WISCONSIN
PUBLIC SERVICE CORPORATION AND SUBSIDIARY
NOTE 1-- FINANCIAL
INFORMATION
We
have prepared the condensed consolidated financial statements of WPSC under
the
rules and regulations of the SEC.
These
financial
statements on Form 10-Q have not been audited. Management believes
that these financial statements include all adjustments (which unless otherwise
noted include only normal recurring adjustments) necessary for a fair
presentation of the financial results for each period shown. We have
condensed or omitted certain financial information and note disclosures normally
included in our annual audited financial statements. These condensed
financial statements should be read along with the audited financial statements
and notes included in our Annual Report on Form 10-K for the year ended
December 31, 2006, which are included within the Annual Report on Form 10-K
for the year ended December 31, 2006, of our parent corporation, Integrys
Energy
Group, Inc. Overall, the formats of WPSC's Condensed Consolidated
Balance Sheets and Statements of Income were modified in the first quarter
of
2007 to conform to the presentation used by Integrys Energy Group. In
addition, certain items from the prior periods have been reclassified to
conform
to the current year presentation. Significant reclassifications are
as follows:
Condensed
Consolidated Balance Sheets
Customers
electing
a budget payment plan had a credit balance of $16.1 million at December 31,
2006. Since this balance is subject to change based upon the amount
of future billings, this balance was reclassified from accounts payable to
other
current liabilities.
At
December 31, 2006, WPSC recorded non-utility property, plant and equipment
of
$9.8 million within other long-term assets. The
$9.8 million was reclassified from other long-term assets to property,
plant, and equipment in order to conform to the June 30, 2007
presentation.
At
December 31, 2006, WPSC recorded accrued labor costs of $5.9 million within
accounts payable. The $5.9 million was reclassified from
accounts payable to other current liabilities in order to conform to the
June 30, 2007, presentation.
At
December 31, 2006, WPSC recorded $4.9 million of taxes payable other than
income taxes within accounts payable. The $4.9 million was
reclassified from accounts payable to other current liabilities in order
to
conform to the June 30, 2007, presentation.
Condensed
Consolidated Statements of Income
For
the three and
six months ended June 30, 2006, $4.0 million and $7.7 million, respectively,
of
software and intangible asset amortization expense was reclassified from
operating and maintenance expense to depreciation and amortization expense
to
conform to the three and six months ended June 30, 2007,
presentation.
Condensed
Consolidated Statements of Cash Flows
The
reclassifications discussed above related to the Condensed Consolidated Balance
Sheets and Condensed Consolidated Statements of Income were also reflected
as
reclassifications in the Condensed Consolidated Statements of Cash Flows
for the
six months ended June 30, 2006. These reclassifications had no
impact on total operating, investing, or financing activities.
NOTE
2--CASH AND CASH EQUIVALENTS
Short-term
investments with an original maturity of three months or less are reported
as cash equivalents.
The
following is
supplemental disclosure to the WPSC Condensed Consolidated Statements of
Cash
Flows:
|
|
Six
Months Ended June 30
|
|
(Millions)
|
|
2007
|
|
|
2006
|
|
Cash
paid for interest
|
|
$ |
18.3
|
|
|
$ |
16.0
|
|
Cash
paid for income taxes
|
|
$ |
16.8
|
|
|
$ |
16.0
|
|
Weston
4
construction costs funded through accounts payable and treated as non-cash
investing activities were $29.3 million at June 30, 2007, and
$39.3 million at June 30, 2006.
Under
WPSC's cash
management policy, accounting overdraft cash balances of $9.3 million and
$5.8 million at June 30, 2007, and December 31, 2006,
respectively, were reclassified to accounts payable.
NOTE 3--RISK
MANAGEMENT ACTIVITIES
As
part of our regular operations, WPSC enters into contracts, including options,
futures, forwards, and other contractual commitments, to manage the risk
of
changes in commodity prices.
WPSC
accounts for
its derivative contracts in accordance with SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities,” as amended and
interpreted. SFAS No. 133 establishes accounting and financial
reporting standards for derivative instruments and requires, in part, that
we
recognize certain derivative instruments on the balance sheet as assets or
liabilities at their fair value. All the derivatives at WPSC qualify
for regulatory deferral subject to the provisions of SFAS No. 71, “Accounting
for the Effects of Certain Types of Regulation.” Therefore, WPSC's
derivatives are marked to fair value pursuant to SFAS No. 133 and are offset
with a corresponding regulatory asset or liability.
