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integrys 2005 wpsr

  1. 1. C O M M I T M E N T T O VA L U E 2005 Annual Report
  2. 2. “We need to be smart about energy delivery and customer service. By listening to our customers, we strive to meet their needs economically and efficiently.” Larry Borgard, President and Chief Operating Officer – Energy Delivery, Wisconsin Public Service CONTENTS 1 Highlights 2 WPS Resources Corporation At A Glance 4 Letter to Shareholders 10 Commitment to Value 20 Forward-Looking Statements 21 Management’s Discussion and Analysis 55 Consolidated Statements of Income 56 Consolidated Balance Sheets 57 Consolidated “Our commitment, when it comes Statements of Common to generating power, is to provide Shareholders’ Equity customers with energy that’s always there, at a price that’s 58 Consolidated Statements reasonable, and safely within of Cash Flows environmental standards. We focus 60 Notes to Consolidated on using demonstrated technology Financial Statements to ensure that we can follow 100 Report of Independent through on that commitment.” Registered Public Accounting Firm Charlie Schrock, 101 Financial Statistics President and Chief Operating Officer – Generation, 102 Board of Directors Wisconsin Public Service 103 Officers 104 Investor Information C O M M I T M E N T T O VA L U E WPS RESOURCES CORPORATION
  3. 3. HIGHLIGHTS Percent Year Ended December 31 2005 2004 Change Consolidated revenues – nonregulated (Millions) * $5,438.5 $3,658.8 48.6 Consolidated revenues – utility (Millions) 1,524.2 1,292.0 18.0 Margins – nonregulated (Millions) * 224.3 138.7 61.7 Margins – utility (Millions) 717.5 720.1 (0.4) Income before cumulative effect of change in accounting principles (Millions) * 162.1 142.8 13.5 Income available for common shareholders (Millions) 157.4 139.7 12.7 Earnings per average share of common stock Income before cumulative effect of change in accounting principles – basic * $4.15 $3.74 11.0 Income before cumulative effect of change in accounting principles – diluted * 4.11 3.72 10.5 Income available for common shareholders – basic 4.11 3.74 9.9 Income available for common shareholders – diluted 4.07 3.72 9.4 Dividends per share $ 2.24 $ 2.20 1.8 Book value per share 32.76 29.30 11.8 Common stock price at year end $55.31 $49.96 10.7 Shares outstanding at year end (excludes treasury stock and shares in deferred compensation trust) 39,807,407 37,259,553 6.8 Total assets (Millions) $5,455.2 $4,376.8 24.6 * Refer to Management’s Discussion and Analysis for an explanation of changes from prior year. CASH FLOW SUMMARY Year Ended December 31 2005 2004 2003 (Millions) Net cash operating activities * $ 62.4 $230.8 $ 59.2 Net cash investing activities * (73.9) (315.0) (247.4) Net cash financing activities * (0.8) 73.5 195.6 Change in cash and cash equivalents * $ (12.3) $ (10.7) $ 7.4 * Refer to Management’s Discussion and Analysis for an explanation of changes from prior year. 2005 EARNINGS BY SEGMENT (Millions) Electric Utility $ 64.2 Gas Utility 13.2 WPS Energy Services 74.1 Other 5.9 Total Earnings $157.4 1 WPS RESOURCES CORPORATION
  4. 4. REGULATED OPERATIONS AT A G L A N C E WPS Resources Corporation WPS Resources Corporation is a holding company headquartered in Green Bay, Wisconsin. Subsidiaries provide products and services in both regulated Wisconsin Public Service Corporation and nonregulated energy markets. Upper Peninsula Power Company NONREGULATED OPERATIONS WPS Energy Services, Inc. WPS RESOURCES CORPORATION 2
  5. 5. WISCONSIN PUBLIC SERVICE CORPORATION UPPER PENINSULA POWER COMPANY Business Business ■ ■ Established in 1883. Established in 1884. ■ ■ Regulated electric and natural gas utility. Regulated electric utility. ■ ■ Operates in northeast and central Wisconsin and an adjacent portion Operates in primarily rural countryside covering 10 of the 15 counties of Upper Michigan (see map at left). in the Upper Peninsula of Michigan (see map at left). ■ ■ 2,310 employees. 165 employees. Market Market ■ ■ Serves 424,615 electric and 307,540 natural gas customers. Serves 52,167 electric customers in 99 communities. ■ ■ Provides electric and natural gas products and services to residential, Provides electric energy to 37 wholesale customers. farm, commercial, and industrial customers. Also provides electric ■ Main industries served are forest products, tourism, and power to wholesale customers. small manufacturing. ■ Electric operations accounted for 64% and natural gas operations ■ Electric revenues are comprised of 77% retail sales and accounted for 36% of 2005 revenues. 23% wholesale sales. ■ Electric revenues are comprised of 90% retail sales and 10% Facilities wholesale sales. ■ Electric generating capacity based on summer capacity ratings is ■ Wisconsin customers accounted for 97% and Michigan customers 77.6 megawatts. A peak demand was reached on December 19, accounted for 3% of 2005 revenues. 2005, with a system demand of 147.2 megawatts. Facilities ■ Electric property includes 3,070 miles of electric distribution lines. ■ Electric generating capacity based on summer capacity ratings is 1,861.1 megawatts, including share of jointly owned facilities. A peak demand was reached on August 2, 2005, with a system demand of 2,349 megawatts. ■ Electric property includes 21,029 miles of electric distribution lines, 92% of which are operated at 24.9 kV. ■ Gas property includes 7,579 miles of gas main, 70% of which is plastic main, and 86 gate and city regulator stations. WPS ENERGY SERVICES, INC. In 2005, WPS Energy Services and WPS Power Development combined Products and Services to create a single organization to better serve customers and capitalize ■ Provides individualized energy supply solutions, structured products, on opportunities in the marketplace. The integration of the generating and strategies that allow customers to manage energy needs while and marketing businesses are yielding results in streamlined operations, capitalizing on opportunities resulting from deregulation. improved efficiencies, synergies between operating units and an integrated ■ Provides natural gas, electric, and alternate fuel products, real-time business focus. Improved results are reflected in better service to customers energy management services, energy utilization consulting, and an enhanced bottom-line. and project development and management. Business ■ Provides market management services and optimization of energy ■ Established in 1994. assets in the competitive marketplace. ■ Patented DENet ®and eMiner ™ computer technology allows customers Diversified nonregulated energy supply and services company, which ■ also owns and operates various nonregulated electric generation facilities to monitor and manage their energy usage. and a minority interest in a