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integrys 1999 wpsr

  1. 1. 1999 Annual Report Striding Into The New World
  2. 2. Striding Into The New World Highlights Year Ended December 31 1999 1998 Percent Change Revenues – utility (Thousands) $773,992 $708,371 9.3 Revenues – nonregulated (Thousands) 324,548 355,365 (8.7) Net Income (Thousands) 59,565 46,631 27.7 Basic and diluted earnings per average share of common stock $ 2.24 $ 1.76 27.3 Dividend paid per share 2.00 1.96 2.0 Book value per share 20.03 19.52 2.6 Common stock price at year end $25.125 $35.25 (28.7) Electric sales – utility (Kilowatt-hours – Thousands) 12,503,487 12,172,432 2.7 Gas deliveries – utility (Therms – Thousands) 662,615 608,092 9.0 Sources of Money Electric Utility Revenue Gas Utility Revenue Nonregulated Revenue WPS Resources Corporation
  3. 3. Table of Contents WPS Resources Corporation at a Glance 2 Letter to Shareholders 3 Striding Into The New World 6 Management’s Discussion and Analysis 13 Consolidated Statements of Income, Comprehensive Income, and Retained Earnings 24 Consolidated Balance Sheets 25 Consolidated Statements of Capitalization 26 Consolidated Statements of Cash Flows 27 Notes to Consolidated Financial Statements 28 Report of Management 45 Report of Independent Public Accountants 45 Financial Statistics 46 Shareholder Information 49 Board of Directors 50 Officers and Leadership Staff 51 Uses of Money Gas Utility Purchased Gas Costs Electric Utility Fuel and Purchased Power Nonregulated Cost of Sales Operating and Maintenance Expense Depreciation and Decommissioning Common Dividends Interest, Other Income, and Preferred Dividends Taxes – Income
  4. 4. WPS Resources Corporation at a glance WPS Resources Corporation is a holding company based in Green Bay, Wisconsin. System companies provide products and services in both regulated and nonregulated energy markets. Wisconsin Public WPS Resources Capital Corporation Service Corporation WPS Resources Capital Corporation is an intermediate holding company for the nonregulated subsidiaries. Business: Wisconsin Public Service Corporation is a regulated electric and WPS Power Development, Inc. WPS Energy Services, Inc. natural gas utility serving an 11,000 Business: WPS Energy Services, Inc. Business: WPS Power Development, Inc. square-mile area of northeastern and develops, owns, and operates nonregulated is a diversified nonregulated energy supply central Wisconsin and an adjacent portion electric generation facilities and provides and services company with principal of Upper Michigan (see map at right). services to the electric power generation Wisconsin Public Service has operations in Illinois, Maine, Michigan, industry nationwide (see map below). 2,493 employees. Ohio, and Wisconsin (see map below). WPS Power Development has Market: Wisconsin Public Service provides Wholesale products are provided on a 129 employees. 388,451 electric and 229,905 natural gas nationwide basis. WPS Energy Services Products and Services: WPS Power customers with a full range of products has 71 employees. Development’s services include acquisition and services customarily offered by Market: WPS Energy Services operates and investment analysis, project regulated utilities. Electric and gas service is in the retail and wholesale nonregulated development, engineering and provided to residential, farm, commercial, energy marketplace. Emphasis is on serving management services, and operations and and industrial customers. Electric power is commercial, industrial, and wholesale maintenance services. WPS Power also provided to wholesale customers. customers in the northeast quadrant of Development’s areas of expertise include Electric operations accounted for 73% of the United States. cogeneration, distributed generation, 1999 revenues, while gas operations Products and Services: WPS Energy generation from renewables, and contributed 27%. Electric revenues are Services provides individualized energy generation plant repowering projects. comprised of 89% retail sales and supply options and strategies that allow Facilities: WPS Power Development owns 11% wholesale sales. Wisconsin customers customers to manage energy needs while a two-thirds interest in the Stoneman accounted for 96% of the utility’s 1999 capitalizing on opportunities resulting from Power Plant, a 53-megawatt coal-fired revenues, compared with 4% from deregulation. WPS Energy Services provides merchant steam plant located in Cassville, Michigan customers. natural gas, electric, and alternate fuel Wisconsin. In June, WPS Power Facilities: Electric generating capacity products, real-time energy management Development acquired 92 megawatts of based on 1999 summer capacity services, energy utilization consulting, and generation assets from Maine Public was 1,994 megawatts, including project management. Patented DENet® Service Company. These facilities are Wisconsin Public Service’s share of jointly- computer technology allows customers to located in the State of Maine and in owned facilities. Wisconsin Public Service New Brunswick, Canada. In November, monitor their energy usage and to access has 1,559 miles of electric transmission and WPS Power Development acquired the energy supply information. 19,745 miles of electric distribution lines. 472-megawatt Sunbury Generation Station Gas properties include 5,099 miles of main in Pennsylvania from PP&L Resources, Inc. and 66 gate and city regulator stations. WPS Power Development is a two-thirds Upper Peninsula owner and the operator of a facility in Alabama which produces synthetic fuel Power Company from coal which is burned in utility boilers. Business: Upper Peninsula Power WPS Power Development also owns landfill Company is a regulated electric utility and wood waste gas generating facilities in which serves a 4,500 square-mile area of Wisconsin and steam boilers in other states. primarily rural countryside covering 10 of the 15 counties in the Upper Peninsula of Michigan (see map at right). Upper Peninsula Power has 170 employees. Wisconsin Public Service Corporation Market: Upper Peninsula Power provides Upper Peninsula Power Company a full range of electric products and services to 48,805 electric customers in 99 communities and adjacent areas, in addition to providing electric energy to 9 wholesale customers. The main industries in Upper Peninsula Power’s service area are forest products, iron mining and processing, tourism, and small manufacturing. Electric revenues are comprised of 92% retail sales and 8% wholesale sales. Facilities: Electric generating capacity based on 1999 summer capacity was 95 megawatts. Upper Peninsula Power has 806 miles of electric transmission WPS Power Development, Inc. and 2,764 miles of distribution lines. WPS Energy Services, Inc. Both WPS Energy Services, Inc. and WPS Power Development, Inc. WPS Resources Corporation 2