|
|
Assets
|
|
|
Liabilities
|
|
(Millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1.4
|
|
|
$ |
3.8
|
|
|
$ |
5.1
|
|
|
$ |
10.2
|
|
Financial
transmission rights
|
|
|
24.9
|
|
|
|
13.7
|
|
|
|
8.6
|
|
|
|
2.0
|
|
Total
|
|
$ |
26.3
|
|
|
$ |
17.5
|
|
|
$ |
13.7
|
|
|
$ |
12.2
|
|
Balance
Sheet Presentation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
current
|
|
$ |
26.1
|
|
|
$ |
17.5
|
|
|
$ |
13.5
|
|
|
$ |
11.3
|
|
Other
long-term
|
|
|
0.2
|
|
|
|
-
|
|
|
|
0.2
|
|
|
|
0.9
|
|
Total
|
|
$ |
26.3
|
|
|
$ |
17.5
|
|
|
$ |
13.7
|
|
|
$ |
12.2
|
|
Assets
and
liabilities from risk management activities are classified as current assets
or
liabilities and other long-term assets or liabilities based upon the maturities
of the underlying contracts. The derivatives listed in the above
table as "Commodity contracts" include a limited number of electric and natural
gas purchase contracts as well as financial derivative contracts (NYMEX futures
and options) used by WPSC's electric utility segment to mitigate the market
price volatility of natural gas used for generation. The electric utility
segment also uses financial instruments to manage transmission congestion
costs,
which are shown in the above table as "Financial transmission
rights."
Derivative
instruments at WPSC are entered into in accordance with the terms of the
risk
management policies and plans approved by the PSCW. Changes in the
fair value of derivative instruments are recognized as regulatory assets
or
liabilities as the PSCW and MPSC have allowed deferral of the mark-to-market
effects of derivative instruments at WPSC. Thus, management believes
any gains or losses resulting from the eventual settlement of these derivative
instruments will be collected from or refunded to customers.
NOTE 4--GOODWILL
AND OTHER INTANGIBLE ASSETS
At
June 30, 2007, and December 31, 2006, goodwill recorded by WPSC was
$36.4 million and relates to WPSC's 2001 acquisition of Wisconsin Fuel and
Light Company. Goodwill is included in other long-term assets on the
Condensed Consolidated Balance Sheets.
NOTE 5--SHORT-TERM
DEBT AND LINES OF CREDIT
WPSC
manages its
liquidity by maintaining adequate external financing
commitments. WPSC had total borrowing capacity under its credit
facilities of $125.0 million at both June 30, 2007, and
December 31, 2006, with $41.8 million and $73.2 million of
available capacity remaining under these credit lines at June 30, 2007, and
December 31, 2006, respectively.
The
information in
the table below relates to WPSC's short-term debt and lines of
credit.
(Millions)
|
Maturity
|
|
|
|
|
|
|
Credit
agreements and revolving notes
|
|
|
|
|
|
|
|
Revolving
credit facility
|
6/02/10
|
|
$ |
115.0
|
|
|
$ |
115.0
|
|
Revolving
short-term notes payable
|
11/13/07
|
|
|
10.0
|
|
|
|
-
|
|
Revolving
short-term notes payable
|
5/13/07
|
|
|
-
|
|
|
|
10.0
|
|
Total
short-term credit capacity
|
|
|
|
125.0
|
|
|
|
125.0
|
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
Letters
of
credit issued inside credit facilities
|
|
|
|
3.8
|
|
|
|
3.8
|
|
Loans
outstanding under the credit agreements
|
|
|
|
10.0
|
|
|
|
10.0
|
|
Commercial
paper outstanding
|
|
|
|
69.4
|
|
|
|
38.0
|
|
Available
capacity under existing agreements
|
|
|
$ |
41.8
|
|
|
$ |
73.2
|
|
WPSC’s
short-term
borrowings consist of sales of commercial paper backed by the unsecured
revolving credit agreement and short-term notes as shown in the following
table.
(Millions)
|
|
|
|
|
|
|
Commercial
paper outstanding
|
|
$ |
69.4
|
|
|
$ |
|
|
Average
discount rate on outstanding commercial paper
|
|
|
5.48 |
% |
|
|
5.47 |
% |
Short-term
notes payable outstanding
|
|
$ |
10.0
|
|
|
$ |
|
|
Average
interest rate on short-term notes payable
|
|
|
5.32 |
% |
|
|
5.30 |
% |
Available
(unused) lines of credit
|
|
$ |
41.8
|
|
|
$ |
|
|
NOTE 6--LONG-TERM
DEBT
In
January 2007, WPSC used the proceeds from $22.0 million of 3.95% senior
notes issued in December 2006 to the Village of Weston, Wisconsin, to repay
the outstanding principal balance of $22.0 million of 6.90% First Mortgage
bonds due February 1, 2013. See WPSC's Condensed Consolidated
Statements of Capitalization for more information on WPSC's long-term
debt.