synthetic fuel facility. ■ Provides engineering and management services and operations and ■ Principal energy marketing operations include Illinois, Maine, Michigan, maintenance services. New York, Ohio, Texas, Virginia, and Wisconsin in the United States and ■ Generation areas of expertise include cogeneration, distributed generation, Alberta, Ontario, and Quebec in Canada. Subsidiaries own and/or operate generation from renewables, and generation plant repowering projects. energy assets in Maine, New York, Oregon, Kentucky, Pennsylvania, and Wisconsin, as well as electric generation facilities in New Brunswick, Facilities Canada (see map at left). ■ 74 megawatts of hydroelectric and diesel generation facilities in ■ Provides retail and wholesale products in nonregulated energy markets the state of Maine and in New Brunswick, Canada. in the United States and Canada. ■ 503 megawatts of primarily coal-fired generation facilities in Pennsylvania. ■ Develops nonregulated assets and provides electric power ■ 259 megawatts of combined cycle and fluidized bed generation generation services. facilities in upstate New York. ■ 423 employees. ■ 50-megawatt cogeneration facility in Combined Locks, Wisconsin. Market ■ 53-megawatt coal-fired generation facility in Cassville, Wisconsin. ■ Operates in the retail and wholesale nonregulated energy marketplace. ■ A minority interest in a synthetic fuel facility located in Kentucky. ■ Emphasis is on serving aggregated residential and small commercial, ■ Landfill and wood waste gas generating facilities in Wisconsin large commercial, industrial, and wholesale customers in the United States and steam boilers in other states. and Canada. ■ 3 billion cubic foot natural gas storage facility in southeast Michigan. ■ Geographic footprint includes services to the northeast quadrant of the United States and adjacent portions of Canada, and also includes services targeted toward energy intensive regions of Texas and Alberta, Canada. WPS RESOURCES CORPORATION 3
  6. 6. Larry L. Weyers, Chairman, President, and Chief Executive Officer of WPS Resources Corporation D E A R F E L LO W S H A R E HOL D E R S Over the past year natural disasters tested our country’s fortitude and created an unstable oil market and high energy prices. However, it was uplifting to see Americans pull together to assist those whose lives were devastated by loss. Working together, Americans are recreating value that was destroyed and creating new value for their countrymen. That is our strength. At WPS Resources Corporation we are taking steps to provide outstanding value to shareholders, customers, employees, and communities. We are committed to value— creating it, protecting what exists, and providing it to others. Let’s take a closer look at what this commitment means. 4 WPS RESOURCES CORPORATION
  7. 7. Creating Value by Growing Proposed Natural Gas Distribution Operations Acquisition our Utility Investments Minnesota Proposed Acquisition At WPS Resources we know customers value our ability to Michigan Proposed Acquisition ensure that they have adequate supplies of low-cost, reliable, Wisconsin Public Service Corporation Upper Peninsula Power Company environmentally-friendly energy. We are investing hundreds of millions of dollars in our utility infrastructure to make certain these needs are met. These investments will also provide competitive returns to our investors. Construction of our Weston 4 generating facility began in October 2004. This is a 500-megawatt, state-of-the-art coal- fired facility in central Wisconsin. We will invest an estimated $549 million in Weston 4. We will own approximately 70 percent of the facility and be the operator. Our partner, Dairyland Power Cooperative, will own the other 30 percent. Commercial operations are scheduled to begin in 2008. In addition, we continue to invest in American Transmission Company’s (ATC) 220-mile transmission line being built between Creating Value with Strong Wausau, Wisconsin, and Duluth, Minnesota. We will provide an Nonregulated Business estimated $61 million for this project between 2006 and 2008. WPS Energy Services, our nonregulated energy supply and Wisconsin Public Service is also constructing the line for ATC. services company, is continuing to deliver strong performance. The Minnesota portion of the line was completed in early 2005. Its net income increased by almost 78 percent in 2005, made Construction of the Wisconsin portion began in August 2005, possible by providing products that satisfy the unique needs of and we expect completion of the entire project in 2008. customers in competitive energy markets. Our long-term financial We continue to increase our ownership share in ATC. At the goal is for 20 to 30 percent of our earnings to come from end of 2005, we owned 31 percent of the company and intend WPS Energy Services. Our nonregulated business provides to continue investing in their construction program, which has earnings diversity for our company rather than depending solely a capital expenditure budget of $3.4 billion over the 10-year on utility earnings that are somewhat dependent upon the period ending 2015. The ATC investment is a utility investment regulatory environment and weather. that provides a good return with reasonable risk. Creating Value with a Reduced Risk Profile We took steps this past year We took steps this past year to reduce the risk profile of our to reduce the risk profile company. We accomplished this in part through enhancement of our company. of our portfolio strategy. This strategy helps diversify our investments into regulated and nonregulated energy businesses, with electric and natural gas product lines sold into retail and wholesale markets. Last year we agreed to acquire natural gas distribution operations in Michigan and Minnesota. This utility investment We transferred ownership of the Kewaunee nuclear power of approximately $558 million, which is subject to post-closing plant to a larger, more experienced operator while maintaining adjustments including working capital, will provide stable returns the right to purchase output from the facility through 2013, for investors and job opportunities for employees. We expect to when the current operating license expires. We also have close on these acquisitions in the first half of 2006. exclusive rights through 2011 to negotiate with the new owner to extend our purchasing rights should the operating We believe that each of these investments is a great opportunity license be renewed. that will benefit shareholders, customers, and employees. C O M M I T M E N T TO VA L U E WPS RESOURCES CORPORATION 5