  5. 5. Striding Into The New World To Our Shareholders WPS Resources Corporation is striding into a new world! plants in different areas of the country. In June, we completed We have hastened our pace and are surging forward in our the purchase of electric generation assets with an aggregate goal to create value for you, our shareholders. As in most tests capacity of 92 megawatts from Maine Public Service of endurance, we have experienced hills and valleys that Company. The $37.4 million transaction yielded hydroelectric require both strategy and strength. Let me describe for you facilities, diesel peaking units, and oil-fired generation in the course we traveled during 1999 and our new world stride. Maine and the Canadian province of New Brunswick. We also were successful in placing 64 percent of the project cost as An Overview nonrecourse debt with Bayerische Landesbank Girozentrale. Our financial performance has improved. We immediately found a market for the energy these WPS Resources Corporation plants produce. In November of 1999, the Maine Public • Revenues were $1,098.5 million in 1999 compared Utilities Commission selected WPS Energy Services to with $1,063.7 million in 1998. serve all residential and industrial accounts taking service • Net income was $59.6 million in 1999 compared under the “standard offer” in the Maine Public Service with $46.6 million in 1998. Company service territory as well as providing 80 percent of • Earnings per share were $2.24 in 1999 compared the market for mid-size business customers in Northern Maine. with $1.76 in 1998. This is very important because starting March 1, 2000, Utility Operations - Wisconsin Public Service consumers in Maine will be able to choose from competing Corporation and Upper Peninsula Power Company power producers. • Revenues were $781.9 million in 1999 compared In November, WPS Power Development completed the with $715.1 million in 1998. purchase of a four-unit, coal-fired power plant located in • Net income was $67.3 million in 1999 compared Pennsylvania. The $107 million transaction yielded assets with with $56.4 million in 1998. a nameplate capacity of 472 megawatts. • Assets were $1,515.2 million in 1999 compared These purchases by WPS Power Development are a part of with $1,363.8 million in 1998. our strategy to develop a portfolio of power generation assets Nonregulated Subsidiaries - WPS Energy which produce energy that is then marketed by WPS Energy Services, Inc. and WPS Power Development, Inc. Services, our diversified nonregulated energy supply and • Revenues were $327.6 million in 1999 compared services company. Our DENet® technology, patented in 1999, was designed with $357.2 million in 1998. • Losses totaled $7.3 million in 1999 compared from the ground up to meet the needs of our customers, and with $9.3 million in 1998. it has quickly set us apart from companies focused solely on • Assets were $255.1 million in 1999 compared electricity and gas as commodities. WPS Energy Services’ with $104.7 million in 1998. DENet system allows real-time monitoring of energy and • WPS Energy Services’ revenues have grown from process information as well as the ability to verify bills and $13.6 million in 1994 to $292.2 million in 1999. analyze load profiles, which helps our customers identify • WPS Power Development’s assets have grown from energy management opportunities. Internet access allows our $4.8 million in 1995 to $190.2 million in 1999. customers to access their information from anywhere in the A number of factors contributed to our success in 1999. world at their convenience. Wisconsin Public Service Corporation, our electric and natural Our DENet product is also used in conjunction with our gas utility, was granted a rate increase at the start of 1999. 24-hour energy monitoring, dispatch, and coordination center Wisconsin retail rates were increased 6.3 percent for electric as it allows us to monitor and control our generation plants and 5.1 percent for gas for 1999 and 2000. A fall rate located in other parts of the nation from our Green Bay offices. reopener on certain issues that were not resolved in that rate Twice in 1999, national recognition came our way for our case yielded an additional 4.6 percent electric increase extraordinary customer service and extremely competitive effective January 1, 2000. Additionally, Wisconsin Public energy prices. Wisconsin Public Service was recognized Service earned its 12.1 percent allowed rate of return for 1999 when a J. D. Powers & Associates’ residential customer as authorized by the Public Service Commission of Wisconsin. survey found us tied for 2nd in the nation in customer Unfortunately, we struggled in achieving one of our five satisfaction among approximately 100 utilities surveyed. goals set out in last year’s report. Achieving profitability within Later in 1999, WPS Energy Services was recognized when the nonregulated sector of our business starting in 1999 proved Mastio & Co. performed an independent, nation-wide difficult for us. This was in part due to a poor return from an customer satisfaction survey in which we were ranked 6th investment made by WPS Power Development for two-thirds of out of 77 energy marketers in the survey. We take great a facility in Alabama. We’ve since solved the problems, which pride in the recognition of our exemplary customer service will allow WPS Power Development to move forward in 2000 because we have always believed that our customers are to achieve its projected returns on this investment. the cornerstone of our business. It is important we serve them well. The Milestones Also in 1999, Wisconsin Public Service installed 14 wind Our progress in 1999 began with the course we set in turbines on a wind farm in Kewaunee County at a cost of 1998. The strategies we developed then allowed us to grow in $10.1 million. When operating at full capacity, they will many areas. Our pace is confident and it allows us to lengthen produce enough electricity to serve 3,600 homes. These our stride as we pass numerous milestones. wind turbines represent our latest entry into the renewable WPS Power Development, our nonregulated electric resources environment and will allow us to learn more generation asset development company, is a good example of about this technology, its impact on Wisconsin, and the confident strides we made with the purchase of power whether it is a viable resource for future investment. 3 WPS Resources Corporation
  6. 6. In November, Wisconsin Public Service filed an application In 1999, we increased our dividend for the 41st with the Public Service Commission of Wisconsin for the consecutive year. We view the continued moderate growth construction of a 250-mile, 345-kilovolt transmission line. We of dividends as a necessity to attract and retain the type of believe this line is the largest transmission project being investors that a company of our size, our profile, and our pursued in the nation right now. Certainly, it’s the largest strategy needs. transmission project in Wisconsin in terms of dollars, distance, We are growing our earnings to bring our payout ratio in and voltage, and it’s the first new transmission line to be built line with our targeted payout ratio of 70 percent or less. Your in Wisconsin in 30 years. The investment opportunity is investment in our company provides a rising cash return around $150 million, and we are targeting completion for from the dividends over the long run while offering the 2003. This line will strengthen the electric network in additional benefit of price appreciation. Wisconsin and provide resources for many consumers in We are using our financial strength and financial flexibility the state. to support the planned growth of our nonregulated In September, Wisconsin Public Service began installing subsidiaries. We are using nonrecourse financing for our automated