (12,930)
Other 3,268 5,328
- --------------------------------------------------------------------------------------------
Net cash used for investing activities (144,819) (78,694)
============================================================================================
Cash flows from (used for) financing activities
Issuance of notes payable 34,250 123,752
Redemptions of notes payable (36,853) (120,951)
Issuance of other long-term debt 150 955
Redemptions of other long-term debt 419 (50,183)
Issuance of mandatorily redeemable trust preferred securities - 50,000
Issuance of commercial paper 1,115,398 1,150,391
Redemptions of commercial paper (1,066,363) (1,135,637)
Cash dividends on common stock (39,708) (37,841)
Issuance of common stock 7,893 -
Other (489) (1,935)
- --------------------------------------------------------------------------------------------
Net cash from (used for) financing activities 14,697 (21,449)
============================================================================================
Net decrease in cash and equivalents (510) (2,045)
Cash and equivalents at beginning of period 7,134 8,495
============================================================================================
Cash and equivalents at end of period $ 6,624 $ 6,450
============================================================================================
Cash paid during period for
Interest, less amount capitalized $ 17,916 $ 16,611
Income taxes 21,570 38,775
Preferred stock dividends of subsidiaries 2,333 2,350
============================================================================================
</TABLE>
Supplemental schedule of noncash investing and financing activities:
A capital lease obligation of $74,130 was incurred when
Wisconsin Public Service entered into a long-term lease agreement
for utility plant assets.
The accompanying notes are an integral part of these statements.
-8-
<PAGE>
<TABLE>
WISCONSIN PUBLIC SERVICE CORPORATION
<CAPTION>
=============================================================================================================
CONSOLIDATED STATEMENTS OF INCOME AND Three Months Ended Nine Months Ended
COMPREHENSIVE INCOME September 30 September 30
(Thousands) 1999 1998 1999 1998
=============================================================================================================
<S> <C> <C> <C> <C>
Operating revenues
Electric $149,346 $132,107 $401,523 $369,971
Gas 30,529 25,890 133,384 115,762
- -------------------------------------------------------------------------------------------------------------
Total operating revenues 179,875 157,997 534,907 485,733
=============================================================================================================
Operating expenses
Electric production fuels 33,160 31,392 86,127 83,781
Purchased power 21,357 11,158 47,853 31,314
Gas purchased for resale 19,840 17,211 80,617 72,545
Other operating expenses 36,731 35,215 110,586 102,439
Maintenance 14,081 8,367 43,532 33,901
Depreciation and decommissioning 18,735 19,071 54,910 58,029
Federal income taxes 6,705 6,381 22,151 19,102
Investment tax credit restored (402) (436) (1,206) (1,307)
State income taxes 2,173 2,571 6,196 6,388
Gross receipts tax and other 6,812 6,434 20,599 19,957
- -------------------------------------------------------------------------------------------------------------
Total operating expenses 159,192 137,364 471,365 426,149
============================================================================================================
Operating income 20,683 20,633 63,542 59,584
- -------------------------------------------------------------------------------------------------------------
Other income and (deductions)
Allowance for equity funds used during construction (19) 68 481 136
Other, net 1,843 749 6,672 4,995
Income taxes (40) (40) (488) (474)
- -------------------------------------------------------------------------------------------------------------
Total other income 1,784 777 6,665 4,657
============================================================================================================
Income before interest expense 22,467 21,410 70,207 64,241
- -------------------------------------------------------------------------------------------------------------
Interest expense
Interest on long-term debt 5,463 4,704 16,393 15,614
Other interest 1,928 876 3,578 1,966
Allowance for borrowed funds used during construction (1,519) (57) (1,937) (95)
- -------------------------------------------------------------------------------------------------------------
Total interest expense 5,872 5,523 18,034 17,485
============================================================================================================
Net income 16,595 15,887 52,173 46,756
Preferred stock dividend requirements 777 778 2,333 2,333
- -------------------------------------------------------------------------------------------------------------
Earnings on common stock 15,818 15,109 49,840 44,423
============================================================================================================
Other comprehensive income - - - -
Comprehensive income $ 15,818 $ 15,109 $ 49,840 $ 44,423
============================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
-9-
<PAGE>
<TABLE>
WISCONSIN PUBLIC SERVICE CORPORATION
<CAPTION>
==================================================================================================
CONSOLIDATED BALANCE SHEETS September 30 December 31
(Thousands) 1999 1998
==================================================================================================
<S> <C> <C>
ASSETS
- --------------------------------------------------------------------------------------------------
Utility plant
Electric $1,593,866 $1,534,711
Gas $282,956 $267,892
Property under capital lease 74,130 -
- --------------------------------------------------------------------------------------------------
Total 1,950,952 1,802,603
Less - Accumulated depreciation and decommissioning 1,172,245 1,120,058
- --------------------------------------------------------------------------------------------------
Total 778,707 682,545
Nuclear decommissioning trusts 182,120 171,442
Construction in progress 55,401 35,996
Nuclear fuel, less accumulated amortization 15,361 18,641
- --------------------------------------------------------------------------------------------------
Net utility plant 1,031,589 908,624
==================================================================================================
Current assets
Cash and equivalents 2,347 1,882
Customer and other receivables, net of reserves 53,157 63,193
Accrued utility revenues 21,407 30,877
Fossil fuel, at average cost 12,430 12,433
Gas in storage, at average cost 21,952 14,855
Materials and supplies, at average cost 21,779 20,054
Prepayments and other 14,969 19,491
- --------------------------------------------------------------------------------------------------
Total current assets 148,041 162,785
==================================================================================================
Regulatory assets 60,356 68,335
Net nonutility plant 1,427 2,888
Pension assets 63,926 60,018
Investments and other assets 60,034 64,932
==================================================================================================
Total $1,365,373 $1,267,582
==================================================================================================
CAPITALIZATION AND LIABILITIES
- --------------------------------------------------------------------------------------------------
Capitalization
Common stock equity $ 515,907 $ 481,708
Preferred stock with no mandatory redemption 51,195 51,200
Capital lease obligation 73,765 -
Long-term debt to parent 13,853 14,061
Long-term debt 287,657 289,972
- --------------------------------------------------------------------------------------------------
Total capitalization 942,377 836,941
==================================================================================================
Current liabilities
Current portion of capital lease obligation 297 -
Note payable 10,000 10,000
Commercial paper 20,000 25,000
Accounts payable 48,769 60,680
Accrued interest and taxes 6,855 2,590
Other 9,028 6,564
- --------------------------------------------------------------------------------------------------
Total current liabilities 94,949 104,834
==================================================================================================
Long-term liabilities and deferred credits
Accumulated deferred income taxes 118,216 118,476
Accumulated deferred investment tax credits 23,953 24,772
Regulatory liabilities 41,886 43,591
Environmental remediation liabilities 38,666 39,028
Other long-term liabilities 105,326 99,940
- --------------------------------------------------------------------------------------------------
Total long-term liabilities and deferred credits 328,047 325,807
==================================================================================================
Total $1,365,373 $1,267,582
==================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
-10-
<PAGE>
<TABLE>
WISCONSIN PUBLIC SERVICE CORPORATION
<CAPTION>
===================================================================================================
CONSOLIDATED STATEMENTS OF CAPITALIZATION September 30 December 31
(Thousands, except share amounts) 1999 1998
===================================================================================================
<S> <C> <C>
Common stock equity
Common stock $ 95,588 $ 95,588
Premium on capital stock 152,842 107,842
Retained earnings 271,566 284,726
ESOP loan guarantees (4,089) (6,448)
- ---------------------------------------------------------------------------------------------------
Total common stock equity 515,907 481,708
===================================================================================================
Preferred stock
Cumulative, $100 par value, 1,000,000 shares authorized;
with no mandatory redemption
Series Shares Outstanding
------ ------------------
5.00% 131,980 13,196 13,200
5.04% 30,000 2,999 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 51,195 51,200
===================================================================================================
Capital lease obligation 74,062 -
Less current portion (297) -
- ---------------------------------------------------------------------------------------------------
Net capital lease obligation 73,765 -
===================================================================================================
Long-term debt to parent
Series Year Due
------ --------
8.76% 2015 5,723 5,808