  8. 8. One of the initiatives, which we call “Competitive Excellence,” an overview is being deployed across our entire enterprise. Competitive of Our Financial Performance Excellence strives to eliminate work that does not provide value for our customers. This creates more efficient processes, WPS Resources Corporation improves the effectiveness of our employees, and reduces costs. Revenues Net Income (Millions) (Millions) $8,000 $200 Another major cost-reduction initiative is our focus on improving project management skills. Our goal is to complete $6,962.7 $6,000 $150 $157.4 every project on schedule, within budget, and with the $139.7 $4,950.8 functionality we expect. We are accomplishing this by following $4,000 $100 defined project management procedures, using state-of-the-art $2,000 $50 project management tools, and ensuring that we have well- trained, experienced project managers assigned responsibility $0 $0 for our projects. 2004 2005 2004 2005 Basic Earnings Market Capitalization Creating Value with Financial Strength (Per Share) (Millions) $5.00 $2,500 Success in the challenging business environment we face today $2,201.7 $4.00 $2,000 requires financial strength. WPS Resources recognizes the $4.11 $3.74 $1,861.5 importance of financial strength in the eyes of stakeholders, $3.00 $1,500 and we protect and build upon this strength in several ways. $2.00 $1,000 Our balance sheet is strong, with 52.4 percent equity in our $1.00 $500 capital structure at year end. We sold 1.9 million shares of $0.00 $0 common stock in November, which increased the equity 2004 2005 2004 2005 component of our balance sheet. We anticipate issuing up to 2.7 million additional shares in 2006 under a forward-sale agreement we have with an investment bank, which we arranged with our planned natural gas distribution acquisitions in mind. WPS Energy Services reduced its risk profile by selling emission allowances allocated to the Sunbury generation plant. Proceeds We also increased our credit facilities by entering into five-year, received enabled Sunbury to eliminate its nonrecourse debt unsecured, revolving credit agreements totaling $615 million. obligation, which provides greater flexibility as WPS Energy WPS Resources has a $500 million agreement and Wisconsin Services evaluates its options for the future of this plant, Public Service has a $115 million agreement. including closure, retention and operation during favorable economic periods, or divestiture. WPS Resources continues to offer dividends on which investors can rely. We paid dividends for the 65th consecutive year and WPS Energy Services also protected a portion of its synthetic increased our quarterly dividend for the 47th consecutive year. fuel tax credits against phase outs that could be triggered by the rising cost of oil. We delivered a 15.2 percent total shareholder return for our investors who reinvested their $2.24 in dividends per share and Risk reduction is part of our long-term strategy and, by taking these held their WPS Resources common stock from December 31, steps in 2005, we made considerable progress toward that goal. 2004, through December 31, 2005. Our credit ratings for debt obligations remain among the best Creating Value Through in the industry, with an “A1” from Moody’s and an “A” from Cost Reductions Standard & Poor’s. This is a major accomplishment in view of the cash requirements of our construction and acquisition initiatives. This past year we began several major initiatives to reduce future costs of our products for customers. This will aid us in fulfilling Corporate governance has garnered more attention since the our corporate mission, which is “To provide customers with the advent of Sarbanes-Oxley, and we have responded by improving best value in energy and related services.” 6 WPS RESOURCES CORPORATION
  9. 9. our governance structure and operations. Our results are very cost of energy for our customers. This past year, the prices of positive. As of January 1, 2006, Institutional Shareholder gasoline, natural gas, coal, and oil all rose to unprecedented Services indicated that we have a Corporate Governance levels. WPS Resources and its subsidiaries are determined Quotient that is better than 95.7 percent of the S&P 400 to provide better protection for our electric and natural gas companies and 93.4 percent of utility companies. customers from volatile and high prices. We have already taken steps to strengthen our capabilities and be successful in this effort. However, we have more to do. Creating Value with a Strategy Another challenge comes from the impact we have on our for the Future environment. We are searching for new ways to protect the Our strategy is simple. It has proven to be successful for environment. This involves a renewed commitment to energy many years, and we believe it will create significant value conservation, the use of renewable energy resources, a for years to come. reduction of emissions from combustion processes, and the deployment of new and better technologies. You can learn more First, we will continue investing in quality utility operations and about our commitment to the environment by reading our 2005 become a stronger regional utility. This aspect of our strategy Environmental Performance Report, which is available on our will provide stable returns for investors and job opportunities Web site at www.wpsr.com, under Investor Information. for employees. We have also faced a changing regulatory environment at WPS Energy Services. High wholesale prices and regulatory rulings negatively impacted our ability to grow or even renew We will continue investing in existing customer contracts in the Michigan retail electric quality utility operations and become markets. WPS Energy Services also did not extend an offer to a stronger regional utility. provide service to electric aggregation programs for the Ohio cities of Cleveland and Euclid when the contracts expired last year. We also ended service to direct sign-up electric customers in the Toledo Edison territory. The decision to exit the Cleveland and Euclid territories is related to the regulatory changes Second, we plan to expand the businesses and footprint of adopted by the Public Utilities Commission of Ohio, which WPS Energy Services. Our focus remains on the northeast makes it more difficult to provide competitively priced power in quadrant of the United States and adjacent portions of Canada, that market area. At the same time, we have made progress in as well as other markets where we can leverage our existing expanding our retail electric activity in other markets by offering capabilities. For instance, we are entering the Texas retail products to customers in Illinois and establishing a retail electric market, which is a thriving, liquid market. We already electric operation in Texas. have Houston operations serving natural gas producer customers, and we will expand