meter reading equipment that is capable of nonregulated projects, and our utilities are moving away hourly meter reads. This equipment allows us to read gas from first mortgage bonds to give us more financing and electric meters electronically and gives our customers flexibility when we need it. flexibility on when and how often their meters are read. We understand the risks associated with our energy We feel this technology is consistent with where commerce business as it becomes deregulated and have strategies in in the energy industry is going and that it will give us the place to allow us to mitigate risks and seize opportunities. As capability to serve our customers better while aiding in the a result, we have extensive policies and procedures requiring creation of a competitive environment in Wisconsin. daily monitoring of the use of financial instruments to take Our jointly-owned Kewaunee Nuclear Power Plant advantage of synergistic opportunities as well as to enhance celebrated its 25th year of operation. Kewaunee also the profitability of energy purchases. completed the year with 100 percent availability for the first Our officers are compensated in part through incentive time in its history as a result of our move to an 18-month pay plans that require them to meet certain operational refueling cycle. As an owner and operator of the plant, we are targets. A portion of our officers’ and directors’ compensation proud of the plant’s 440-day continuous operating record is also provided via stock options. These compensation which began in 1998 and continues today. Kewaunee enjoys policies help to align the interests of our officers and directors a reputation as one of the best operated plants in the world with those of our shareholders. and is a flagship in the industry. Wisconsin Public Service’s rates are from 10 percent to We became partners with three other utilities in the 15 percent lower than the average rates for all customer creation of Nuclear Management Company, LLC in 1999. classes of the major investor-owned utilities in Wisconsin. This new company will assume the day-to-day operating In fact, in 2000, Wisconsin Public Service’s typical residential responsibility for the seven nuclear plants owned by the electric customer will pay only about one percent more than partners, representing 3,800 megawatts of nuclear capacity, by they paid in 1993. mid-2000. The short-term goals of the Nuclear Management One area of disappointment in 1999 has been our Company are to sustain long-term safety, optimize reliability, stock price. From a high of $35.50 on January 4, 1999, our and improve operational performance. We expect to transfer stock dropped to $25.125 on December 31, 1999. Our stock our operating license for the Kewaunee plant to the Nuclear tracks the trend of the electric utility industry, which has Management Company sometime in 2000. experienced difficulty with deregulation and merger We also continue to play a role in shaping the energy uncertainties. Wisconsin utilities have been particularly industry in Wisconsin and indeed the nation. Since our affected by the slow pace of deregulation in this state, subsidiaries operate in several states, we are involved in the unfavorable weather, and state power reliability legislation. restructuring initiatives being championed both by the But the single most important event in the broad economic legislators and regulators in those states. Restructuring is environment is the increased yield on the 30-year occurring differently in each of these states, and we’ve been government bond. Our stock trades in an inverse relationship successful in understanding and influencing the restructuring to bond yields. Thus, our stock price peaked at the same plans of the states in which we operate. time that the government bond yields were at their lowest, and our stock price was near its lowest point at Financial Hurdles year-end when government bonds were yielding their For any marathon or like undertaking, participants must highest rate in two years. But looking at the stock price be assured that their pace will take them through to the positively, as the economic uncertainty is alleviated and finish. It is no different in our industry. given our financial strength, we expect our stock price to Wisconsin Public Service owns just under recover. Eventually, the market will begin to recognize the 1,800 megawatts of generation. We recently completed success of our growth strategies, which will then be detailed analysis which suggests that these generation reflected in our stock price. assets are worth up to five times their current book value. Financial Goals Our current strategy is to retain existing generation, but the low book value and competitive position of our generation, Our future course includes the following financial goals: especially considering transmission limitations in Wisconsin, • Achieving a return for Wisconsin Public Service offer both insurance against stranded investment and consistent with the Public Service Commission increased shareholder value potential as generation of Wisconsin’s allowed rate of return of 12.1 percent deregulation evolves in the Midwest. for 2000.
  7. 7. • Achieving profitability within the nonregulated segment change, and thus we have in place initiatives to allow every of our business in 2000. employee an opportunity to understand our strategic plan • Achieving 10 percent of our earnings from WPS Energy and to be a part of ensuring its success by using their skills Services and WPS Power Development in 2000. and knowledge. • Achieving a dividend payout ratio of 70 percent within Examples of this include the integration of Upper three years. Peninsula Power Company and the Sunbury Plant • Achieving earnings growth of 10 percent per annum. in Pennsylvania into WPS Resources. We were able to accomplish these integrations at a great savings while at the Passing the Baton same time offering employees whose jobs were eliminated a The membership on our Board of Directors has changed. job opportunity should they choose. We feel it is important to Sister Lois Bush, a valued member of our Board since 1993, use the skills and knowledge of employees who join us as part did not seek re-election in 1999. As the Board had expanded of an integration, whether in their existing job or in another in 1998 as a result of our merger with Upper Peninsula Energy position that is suited to their skills and talents. This allows Corporation and the addition of Clarence R. Fisher to the us to retain valued employees. As a result, we are able to Board, we did not replace Sister Lois and instead returned the continue striding forward rather than taking steps backward Board to nine members. to ramp up because of personnel changes. December 31, 1999, brought the retirement of another And, to be a success as a company, we must be a success Board member. Daniel A. Bollom has served our company for in the communities we serve. So, we actively support our over 41 years in roles that included not only Board member, communities through involvement by our employees and but also Chairman, President, and Chief Executive Officer. contributions from our foundations. Dan’s leadership and true concern for our company will be Approaching the next corner in the road, we must be missed. Our new Board member is John C. Meng, who joined confident