7.35% 2016 8,130 8,253
- ---------------------------------------------------------------------------------------------------
Total long-term debt to parent 13,853 14,061
===================================================================================================
Long-term debt
First mortgage bonds
Series Year Due
------ --------
7.30% 2002 50,000 50,000
6.80% 2003 50,000 50,000
6-1/8% 2005 9,075 9,075
6.90% 2013 22,000 22,000
8.80% 2021 53,100 53,100
7-1/8% 2023 50,000 50,000
6.08% 2028 50,000 50,000
- ---------------------------------------------------------------------------------------------------
Total 284,175 284,175
Unamortized discount and premium on bonds, net (773) (817)
- ---------------------------------------------------------------------------------------------------
Total first mortgage bonds 283,402 283,358
- ---------------------------------------------------------------------------------------------------
ESOP loan guarantees 4,089 6,448
Other long-term debt 166 166
- ---------------------------------------------------------------------------------------------------
Total long-term debt 287,657 289,972
===================================================================================================
Total capitalization $942,377 $836,941
===================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
-11-
<PAGE>
<TABLE>
WISCONSIN PUBLIC SERVICE CORPORATION
<CAPTION>
=======================================================================================
CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended
(Thousands) September 30
1999 1998
=======================================================================================
<S> <C> <C>
Cash flows from operating activities
Net income $ 52,173 $ 46,756
Adjustments to reconcile net income to net cash from
operating activities
Depreciation and decommissioning 54,910 58,029
Amortization of nuclear fuel and other 10,636 12,411
Deferred income taxes (2,718) (11,324)
Investment tax credit restored (1,206) (1,306)
Allowance for equity funds used during construction (481) (136)
Pension income (3,908) (6,824)
Postretirement funding 4,847 2,956
Other, net 2,293 995
Changes in
Customer and other receivables 10,036 4,630
Accrued utility revenues 9,470 12,609
Fossil fuel inventory 3 1,048
Gas in storage (7,097) (1,566)
Accounts payable (11,911) (3,779)
Miscellaneous current and accrued liabilities 2,632 (4,713)
Accrued taxes 5,742 (3,907)
Gas refunds - 710
- ---------------------------------------------------------------------------------------
Net cash from operating activities 125,421 106,589
=======================================================================================
Cash flows from (used for) investing activities
Construction of utility plant and nuclear fuel expenditures (97,152) (55,042)
Decommissioning funding (6,818) (12,930)
Purchase of other property and equipment (111) (233)
Other 4,531 3,868
- ---------------------------------------------------------------------------------------
Net cash used for investing activities (99,550) (64,337)
=======================================================================================
Cash flows from (used for) financing activities
Proceeds from issuance of commercial paper 261,500 118,000
Redemptions of commercial paper (266,500) (108,500)
Redemptions of first mortgage bonds - (50,000)
Equity infusion from parent 45,000 34,000
Dividend to parent (63,000) (35,009)
Preferred stock dividends (2,333) (2,333)
Other (73) -
- ---------------------------------------------------------------------------------------
Net cash used for financing activities (25,406) (43,842)
=======================================================================================
Net increase (decrease) in cash and equivalents 465 (1,590)
Cash and equivalents at beginning of period 1,882 3,921
=======================================================================================
Cash and equivalents at end of period $ 2,347 $ 2,331
=======================================================================================
Cash paid during period for
Interest, less amount capitalized $ 18,647 $ 18,062
Income taxes 27,449 39,490
=======================================================================================
</TABLE>
Supplemental schedule of noncash investing and financing activities:
A capital lease obligation of $74,130 was incurred when
Wisconsin Public Service entered into a long-term lease agreement
for utility plant assets.
The accompanying notes are an integral part of these statements.
-12-
<PAGE>
<TABLE>
WISCONSIN PUBLIC SERVICE CORPORATION
<CAPTION>
========================================================================================
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS Nine Months Ended
(Thousands) September 30
1999 1998
========================================================================================
<S> <C> <C>
Balance at beginning of period $284,726 $297,489
Add Net income 52,173 46,756
- ----------------------------------------------------------------------------------------
336,899 344,245
- ----------------------------------------------------------------------------------------
Deduct
Cash dividends declared on preferred stock 2,333 2,333
Dividend to parent 63,000 35,009
- ----------------------------------------------------------------------------------------
65,333 37,342
- ----------------------------------------------------------------------------------------
Balance at end of period $271,566 $306,903
========================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
-13-
<PAGE>
WPS RESOURCES CORPORATION AND SUBSIDIARIES
WISCONSIN PUBLIC SERVICE CORPORATION
CONDENSED NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
NOTE 1. FINANCIAL INFORMATION
______________________________
We have prepared the consolidated financial statements of WPS Resources
Corporation and Wisconsin Public Service Corporation under the rules and
regulations of the Securities and Exchange Commission. These financial
statements have not been audited. Management believes that these financial
statements include all normal recurring adjustments which are necessary for a
fair presentation of the financial results for each period shown. We have
condensed or omitted certain information and footnote disclosures normally
included in financial statements prepared under generally accepted accounting
principles. We believe that the disclosures made are adequate to make the
information presented not misleading. These financial statements should be
read along with the financial statements and notes included with our latest
annual Form 10-K report.
Because of the seasonal nature of utility operations, the results reported
for the quarter and nine-months ended may not be representative of annual
results.
NOTE 2. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
______________________________________________________
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement requires all derivatives
to be measured at fair value and recognized as either assets or liabilities
in the statement of financial position. The accounting for changes in the
fair value of a derivative depends upon the use of the derivative and its
resulting designation. Unless specific hedge accounting criteria are met,
changes in the derivative's fair value must be recognized currently in
earnings. In June 1999, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 137 which delays the
effective date of Standard No. 133 to fiscal periods beginning after June 15,
2000. Accordingly, we will be adopting the requirements of this statement on
January 1, 2001, and have not yet determined its impact on our financial
statements. However, the requirements of this statement could increase
volatility in earnings and other comprehensive income.
-14-
<PAGE>
NOTE 3. SEGMENTS OF BUSINESS
_____________________________
Effective December 31, 1998, we adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information." We manage our reportable segments separately due to their
different operating and regulatory environments. Our principal business
segments are the regulated electric utility operations of Wisconsin Public
Service Corporation and Upper Peninsula Power Company and the regulated gas
utility operations of Wisconsin Public Service. The other reportable
business segment, WPS Energy Services, Inc., participates in nonregulated
energy marketing operations. Reconciling eliminations represent intercompany
transactions.
The table below presents summary information pertaining to our operations
segmented by lines of business.
<TABLE>
<CAPTION>
Nonutility and
Regulated Utilities Nonregulated Operations
------------------- -----------------------
WPS
WPS Power WPS
Segments of Business Energy Development Reconciling Resources
(Thousands) Electric Gas Services and Other Eliminations Consolidated
- -------------------- -------- --- -------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Quarter Ended
September 30, 1999
- ------------------
Operating revenues $165,439 $30,529 $50,854 $8,459 ($4,276) $251,005
Net income (loss) 17,393 (1,970) (1,242) (362) - 13,819
Quarter Ended
September 30, 1998
- ------------------
Operating revenues $148,022 $25,890 $75,049 $2,715 ($3,748) $247,928
Net income (loss) 18,030 (2,606) (2,193) (1,432) - 11,799
Nine Months Ended
September 30, 1999
- ------------------
Operating revenues $448,278 $133,384 $213,193 $18,739 ($11,203) $802,391
Net income (loss) 43,606 6,938 (2,047) (1,885) - 46,612
Nine Months Ended
September 30, 1998
- ------------------
Operating revenues $415,384 $115,762 $243,594 $5,448 ($8,980) $771,208
Net income (loss) 43,080 2,628 (4,706) (786) - 40,216
</TABLE>
NOTE 4. POWER SUPPLY
_____________________
The De Pere Energy Center cogeneration facility became operational on
June 14, 1999. Wisconsin Public Service's agreement to purchase electricity
from this facility is accounted for as a capital lease and has been
capitalized at $74.1 million.
NOTE 5. ASSET ACQUISITION
__________________________
On June 8, 1999 WPS Power Development, Inc. purchased generation assets from
Maine Public Service Company for $37.5 million. The purchase included
hydroelectric, steam, and diesel units in the State of Maine and in the
Canadian Province of New Brunswick with a total capacity of 91.7 megawatts.
-15-
<PAGE>
NOTE 6. STOCK OPTION PLAN
__________________________
WPS Resources granted stock options under our 1999 Stock Option Plan as
approved by shareholders on May 6, 1999. The stock option plan is accounted
for under Accounting Principles Board Opinion No. 25. As a result, the plan
grants fixed stock options and no compensation expense is recognized.