NOTE
7--ASSET RETIREMENT OBLIGATIONS
Under
the
provisions of SFAS No. 143, "Accounting for Asset Retirement Obligations,"
and Interpretation No. 47, "Accounting for Conditional Asset Retirement
Obligations," WPSC has recorded liabilities for legal obligations associated
with the retirement of tangible long-lived assets. WPSC identified
asset retirement obligations primarily related to asbestos abatement at certain
generation facilities, office buildings, and service centers; disposal of
PCB-contaminated transformers; and closure of fly-ash landfills at certain
generation facilities. In accordance with SFAS No. 71, WPSC
establishes regulatory assets and liabilities to record the differences between
ongoing expense recognition under SFAS No. 143 and Interpretation
No. 47, and the rate-making practices for retirement costs authorized by
the applicable regulators. All asset retirement obligations are
recorded as other long-term liabilities in the Condensed Consolidated Balance
Sheet of WPSC.
The
following table
shows changes to the asset retirement obligations of WPSC through
June 30, 2007.
(Millions)
|
|
|
|
|
|
$ |
8.1
|
|
Accretion
|
|
|
0.2
|
|
|
|
$ |
8.3
|
|
NOTE 8--INCOME
TAXES
The
effective tax
rates for the three months ended June 30, 2007 and 2006 were 36.2% and
34.6%, respectively. The effective tax rates for the six months ended
June 30, 2007 and 2006 were 37.5% and 35.2%,
respectively. WPSC's provision for income taxes was calculated in
accordance with APB Opinion No. 28, "Interim Financial
Reporting." Accordingly, our interim effective tax rate reflects our
projected annual effective tax rate. The effective tax rate differs
from the federal tax rate of 35%, primarily due to state income
taxes.
Effective
January
1, 2007, WPSC adopted the provisions of FASB Interpretation No. 48 (FIN 48),
“Accounting for Uncertainty in Income Taxes – an Interpretation of FAS
109.” The cumulative effect of adopting FIN 48 was a decrease
of $0.9 million to the January 1, 2007, retained earnings balance.
At
January 1, 2007, WPSC's liability for uncertain tax positions was
$3.5 million. During the second quarter of 2007, WPSC recognized
no additional liabilities for uncertain tax positions. For the six
months ended June 30, 2007, WPSC recognized additional liabilities for uncertain
tax positions of $0.5 million.
With
the adoption
of FIN 48, WPSC now records penalties and accrued interest related to income
taxes as a component of income tax expense. Prior to January 1, 2007,
WPSC had recorded interest and penalties as components of income before
taxes. As of January 1, 2007, unrecognized tax benefits of
$2.4 million would affect WPSC's effective tax rate if recognized in
subsequent periods. WPSC records penalties and accrued interest related to
uncertain tax positions in income tax expense. At January 1, 2007,
subsequent to the adoption of FIN 48, $0.1 million was included in WPSC's
liability for uncertain tax positions for the possible payment of interest
and
penalties. During the second quarter of 2007, WPSC recognized a
reduction in liabilities for possible payment of interest of $0.3
million. No changes were recognized during the first quarter of
2007.
WPSC
files income
tax returns in the United States federal jurisdiction, and in various state
and
local jurisdictions, on a stand-alone basis or as part of Integrys Energy
Group
filings. With a few exceptions (major exceptions listed below), WPSC
is no longer subject to federal, state and local income tax examinations
by tax
authorities for years prior to 2002.
●
|
Wisconsin
Department of Revenue – WPSC has agreed to statute extensions for tax
years covering 1996-2001.
|
WPSC
has closed
examinations for the following major jurisdictions for the following tax
years:
●
|
United
States
Internal Revenue Service (IRS) – Integrys Energy Group (formerly WPS
Resources Corporation) and consolidated subsidiaries have an agreed
to
audit report and closing statement for an IRS examination of the
2002 and
2003 tax years.
|
●
|
United
States
IRS – Integrys Energy Group (formerly WPS Resources Corporation) and
consolidated subsidiaries have a partially agreed to audit report
and
closing statement for an IRS examination of the 2004 and 2005 tax
years,
but one open issue from the agents report has been protested by
the
taxpayer and has been sent to IRS appeals for potential
resolution. Through subsequent discussion with IRS Appeals,
this matter has been tentatively settled in our
favor. Subsequent to June 30, 2007, we received draft
settlement documentation and adjusted tax calculations for 2004-2005
tax
years. We expect that once that settlement is concluded, we
will record approximately $1 million of additional tax
benefit.
|
WPSC
has open
examinations for the following major jurisdictions for the following tax
years:
●
|
Wisconsin
Department of Revenue – WPSC has an open examination for the 1996-2001 tax
years.
|
We
do not expect a significant impact to the FIN 48 liability from the expiration
of the statute of limitations in any jurisdiction to occur within the next
12
months. We do expect to settle several of the examinations listed
above within the next 12 months and estimate a reduction in the FIN 48 tax
liability of $2.7 million.