we can proceed in stride, without losing speed. our Board on February 10, 2000. Our strategy, as detailed in the following article, will provide Retirement also claimed our Corporate Secretary in 1999 insights into why we believe we will be able to take that next when Francis J. Kicsar retired after more than 33 years of corner with ease. service in numerous capacities throughout his tenure. Striding Forward Barth J. Wolf has stepped into the newly created role of Secretary and Manager-Legal Services. We are striding with confidence and bringing value to We also saw the appointment of new officers during the our shareholders and customers through our technological past year. Diane L. Ford became Vice President-Controller and innovations, our mastery of power plant development and Chief Accounting Officer. optimization, and our customer solutions. At Wisconsin Public Service, Lawrence T. Borgard became We appreciate the confidence you have shown in our Vice President-Transmission. company and ask that you continue your support. We are in At WPS Energy Services, Mark A. Radtke became President, a competitive race, but we have studied and trained for this Daniel J. Verbanac became Vice President in our Green Bay time. We are ready to yield impressive results. office, Ruqaiyah Z. Stanley-Lolles became Vice President in our Chicago office, and Betty J. Merlina became Vice President-FSG Sincerely, Energy Services in our Columbus, Ohio, office. These individuals fill strategic positions within our company and will support our confident pace into the new world. Around the Next Corner Larry L. Weyers As we view the road ahead, we are confident that the skills Chairman, President, and and knowledge of our employees combined with our strategy Chief Executive Officer will carry us forward. Our employees are instrumental in allowing us to stride with confidence in a world of constant February 11, 2000 WPS Resources Corporation 5
  8. 8. Striding Into The New World WPS Power Development, Inc. A new world of energy beckons, and WPS Resources Corporation is answering this call to discover and grow. Building the Architecture The landscape of the energy world has changed. It is Our strategy at WPS Power Development is to increase more expansive, extending into other states and regions. WPS Resources’ asset base. This is the steel and concrete side And, it is filled with the architecture of competition and of our nonregulated business, including fossil power plants, customers who have choice. hydroelectric stations, and renewable energy sources. It is Backed by a strong growth strategy, advances in the infrastructure we believe is necessary to serve our new technology, and our dedicated employees, we are striding customers well. forward with confidence on the road ahead. As electric markets deregulate, many utilities are selling their generation assets. WPS Power Development continually Expanding Through New Customers evaluates these opportunities. We’ve been successful at and New Investments winning bids to purchase plants that have great potential in this new world of energy. And more importantly, we’ve taken At WPS Resources, we believe our strategy must begin those purchases and managed them to extract value for with our customers. We can provide value in the marketplace WPS Resources’ shareholders.We’re also evaluating the only when we truly understand what our customers value in construction of new plants and the possibility of repowering energy and aggressively pursue the solutions they seek. existing plants. Diversity in these projects—in location, market, technology, and fuel—brings us strength. Producing Power in Maine and Pennsylvania WPS Energy Services, Inc. In 1999,WPS Power Development made great Taking the Lead with Natural Gas Marketing strides by bringing to reality WPS Energy Services, our diversified nonregulated our theories about buying Mark Radtke (center), energy supply and services company, leads into new markets and developing generation with natural gas marketing, because customers in many states President of WPS Energy facilities, and then significantly are able to choose their natural gas supplier. Then, as the reducing their operating states restructure their electric industries, we provide Services, co-developed costs to be competitive in electricity to these customers as well.With this strategy, we the marketplace. the patented DENet® refine the tools and talents we need to grow, and we build In June,WPS Power a foundation for entering the competitive electric market. Development purchased Making Inroads to the Competitive Electric Market energy management 92 megawatts of generation The volatility of the emerging competitive electric facilities from Maine Public system. Using DENet, market exposes customers to risk. All customers must begin Service. This $37.4 million to deal with this risk, and our customer representatives at acquisition included customers like Wausau- WPS Energy Services are prepared to be a resource for these 35.8 megawatts of customers. They work to understand each customer’s Mosinee Paper Corp., hydroelectric generation and business and the challenges in that industry. Then they 55.9 megawatts of fossil-fueled recommend an energy strategy to address those needs. based in Mosinee, generation in Northern Maine Investing in Growth and New Brunswick, Canada. Historically, we have made substantial investments in our Wisconsin, can manage As a result, we are able to growth at WPS Energy Services. As a result, the number of participate in Maine’s newly WPS Energy Services’ customers has grown by 25 percent multiple plants’ energy opened energy marketplace. or more annually. In November, we purchased That growth has resulted in a negative financial impact in and processes from one the 472-megawatt Sunbury the short term. Our objective in 2000 is to continue expanding Power Plant in Pennsylvania. central point. WPS Energy Services, but at a measured rate that provides more This plant, purchased for immediate rewards for WPS Resources’ shareholders. $107 million, will enable us to Establishing a Regional Presence compete as an energy supplier As we grow, WPS Energy Services establishes a physical in the sizable Pennsylvania, presence in the major regional markets the company serves. New Jersey, and Maryland marketplace. These states have Our office in Traverse City, Michigan, for example, opened in already established open electric markets, so they provide December 1999, hiring seasoned energy professionals from a good opportunity for us to extract value from the plant. that area. Our staff there specializes in creating products that serve the needs of producers, utilities, other energy marketing Synergy in the Competitive Marketplace companies, and end-use customers. Because there’s significant natural gas production and storage in Michigan, our Traverse In 1995,WPS Energy Services and WPS Power City office develops products and services that marry the Development began a journey together into the competitive needs of gas producers with those of end-use customers. marketplace. Today, they continue to travel as partners and WPS Energy Services has used this distributed business support one another as we stride into the new world. design, which puts us close to our customers, with positive results. WPS Resources Corporation 6