these operations to offer electricity to commercial and industrial customers. The third leg of our strategy is asset and portfolio management Long-Term Financial Goals across the entire enterprise. Our goal is a portfolio of energy and energy-related investments that manages our risk profile ■ Provide investors with a solid return on their investments. through diversity. We will manage assets to provide our targeted ■ Grow our earnings per share from continuing operations returns. This may include the acquisition of new assets, the at 6 to 8 percent on an average annualized basis. divestiture of existing assets, or modification of the operations of certain assets. ■ Achieve 20 to 30 percent of our earnings from our nonregulated energy supply and services company. Creating Value by Managing ■ Manage the risk profile of our business portfolio. the Challenges ■ Continue our growth in the annual dividend paid. As always, WPS Resources must address numerous challenges for continued success. One of those challenges is the rising C O M M I T M E N T TO VA L U E WPS RESOURCES CORPORATION 7
  10. 10. Creating Value with returns on investment Operational Excellence Basic Earnings Per Common Share Customers rely on us to provide for their energy needs around the $5.00 clock, every day. Meeting their needs requires dedicated and diligent employees willing to go the extra mile. $4.00 $4.11 $3.74 As evidence of our commitment to reliability, this past summer we $3.45 $3.00 met ten new electric system demand peaks. This resulted in an $2.87 $2.75 $2.53 overall increase in peak demand of more than 8 percent. $2.24 $2.00 $2.10 $1.99 $1.76 This is just one example of the operational excellence our employees $1.00 provide. Other organizations have recognized our success with a number of awards we received in 2005, including the following: $0.00 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 ■ The United Way of Brown County, Wisconsin, presented WPS Resources with the Outstanding Corporate Support Award. (January 2005) Dividends Per Common Share ■ The Wausau Region Chamber of Commerce Cornerstone Award $2.50 was presented to Wisconsin Public Service for its support of small $2.24 $2.20 $2.16 business, economic development, and community involvement $2.12 $2.00 $2.08 $2.04 $2.00 $1.96 $1.92 $1.88 efforts in Wausau and Marathon County, Wisconsin. (April 2005) $1.50 ■ The National Arbor Day Foundation named Wisconsin Public Service a Tree Line USA utility for the tenth year and Upper $1.00 Peninsula Power Company a Tree Line USA Utility for the second $0.50 year. The program recognizes energy companies with a dedicated commitment to quality tree care, tree planting, and public $0.00 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 education. (April 2005) ■ Wisconsin Public Service was named “Communicator of the Year” in May 2005 by Utility Communicators International. Cumulative Total Return* ■ Mergent, Inc.** named WPS Resources a Mergent Dividend $300.00 Achiever™ in 2005, an honor shared with only 3 percent of United $288.05 States-listed dividend-paying companies, for consistently delivering $250.00 $250.09 dividend increases to shareholders, for at least the past ten years $220.98 $200.00 or longer. We tied for eighth place by increasing dividends for 46 $176.33 consecutive years. (June 2005) $150.00 $157.06 $148.89 $124.59 ■ $112.90 The 2005 J. D. Power and Associates electric and natural gas $100.00 $95.15 $89.08 customer satisfaction studies indicated that Wisconsin Public $50.00 Service achieved an overall satisfaction ranking within the Midwest $0.00 of fourth (out of 19 utilities) in the electric study and fifth (out of 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 20 utilities) in the natural gas study. J. D. Power and Associates Equivalent average annual return of 11.16%. classified Wisconsin Public Service as an “All Time Best * Assumes $100 investment in common stock at year-end 1995 and all dividends reinvested quarterly. Cumulative total return Residential Electric Performer” because we ranked in the top for the ten-year period is equivalent to an average annual return of 11.16%. quartile nationally over a seven-year period—an indication of Wisconsin Public Service’s strong record of performance. (July and September 2005) ** Mergent’s Dividend Achievers®and Dividend Achievers™ are trademarks of Mergent, Inc. 8 WPS RESOURCES CORPORATION
  11. 11. ■ Standard & Poor’s named WPS Resources to its High employees and retirees can be found lending a hand. Their Yield Dividend Aristocrats Index. This index measures the contributions of thousands of volunteer hours and millions of performance of the 50 highest dividend-yielding stocks in dollars in benevolent gifts enrich and sustain communities. For the S&P Composite 1500 that have followed a dividend policy more information about our commitment to communities, please of consistent annual increases for at least 25 consecutive see our 2005 Community Report, which is available on our Web years. (November 2005) site at www.wpsr.com, under Investor Information. ■ The 2005 MastioGale customer satisfaction survey listed WPS Energy Services fourth out of 38 in overall customer Creating Value with satisfaction and fourth in the regional energy marketer Strong Leadership category. Since first appearing in the survey in 1999, In addition to having skilled, compassionate employees, I am WPS Energy Services’ customers have consistently rated it fortunate to have a talented and capable management team at in the top 10 in MastioGale’s customer satisfaction ratings. WPS Resources and all of our subsidiaries. The people who A new feature of the 2005 MastioGale study, the Customer make up this management team are invaluable to our success. Value Index score, combines price and customer satisfaction Once again, there were changes in this team. rankings into a single rating of the company. WPS Energy Services finished second in the Customer Value Index. ■ Gary Erickson is moving from President of Upper Peninsula (December 2005) Power Company to become the President of our new natural gas subsidiary in Michigan. ■ Customers rely on us to provide Chuck Cloninger, Assistant Vice President - Operations and Engineering for Wisconsin Public Service, has been named for their energy needs around the clock, President of our new natural gas subsidiary in Minnesota. every day. ■ Neal Siikarla, Vice President of WPS Resources, retired. This year we will have many new employees joining our ranks in Michigan and Minnesota. I welcome each and every one of you ■ Forbes magazine designated WPS Resources as the utility to the WPS Resources team. You are a great addition. industry’s “Best Managed Company in America” in its January 9, 2006, issue. In 2005, the efforts of our