NOTE 7. SUPPLEMENTAL INFORMATION ON TWELVE MONTH RESULTS OF OPERATIONS
_______________________________________________________________________
<TABLE>
WPS RESOURCES CORPORATION
COMPARATIVE TWELVE MONTHS YEAR-ENDED STATEMENTS
<CAPTION>
===============================================================================================
CONSOLIDATED STATEMENT OF INCOME Twelve Months Ended
(Thousands, except per share amounts) September 30
1999 1998
===============================================================================================
<S> <C> <C>
Operating revenues
Electric utility revenues $ 574,809 $ 538,707
Gas utility revenues 182,733 177,428
Nonregulated energy and other 337,377 308,048
- -----------------------------------------------------------------------------------------------
Total operating revenues 1,094,919 1,024,183
===============================================================================================
Operating expenses
Electric production fuels 113,285 111,076
Purchased power 74,317 53,767
Gas purchased for resale 115,319 116,373
Nonregulated energy cost of sales 321,736 302,093
Other operating expenses 183,904 169,495
Maintenance 62,877 45,984
Depreciation and decommissioning 84,234 85,473
Taxes other than income 32,858 31,580
- -----------------------------------------------------------------------------------------------
Total operating expenses 988,530 915,841
===============================================================================================
Operating income 106,389 108,342
- -----------------------------------------------------------------------------------------------
Other income and (deductions)
Allowance for equity funds used during construction 524 151
Other, net 6,261 6,589
- -----------------------------------------------------------------------------------------------
Total other income and (deductions) 6,785 6,740
===============================================================================================
Income before interest expense 113,174 115,082
- -----------------------------------------------------------------------------------------------
Interest on long-term debt 24,790 24,865
Other interest 6,554 5,591
Allowance for borrowed funds used during construction (2,039) (228)
- -----------------------------------------------------------------------------------------------
Total interest expense 29,305 30,228
===============================================================================================
Distributions - preferred securities of subsidiary trust 3,500 613
===============================================================================================
Income before income taxes 80,369 84,241
Income taxes 24,706 28,818
Minority interest (479) (583)
Preferred stock dividends of subsidiary 3,115 3,133
- -----------------------------------------------------------------------------------------------
Net income 53,027 52,873
- -----------------------------------------------------------------------------------------------
Other comprehensive income - -
- -----------------------------------------------------------------------------------------------
Comprehensive income 53,027 52,873
===============================================================================================
Retained earnings at beginning of period 341,883 339,385
Cash dividends on common stock 52,852 50,375
- -----------------------------------------------------------------------------------------------
Retained earnings at end of period $ 342,058 $ 341,883
===============================================================================================
Average shares of common stock 26,577 26,514
Earnings per average share of common stock $2.00 $1.99
Dividend per share of common stock $1.99 $1.95
===============================================================================================
</TABLE>
-16-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - WPS RESOURCES CORPORATION
WPS Resources Corporation is a holding company. Our wholly-owned
subsidiaries include two regulated utilities, Wisconsin Public Service
Corporation and Upper Peninsula Power Company. Another wholly-owned
subsidiary, WPS Resources Capital Corporation, is a holding company for our
nonregulated businesses including WPS Energy Services, Inc. and WPS Power
Development, Inc. Approximately 84% of our assets at September 30, 1999, and
approximately 67% of our revenues for the first nine months of 1999 were
derived from Wisconsin Public Service, an electric and gas utility.
Substantially all of our net income for the first nine months of 1999 was
derived from Wisconsin Public Service and Upper Peninsula Power, an electric
utility.
THIRD QUARTER 1999 COMPARED WITH THIRD QUARTER 1998
WPS RESOURCES OVERVIEW
WPS Resources' consolidated operating revenues were $251.0 million in the
third quarter of 1999 compared with $247.9 million in the third quarter of
1998, an increase of 1.3%. Net income was $13.8 million in the third quarter
of 1999 and $11.8 million in the third quarter of 1998, an increase of 16.9%.
Basic and diluted earnings per share were $0.52 in the third quarter of 1999
compared with $0.45 in the third quarter of 1998, an increase of 15.6%. The
reasons for the increase in earnings, as explained below, were higher
electric utility, gas utility, and nonregulated margins and an increase in
other income. Partially offsetting these factors were increases in other
operating expenses and maintenance expenses.
OVERVIEW OF UTILITY OPERATIONS (WISCONSIN PUBLIC SERVICE AND UPPER PENINSULA
POWER)
Revenues at Wisconsin Public Service were $179.9 million in the third quarter
of 1999 compared with $158.0 million in the third quarter of 1998, an
increase of 13.9%. Earnings on common stock were $15.8 million in the third
quarter of 1999 and $15.1 million in the third quarter of 1998, an increase
of 4.6%. The primary reasons for the increase in earnings on common stock
were higher electric utility and gas utility margins and an increase in other
income. Partially offsetting these factors were higher other operating and
maintenance expenses.
Revenues at Upper Peninsula Power were $16.1 million in the third quarter of
1999 compared with $15.9 million in the third quarter of 1998, an increase of
1.3%. Earnings on common stock were $0.3 million in the third quarter of
1999 and $0.5 million in the third quarter of 1998.
-17-
<PAGE>
ELECTRIC UTILITY OPERATIONS (WISCONSIN PUBLIC SERVICE AND UPPER PENINSULA
POWER)
WPS Resources' consolidated electric utility margin increased $4.0 million,
or 4.0%, primarily due to Wisconsin Public Service's implementation of a
Public Service Commission of Wisconsin rate order which authorized a 6.3%
increase in Wisconsin retail electric rates.
Third Quarter
WPS Resources' Consolidated --------------------------
Electric Utility Margins (Thousands) 1999 1998
- ------------------------------------ ---- ----
Revenues $162,952 $146,007
Fuel and purchased power 58,781 45,871
------- -------
Margins $104,171 $100,136
======= =======
Sales in kilowatt-hours (Thousands) 3,265,890 3,306,208
Our consolidated electric utility revenues increased $16.9 million, or 11.6%.
Revenues at Wisconsin Public Service were up 13.0% largely due to the
Wisconsin retail electric rate increase and additional wholesale revenues
because of unusually warm weather early in the third quarter of 1999. This
occurred in spite of the fact that overall sales volumes at Wisconsin Public
Service were down 1.3%.
Our consolidated fuel expense increased $1.9 million, or 6.1%, due to
increased production at Wisconsin Public Service's combustion turbine
generating plants. Our consolidated purchased power expense increased
$11.0 million, or 76.5%, primarily due to additional purchase requirements at
Wisconsin Public Service. Purchase requirements and prices were higher
during a period of unusually warm weather early in the third quarter of 1999.
This increase was partially offset by purchases made late in the third
quarter of 1999 when purchased power prices were low.
The Public Service Commission of Wisconsin allows Wisconsin Public Service to
prospectively adjust the amount billed to Wisconsin retail customers for fuel
and purchased power if costs fall outside a specified range. Wisconsin
Public Service is required to file an application to adjust rates either
higher or lower when costs are plus or minus 2.0% from forecasted costs on an
annualized basis. Forecasted annual 1999 fuel costs at September 30, 1999
are expected to be within this 2.0% window.
GAS UTILITY OPERATIONS (WISCONSIN PUBLIC SERVICE)
The consolidated gas utility margin represents gas revenues less purchases
exclusive of intercompany transactions. The gas utility margin at
Wisconsin Public Service increased $2.0 million, or 2.3%. This increase was
primarily due to the implementation of a Public Service Commission of
Wisconsin rate order which authorized a 5.1% increase in Wisconsin retail gas
rates.
-18-
<PAGE>
Third Quarter
Wisconsin Public Service's ------------------------
Gas Utility Margins (Thousands) 1999 1998
- ------------------------------- ---- ----
Revenues $30,529 $25,890
Purchase costs 19,840 17,211
------ ------
Margins $10,689 $ 8,679
====== ======
Volume in therms (Thousands) 103,748 96,586
Wisconsin Public Service's gas revenues increased $4.6 million, or 17.9%.
This increase was due to the implementation of new Wisconsin retail gas rates
and a 7.4% increase in overall therm sales.
Wisconsin Public Service's gas purchase costs increased $2.6 million, or
15.3%. This increase resulted from additional purchase requirements and
higher gas costs in the third quarter of 1999. Under current regulatory
practice, the Public Service Commission of Wisconsin and the Michigan Public
Service Commission allow Wisconsin Public Service to pass changes in the cost
of gas on to customers through a purchased gas adjustment clause.
OTHER UTILITY EXPENSES/INCOME (WISCONSIN PUBLIC SERVICE AND UPPER PENINSULA
POWER)
Other operating expenses at Wisconsin Public Service increased $1.5 million,
or 4.3%, primarily due to higher pension and post-retirement medical expenses
as a result of a decrease in the discount rate used to calculate these
obligations.
Maintenance expense at Wisconsin Public Service's fossil-fueled generation
plants increased $1.3 million due to additional costs for scheduled and
unscheduled maintenance activities. Electric transmission and distribution
maintenance expense at Wisconsin Public Service increased $3.9 million
primarily due to costs for repairing storm damage experienced in the third
quarter of 1999 and for precertification costs associated with the proposed
Wausau to Arrowhead transmission line.
OVERVIEW OF NONREGULATED OPERATIONS
Nonregulated operations primarily consist of the gas and electric sales at
WPS Energy Services, an energy marketing subsidiary. Nonregulated operations
also include those of WPS Resources as a holding company (primarily
investments, borrowings, and certain unallocated corporate costs) and those
of WPS Power Development which develops electric generation projects, invests
in generating facilities, and provides services to the electric power
generation industry.
Nonregulated operations experienced a loss of $2.3 million in the third
quarter of 1999 compared with a loss of $3.8 million in the third quarter of
1998. Although margins on nonregulated energy sales continue to grow, losses
-19-
<PAGE>
are being experienced primarily due to operating expenses associated with new
facilities, market expansion, and the pursuit of additional projects.
OVERVIEW OF WPS ENERGY SERVICES
Revenues at WPS Energy Services were $50.9 million in the third quarter of
1999 compared with $75.0 million in the third quarter of 1998, a decrease of
32.1%. WPS Energy Services experienced a loss of $1.2 million in the third
quarter of 1999 compared with a loss of $2.2 million in the third quarter of
1998. The primary reason for the decrease in losses was improved trading
activities in 1999. Partially offsetting this factor was a $0.7 million
one-time pretax write-down related to an investment in a gas production
field.