  9. 9. The Tinker Hydro Station, on the Aroostook River in New Brunswick, Canada, is one of three hydroelectric facilities WPS Power Development purchased in 1999. Coexisting on the river with wildlife such as salmon, bald eagles, and moose, the Tinker plant offers a stunning view of the new energy landscape. At our utility companies, storm restoration can mean more than restoring power. Wisconsin Public Service employees delivered dry ice following the most damaging summer storm in the area in 1999. WPS Resources Corporation 7
  10. 10. Striding Into The New World Each day, workers at the Tinker Hydro Station walk over the plant’s forebay, where water from the Aroostook River is directed into the hydroelectric units. WPS Resources Corporation 8
  11. 11. When WPS Power Development purchases generation our customers’ needs, and tap new generation resources assets,WPS Energy Services moves in to market the energy such as the De Pere Energy Center. We are proud to say produced and maximize the value of those assets. For Wisconsin Public Service is the lowest-cost electric supplier example, when WPS Power Development bought generating among all major investor-owned utilities in Wisconsin. This is facilities in Maine in 1999,WPS Energy Services immediately true even after a rate increase of 4.6 percent that began on opened a marketing office there. As a result,WPS Energy January 1, 2000.Wisconsin Public Service is also among the Services now serves more than 90 percent of the electric low-cost providers of natural gas in the state. customers in Northern Maine. Substantial additional value We believe our use of technology and more efficient was derived from our assets in Maine because we actively systems in the years ahead will enable us to remain a low- cost marketed the power through WPS Energy Services. provider—always operating in an effective, least-cost manner Conversely, when WPS Energy Services enters a that facilitates the new marketplace. new retail market, it will require generation supplies (to be provided by Advancing Through Technology WPS Power Development wherever possible) to Operating Systems for the back its electric sales. New World of Energy In the new world of energy, our strategy is to Technology for Customers and Backroom Operations The Aroostook River, continue growing through the We take pride in the technology we’ve developed to synergy our two nonregulated offer advanced real-time energy management systems to running from Northern subsidiaries offer—putting our customers and also streamline our own backroom WPS Power Development’s operations. With WPS Energy Services’ patented DENet® Maine into Canada, is assets to work to support the energy management system, customers can manage their market growth WPS Energy energy and processes in real time, access this information a significant waterway, Services achieves. remotely over the Internet, and generate historical reports with a drainage area for analysis. System flexibility allows monitoring of virtually A Competitive any utility or process parameter, such as gas, electricity, water, measuring 2,350 Position for Our steam, temperature, and production output. WPS Energy Services and WPS Power Development Regulated Utilities square miles. also use DENet to tie together our nonregulated plants Finding a Place through an integrated computer network. All of our In spring, its waters in This World employees in these nonregulated businesses, wherever WPS Resources they are located along the energy landscape, have access travel up to 40,000 believes our regulated to this system. companies—Wisconsin Public In addition to DENet and the benefits it provides for cubic feet per second. Service Corporation, based in our customers and backroom operations, we’ve developed It’s a powerful Green Bay,Wisconsin, and Internet-based customer enrollment, information, and Upper Peninsula Power billing systems to support the needs of our diverse natural resource. Company, based in Houghton, customers—from large industrial accounts to residential Michigan—will also expand homes. This is part of the technological infrastructure that in this new environment. In a supports our growth strategy. new world of energy, a large Centralizing Plant Operations number of customers will continue to desire the comfort, In 1999, our nonregulated companies established a ease, and value brought by a regulated energy supplier. The 24-hour energy monitoring, dispatch, and coordination regulated delivery of energy will also continue to be a center in Green Bay, Wisconsin, operated by WPS Energy profitable business, meeting a critical customer need. Services. This center monitors and controls our production Our utility companies have the expertise to serve customers facilities and generating plants in Maine, Pennsylvania, reliably and at a reasonable cost. Alabama, Arkansas, Wisconsin, and Oregon—scheduling Remaining a Low-Cost Provider operations, bringing units on line or taking them off line The entire energy marketplace is becoming more in response to market prices, and coordinating operations volatile. This was evident in skyrocketing prices—up to 100 with the employees at the plants. A centralized operation times higher than usual—some companies paid for electricity contributes greatly to the savings we’ve achieved in over the past two summers. The new energy market has operating our new plants. brought unprecedented price spikes, and costs are increasing WPS Power Development has contracted with because investments in new generation, transmission WPS Energy Services for this function.WPS Energy Services’ systems, and technology have become necessary. employees are on duty 24 hours a day, scheduling energy Wisconsin Public Service has proven, however, that even delivery. They’re familiar with the markets for energy and as energy costs rise across the system, we are able to operate are prepared to make decisions about the energy we our facilities efficiently, acquire capacity in advance to meet produce at our generating facilities. WPS Resources Corporation 9
  12. 12. Striding Into The New World their power. Our use will benefit thousands of electric Wind Energy customers in northern Wisconsin, where significant growth and summer tourism have been straining power lines. Perhaps the most striking visible evidence of the new Six D-SMES units, each self-contained in a semi-trailer, will world of energy is the sight of wind turbines along the be installed on concrete pads at electric substations throughout horizon. In 1999,Wisconsin Public Service erected 14 wind the northern portion of our service area. When our system turbines, capable of producing approximately 10 megawatts detects a voltage drop, electricity of wind power, in the Town of Lincoln,Wisconsin. stored in the D-SMES units will The turbines are operating well, with the capacity to instantaneously flow onto the power about 3,600 homes. In addition, they are giving us electric grid. So, the power will more experience and more data as we move into a future keep flowing, and customers that will call for more renewable energy resources. won’t feel the negative impact Wisconsin Public Service has a history of developing of momentary outages. wind power. Several years ago, we built a wind turbine in The D-SMES technology Kewaunee,Wisconsin, and in 1998 we built two wind has reasonable costs, is quicker turbines on the Niagra