management team and the employees who support them resulted in another successful year. Our hard ■ The Wall Street Journal ranked WPS Resources sixth among work and achievements were recognized by many. My thanks to 44 electric utilities in five-year average total shareholder returns all employees for their role in bringing about this success and for 2005 with a 14.1 percent average. (February 27, 2006) providing value to our shareholders, customers, and communities. ■ FORTUNE magazine designated WPS Resources Corporation I’m proud to be a part of the WPS Resources team. as the most admired energy company on its prestigious I also want to thank our shareholders and customers for their 2006 list of “America’s Most Admired Companies” in its continued support through a year full of uncertainty. We March 6, 2006, issue. appreciate the trust placed in our company and our ability to create and deliver value in challenging times. You have my word Creating Value for Communities that you can count on WPS Resources’ commitment to value as we head into the future. At WPS Resources we have a strong commitment to the communities we call home. Each year employees and retirees With Warmest Regards, invest time, talent, and resources to help improve the quality of life in their neighborhoods. Our employees and retirees can be found enthusiastically Larry L. Weyers helping out wherever there are charitable needs in their Chairman, President & CEO particular communities. From teaching second graders to March 6, 2006 volunteering with the local Habitat for Humanity, WPS Resources’ C O M M I T M E N T TO VA L U E WPS RESOURCES CORPORATION 9
  12. 12. “UPPCO is a relatively small company with a deep commitment to its customers, who are often our friends and neighbors. Our focus on efficient, prompt, quality service is a natural extension of those close community relationships.” Frank Stipech, Operations Manager at Upper Peninsula Power C O M M I T M E N T TO VA L U E Concern about rising energy costs dominated the public consciousness in 2005. From the gasoline pump to the natural gas meter, customers experienced the far-reaching effects of volatile market conditions and rising prices. The people of WPS Resources Corporation share our customers’ and other stakeholders’ growing concern. The challenges of the 2005 energy market have made it even more critical to proceed with a clear, compelling commitment to value—value achieved through both our strong utility base and our strategically focused nonregulated energy business. 10 WPS RESOURCES CORPORATION
  13. 13. Value to Customers Transmitting Value Part of WPS Resources’ long-term strategy to serve customers Every day, enterprise-wide, the nearly 3,000 employees of reliably at competitive prices is to pursue cost-effective changes WPS Resources show their personal commitment to offering to the electric system. An important step in this strategy unfolded measurable value—to our customers, to the communities as MISO implemented a new energy market on April 1, 2005. we serve, to our shareholders, and to each other. In MISO’s new energy market, less costly generation output As we reflect on the year, we invite you to weigh the value is dispatched and transmitted before more costly energy is of our commitment for yourself. brought online. The goal is to provide electric utility customers throughout the region with access to economically priced energy. Peak Performance Drives Reliability One of the most important measures of our value is our ability With continued improvements, MISO has the potential to to deliver reliable power during adverse conditions. decrease energy costs. For example, MISO’s efforts to develop a single electric transportation rate for the entire Midwest, a Throughout 2005, reliability was continuously tested and joint market with transmission organizations in the eastern expectations met. This was due to the commitment of United States, and updated systems can further reduce the employees system-wide, from the energy supply supervisors delivery cost of electricity. who managed the logistics of meeting peak electric load to veteran dispatchers who deployed line crews in response to Key to ensuring access to the benefits of MISO’s energy market power outages. is expansion of the transmission infrastructure within and across state boundaries—eliminating congestion so more Driven by wave after wave of sultry summer weather, a economically priced energy can be imported across state sequence of successive peak usage days pushed demand at lines. Because we operate in an area that experiences more both Wisconsin Public Service Corporation and Upper Peninsula than 500 hours of transmission congestion annually, we Power Company, our regulated utilities, to record levels. are encouraging both American Transmission Company (the During one hour on August 2, 2005, Wisconsin Public Service transmission owner in our region) and MISO (the operator of customers used a record 2,349 megawatts of electricity— that system) to act with greater urgency to provide a system that making it the tenth record-breaking day of peak electric use in can meet emerging needs with cost-competitive energy pricing. 2005 alone. Upper Peninsula Power reached a peak demand as well, at 147.2 megawatts on December 19. To meet this intense demand, the energy supply group worked Demand for energy in our region closely with its generation facilities and the Midwest Independent System Operator (MISO)—a regional transmission continues to climb. organization—to deliver the available energy resources and meet each of the new peaks. To manage costs, measures were taken to ensure that the maximum output could be attained from the existing generation fleet and, when necessary, to reduce system load via customer load reduction programs. In Pilot Programs Have the Potential addition, contractual resources were evaluated in terms of cost to Generate Savings and accessed as needed to support our energy portfolio. Through innovative pilot programs, we continue looking for ways to increase value for customers who seek to manage energy Demand for energy in our region continues to climb. Our efforts costs. Led by the Customer Solutions Development team, to build resources for future energy needs, along with efforts by Wisconsin Public Service has infused new cost-management regional and local transmission organizations, are progressing. possibilities into the consumer and business markets. Until these projects are complete, our employees will continue working through unusual challenges in an effort to provide Most recently, our development team has turned its focus to adequate power from the MISO energy market at a fair cost for an innovative energy-saving option for customers. The team our customers. is piloting a Thermostat Load Reduction Program, which uses new “smart technologies” to create energy savings. C O M M I T M E N T TO VA L U E WPS RESOURCES CORPORATION 11