NONREGULATED MARGINS (WPS ENERGY SERVICES)
Gas and electric margins at WPS Energy Services in the third quarter of 1999
remained fairly stable when compared with the third quarter of 1998. Gas
revenues at WPS Energy Services were $49.6 million in the third quarter of
1999 compared with $65.7 million in the third quarter of 1998, a decrease of
24.5%. The decrease was the result of increased emphasis on higher quality
wholesale transactions versus wholesale transactions with lower margins.
Electric revenues at WPS Energy Services were $1.1 million in the third
quarter of 1999 and $9.1 million in the third quarter of 1998, a decrease of
87.9%. This decrease was the result of WPS Energy Services' effort to focus
participation in the wholesale electric markets, where transactions are based
on physical generation assets controlled by an affiliate of WPS Resources.
WPS Energy Services' gross margins were $0.9 million in the third quarter of
1999 and $1.0 million in the third quarter of 1998, a decrease of 10.0%.
This change was due to decreased wholesale sales and resulted in a decrease
in gas purchases of $16.1 million and a decrease in electric purchases of
$8.0 million.
OTHER NONREGULATED EXPENSES/INCOME (WPS ENERGY SERVICES)
Improved processes and strategies emphasizing reduced risk at WPS Energy
Services resulted in gas trading gains of $0.1 million in the third quarter
of 1999 compared with gas trading losses of $0.9 million in the third quarter
of 1998. In addition, the volume of instruments traded has decreased. No
electric trading gains or losses were experienced in the third quarter of
1999 compared with electric trading losses of $1.0 million in the third
quarter of 1998.
PRICE RISK MANAGEMENT ACTIVITIES (WPS ENERGY SERVICES)
WPS Resources engages in minimal price risk management activities at its
utility operations because much of the utility price risk exposure is
recoverable through customer rates. (See pages 18 and 19 for descriptions of
electric and gas retail price adjustment mechanisms.) More price risk
exposure is experienced at WPS Energy Services, and WPS Energy Services
actively engages in price risk management activities.
WPS Energy Services uses derivative financial and commodity instruments
including futures and forward contracts. These derivatives reduce the market
-20-
<PAGE>
risk associated with changes in the price of natural gas and electricity sold
under fixed price commitments with certain customers. WPS Energy Services
also uses price swap agreements, call and put option contracts, and futures
and forward contracts. These derivatives manage the risk associated with a
portion of the anticipated supply requirements. WPS Energy Services uses
derivatives, within specified guidelines, for trading purposes.
The notional amount of derivatives outstanding at September 30, 1999,
decreased from December 31, 1998, due to the end of the 1999 winter heating
season. This includes a decrease of approximately 38.0% for hedging
activities and 91.0% for trading activities. Although wholesale activity has
decreased, as WPS Energy Services enters into supply commitments for the
1999-2000 winter season, it expects that the notional amount of derivatives
outstanding will increase accordingly.
OTHER NONREGULATED OPERATIONS
Losses at WPS Power Development were $0.7 million in the third quarter of
1999 compared with $0.6 million in the third quarter of 1998. The increased
losses were due to additional costs incurred in the third quarter of 1999 for
the operation of newly acquired facilities and the pursuit of new projects.
WPS Power Development experienced an increase of $3.4 million in its margin
on operating generation facilities in the third quarter of 1999. This
increase was largely due to the operation of the electric generation assets
acquired in Maine and Canada on June 8, 1999. Other operating expenses at
WPS Power Development increased $2.2 million due to operating expenses
related to the Maine Public Service asset acquisition and to higher operating
expenses at ECO Coal Pelletization #12, LLC. Although not significant for
the third quarter, ECO Coal Pelletization #12 resumed production and sales of
coal briquettes. Also contributing to higher operating expenses at WPS Power
Development were additional costs related to the pursuit and development of
new projects.
NINE MONTHS 1999 COMPARED WITH NINE MONTHS 1998
WPS RESOURCES OVERVIEW
WPS Resources' consolidated operating revenues were $802.4 million in the
first nine months of 1999 compared with $771.2 million in the first nine
months of 1998, an increase of 4.0%. Net income was $46.6 million in the
first nine months of 1999 and $40.2 million in the first nine months of 1998,
an increase of 15.9%. Basic and diluted earnings per share were $1.75 in the
first nine months of 1999 compared with $1.52 in the first nine months of
1998, an increase of 15.1%. The primary reasons for the increase in
earnings, as explained below, were higher electric utility, gas utility, and
nonregulated margins and an increase in other income. Partially offsetting
these factors were higher other operating expenses and maintenance expenses.
-21-
<PAGE>
OVERVIEW OF UTILITY OPERATIONS (WISCONSIN PUBLIC SERVICE AND UPPER PENINSULA
POWER)
Revenues at Wisconsin Public Service were $534.9 million in the first nine
months of 1999 compared with $485.7 million in the first nine months of 1998,
an increase of 10.1%. Earnings on common stock were $49.8 million in the
first nine months of 1999 and $44.4 million in the first nine months of 1998,
an increase of 12.2%. The primary reasons for the increase in earnings on
common stock at Wisconsin Public Service were increased electric and gas
utility margins. Margins increased largely as a result of the implementation
of a January 15, 1999, Public Service Commission of Wisconsin rate order
which authorized a 6.3% increase in Wisconsin retail electric rates and a
5.1% increase in Wisconsin retail gas rates. Partially offsetting these
factors were increases in other operating expenses and maintenance expense.
Revenues at Upper Peninsula Power were $46.8 million in the first nine months
of 1999 compared with $45.4 million in the first nine months of 1998, an
increase of 3.1%. Earnings on common stock were $2.2 million in the first
nine months of 1999 and $2.3 million in the first nine months of 1998.
ELECTRIC UTILITY OPERATIONS (WISCONSIN PUBLIC SERVICE AND UPPER PENINSULA
POWER)
WPS Resources' consolidated electric utility margin increased $11.2 million,
or 3.9%. Wisconsin Public Service's electric utility margin increased
$12.7 million primarily due to its implementation of a January 15, 1999
Public Service Commission of Wisconsin rate order which authorized a 6.3%
increase in Wisconsin retail electric rates.
Nine Months
WPS Resources' Consolidated ----------------------
Electric Utility Margins (Thousands) 1999 1998
- ------------------------------------ ---- ----
Revenues $442,270 $410,721
Fuel and purchased power 146,347 126,001
------- -------
Margins $295,923 $284,720
======= =======
Sales in kilowatt-hours (Thousands) 9,399,470 9,189,539
Our consolidated electric utility revenues increased $31.5 million, or 7.7%,
largely due to the electric rate increase at Wisconsin Public Service. Also
contributing to higher electric revenues was a 8.5% increase in overall
kilowatt-hour sales at Wisconsin Public Service and a 3.5% increase in
kilowatt-hour sales at Upper Peninsula Power. These sales were largely the
result of weather that was 12.3% colder in the first nine months of 1999 than
in the first nine months of 1998. However, weather was still 8.4% warmer
than normal.
-22-
<PAGE>
Our consolidated electric production fuel expense increased $2.5 million, or
2.9%, primarily as a result of increased generation requirements at
Wisconsin Public Service's combustion turbine and nuclear generating plants
in the first nine months of 1999. Partially offsetting this factor was a
decrease in production at Wisconsin Pubic Service's fossil-fueled generation
plants as a result of scheduled maintenance activities.
Our consolidated purchased power expense increased $17.9 million, or 42.6%,
primarily due to additional purchase requirements at both Wisconsin Public
Service and Upper Peninsula Power in the first nine months of 1999. Purchase
requirements increased 40.2% at Wisconsin Public Service due to the lack of
production at its fossil-fueled generation plants which were off-line for
scheduled maintenance activities in the first half of 1999. In addition, the
cost of purchases were 9.0% higher in the first nine months of 1999 than in
the same period in 1998.
The Public Service Commission of Wisconsin allows Wisconsin Public Service to
prospectively adjust the amount billed to Wisconsin retail customers for fuel
and purchased power if costs fall outside a specified range. Wisconsin
Public Service is required to file an application to adjust rates either
higher or lower when costs are plus or minus 2.0% from forecasted costs on an
annualized basis. Forecasted annual 1999 fuel costs at September 30, 1999
are expected to be within this 2.0% window.
GAS UTILITY OPERATIONS (WISCONSIN PUBLIC SERVICE)
The consolidated gas utility margin represents gas revenues less purchases
exclusive of intercompany transactions. The consolidated gas utility margin
increased $8.2 million, or 19.3%, in the first nine months of 1999. The gas
utility margin at Wisconsin Public Service increased $9.6 million, or 22.1%,
in the first nine months of 1999. This increase was primarily due to the
implementation of a Public Service Commission of Wisconsin rate order which
authorized a 5.1% increase in Wisconsin retail gas rates and to an increase
in therm sales.