Escarpment, outside of Green Bay. to deploy than transmission We’ve also conducted wind studies to evaluate possible lines, and has less environmental future sites. The experience we’ve gained will help us make WPS Power impact. And while we believe decisions about wind generation as we continue to look at the true answer to Wisconsin’s renewable options. Development purchased reliability concerns is the Wisconsin Act 9, signed into law in October 1999, proposed Wausau-Duluth requires that by the end of 2011, 2.2 percent of energy sold the coal-fired Sunbury transmission line, this to Wisconsin Public Service customers must come from innovative, temporary renewable resources. Our strategy will be to fine-tune Power Plant in 1999. solution will mean good the renewable options that make the most sense for our things for our customers. The plant is located near customers, our shareholders, and the environment. Later, we will redeploy this Sunbury, Pennsylvania, equipment elsewhere on A New High-Voltage Transmission Line the energy landscape—always one of the first cities pursuing what is needed by As a good economy continues and business and industry our customers. expand, the electric system in Wisconsin is becoming Thomas Edison wired increasingly strained. The state’s electric load over the last two summers has brought utilities throughout the state close Bringing Value to for electricity. to maximizing the system. Shareholders Wisconsin needs more generation and more transmission to improve electric reliability in the state and WPS Resources to make available abundant supplies of energy from other Corporation is striving for a regions. The Wisconsin Reliability Assessment Organization position of strength in the new world of energy. Strategy, has strongly recommended a line from the middle of of course, is key to our success—but we also need Wisconsin north and west to access power from Canada employees who can perform in a competitive environment. and the West. The combination of a strong growth strategy and people In 1999,Wisconsin Public Service, along with Minnesota with excellent skills and work ethic is what allows us to Power, took the lead in developing plans for a 250-mile-long, stride confidently into the new world. 345-kilovolt transmission line from Wausau,Wisconsin, to At WPS Resources, we continue to rely on our Duluth, Minnesota. We filed our request to build the line in strengths—the commitment of our employees, our low-cost November, and we hope to receive approval from the Public production and low rates, a commitment to quality facilities, Service Commission of Wisconsin in 2000. Our goal is to and financial performance. These strengths will carry us into complete construction of the line in 2003. the future. We continue to maintain our focus on providing value to customers in a way that creates value for our Distributive Superconducting shareholders.We’re increasing our efforts to understand our Magnetic Energy Storage customers, and we’re investing in systems and technology that support service to our customers. While plans are under way to remedy Wisconsin’s strained We are not resting. We’re looking for ways to improve transmission system for the long term,Wisconsin Public our operations. We continue our efforts to control costs. Service is working on energy solutions for the near term. We’ve taken steps to ensure that we can improve cost In February 2000,Wisconsin Public Service was the projections for each of our business units. first utility in the world to use distributed superconducting With a strong financial foothold and the flexibility to magnetic energy storage (D-SMES) to stabilize the voltage grow, we are in a position of strength for whatever the new on its electric system. This technology, while not new, has world brings. typically been used only by individual businesses to control WPS Resources Corporation 10
  13. 13. “We’re successful because we understand which plants are profitable, which ones aren’t, and how to optimize those that aren’t,” says Jerry Mroczkowski (below right), Vice President of WPS Power Development. In September 1999, Wisconsin Public Service began installing automated meter reading equipment in its service area. This system, which electronically reads gas and electric meters, is a hallmark of where the energy industry is going.We save by not having to travel to customers’ properties, and we gain up-to-the-hour energy use data. WPS Resources Corporation 11
  14. 14. Striding Into The New World Earnings per Share 1990-1999 Dollars 2.48 2.5 2.28 2.25 2.24 2.19 2.17 2.10 1.99 1.95 2.0 1.76 Forward - Looking Statements 1.5 1.0 This report contains forward-looking statements within 0.5 the meaning of Section 21E of the Securities Exchange Act of 1934.You can identify these statements by the fact that 0.0 they do not relate strictly to historical or current facts and 90 91 92 93 94 95 96 97 98 99 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 Dividend per Share unknown risks or uncertainties materialize, or should 1990-1999 underlying assumptions prove inaccurate, actual results Dollars could vary materially from those anticipated. 2.00 Forwarding-looking statements speak only as of the date 1.96 1.92 1.88 2.0 1.84 1.80 on which they are made, and we undertake no obligation to 1.76 1.72 1.68 1.64 update any forward-looking statements, whether as a result 1.5 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 1.0 to the Securities and Exchange Commission. The following is a cautionary list of risks and 0.5 uncertainties that may affect the assumptions which form the basis of forward-looking statements relevant to our 0.0 business. These factors, and other factors not listed here, 90 91 92 93 94 95 96 97 98 99 could cause actual results to differ materially from those contained in forward-looking statements. • General economic, business, and regulatory conditions • Legislative and regulatory initiatives regarding deregulation and restructuring of the utility industry which could affect costs and investment recovery • State and federal rate regulation Cumulative Total Return* • Growth and competition and the extent and timing of 1990-1999 new business development in the markets of Dollars subsidiary companies • The performance of projects undertaken by 300 subsidiary companies 258.98 234.68 250 • Business combinations among our competitors 207.87 197.79 and customers 185.17 181.64 200 • Energy supply and demand 162.95 153.94 136.91 • Financial market conditions, including availability, 150 107.20 terms, and use of capital 100 • Nuclear and environmental issues • Weather and other natural phenomena 50 • Commodity price and interest rate risk 0 90 91 92 93 94 95 96 97 98 99 * Assumes $100 investment in common stock at year-end 1989 and all dividends reinvested quarterly. Cumulative total return for the ten-year period is equilavent to an average annual return of 7.06%. WPS Resources Corporation 12