  14. 14. Programmable thermostats with automated paging units are customer service. Our utilities increased the promotion of installed for a test group of customers in the Wisconsin Public flexible payment options such as Budget Billing, which allows Service area for use during summer’s peak energy-use periods. customers to pay average monthly bills, eliminating seasonal Temperature settings are controlled automatically by the utility, lows and highs. with cooling points adjusted to reduce energy use during peak When circumstances made it difficult for customers to pay times of electric demand. Test participants can also self- their bills, our customer service representatives negotiated manage their thermostat or override the utility’s settings by extended pay plans based on the customers’ ability to pay. In visiting a special Web site. some instances, customer assistance advisors provided these The technology provides an alternate solution to help lower customers with information on weatherization, conservation, and cumulative load, especially on peak demand days. other payment assistance options, such as the Federal Home Heating Assistance programs, the Keep Wisconsin Warm fund, Concern for Customers Drives Solutions and local organizations such as the Salvation Army. Concern for customers as heating costs continue to rise has Gift Certificates Warm Holiday Giving generated new and better ways for our customers and our own companies to control the cost of energy. As temperatures dipped in early winter, the popularity of our energy gift certificate program heated up. The certificates, available to both Wisconsin Public Service and Upper Peninsula Power customers, provided a warm and practical way for gift Concern for customers givers, especially during the holiday season, to ease the pinch has generated new and better ways to on others’ energy budgets. control the cost of energy. Friends and families of utility customers purchased a record 3,121 certificates in the fourth quarter of 2005—a 70 percent increase over the same quarter in the previous year—making it the most successful program year ever. The gift certificates Throughout the year, we asked, “What can we do to provide could be used on natural gas and electric bills. the lowest possible cost, given market conditions? How can we Lift-Off in Houston help customers make wise decisions and manage their energy dollars? How can we assist customers on low or fixed incomes WPS Energy Services, WPS Resources’ nonregulated energy who are having difficulty paying their bills?” services company, continues bringing competitive new choices to communities in nonregulated energy markets. In 2005, The answers came in many forms. WPS Energy Services expanded its product offerings to the state of Texas with the opening of a Houston Service Center. Expected Tools to Understand Costs and Control Energy Use to be fully operational in the second quarter of 2006, the office To help customers stretch their energy dollars, Wisconsin Public will be staffed by retail electric marketing specialists. Service launched an informational campaign via the Web and Experienced energy traders are also joining the team to help the other media. This alerted customers to energy costs affecting Gulf region’s independent natural gas producers market their the heating season, offering online tools to help them supplies, bridging the gap between producers and consumers. understand their energy use, as well as outline preventive measures they could take to lower costs. Award-Winning Value Online Throughout WPS Resources, a paradigm shift is having a The campaign—with the tagline “Log On. Learn More. Use profound effect on value. The growing use of Web-based Less.”—promoted a range of cost-management ideas, from solutions is delivering value to busy customers, offering 24/7 “quick fixes” such as lowering thermostats and simple access to information and resources, contact options, energy- maintenance, to the purchase of more energy-efficient management tools, and more. In 2005, the Wisconsin Public appliances. A feature on our Web site even helps them Service and Upper Peninsula Power Web sites together hosted forecast their energy costs. more than 1,000,000 visits—a 52 percent increase over 2004. Payment Options and Assistance The Wisconsin Public Service Web site contains helpful As the year unfolded, providing help with monthly energy information about a host of issues. Our “For Farms” area bills became increasingly more critical as a component of 12 WPS RESOURCES CORPORATION
  15. 15. “We’ve received more calls than usual this winter from customers who are having trouble paying their bills. I work with a lot of small businesses that are really stretched to absorb the higher energy costs. Their operating budgets are pretty tight. I want to help them find a way to work through this difficult time.” Andy Summers, Credit Management Coordinator at Wisconsin Public Service “The challenge of natural gas rate design is to balance the cost of providing our customers with world-class service while maintaining a reasonable rate for that service.” Les Nishida, Supervisor of Gas Rates for Wisconsin Public Service C O M M I T M E N T TO VA L U E WPS RESOURCES CORPORATION 13
  16. 16. “What’s different about building the Weston 4 plant is the involvement we’ve asked for from the people who will be operating the plant on a daily basis. It’s just one way we’re ensuring that this plant will operate reliably for the next 50 years.” Jeff Jensen, Director of Energy Supply Projects for Wisconsin Public Service 14 WPS RESOURCES CORPORATION