Nine Months
Wisconsin Public Service's ----------------------
Gas Utility Margins (Thousands) 1999 1998
- ------------------------------- ---- ----
Revenues $133,384 $115,762
Purchase costs 80,617 72,545
------- -------
Margins $ 52,767 $ 43,217
======= =======
Volume in therms (Thousands) 475,829 434,315
Wisconsin Public Service gas operating revenues increased $17.6 million, or
15.2%. This increase was due to the implementation of new Wisconsin retail
gas rates and a 9.6% increase in overall therm sales as a result of colder
weather in the first nine months of 1999. Although weather was 12.3% colder
in the first nine months of 1999 than in the first nine months of 1998, it
was
-23-
<PAGE>
still 8.4% warmer than normal. In addition, gas revenues at Wisconsin Public
Service in the first nine months of 1998 were reduced by $7.5 million for
refunds from ANR Pipeline Company which were passed on to its customers.
Wisconsin Public Service's gas purchase costs increased $8.1 million, or
11.3%. This increase was largely due to increased sales. Gas purchase costs
for the first nine months of 1998 were reduced due to the $7.5 million refund
from ANR Pipeline Company which was credited to gas expense in the third
quarter of 1998. Under current regulatory practice, the Public Service
Commission of Wisconsin and the Michigan Public Service Commission allow
Wisconsin Public Service to pass changes in the cost of gas on to customers
through a purchased gas adjustment clause.
OTHER UTILITY EXPENSES/INCOME (WISCONSIN PUBLIC SERVICE AND UPPER PENINSULA
POWER)
Other operating expenses at Wisconsin Public Service increased $8.1 million,
or 8.0%, primarily due to higher electric distribution expense of
$2.1 million, higher customer service expense of $3.2 million, and higher
pension costs of $2.8 million due to a decrease in the discount rate used to
calculate this expense.
Maintenance expense at Wisconsin Public Service increased $9.6 million, or
28.4%, primarily due to additional costs of $6.8 million for scheduled and
unscheduled maintenance activities at the fossil-fueled generation plants.
Maintenance of overhead lines also increased largely as a result of
expenditures of $1.4 million for repairing storm damage experienced in the
third quarter of 1999. Precertification costs increased $0.7 million due to
expenses associated with the proposed Wausau to Arrowhead transmission line.
OVERVIEW OF NONREGULATED OPERATIONS
Nonregulated operations experienced a loss of $5.4 million in the first nine
months of 1999 compared with a loss of $6.5 million in the first nine months
of 1998. Although margins on nonregulated energy sales continue to grow,
losses are being experienced primarily due to operating expenses associated
with new facilities, market expansion and the pursuit of additional projects.
In addition, nonregulated earnings in the first nine months of 1998 included
a one-time dividend of $2.0 million received by WPS Resources from a venture
capital investment in the first quarter of 1998.
OVERVIEW OF WPS ENERGY SERVICES
Revenues at WPS Energy Services were $213.2 million in the first nine months
of 1999 compared with $243.6 million in the first nine months of 1998, a
decrease of 12.5%. WPS Energy Services experienced a loss of $2.0 million in
the first nine months of 1999 compared with a loss of $4.7 million in the
first nine months of 1998. The primary reasons for the decrease in losses
were lower electric and gas trading losses primarily due to improved trading
activities in 1999 and an increase in the gas margin due to improved gas
procurement operations and processes, including a reduced emphasis on
wholesale sales. Partially offsetting these factors was a one-time pretax
write-down of $0.7 million related to an investment in a gas production
field.
-24-
<PAGE>
NONREGULATED MARGINS (WPS ENERGY SERVICES)
Gas margins at WPS Energy Services were $4.3 million in the first nine months
of 1999 compared with $3.1 million in the first nine months of 1998, an
increase of 38.7%. Electric margins remained fairly stable. Gas revenues at
WPS Energy Services were $209.7 million in the first nine months of 1999
compared with $225.5 million in the first nine months of 1998. This decrease
was the result of increased emphasis on higher quality wholesale transactions
versus wholesale transactions with lower margins. Electric revenues were
$2.9 million in the first nine months of 1999 and $17.5 million in the first
nine months of 1998, a decrease of 83.3%. This decrease was the result of
WPS Energy Services' effort to focus participation in the wholesale electric
markets where transactions are based on physical generation assets controlled
by an affiliate of WPS Resources.
WPS Energy Services' cost of sales were $208.1 million in the first nine
months of 1999 and $239.8 million in the first nine months of 1998, a
decrease of 13.2%. This decrease was due to decreased gas purchases of $17.1
million due to lower sales, improvements in gas procurement processes and
decreased electric purchases of $14.6 million due to decreased sales.
OTHER NONREGULATED EXPENSES/INCOME (WPS ENERGY SERVICES)
Other operating expenses at WPS Energy Services increased $0.9 million, or
14.4%, primarily due to costs of $0.7 million associated with entering into
expanded retail customer-choice programs. Improved processes and strategies
emphasizing reduced risk at WPS Energy Services resulted in a slight gas
trading gain in the first nine months of 1999 compared with gas trading
losses of $3.2 million in the first nine months of 1998. Minimal electric
trading losses were experienced in the first nine months of 1999 compared
with $1.1 million in the first nine months of 1998.
PRICE RISK MANAGEMENT ACTIVITIES (WPS ENERGY SERVICES)
WPS Resources engages in minimal price risk management activities at its
utility operations because much of the utility price risk exposure is
recoverable through customer rates. More price risk exposure is experienced
at WPS Energy Services, and WPS Energy Services actively engages in price
risk management activities. See the discussion at pages 20 and 21 for a
discussion of WPS Energy Services' price risk management activities.
OTHER NONREGULATED OPERATIONS
Losses at WPS Power Development were $2.4 million in the first nine months of
1999 compared with $1.5 million in the first nine months of 1998. The
increase in losses at WPS Power Development was primarily due to additional
costs incurred in the first nine months of 1999 for the operation of newly
acquired facilities and the pursuit of new projects.
WPS Power Development experienced an increase of $5.7 million in its margin
on operating generation facilities in the first nine months of 1999. This
increase was largely due to the operation of the electric generation assets
acquired in Maine and Canada on June 8, 1999. Other operating expenses at
WPS Power Development increased $4.4 million due to operating expenses
related
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<PAGE>
to the Maine Public Service asset acquisition and to higher operating
expenses at ECO Coal Pelletization #12, LLC. Although not significant for
the first nine months of 1999, ECO Coal Pelletization #12 resumed production
and sales of coal briquettes in the third quarter. Also contributing to
higher operating expenses at WPS Power Development were additional costs
related to the pursuit and development of new projects.
The first nine months of 1998 included a one-time dividend of $2.0 million
received by WPS Resources from a venture capital investment. This dividend
represented a four cents per share increase to earnings for the first nine
months of 1998.
FINANCIAL CONDITION - WPS RESOURCES
INVESTMENTS AND FINANCING
Special common stock dividends of $25.0 million were paid by Wisconsin Public
Service to WPS Resources in the first nine months of 1999. Equity infusions
of $45.0 million were made by WPS Resources to Wisconsin Public Service
Corporation in the first nine months of 1999. These special dividends and
equity infusions allowed Wisconsin Public Service's average equity
capitalization ratio for ratemaking to remain at its target level as
established by the Public Service Commission of Wisconsin in its most recent
rate order.
Cash requirements exceeded internally generated funds in the first nine
months of 1999 and short-term borrowings increased $46.4 million as a result
of obtaining funds for the acquisition of generating units from Maine Public
Service. Our pretax interest coverage was 3.13 times for the 12 months ended
September 30, 1999. See the table below for WPS Resources' credit ratings.
Credit Ratings Standard & Poor's Moody's
- -------------- ----------------- -------
Wisconsin Public Service Corporation
Bonds AA+ Aa2
Preferred stock AA aa3
Commercial paper A1+ P1
WPS Resources Corporation
Trust preferred securities A+ a1
Commercial paper A1+ P1
WPS Resources Capital Corporation
Unsecured debt* AA A1
* No securities currently outstanding.
We normally use internally-generated funds and short-term borrowing to
satisfy most of our capital requirements. We may periodically issue
additional long-term debt and common stock to reduce short-term debt and to
maintain desired capitalization ratios.
The specific forms of financing, amounts, and timing will depend on the
availability of projects, market conditions, and other factors. We recently
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<PAGE>
filed a shelf registration with the Securities and Exchange Commission which
allows the issuance of $400.0 million in the aggregate of long-term debt and
common stock. We may issue up to $100.0 million of long-term debt in the next
few months to reduce short-term debt. We began issuing new shares of common
stock for our Stock Investment Plan in January 1999. We may also expand our
leveraged employee stock ownership plan during the next three-year period.
Wisconsin Public Service makes large investments in capital assets.
Construction expenditures for Wisconsin Public Service are expected to be
approximately $376.0 million in the aggregate for the 1999 through 2001
period. This includes expenditures for the replacement of the Kewaunee
Nuclear Power Plant steam generators and construction of a proposed
transmission line between Wausau, Wisconsin and Duluth, Minnesota.