NOTE 9--COMMITMENTS
AND CONTINGENCIES
Commodity
and Purchase Order Commitments
WPSC
routinely
enters into long-term purchase and sale commitments that have various quantity
requirements and durations. As of June 30, 2007, WPSC has
obligations related to coal, purchased power, and natural
gas. Obligations related to coal supply and transportation extend
through 2016 and total $394.3 million. Through 2016, WPSC has obligations
totaling $1.2 billion for either capacity or energy related to purchased
power. Also, there are natural gas supply and transportation
contracts with total estimated demand payments of $90.7 million through
2017. WPSC has obligations for other commodities totaling $6.1
million, which extend through 2012. WPSC expects to recover these
costs in future customer rates. Additionally, WPSC has contracts to
sell electricity and natural gas to customers.
WPSC
has
commitments in the form of purchase orders issued to various
vendors. At June 30, 2007, these purchase orders totaled
$287.0. The majority of these commitments relate to large
construction projects, including construction of the 500-megawatt Weston
4
coal-fired generation facility near Wausau, Wisconsin.
Environmental
EPA
Section
114 Request
In
December 2000, WPSC received from the EPA a request for information under
Section 114 of the Clean Air Act. The EPA sought information and
documents relating to work performed on the coal-fired
boilers
located at
WPSC's Pulliam and Weston electric generation stations. WPSC filed a
response with the EPA in early 2001.
On
May 22, 2002, WPSC received a follow-up request from the EPA seeking additional
information regarding specific boiler-related work performed on Pulliam Units
3,
5, and 7, as well as information on WPSC's life extension program for Pulliam
Units 3-8 and Weston Units 1 and 2. WPSC made an initial response to
the EPA's follow-up information request on June 12, 2002, and filed a final
response on June 27, 2002.
In
2000 and 2002, Wisconsin Power and Light received a similar series of EPA
information requests relating to work performed on certain coal-fired boilers
and related equipment at the Columbia generation station (a facility located
in
Portage, Wisconsin, jointly owned by Wisconsin Power and Light, Madison Gas
and
Electric Company, and WPSC). Wisconsin Power and Light is the
operator of the plant and is responsible for responding to governmental
inquiries relating to the operation of the facility. Wisconsin Power
and Light filed its most recent response for the Columbia facility on July
12,
2002.
Depending
upon the
results of the EPA's review of the information provided by WPSC and Wisconsin
Power and Light, the EPA may issue "notices of violation" or "findings of
violation" asserting that a violation of the Clean Air Act occurred and/or
seek
additional information from WPSC and/or third parties who have information
relating to the boilers or close out the investigation. To date, the
EPA has not responded to the filings made by WPSC and Wisconsin Power and
Light. In addition, under the federal Clean Air Act, citizen groups
may pursue a claim. WPSC has no notice of such a claim based on the
information submitted to the EPA.
In
response to the EPA’s Clean Air Act enforcement initiative, several utilities
have elected to settle with the EPA, while others are in
litigation. In general, those utilities that have settled have
entered into consent decrees which require the companies to pay fines and
penalties, undertake supplemental environmental projects, and either upgrade
or
replace pollution controls at existing generating units or shut down existing
units and replace these units with new electric generation
facilities. Several of the settlements involve multiple
facilities. The fines and penalties (including the capital costs of
supplemental environmental projects) associated with these settlements range
between $7.0 million and $30.0 million. The regulatory
interpretations upon which the lawsuits or settlements are based may change
based on future court decisions that may be rendered in pending
litigations.
If
the federal government decided to bring a claim against WPSC and if it were
determined by a court that historic projects at WPSC's Pulliam and Weston
plants
required either a state or federal Clean Air Act permit, WPSC may, under
the
applicable statutes, be required to:
·
|
shut
down any
unit found to be operating in non-compliance,
|
·
|
install
additional pollution control equipment,
|
·
|
pay
a fine,
and/or
|
·
|
pay
a fine
and conduct a supplemental environmental project in order to resolve
any
such claim.
|
Pulliam
Air
Permit Violation Lawsuit
On
October 19, 2005, the Sierra Club Inc. and Clean Wisconsin Inc. filed a
complaint against WPSC in the Eastern District of Wisconsin pursuant to the
citizen suit provisions of the Clean Air Act. The complaint alleged
various violations at the 373-megawatt J.P. Pulliam Plant located in Green
Bay,
Wisconsin, including opacity exceedances, opacity monitoring violations,
and
other violations of limitations in the facility's Clean Air Act operating
permit. On January 10, 2007, the court entered a Consent Decree based
on the stipulated agreement of the parties, settling the
litigation. Under the terms of the Consent Decree, WPSC is to pay the
plaintiffs attorneys fees, fund $500,000 of environmental projects through
the
Wisconsin Energy Conservation Corporation, and perform upgrades on the
precipitators and other environmental control equipment at
Pulliam. For one year after the improvements are completed
(January 1 through December 1, 2008), WPSC's performance will be
evaluated and, depending upon that performance, WPSC may be required to make
additional contributions to energy efficiency projects.