  15. 15. Management’s Discussion and Analysis A 6.3% increase in electric rates was authorized by the Public Results of Operations Service Commission of Wisconsin. WPS Resources Corporation is a holding company. Our wholly-owned subsidiaries include two regulated utilities, WPS Resources’ Consolidated Electric Utility Results Wisconsin Public Service Corporation and Upper Peninsula Power (Thousands) 1999 1998 1997 Company. Another wholly-owned subsidiary, WPS Resources Revenues $582,471 $543,260 $536,885 Capital Corporation, is a holding company for our nonregulated Fuel and purchased power 187,399 167,256 171,935 businesses including WPS Energy Services, Inc. and WPS Power Margin $395,072 $376,004 $364,950 Development, Inc. Approximately 83% of our assets at Sales in kilowatt-hours 12,503,487 12,172,432 11,993,358 December 31, 1999 and approximately 71% of our 1999 revenues were derived from electric and gas utility operations. Substantially Our consolidated electric utility revenues increased all of our 1999 net income was derived from utility operations. $39.2 million, or 7.2%, primarily due to the electric rate increase at Wisconsin Public Service. Also contributing to higher electric 1999 Compared with 1998 revenues was a 2.8% increase in overall kilowatt-hour sales at Wisconsin Public Service. Included in 1998 electric revenues, WPS Resources Corporation Overview but not in 1999 electric revenues, are surcharge revenues at WPS Resources’ 1999 and 1998 results of operations are Wisconsin Public Service of $3.8 million related to the recovery shown in the following chart: of the deferred costs for the 1997 Kewaunee Nuclear Power WPS Resources’ Results Percent Plant steam generator repairs.Wisconsin Public Service is the (Millions, except share amounts) 1999 1998 Change operator and 41.2% owner of the Kewaunee plant. Consolidated operating revenues $1,098.5 $1,063.7 3.3 Our consolidated electric production fuel expense increased Net income 59.6 46.6 27.9 $3.0 million, or 2.7%, primarily as a result of increased generation Basic and diluted requirements at Wisconsin Public Service’s combustion turbine earnings per share $2.24 $1.76 27.3 and nuclear generating plants in 1999. Partially offsetting this factor was a decrease in production at Wisconsin Public Service’s coal-fired generation plants as a result of both scheduled and The primary reasons for the higher earnings were unscheduled maintenance activities. increased sales volumes at Wisconsin Public Service coupled Our consolidated purchased power requirements increased with the implementation of new Wisconsin retail electric $17.2 million, or 30.4%, primarily due to additional purchase and gas rates and the elimination of net trading losses at requirements at both Wisconsin Public Service and Upper WPS Energy Services. Peninsula Power in 1999. Purchase requirements increased 20.1% at Wisconsin Public Service due to the lack of production at its Overview of Utility Operations (Wisconsin Public coal-fired generation plants during the time they were off-line for Service and Upper Peninsula Power) maintenance in 1999. In addition, the cost of purchases was Revenues and earnings for our electric and gas utility 12.8% higher in 1999 than in 1998. operations are shown in the following chart: The Public Service Commission of Wisconsin allows Percent Wisconsin Public Service to adjust prospectively the amount Results (Millions) 1999 1998 Change billed to Wisconsin retail customers for fuel and purchased Wisconsin Public Service power if costs fall outside a specified range.Wisconsin Public Operating revenues $719.4 $652.5 10.3 Service is required to file an application to adjust rates either Earnings 65.3 52.9 23.4 higher or lower when costs are plus or minus 2.0% from Upper Peninsula Power forecasted costs on an annualized basis. Annual 1999 fuel costs Operating revenues 62.4 62.7 (0.5) at December 31, 1999 were within this 2.0% window and, Earnings 2.0 3.5 (42.9) accordingly, no adjustment will be made. Gas Utility Operations (Wisconsin Public Service) The primary reasons for higher earnings at Wisconsin Public Service were increased sales coupled with the implementation of The consolidated gas utility margin represents new Wisconsin retail electric and gas rates. gas revenues less purchases exclusive of intercompany transactions. The consolidated gas utility margin increased Electric Utility Operations (Wisconsin Public Service $13.4 million in 1999. The gas utility margin at Wisconsin and Upper Peninsula Power) Public Service increased $13.4 million, or 22.2%, in 1999. Our consolidated electric margins increased $19.1 million, This increase was primarily due to the implementation of a or 5.1%. This increase was due to increased sales volume at Public Service Commission of Wisconsin rate order which Wisconsin Public Service coupled with the January 15, 1999 authorized a 5.1% increase in Wisconsin retail gas rates and implementation of new Wisconsin retail electric rates. to an increase in therm sales. WPS Resources Corporation 13
  16. 16. Striding Into The New World Management’s Discussion and Analysis Overview of Nonregulated and Nonutility Operations Wisconsin Public Service’s Gas Utility Results Nonregulated operations consist of the gas and electric (Thousands) 1999 1998 1997 sales at WPS Energy Services, Inc., a diversified energy supply and services company. Nonregulated operations also include Revenues $191,521 $165,111 $211,090 those of WPS Resources as a holding company and those of Purchase costs 117,582 104,608 147,493 WPS Power Development, Inc., an electric generation asset Margin $ 73,939 $ 60,503 $ 63,597 development company. Nonutility operations refer to the Sales in therms 662,615 608,092 662,008 activities of Wisconsin Public Service and Upper Peninsula Power which do not fall under utility regulation. Wisconsin Public Service’s gas operating revenues Nonregulated and nonutility operations experienced increased $26.4 million, or 16.0%. This increase was due to a loss of $7.8 million in 1999 compared with a loss of the implementation of new Wisconsin retail gas rates and a $9.8 million in 1998. Although margins on nonregulated energy 9.0% increase in overall therm sales as a result of colder weather sales continue to grow, losses are being experienced primarily in 1999. Although the winter weather was 11.4% colder in 1999 due to operating expenses associated with new facilities, market than in 1998, it was still 8.3% warmer than normal. expansion, and the pursuit of additional projects. Nonutility Note that 1998 gas utility revenues were reduced by operations in 1999 included a one-time special dividend of $7.5 million for refunds from ANR Pipeline Company which $0.5 million. This special dividend was related to a land sale from were passed on to Wisconsin Public Service’s customers. an investment held at Wisconsin Public Service. Nonregulated Gas purchase costs in 1998 were likewise reduced as this earnings in 1998 included a one-time dividend of $2.0 million $7.5 million refund was credited to gas expense. received by WPS Resources from a venture capital investment. Wisconsin Public Service’s gas purchase costs increased Overview of WPS Energy Services, Inc. $13.0 million, or 12.4%. This increase was due to increased sales and to a higher cost of gas. Under current regulatory practice, the Revenues at WPS Energy Services were $292.2 million Public Service Commission of Wisconsin and the Michigan Public in 1999 compared with $351.3 million in 1998, a decrease of Service Commission allow Wisconsin Public Service to pass 16.8%. The revenue decrease is attributable to a combination changes in the cost of gas on to customers through a purchased of lower overall natural gas prices experienced in 1999, and a gas adjustment clause. deliberate change in the