In addition, other capital requirements for Wisconsin Public Service for the
three-year period will include contributions of approximately $20.7 million
to the Kewaunee Nuclear Power Plant decommissioning trust fund.
Wisconsin Public Service's agreement to purchase electricity from the
De Pere Energy Center, a gas-fired cogeneration facility, is accounted for as
a capital lease. The De Pere Energy Center lease was capitalized at
$74.1 million at the in-service date, June 14, 1999. While not a capital
expenditure, this accounting affects the capital structure.
Upper Peninsula Power will incur construction expenditures of about
$23.0 million in the aggregate for the period 1999 through 2001, primarily
for electric distribution improvements.
On November 1, 1999, WPS Power Development completed the purchase from
PP&L Resources, Inc. of the Sunbury Station. The purchase includes a
389 megawatt coal fired plant, two oil-fired combusion turbines with a
capacity of 42 megawatts, coal inventories and a coal transshipment facility.
We plan to refinance the acquisition of this project with nonrecourse
long-term debt.
WPS Power Development's purchase of generation assets from Maine Public
Service which was financed with $37.5 million of short-term debt is being
refinanced with $24.0 million of nonrecourse long-term debt and equity from
its parent.
Other investment expenditures for nonregulated projects are uncertain since
there are few firm commitments at this time. Financing for most nonregulated
projects is expected to be obtained through nonrecourse project financing
and/or through a new subsidiary, WPS Resources Capital Corporation, which was
formed in January 1999 to obtain funding for those projects.
REGULATORY
Wisconsin Public Service received a rate order in the Wisconsin jurisdiction
on January 15, 1999. The impact is a $26.9 million increase in electric
revenues and a $10.3 million increase in gas revenues on an annual basis.
The new rates are effective for 1999 and 2000. The Public Service Commission
of Wisconsin authorized a 12.1% return on Wisconsin Public Service's equity
for 1999 and 2000.
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<PAGE>
On July 1, 1999 Wisconsin Public Service filed to reopen this rate order to
consider issues related to the Kewaunee Nuclear Power Plant, the recovery of
deferred expenses related to the repowering of Pulliam Unit 3, and the fuel
forecast for 2000. Hearings on the rate reopener were held on October 12,
1999. As a result of those hearings, we expect to receive a $21.1 million or
4.6% electric rate increase with new rates to be implemented January 1, 2000.
The Public Service Commission of Wisconsin is expected to rule on this
request in December 1999.
YEAR 2000 COMPLIANCE
The Year 2000 issue arises because software programs, computer hardware, and
equipment that have date sensitive software or embedded chips may recognize a
date using "00" as the year 1900 rather than the year 2000. This may result
in system failures or other disruptions of operations.
WPS Resources and its subsidiary companies are committed to eliminating or
minimizing adverse effects of the Year 2000 computer compliance issue on our
business operations, including the products and services provided to
customers, and to maintaining our reputation as an efficient and reliable
supplier of energy. We, however, are unable to guarantee that there will be
no adverse effects as a result of the Year 2000 computer compliance issue
because many aspects of compliance are beyond our direct control.
We have undertaken a program to assess Year 2000 compliance and to bring
computer systems into compliance by the year 2000. All systems, including
energy production and delivery systems, other embedded systems, and third
party systems of suppliers were evaluated and steps were taken to resolve
potential problems.
A Year 2000 project plan which includes awareness, inventory and assessment,
remediation, testing, and implementation was developed. The formal awareness
phase of the Year 2000 project which includes understanding and communication
of the issue to employees, customers, suppliers, and other affected parties
is complete. The Year 2000 issue was communicated to our employees and
customers via several media. All of our business unit leaders are aware of
the Year 2000 project plan and their roles in implementing the plan.
Communication and response to Year 2000 inquiries continue.
The inventory and assessment phase which includes identification of all
information and non-information technology systems and of non-compliant
systems, applications, and hardware, is complete.
Our Information Technology Department has identified five major systems. All
of these systems (customer information, finance, human resources, materials
management, and facility management) are currently Year 2000 compliant.
In addition, all other systems including non-information technology systems
were identified and ranked as to the risk posed by non-compliance.
Non-information technology systems include computer and embedded systems
related to power plant, system operating, hydroelectric, transmission, and
other operating functions. All systems ranked as "critical," "severe," or
"high" are Year 2000 compliant.
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<PAGE>
We hired an external consulting group to monitor the progress of our
Year 2000 compliance activities. The consulting group's responsibilities
include performing a status check on our ability to achieve Year 2000
compliance.
In addition, we have identified, contacted, and assessed suppliers and other
business partners for Year 2000 readiness, as these external parties may have
the potential to impact our Year 2000 readiness. We are also working to
address Year 2000 issues related to all joint ownership facilities. At the
present time, we are not aware of problems that would materially impact our
operations. However, we have no means of ensuring that all third parties
will be Year 2000 compliant in a timely manner, and the inability of these
parties to resolve successfully their Year 2000 issues could have a material
impact on our operations.
Due to fewer expenditures for hardware and software than originally
anticipated, the estimate of total Year 2000 project costs has been reduced
to $5.1 million. The Wisconsin retail portion of this cost has been approved
for rate recovery by the Public Service Commission of Wisconsin. This
estimate includes internal labor costs of $2.0 million, software replacement
costs for non-compliant products of $1.2 million, and contract labor costs of
$1.9 million. Expenditures for the Year 2000 project incurred through
September 30, 1999, were $3.4 million.
The failure to correct a material Year 2000 problem could result in an
interruption in, or the failure of, certain normal business activities or
operations which could materially affect our results of operations. However,
due to the general uncertainty inherent in the Year 2000 issue, we are unable
to determine at this time whether the consequences of Year 2000 failures will
have a material impact on operations. A preliminary identification of
potential risks related to the failure to be in compliance by the Year 2000
was made. The most reasonably likely worst case Year 2000 scenario includes
loss or unavailability of some generation, partial loss of system monitoring
and control functions, partial loss of voice communications, loss of
transmission facilities, and loss of load or uncharacteristic loads. We
believe that the probable extent of any of these events is not significantly
in excess of similar events caused by normal risks and that the handling of
such events is within the capabilities of the systems.
WPS Resources assessed the potential impact of failure to achieve Year 2000
compliance with respect to each of the following:
- - Generation availability
- - System monitoring and control functions
- - Ability to restart generators that are out of service for planned
or unplanned outages
- - Company-owned voice/data communications
- - Transmission facilities
- - System protection
- - Critical operating data (i.e., generation plant data)
- - Electric and gas distribution systems
- - Pipelines' constraints to the supply or pressure of natural gas
- - Major support systems
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<PAGE>
Contingency plans for dealing with Year 2000 issues were developed for each
application identified as "critical" or "severe." In addition, a proposal
for a "quick response team" concept was drafted, and a process for handling
unexpected Year 2000 problems was formalized. A crisis management training
session utilizing a Year 2000 case study has been completed.
ENVIRONMENTAL
In September 1998, the Environmental Protection Agency required certain
states, including Wisconsin, to develop plans to reduce the emission of
nitrogen oxides from sources within the state by May of 2003. In May 1999,
the United States Court of Appeals for the District of Columbia found the
national air quality standards for ozone and particulate matter flawed. The
Court stayed the requirement for states to file implementation plans by
September of 1999. The Public Service Commission of Wisconsin held a hearing
on October 19, 1999 to review the plans of Wisconsin utilities to meet the
pollution reduction standards. The Public Service Commission of Wisconsin
has already approved Phase I of the jointly owned Columbia Energy Center's
selective catalytic reduction installation. Wisconsin Public Service's cost
for this installation which is expected to be completed in the spring of 2000
is $6.3 million.
Capital expenditures for complying with the original requirements in current
year dollars are projected to be between $61.0 million and $112.0 million in
1999 dollars. The nature of any revised emission standard, the
implementation period for compliance, and the number of Wisconsin utilities
required to implement the new standard could impact future expenditure
levels.
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<PAGE>
RESULTS OF OPERATIONS - WISCONSIN PUBLIC SERVICE CORPORATION
Wisconsin Public Service is a regulated electric and gas utility. Electric
operations accounted for 75% of revenues for the first nine months of 1999,
while gas operations accounted for 25% of revenues for the first nine months
of 1999.
THIRD QUARTER 1999 COMPARED WITH THIRD QUARTER 1998
WISCONSIN PUBLIC SERVICE OVERVIEW
Revenues at Wisconsin Public Service were $179.9 million in the third quarter
of 1999 compared with $158.0 million in the third quarter of 1998, an
increase of 13.9%. Earnings on common stock were $15.8 million in the third
quarter of 1999 and $15.1 million in the third quarter of 1998, an increase
of 4.6%. The primary reasons for the increase in earnings on common stock
were higher electric utility and gas utility margins and an increase in other
income. Partially offsetting these factors were higher other operating
expenses and maintenance expenses.