WPSC
will implement
environmental control upgrades on Pulliam Units 5, 6, 7, and 8 and continue
to
operate those units. In lieu of upgrading the precipitators for
Pulliam Units 3 and 4 (both are 30-megawatt units), WPSC elected to shut
down
these units by December 31, 2007. Since WPSC expects the
500-megawatt Weston 4 plant to achieve commercial operation by June 2008,
it
anticipates no electric supply shortfalls as there will be power available
to
replace these small units.
Weston
4 Air
Permit
On
November 15, 2004, the Sierra Club filed a petition with the WDNR under
Section 285.61 of the Wisconsin Statutes, seeking a contested case hearing
on the construction permit issued for the Weston 4 generation station,
which is a necessary predicate to plant construction under the pertinent
air
emission regulations (hereinafter referred to as the “Weston 4 air
permit”). In February 2006, the Administrative Law Judge affirmed the
Weston 4 air permit with changes to the emission limits for sulfur dioxide
and nitrogen oxide from the coal-fired boiler and particulate from the cooling
tower. The changes, which were implemented by the WDNR in a revised
permit issued on March 28, 2007, set limits that are more stringent than
those
originally set by the WDNR (hereinafter referred to as the “March 28, 2007
permit language”).
The
Sierra Club and
WPSC filed petitions for judicial review of the Administrative Law Judge's
decision with the circuit court. On August 7, 2006, WPSC withdrew its
petition for judicial review and sought dismissal, without prejudice, of
the
Sierra Club's petition as premature. On October 12, 2006, the court
granted the motion to dismiss and the Sierra Club filed a petition for appeal
of
the circuit court's dismissal with the Wisconsin Court of
Appeals. The Court of Appeals affirmed the dismissal of the Sierra
Club’s petition for judicial review. On April 27, 2007, Sierra Club
filed a second petition requesting a contested case hearing regarding the
March
28, 2007 permit language. WDNR granted Sierra Club’s second petition
for a contested case hearing. A hearing date, to the extent
necessary, has not yet been set by the Administrative Law Judge. In
addition, on April 27, 2007, Sierra Club also filed a second petition with
the
Dane County Circuit Court for judicial review of the Weston 4 air permit,
including the March 28, 2007 permit language. The second judicial
review proceeding has been stayed pending the outcome of the second contested
case hearing.
These
activities
did not stay the construction of the Weston 4 facility or the Administrative
Law
Judge's decision on the Weston 4 air permit. WPSC believes that it
has substantial defenses to the Sierra Club's appeal of the circuit court's
decision and does not expect these actions to stop
construction. However, until the Sierra Club's challenge is finally
resolved, Integrys Energy Group will not be able to make a final determination
of the probable cost impact, if any, of compliance with the revised Weston
4 air
permit on its future operating or construction costs.
Weston
Operating Permits
On
April 18 and April 26, 2005, WPSC notified the WDNR that the existing Weston
facility was not in compliance with certain provisions of the Title V air
operating permit that was issued to the facility in October
2004. These provisions include: (1) the particulate
emission limits applicable to the coal handling equipment; (2) the carbon
monoxide limit for Weston combustion turbines; and (3) the limitation on
the
sulfur content of the fuel oil stored at the Weston facility. On July
25, 2005, a Notice of Violation (“NOV”) was issued to WPSC by the WDNR alleging
various violations of the operating permit. In response to the NOV, a
compliance plan was submitted to the WDNR. Subsequently, stack
testing was performed, which indicated continuing exceedances of the particulate
limits from the coal handling equipment. On January 19, 2006,
WPSC received from the WDNR a Notice of Noncompliance seeking further
information by February 3, 2006, regarding the alleged noncompliance
event. On February 20, 2006, a NOV was issued regarding the fuel oil
issue, concerns over monitoring procedures, and the operation of baghouse
equipment. The WDNR referred the matter to the Wisconsin Attorney
General’s Office for resolution on April 11, 2007. WPSC has
undertaken corrective actions and is seeking to revise the applicable permit
limits.