  17. 17. of the site is a case in point. Enhanced Web pages for farm NOx emissions result from burning coal. The proposed project customers deliver farm-specific energy tools and information, includes not only new equipment, but structural modifications, including online calculators to assess power use and energy alterations to existing equipment, and enhanced instrumentation savings of various technologies. Information is also available and controls to monitor the upgraded system. on our Farm Rewiring Program, including grant and financing While the plant meets current environmental requirements, resources, safety information, stray voltage information, and the new emission-control technologies will reduce emissions links to farm-related sites. further than required by new standards. Upper Peninsula Power expanded www.uppco.com to help small Power Recycling business owners deal with rising energy costs. Featuring helpful During construction of the new Weston 4 power plant, near online Equipment Buying and Maintenance Advice, the site Wausau, Wisconsin, Wisconsin Public Service, with assistance addresses the nuts-and-bolts issues of purchasing and from a company called WasteCap, is undertaking the largest maintaining the best heating, cooling, and lighting system construction waste reduction and recycling program in equipment. Simply by logging on and learning more, businesses Wisconsin to date. can drive more efficiencies through the systems that account for the lion’s share of their energy bills. WPS Energy Services now offers real-time power data through the Energy Manager portion of its Web site (www.wpsenergy.com). Better data means better decisions As regional transmission organizations and utilities provide for our customers. financial incentives for customers to reduce their energy demand during peak pricing periods, up-to-the-minute pricing data becomes more important for customers. The new Power Price Analyst component of the Energy Manager provides day-ahead, hour-ahead, and real-time prices for a variety of electric power Thanks to the shared ingenuity of employees and our construction markets. Customers can display the information in graphical, partners, 85 percent of all waste building materials generated tabular, or spreadsheet formats to suit their needs. This new during construction of the plant have been recycled—nearly feature reflects the company’s belief that better data means 3,500 tons of materials since the project’s beginning in 2005. better decisions for our customers. Together, we pitched in and creatively found ways to reuse materials from scrap metal to wood, cardboard to asphalt. More Value to Communities than 2,000 tons of rock and reclaimed materials were used in constructing roadways, and 15 tons of drywall scrap was used Throughout WPS Resources, we are committed to bringing on nearby farmland as a soil additive. value to the communities we serve, balancing global vision with local responsibility. What has been the value of the project? To date, we have achieved a dollar savings of $182,000 in materials. We have Our commitment is evident through wise decisions on issues also diverted approximately 500 dumpsters’ worth of waste that impact the world in which we live and work. We develop from Wisconsin’s landfills. Ultimately, the true value of the programs that add to the quality of life, serve with dedication, project is our reduced impact on the environment. and act with concern for the environment. Proactive Emissions Reductions Value to Employees Value means going beyond basic compliance requirements for the greater good, acting prudently and proactively to reduce How is value created? It begins with the people of emissions. In line with this belief, Wisconsin Public Service has WPS Resources, a concept inherent in our vision of applied to state utility regulators to retrofit new emission-control “People Creating a World-Class Energy Company.” equipment on the Weston 3 power plant near Wausau, Wisconsin. To cultivate and sustain a culture of value, we first actively If approved, the $7.5 million upgrade will reduce nitrogen create value for our employees, offering them opportunities oxide (NOx) emissions by 40 percent from existing levels. to learn, grow, and contribute to the business. C O M M I T M E N T TO VA L U E WPS RESOURCES CORPORATION 15
  18. 18. Our collective effort remains a powerful way to achieve our Collaborative Safety corporate mission to “Provide Customers with the Best Value We strongly believe in forming strategic partnerships and in Energy and Related Services.” involving outside stakeholders in the value process. Cultivating World-Class Talent In a collaborative new program, contractors, trade unions, It takes world-class people to create world-class value. workers, agencies, and other stakeholders working on the new Weston 4 power plant came together to sign a partnership Continuous learning and education drives the performance we agreement with the Occupational Safety and Health need as we ask our workforce to stretch their competencies Administration (OSHA). and expand their roles in pursuing excellence. This new model for safety transforms the role of OSHA from Increasingly, we’re deploying electronic learning options with an “enforcer” into a valued resource with a vast wealth of our employees. This flexible medium allows WPS Resources knowledge and experience. The program allows OSHA and its to offer a wide range of training opportunities to geographically partners to work together to assess areas of mutual concern, dispersed employees. They can self-manage the process identify potential hazards, agree upon individual responsibilities and learn whenever and wherever it fits their needs. Career- and tactics to meet performance measures, and resolve safety development benefits such as tuition reimbursement and issues that arise. interest-free educational loans encourage learning throughout an individual’s career. It’s a shared focus built on our mutual concern for sending our employees and partners home healthy every day. We’re deliberate about cultivating new leaders, providing a range of tools from mentoring programs to educating emerging leaders in competencies such as conflict management and Value to Shareholders strategic thinking. Using talent-management tactics such as Throughout 2005, WPS Resources maintained a strategic succession planning, we proactively manage transitions within value focus through savvy asset management. We continued the organization. to acquire and dispose of assets, or modify the operations of assets, in a manner that enhanced earnings, mitigated risk, balanced our energy portfolio, and achieved regulated and nonregulated growth. Increasing value became The addition of natural gas distribution operations in Michigan a compelling responsibility. and Minnesota, expected to close in the first half of 2006, will transition WPS Resources to a larger, stronger regional energy company. When the acquisitions are complete, WPS Resources will serve roughly 660,000 natural gas customers through its As demographics change and our customers and the labor regulated utilities, with annual gas throughput of 189 billion pool become increasingly diverse, our diversity initiatives cubic feet. add value throughout the organization. We actively engage Creative Approach Offers New Paradigm the differences that define each individual. This richness Providing value through customer service must remain a focus of perspectives expands our ability to create, innovate, and during times of rapid growth. We studied many options for meet customer needs. providing customer care and related information technology Finally, as management of health care costs becomes a key services (including call handling, billing, payment processing, cost issue for our employees personally, as well as for the and dispatching) to our future Michigan and Minnesota organization, we stress preventive care for self and family. customers. We performed this analysis to ensure we would Health and wellness partnerships, like our health risk maximize not only their service, but also the effectiveness of assessment program with a local healthcare leader, strive our current resources and the value our shareholders receive. to help employees make healthy choices in diet, exercise, After carefully considering the costs and benefits of the options and early detection of disease. before us, we decided to work with a highly respected, experienced customer care provider for these services. 16 WPS RESOURCES CORPORATION