ELECTRIC UTILITY OPERATIONS
Wisconsin Public Service's consolidated electric utility margin increased
$5.3 million, or 5.9%, primarily due to the implementation of a Public
Service Commission of Wisconsin rate order which authorized a 6.3% increase
in Wisconsin retail electric rates.
Third Quarter
Wisconsin Public Service --------------------------
Electric Utility Margins (Thousands) 1999 1998
- ------------------------------------ ---- ----
Revenues $149,346 $132,107
Fuel and purchased power 54,517 42,550
------- -------
Margin $ 94,829 $ 89,557
======= =======
Sales in kilowatt-hours (Thousands) 3,137,697 3,177,521
Wisconsin Public Service's electric utility revenues increased $17.2 million,
or 13.0%. Although overall sales volumes at Wisconsin Public Service were
down 1.3%, revenues were up 13.0% largely due to the Wisconsin retail
electric rate increase and to additional revenues from wholesale customers
because of higher prices received during a period of unusually warm weather
early in the third quarter of 1999.
Wisconsin Public Service's fuel expense increased $1.8 million, or 5.6%, due
to increased production at the combustion turbine generating plants.
Wisconsin Public Service's purchased power expense increased $10.2 million,
or 91.4%, primarily due to additional purchase requirements during a period
of unusually warm weather early in the third quarter of 1999. This increase
was
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<PAGE>
partially offset by purchases made late in the third quarter of 1999 when
purchased power prices were low.
The Public Service Commission of Wisconsin allows Wisconsin Public Service to
prospectively adjust the amount billed to Wisconsin retail customers for fuel
and purchased power if costs fall outside a specified range. Wisconsin
Public Service is required to file an application to adjust rates either
higher or lower when costs are plus or minus 2.0% from forecasted costs on an
annualized basis. Forecasted annual 1999 fuel costs at September 30, 1999,
are expected to be within this 2.0% window.
GAS UTILITY OPERATIONS
The gas utility margin at Wisconsin Public Service increased $2.0 million, or
2.3%. This increase was primarily due to the implementation of a Public
Service Commission of Wisconsin rate order which authorized a 5.1% increase
in Wisconsin retail gas rates.
Third Quarter
Wisconsin Public Service's -------------------------
Gas Utility Margins (Thousands) 1999 1998
- ------------------------------- ---- ----
Revenues $30,529 $25,890
Purchase costs 19,840 17,211
------ ------
Margins $10,689 $ 8,679
====== ======
Volume in therms (Thousands) 103,748 96,586
Wisconsin Public Service's gas revenues increased $4.6 million, or 17.9%.
This increase was due to the implementation of new Wisconsin retail gas rates
and a 7.4% increase in overall therm sales.
Wisconsin Public Service's gas purchase costs increased $2.6 million, or
15.3%. This increase resulted from additional purchase requirements and
higher gas costs in the third quarter of 1999. Under current regulatory
practice, the Public Service Commission of Wisconsin and the Michigan Public
Service Commission allow Wisconsin Public Service to pass changes in the cost
of gas on to customers through a purchased gas adjustment clause.
OTHER UTILITY EXPENSES/INCOME
Other operating expenses at Wisconsin Public Service increased $1.5 million,
or 4.3%, primarily due to higher pension and post-retirement medical expenses
due to a decrease in the discount rate used to calculate these obligations.
Maintenance expense at Wisconsin Public Service's fossil-fueled generation
plants increased $1.3 million due to additional costs for scheduled and
unscheduled maintenance activities. Electric transmission and distribution
maintenance expense at Wisconsin Public Service increased $3.9 million
primarily due to costs for repairing storm damage experienced in the third
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<PAGE>
quarter of 1999 and for precertification costs associated with the proposed
Wausau to Arrowhead transmission line.
PRICE RISK MANAGEMENT ACTIVITIES
Wisconsin Public Service engages in minimal price risk management activities
because much of the utility price risk exposure is recoverable through
customer rates.
NINE MONTHS 1999 COMPARED WITH NINE MONTHS 1998
WISCONSIN PUBLIC SERVICE
Revenues at Wisconsin Public Service were $534.9 million in the first nine
months of 1999 compared with $485.7 million in the first nine months of 1998,
an increase of 10.1%. Earnings on common stock were $49.8 million in the
first nine months of 1999 and $44.4 million in the first nine months of 1998,
an increase of 12.2%. The primary reasons for the increase in earnings on
common stock, as explained below, were higher electric and gas utility
margins and an increase in other income. Partially offsetting these factors
were higher other operating expenses and maintenance expenses.
ELECTRIC UTILITY OPERATIONS
Wisconsin Public Service's electric utility margin increased $12.7 million,
or 5.0%, primarily due to the implementation of a January 15, 1999 Public
Service Commission of Wisconsin rate order which authorized a 6.3% increase
in Wisconsin retail electric rates.
Nine Months
Wisconsin Public Service's ------------------------
Electric Utility Margins (Thousands) 1999 1998
- ------------------------------------ ---- ----
Revenues $401,523 $369,971
Fuel and purchased power 133,980 115,095
------- -------
Margins $267,543 $254,876
======= =======
Sales in kilowatt-hours (Thousands) 8,955,022 8,748,125
Wisconsin Public Service's electric utility revenues increased $31.6 million,
or 8.5%, largely due to the electric rate increase. Also contributing to
higher electric revenues was an 8.5% increase in overall kilowatt-hour sales.
These sales were largely the result of weather that was 12.3% colder in the
first nine months of 1999 than in the first nine months of 1998. However,
weather was still 8.4% warmer than normal.
Wisconsin Public Service's electric production fuel expense increased
$2.3 million, or 2.8%, primarily as a result of increased generation
requirements at Wisconsin Public Service's combustion turbine and nuclear
generating plants in the first nine months of 1999. Partially offsetting
this
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factor was a decrease in production at the fossil-fueled generation plants as
a result of scheduled maintenance activities.
Wisconsin Public Service's purchased power expense increased $16.5 million,
or 52.8%, primarily due to additional purchase requirements in the first nine
months of 1999. Purchase requirements increased 40.2% at Wisconsin Public
Service due to lack of production at its fossil-fueled generation plants
which were off-line for scheduled maintenance activities in the first half of
1999. In addition, the cost of purchases were 9.0% higher in the first nine
months of 1999 than in the same period in 1998.
The Public Service Commission of Wisconsin allows Wisconsin Public Service to
prospectively adjust the amount billed to Wisconsin retail customers for fuel
and purchased power if costs fall outside a specified range. Wisconsin
Public Service is required to file an application to adjust rates either
higher or lower when costs are plus or minus 2.0% from forecasted costs on an
annualized basis. Forecasted annual 1999 fuel costs at September 30, 1999
are expected to be within this 2.0% window.
GAS UTILITY OPERATIONS
The gas utility margin at Wisconsin Public Service increased $9.6 million, or
22.1%, in the first nine months of 1999. This increase was primarily due to
the implementation of a Public Service Commission of Wisconsin rate order
which authorized a 5.1% increase in Wisconsin retail gas rates and an
increase in therm sales.
Nine Months
Wisconsin Public Service's -----------------------
Gas Utility Margins (Thousands) 1999 1998
- ------------------------------- ---- ----
Revenues $133,384 $115,762
Purchase costs 80,617 72,545
------- -------
Margins $ 52,767 $ 43,217
======= =======
Volume in therms (Thousands) 475,829 434,315
Wisconsin Public Service's gas operating revenues increased $17.6 million, or
15.2%. This increase was due to the implementation of new Wisconsin retail
gas rates and a 9.6% increase in overall therm sales as a result of colder
weather in the first nine months of 1999. Although weather was 12.3% colder
in the first nine months of 1999 than in the first nine months of 1998, it
was still 8.4% warmer than normal. In addition, gas revenues at Wisconsin
Public Service in the first nine months of 1998 were reduced by $7.5 million
for refunds from ANR Pipeline Company which were passed on to its customers.
Wisconsin Public Service's gas purchase costs increased $8.1 million, or
11.3%. This increase was largely due to increased sales. Gas purchase costs
for the first nine months of 1998 were reduced due to the $7.5 million refund
from ANR Pipeline Company which was credited to gas expense in the third
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quarter of 1998. Under current regulatory practice, the Public Service
Commission of Wisconsin and the Michigan Public Service Commission allow
Wisconsin Public Service to pass changes in the cost of gas on to customers
through a purchased gas adjustment clause.
OTHER UTILITY EXPENSES/INCOME
Other operating expenses at Wisconsin Public Service increased $8.1 million,
or 8.0%, primarily due to higher miscellaneous electric distribution expense
of $2.1 million, higher customer service expense of $3.2 million, and higher
pension costs of $2.8 million due to a decrease in the discount rate used to
calculate this expense.
Maintenance expense at Wisconsin Public Service increased $9.6 million, or
28.4%, primarily due to additional costs of $6.8 million for scheduled and
unscheduled maintenance activities at the fossil-fueled generation plants.
Maintenance of overhead lines also increased largely as a result of an
additional estimated cost of $1.4 million for repairing storm damage
experienced in the third quarter of 1999. Precertification costs increased
$0.7 million due to expenses associated with the proposed Wausau to Arrowhead
transmission line.