In
early November 2006, it came to the attention of WPSC that previous ambient
air
quality computer modeling done by the WDNR for the Weston facility (and other
nearby air sources) did not take into account the emissions from the existing
Weston 3 facility for purposes of evaluating air quality increment consumption
under the required Prevention of Significant Deterioration (“PSD”)
analysis. For the PSD analysis, a baseline of emissions was
established in each area of the country which meets National Ambient Air
Quality
Standards, with a corresponding allowable increment of additional emissions
for
each regulated pollutant which, if permitted, would still ensure that the
air
quality in the area will not be degraded below the National
Standard. Each new air permit issued by the WDNR then uses up part of
the available increment for specific pollutants, and once, and so long as
the
total increment for any pollutant is exhausted, the WDNR cannot issue air
permits for any additional sources of that pollutant.
WPSC
continues to
investigate the situation as it relates to the Weston facility in connection
with the future Weston operating permit and is continuing to work with the
WDNR. WPSC may be required to make changes to the Weston facility
operating permits to address any modeling issues that may arise. To
the extent necessary, WDNR would have the ability under the Title V program
to
incorporate any such changes in a compliance plan. WPSC currently is
not able to make a final determination of the probable timing or cost impact
of
this issue, if any.
Mercury
and
Interstate Air Quality Rules
On
October 1, 2004, the mercury emission control rule became effective in Wisconsin
(Chapter NR 446). The rule requires WPSC to control annual system
mercury emissions in phases. The first phase will occur in 2008 and
2009. In this phase, the annual mercury emissions are capped at the
average annual system mercury emissions for the period 2002 through
2004. The next phase will run from 2010 through 2014 and requires a
40% reduction from average annual 2002 through 2004 mercury input
amounts. After 2015, a 75% reduction is required with a goal of an
80% reduction by 2018. The State of Wisconsin is currently proposing
revisions to the state’s air mercury rule in response to three separate but
related actions. They include promulgation of the federal Clean Air
Mercury Rule (“CAMR”) in May 2005, a directive from Wisconsin Governor Doyle in
August 2006 to further reduce mercury emissions, and a January 2007 Citizens
Petition requesting revision to Chapter NR 446. The draft rule
revisions contain provisions that may impact the cost of
compliance. However, following the public hearing and comment
process, those provisions may further change. Also, the State of
Wisconsin has filed suit against the federal government along with other
states
in opposition to the federal rule. WPSC estimates capital costs of
approximately $18 million to achieve the proposed reductions in the State’s
revised draft rule. The capital costs are expected to be recovered in
future rate cases.
In
March 2005, the EPA finalized the mercury "maximum achievable control
technology" standards and an alternative mercury "cap and trade" program,
CAMR,
modeled on the Clear Skies legislation initiative. The EPA also
finalized the Clean Air Interstate Rule (formerly known as the Interstate
Air
Quality Rule), which will reduce sulfur dioxide and nitrogen oxide emissions
from utility boilers located in 29 states, including Wisconsin, Michigan,
Pennsylvania, and New York.
The
final federal
mercury rule establishes New Source Performance Standards (“NSPS”) for new units
based upon the type of coal burned. Weston 4 will install and operate
mercury control technology, which will achieve a mercury emission rate that
meets the permit and NSPS for mercury.
The
final mercury
rule establishes a mercury cap and trade program, which requires a 21% reduction
in national mercury emissions in 2010 and a 70% reduction in national mercury
emissions beginning in 2018. Based on the final rule and current projections,
WPSC anticipates meeting the mercury rule cap and trade requirements and
does
not anticipate incurring additional costs beyond those to comply with the
current proposed revision to the Wisconsin rule.
The
final Clean Air
Interstate Rule requires reduction of sulfur dioxide and nitrogen oxide
emissions in two phases. The first phase requires about a 50%
reduction beginning in 2009 for nitrogen oxide and beginning in 2010 for
sulfur
dioxide. The second phase begins in 2015 for both pollutants and
requires about a 65% reduction in emissions. The rule allows the
State of Wisconsin to either require utilities
located
in the
state to participate in the EPA's interstate cap and trade program or meet
the
state's emission budget for sulfur dioxide and nitrogen oxide through measures
to be determined by the state. Wisconsin’s rule, which incorporates
the cap and trade approach, has completed the state legislative review and
has
been forwarded to the EPA for final review.
Currently,
WPSC is
evaluating a number of options that include using the cap and trade program
and/or installing controls. For planning purposes, it is assumed that
additional sulfur dioxide and nitrogen oxide controls will be needed on existing
units or the existing units will need to be converted to natural gas by
2015. The installation of any controls and/or any conversion to
natural gas will need to be scheduled as part of WPSC's long-term maintenance
plan for its existing units. As such, controls or conversions may
need to take place before 2015. On a preliminary basis and assuming
controls or conversion are required, WPSC estimates capital costs of
$238 million in order to meet an assumed 2015 compliance
date. This estimate is based on costs of current control technology
and current information regarding the final EPA rule. The costs may
change based on the requirements of the final state rules.