wholesale product mix.WPS Energy Services experienced an improvement in operating results, Other Utility Expenses/Income (Wisconsin Public reducing net losses by 49.3% in 1999. Net losses were Service and Upper Peninsula Power) $3.5 million in 1999 compared with $6.9 million in 1998. Other operating expenses at Wisconsin Public Service The primary reason for the decrease in losses was the elimination increased $12.6 million, or 9.1%, primarily due to higher of trading losses that occurred in 1998.WPS Energy Services customer service expenses of $5.1 million related to implemented a deliberate shift in focus within its trading unit to conservation expenditures, and higher pension costs of emphasize capturing present opportunities in the market rather $3.4 million due to a change in the assumptions used to than taking a position in anticipation of a future market calculate this expense. Also contributing to increased operating movement.While not without risk, this lower-risk approach did expenses were higher medical benefit expenses of $1.2 million yield gains in 1999. WPS Energy Services also experienced an and higher electric distribution expenses of $1.2 million. increase in total gas margin due to improved gas procurement Maintenance expense at Wisconsin Public Service increased operations and processes, and an increased emphasis on creation $7.2 million, or 14.6%, primarily due to additional costs of of wholesale products providing greater value, thus higher $8.0 million at its coal-fired generation plants and $1.6 million at margin, to customers in the wholesale marketplace. Partially its other power generation plants for both scheduled and offsetting these factors was a one-time pretax write-down of unscheduled maintenance activities. Offsetting these costs was a $0.7 million related to an investment in a gas production field. decrease in maintenance expense of $8.5 million at the Nonregulated Margins (WPS Energy Services) Kewaunee plant. A scheduled refueling outage at the Kewaunee plant in 1998 caused 1998 nuclear maintenance expenses to be Gas margins at WPS Energy Services were $4.6 million higher. In addition, $3.8 million in deferred costs for the 1997 in 1999 compared with $4.0 million in 1998, an increase of Kewaunee plant’s steam generator repairs was recognized in 15.0%. Electric margins remained fairly stable. Gas revenues at 1998. Maintenance of overhead distribution lines increased WPS Energy Services were $288.0 million in 1999 compared $4.7 million in 1999 due to additional tree trimming, line with $330.0 million in 1998. This decrease was the result clearance, and storm damage repairs. of lower overall natural gas market prices and an increased emphasis on higher quality and lower-risk wholesale products Price Risk Management Activities (Wisconsin Public rather than a large volume of wholesale transactions with lower Service and Upper Peninsula Power) margins. Electric revenues were $3.4 million in 1999 and WPS Resources engages in minimal price risk management $20.5 million in 1998, a decrease of 83.4%. This decrease was activities at its utility operations because much of the utility the result of WPS Energy Services’ efforts to focus participation price risk exposure is recoverable through customer rates. in the wholesale electric markets where transactions are WPS Resources Corporation 14
  17. 17. Management’s Discussion and Analysis based on physical generation assets controlled by an affiliate energy purchases, as well as trading activities. Derivatives may of WPS Resources. include futures and forward contracts, basis swap agreements, WPS Energy Services’ cost of sales was $286.6 million or call and put options. in 1999 and $346.4 million in 1998, a decrease of 17.3%. Gains and losses on derivatives are recognized immediately This decrease was due to decreased gas purchases of in earnings when it is no longer probable that the related $42.7 million primarily due to lower natural gas prices and, forecasted transaction will occur. Each accounting period, to a lesser extent, reduced wholesale sales volumes. Also WPS Energy Services records gains or losses on changes in contributing to the lower cost of sales was continued market value of trading derivatives in other income.WPS Energy improvement in gas procurement processes. Electric purchases Services recorded net trading gains of $0.1 million in 1999 and decreased $17.1 million due to decreased sales. net trading losses of $6.1 million in 1998. At December 31, 1999,WPS Energy Services had Other Nonregulated Expenses/Income outstanding 11.4 million notional dekatherms of natural gas (WPS Energy Services) under futures and option agreements and 5.9 million notional Other operating expenses at WPS Energy Services increased dekatherms of natural gas under basis swap agreements in $1.0 million, or 11.1%, primarily due to costs of $0.7 million order to manage market risk. These financial instruments associated with entering into expanded retail customer-choice expire at various times through October 2001.WPS Energy programs. Improved processes and strategies emphasizing Services has gas sales commitments through October 2000 reduced risk at WPS Energy Services resulted in a gas trading with a range of sale prices from $2.06 to $3.09 per dekatherm gain in 1999 compared with gas trading losses of $4.9 million in and a range of associated gas purchase costs of $2.05 to 1998. Essentially no electric trading losses were experienced in $3.00 per dekatherm. 1999 compared with $1.2 million in 1998. At December 31, 1999, the fair value of trading instruments included assets of $7.5 million and liabilities of $6.8 million. Price Risk Management Activities Natural gas derivatives were used for all trading activities in (WPS Energy Services) 1999 and 1998, except for a small amount of electric trading WPS Energy Services uses derivative financial and transactions. At December 31, 1999,WPS Energy Services had commodity instruments to reduce market risk associated with outstanding 1.4 million notional dekatherms of natural gas the changing prices of natural gas and electricity sold under futures and option agreements and 1.7 million notional at firm prices to customers. WPS Energy Services also uses dekatherms of natural gas under basis swap agreements for derivatives to manage market risk associated with anticipated trading purposes. Derivatives (contract amounts in millions) Expected Maturity Fair 2000 2001 2002 Total Value Futures NYMEX – hedging Long (billion cubic feet) 25.3 Weighted average settlement price (per dekatherm) $2.54 Contract amount $64.4 $64.4 $(5.1) Short (billion cubic feet) 23.1 0.4 Weighted average settlement price (per dekatherm) $2.60 $2.80 Contract amount $59.9 $1.1 $61.0 $5.8 Futures NYMEX – trading Long (billion cubic feet) 10.3 Weighted average settlement price (per dekatherm) $2.63 Contract amount $27.2 $27.2 $(3.0) Short (billion cubic feet) 10.8 Weighted average settlement price (per dekatherm) $2.63 Contract amount $28.5 $28.5 $3.2 OTC futures – hedging Long (billion cubic feet) 7.8 0.7 0.18 Weighted average settlement price (per dekatherm) $2.36 $2.22 $2.22 Contract amount $18.5 $1.6 $0.4 $20.5 $0.4 Short (billion cubic feet) 3.2 Weighted average settlement price (per dekatherm) $2.64 Contract amount $8.4 $8.4 $0.9 WPS Resources Corporation 15

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