PRICE RISK MANAGEMENT ACTIVITIES
Wisconsin Public Service engages in minimal price risk management activities
because much of the utility price risk exposure is recoverable through
customer rates.
FINANCIAL CONDITION - WISCONSIN PUBLIC SERVICE
INVESTMENTS AND FINANCING
Special common stock dividends of $25.0 million were paid by Wisconsin Public
Service to WPS Resources in the first nine months of 1999. Equity infusions
of $45.0 million were made by WPS Resources to Wisconsin Public Service
Corporation in the first nine months of 1999. These special dividends and
equity infusions allowed Wisconsin Public Service's average equity
capitalization ratio for ratemaking to remain at its target level as
established by the Public Service Commission of Wisconsin in its most recent
rate order.
Internally generated funds exceeded cash requirements in the first nine
months of 1999 resulting in a $5.0 million reduction in short-term
borrowings. Pretax interest coverage was 4.48 times for the 12 months ended
September 30, 1999. See the table below for Wisconsin Public Service's
credit ratings.
Credit Ratings Standard & Poor's Moody's
- -------------- ----------------- -------
Wisconsin Public Service Corporation
Bonds AA+ Aa2
Preferred stock AA aa3
Commercial paper A1+ P1
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<PAGE>
See WPS Resources' management discussion at page 26 for additional
information regarding Wisconsin Public Service's financial condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and Qualitative Disclosures About Market Risk are reported under
"Price Risk Management Activities (WPS Energy Services)" as part of Item 2,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, on pages 20 and 21.
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<PAGE>
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
PURCHASE OF ELECTRIC GENERATION UNITS
On November 1, 1999, WPS Power Development, Inc. completed the purchase of
the 389 megawatt, coal-fired Sunbury Station from PP&L Resources, Inc. The
total purchase price is $106.0 million. Included in the purchase are two
oil-fired combustion turbines with a capacity of 42 megawatts, coal
inventories, and a coal transshipment facility.
LEGISLATION
On October 27th, the Governor signed the State of Wisconsin Budget Bill. The
Bill included several items affecting utilities and utility holding
companies. The legislation:
- Changes the asset cap for three investor-owned utility holding
companies, including WPS Resources, to allow investments in energy and
energy-related business which would be exempt from the asset cap
calculation,
- Requires the utility subsidiaries of these three utility holding
companies to place their transmission assets into a statewide
transmission company as a condition of applying the new asset cap
provisions, and
- Increases the amount of public benefits spending used for low-income
energy assistance, conservation and renewable energy research.
The statewide transmission company will be owned by those utilities
transferring transmission assets into the new company. This transmission
company will own electric transmission facilities in Wisconsin and
neighboring states. These legislative changes do not require any public
utility to contribute its transmission facilities to the transmission
company. The bill only requires such a transfer as a condition of granting
relief to a public utility holding company from the asset cap.
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<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following documents are included as a part of this
filing.
Exhibit 12 Ratio of Earnings to Fixed Charges and
Ratio of Earnings to Fixed Charges
and Preferred Dividends
Exhibit 27 Financial Data Schedule
WPS Resources Corporation
Wisconsin Public Service Corporation
(b) REPORTS ON FORM 8-K
None
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<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant, WPS Resources Corporation, has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
WPS Resources Corporation
Date: November 3, 1999 /s/ Diane L. Ford
_________________________________
Diane L. Ford
Vice President - Controller
and Chief Accounting Officer
(Duly Authorized Officer and
Chief Accounting Officer)
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<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant, Wisconsin Public Service Corporation, has duly caused this report
to be signed on its behalf by the undersigned thereunto duly authorized.
Wisconsin Public Service Corporation
Date: November 3, 1999 /s/ Diane L. Ford
____________________________________
Diane L. Ford
Vice President - Controller
(Duly Authorized Officer and
Chief Accounting Officer)
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<PAGE>
WPS RESOURCES CORPORATION AND
WISCONSIN PUBLIC SERVICE CORPORATION
EXHIBIT INDEX TO FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
Exhibit No. Description
___________ ___________
12 Ratio of Earnings to Fixed Charges and Ratio of
Earnings to Fixed Charges and Preferred Dividends
27 Financial Data Schedule
WPS Resources Corporation
Wisconsin Public Service Corporation
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<TABLE>
Exhibit 12
WPS Resources Corporation
Ratio of Earnings to Fixed Charges and
Ratio of Earnings to Fixed Charges and Preferred Dividends
<CAPTION>
1999 1998
1998 1997 1996 1995 1994 9 Months 9 Months
---- ---- ---- ---- ---- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
EARNINGS
Net income 46,631 55,809 52,885 60,634 58,122 46,612 40,216
Federal and state income taxes 23,445 31,106 27,216 33,494 32,157 22,827 21,566
------- ------- ------- ------- ------- ------- -------
Net pretax income 70,076 86,915 80,101 94,128 90,279 69,439 61,782
Fixed charges 36,310 37,533 35,822 35,818 35,308 31,502 27,031
Subtract preference dividend
requirement (4,606) (4,791) (4,657) (4,783) (4,788) (3,427) (3,552)
------- ------- ------- ------- ------- ------- -------
Total earnings as defined 101,780 119,657 111,266 125,163 120,799 97,514 85,262
FIXED CHARGES
Interest on long-term debt,
including related amort. 23,987 26,273 25,494 26,839 27,404 19,189 18,386
Other interest 4,827 4,910 3,922 2,677 1,856 5,180 3,453
Distributions-preferred
securities of subsidiary trust 1,488 - - - - 2,625 613
Interest factor applicable to
rentals 1,402 1,559 1,749 1,519 1,260 1,081 1,027
------- ------- ------- ------- ------- ------- -------
Fixed charges before preferred
dividend requirement 31,704 32,742 31,165 31,035 30,520 28,075 23,479
Ratio of earnings to
fixed charges 3.21 3.65 3.57 4.03 3.96 3.47 3.63
Preferred dividends
(grossed up)(see below) 4,606 4,791 4,657 4,783 4,788 3,427 3,552
Total fixed charges including
preferred dividend 36,310 37,533 35,822 35,818 35,308 31,502 27,031
Ratio of earnings to fixed
charges and preferred
dividends 2.80 3.19 3.11 3.49 3.42 3.10 3.15
- --------------------------------
PREFERRED DIVIDENDS CALCULATION:
Preferred dividends 3,132 3,133 3,134 3,136 3,140 2,333 2,350
Tax rate 32.00% 34.60% 32.70% 34.44% 34.42% 31.92% 33.84%
------- ------- ------- ------- ------- ------- -------
Preferred dividends
(grossed up) 4,606 4,791 4,657 4,783 4,788 3,427 3,552
</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT EXHIBIT 27
<CIK> 0000916863
<NAME> WPS RESOURCES CORPORATION
<SUBSIDIARY>
<NUMBER> 1
<NAME> WISCONSIN PUBLIC SERVICE CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,133,653
<OTHER-PROPERTY-AND-INVEST> 76,375
<TOTAL-CURRENT-ASSETS> 213,823
<TOTAL-DEFERRED-CHARGES> 62,000
<OTHER-ASSETS> 139,664
<TOTAL-ASSETS> 1,625,515
<COMMON> 26,749
<CAPITAL-SURPLUS-PAID-IN> 171,133
<RETAINED-EARNINGS> 336,049
<TOTAL-COMMON-STOCKHOLDERS-EQ> 533,931
0
51,195
<LONG-TERM-DEBT-NET> 340,784
<SHORT-TERM-NOTES> 10,100
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 96,625
<LONG-TERM-DEBT-CURRENT-PORT> 772
0
<CAPITAL-LEASE-OBLIGATIONS> 73,765
<LEASES-CURRENT> 297
<OTHER-ITEMS-CAPITAL-AND-LIAB> 518,046
<TOT-CAPITALIZATION-AND-LIAB> 1,625,515
<GROSS-OPERATING-REVENUE> 802,391
<INCOME-TAX-EXPENSE> 22,827
<OTHER-OPERATING-EXPENSES> 713,306
<TOTAL-OPERATING-EXPENSES> 713,306<F1>
<OPERATING-INCOME-LOSS> 89,085<F2>
<OTHER-INCOME-NET> 7,461
<INCOME-BEFORE-INTEREST-EXPEN> 96,546<F3>
<TOTAL-INTEREST-EXPENSE> 25,037
<NET-INCOME> 48,945<F4>
2,333
<EARNINGS-AVAILABLE-FOR-COMM> 46,612
<COMMON-STOCK-DIVIDENDS> 39,708
<TOTAL-INTEREST-ON-BONDS> 17,916
<CASH-FLOW-OPERATIONS> 129,612
<EPS-BASIC> 1.75
<EPS-DILUTED> 1.75
<FN>
<F1>Operating expenses exclude income taxes of $22,827.
<F2>Operating income is before income taxes of $22,827.
<F3>Income before interest expense is before income taxes of
$22,827.
<F4>Net income includes minority interest of $(263).
</FN>
</TABLE>