Manufactured
Gas Plant Remediation
WPSC
continues to
investigate the environmental cleanup of ten manufactured gas plant
sites. Cleanup of the land portion of the Oshkosh, Stevens Point,
Green Bay, Manitowoc, Menominee, and two Sheboygan sites in Wisconsin is
substantially complete. Groundwater treatment and/or monitoring at
these sites will continue into the future. Cleanup of the land
portion of three sites will be addressed in the future. River
sediment remains to be addressed at sites with sediment contamination, and
priorities will be determined in consultation with the EPA. The
additional work at the sites remains to be scheduled.
In
May 2006, WPSC transferred six sites with sediment contamination formally
under
WDNR jurisdiction to the EPA Superfund Alternative Sites Program. In
January 2007, a seventh site in Sheboygan was transferred to the EPA Superfund
Alternative Sites Program. Under the EPA's program, the remedy
decision will be based on risk-based criteria typically used at Superfund
sites. A schedule has been agreed to under which on-site
investigative work will commence in 2007. Three of WPSC’s
manufactured gas plant sites remain under state jurisdiction.
WPSC
estimated the
future undiscounted investigation and cleanup costs as of June 30, 2007, to
be approximately $68 million and has accrued this amount at June 30,
2007. WPSC may adjust these estimates in the future, contingent
upon remedial technology, regulatory requirements, remedy determinations,
and
the assessment of natural resource damages. WPSC expects to recover
actual cleanup costs, net of insurance recoveries, in future customer
rates. Under current PSCW policies, WPSC will not recover carrying
costs associated with the cleanup expenditures. WPSC has received
$15.6 million in insurance recoveries as of June 30, 2007, which were recorded
as a reduction in the regulatory asset.
Other
Environmental Issues
There
is increasing
concern over the issue of climate change and the effect of emissions of
greenhouse gases. WPSC management participates in national and state initiatives
aimed at mitigating greenhouse gas. WPSC is evaluating both the
technical and cost implications, which may result from a future greenhouse
gas
regulatory program. This evaluation indicates that it is probable
that any regulatory program that caps emissions or imposes a carbon tax will
increase costs for WPSC and its customers. At this time, there is no
commercially available technology for removing carbon dioxide from a pulverized
coal-fired plant, but significant research is in progress. Efforts
are underway within the utility industry to develop cleaner ways to burn
coal. The use of alternate fuels is also being explored by the
industry, but there are many cost and availability issues. Based on
the complexity and uncertainty of the climate issues,
a risk
exists that future carbon regulation will increase the cost of electricity
produced at coal-fired generation units. However, we believe the
capital expenditures we are making at our generation units are appropriate
under
any reasonable mandatory greenhouse gas program. WPSC will continue
to monitor and manage potential risks and opportunities associated with future
greenhouse gas regulatory actions.
Spent
Nuclear Fuel Disposal
The
federal
government is responsible for the disposal or permanent storage of spent
nuclear
fuel. The DOE is currently preparing an application to license a
permanent spent nuclear fuel storage facility in the Yucca Mountain area
of
Nevada. Spent nuclear fuel is currently being stored at the Kewaunee
Nuclear Power Plant formerly owned by WPSC.
The
United States
government through the DOE was under contract with WPSC for the pick up and
long-term storage of Kewaunee's spent nuclear fuel. Because the DOE
failed to begin scheduled pickup of the spent nuclear fuel, WPSC incurred
costs
for the storage of the spent nuclear fuel. WPSC is a participant in a suit
filed
against the federal government for breach of contract and failure to pick
up and
store the spent nuclear fuel. The case was filed on January 22, 2004,
in the United States Court of Federal Claims. The case has been
temporarily stayed until December 14, 2007.
In
July 2005, WPSC sold Kewaunee to a subsidiary of Dominion Resources,
Inc. Pursuant to the terms of the sale, Dominion has the right to
pursue the spent nuclear fuel claim, and WPSC will retain the contractual
right
to an equitable share of any future settlement or verdict. The total
amount of damages sought is unknown at this time.
Stray
Voltage Claims
The
PSCW has
established certain requirements regarding stray voltage for all utilities
subject to its jurisdiction. The PSCW has defined what constitutes
"stray voltage," established a level of concern at which some utility corrective
action is required, and set forth test protocols to be employed in evaluating
whether a stray voltage problem exists. However, in 2003, the Supreme
Court of Wisconsin ruled in Hoffmann v. WEPCO that a utility could be
found liable for damage from stray voltage even though the utility had complied
with the PSCW's requirements and no stray voltage problem existed as defined
by
the PSCW. Consequently, although WPSC believes it abides by the
applicable PSCW requirements, it is not immune from stray voltage
lawsuits.