  19. 19. “My role is to sell our organization to students, career centers, campus organizations, clubs, and professors. It’s really very easy, and my excitement for this organization really shows. I truly feel that we are world class, and we are recruiting world-class individuals to join our organization. The key is building relationships, not only with students, but with the centers of influence that revolve around the students.” Laura Charette, Corporate Recruiter for Wisconsin Public Service C O M M I T M E N T TO VA L U E WPS RESOURCES CORPORATION 17
  20. 20. “One of our Competitive Excellence goals is to involve every leader in lean improvement so we can create sustainable change to the ‘way of life’ at our nonregulated entities. I spend a lot of time talking with the leaders, asking them about their plans, what they’re doing to incorporate lean principles, and how we can build on the momentum of change to achieve our Competitive Excellence goals.” Ann Farrell, Director of Competitive Excellence at WPS Energy Services “My group’s mission is to develop an energy asset portfolio that maximizes economic value to the company and its shareholders. We work to optimize our current assets and look at creative ways to develop new assets, such as projects that enhance customer value, lower production costs, or produce renewable energy.” Joel Jansen, Asset Development Manager at WPS Energy Services 18 WPS RESOURCES CORPORATION
  21. 21. This approach will provide a scalable, efficient way to deliver Lean Thinking Leads the Way customer care, and allow us to continue concentrating on core to Competitive Excellence business processes during the transition. It’s a new paradigm In 2005, increasing value became a compelling for our utility business in terms of serving customers. We look responsibility across the enterprise through our new forward to the learning our employees will gain, and the benefits Competitive Excellence initiative. for our customers, the company, and our shareholders. The program grew out of increasing costs and conversations Creating Powerful Synergies Between with customers, who shared concerns about how rising costs Generation and Marketing were impacting their competitive stance. These customers Creating powerful new synergies between our nonregulated challenged us clearly: “What are you doing to control costs?” generating and marketing businesses in 2005, WPS Resources Based on the Lean Enterprise philosophy, Competitive combined its subsidiaries WPS Energy Services and WPS Power Excellence is a process approach that gives employees the Development which now operate under an integrated business tools and knowledge to eliminate waste and work more focus that better drives operational efficiency and competitive efficiently. Through the program, we’re examining how value advantage in the nonregulated market. WPS Energy Services is delivered in key business processes and outlining areas owns and operates about 939 megawatts of nonregulated of individual employee control and ownership. generation assets, including natural gas, hydroelectric, coal, and alternative energy facilities. Employees are exploring how their work connects with the work of others, creating agreed-upon standards of performance, and Nonregulated Marketplace Energizes Return identifying operational improvements that affect value up and Rapid expansion of WPS Energy Services’ infrastructure is down stream. Any practices that are barriers to value, keeping paving the way for continued growth and solid earnings. us from being a lean and agile organization, are identified and One rising star is our Asset Management and Portfolio resolved. In the end, we permanently reduce costs. Optimization capability. Now in its third year, this area is responsible for managing risk and maximizing returns for the entire portfolio of nonregulated generation assets, wholesale WPS Resources energized customers, and retail sales. The team has generated strong people, resources, and new ways of performance throughout 2005 and is helping our integrated business lines in the nonregulated energy marketplace capture working to deliver value. economies of scale, deliver clear value to customers, and capitalize on market opportunities. Sunbury Operates for Maximum Return The Value of Our Commitment WPS Energy Services’ Sunbury generation facility, located in Shamokin Dam, Pennsylvania, benefited from favorable market As you can see, throughout 2005, WPS Resources energized conditions in 2005 and the expiration of a fixed price outtake people, resources, and new ways of working to deliver value in contract. When the plant was initially purchased in 1999, power a complex and competitive marketplace. Strong shareholder from the plant was sold at a predetermined price established in earnings, engaged community partnerships, and caring an outtake contract. Now that contract has expired, and the customer relationships speak volumes about our commitment plant can truly operate in the open market. In 2005, warmer- to those we serve. than-normal weather, higher regional demand for electricity, and stronger power prices all led to improved profitability at the The many changes we are making to become a leaner Sunbury plant. organization, grow in both our utility operations and nonregulated markets, and strengthen our employees’ In line with serving a competitive marketplace, the Sunbury knowledge base are exciting. When all is said and done, these plant will be run differently than in the past. Rather than running efforts all have one thing in common—they are designed to every day, the plant will operate when it is most economical to improve WPS Resources’ ability to create value. That is our do so—normally anticipated to be during the summer or winter most important task, and we are committed to it. peak demand periods. This will optimize the plant’s operations for maximum return. C O M M I T M E N T TO VA L U E WPS RESOURCES CORPORATION 19

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