From
time to time,
WPSC has been sued by dairy farmers who allege that they have suffered loss
of
milk production and other damages due to "stray voltage" from the operation
of
WPSC's electrical system. Past cases have been resolved without any
material adverse effect on the financial statements of WPSC. Two stray voltage
cases are now pending. The first case, Allen v. WPSC, resulted
in a June 2003 jury verdict in the plaintiff's favor. Both parties
appealed. In February 2005, the court of appeals affirmed the damage
verdict but remanded to the trial court for a determination of whether a
post-verdict injunction was warranted. WPSC paid the damages
verdict. On August 31, 2006, the parties settled the injunction
issues. This settlement does not resolve the entire case, because the
plaintiff has been permitted to file an amended complaint seeking money damages
allegedly suffered since June 2003. Trial is scheduled for October
30, 2007, in Green Bay, Wisconsin. The expert witnesses retained by
WPSC do not believe that there is any scientific evidence of a "stray voltage"
problem caused by WPSC on the plaintiff's land after
June 2003. Accordingly, WPSC intends to contest the plaintiff's
claim for money damages. The second case, Wojciehowski Brothers
Farms v. WPSC, was brought in Wisconsin in Marinette County. The case is
currently in discovery, and WPSC is vigorously defending the case. No
trial date has been set. One other case has been recently
resolved. Schmoker v. WPSC was brought in Wisconsin state
court in Winnebago County, and it has been settled well within WPSC's self
insured retention.
WPSC
has insurance
coverage for these pending claims, but the policies have customary self-insured
retentions per occurrence. Based upon the information known at this
time and the availability of insurance, WPSC believes that the total cost
to it
of resolving the pending actions will not be material.
NOTE 10--GUARANTEES
As
part of normal business, WPSC enters into various guarantees providing financial
or performance assurance to third parties.
Outstanding
Guarantees (Millions)
|
|
|
|
|
|
|
Standby
letters of credit
|
|
$ |
3.9
|
|
|
$ |
3.9
|
|
Other
guarantees
|
|
|
8.7
|
|
|
|
10.2
|
|
Total
guarantees
|
|
$ |
12.6
|
|
|
$ |
14.1
|
|
At
WPSC's request, financial institutions have issued $3.9 million in standby
letters of credit for the benefit of third parties that have extended credit
to
WPSC.
In
conjunction with the sale of Kewaunee, WPSC and Wisconsin Power and Light
Company agreed to indemnify Dominion for 70% of any and all reasonable costs
asserted or initiated against, suffered, or otherwise existing, incurred
or
accrued, resulting from or arising from the resolution of any design bases
documentation issues that are incurred prior to completion of Kewaunee's
scheduled maintenance period for 2009 up to a maximum exposure of
$15.0 million for WPSC and Wisconsin Power and Light Company
combined. WPSC believes that it will expend its share of costs
related to this indemnification and, as a result, initially recorded the
fair
value of the liability, or $8.9 million, as a component of the loss on the
sale of Kewaunee. As of June 30, 2007, WPSC has paid a total of
$4.1 million to Dominion related to this guarantee, reducing the liability
to $4.8. The liability recorded at December 31, 2006, for this
guarantee was $5.3 million.
A
guarantee was issued by WPSC to indemnify a third party for exposures related
to
the construction of utility assets. This amount is not reflected on
WPSC's Consolidated Balance Sheet, as this agreement was entered into prior
to
the effective date of FASB Interpretation No. 45. The maximum
exposure related to this guarantee was $3.9 million at June 30, 2007, and
$4.9 million at December 31, 2006, and is included in the above
table.
NOTE 11--EMPLOYEE
BENEFIT PLANS
The
following table
provides the components of net periodic benefit cost for WPSC's benefit plans
for the three months ended June 30:
|
|
Pension
Benefits
|
|
|
Other
Benefits
|
|
(Millions)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Net
periodic benefit cost
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
4.3
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Interest
cost
|
|
|
8.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
return on plan assets
|
|
|
(9.2 |
) |
|
|
(8.9 |
) |
|
|
(3.2 |
) |
|
|
(3.4 |
) |
Amortization
of transition obligation
|
|
|
-
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
Amortization
of prior-service cost (credit)
|
|
|
1.2
|
|
|
|
|
|
|
|
(0.5 |
) |
|
|
(0.5 |
) |
Amortization
of net loss
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
periodic
benefit cost
|
|
$ |
5.6
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
The
following table
provides the components of net periodic benefit cost for WPSC's benefit plans
for the six months ended June 30:
|
|
Pension
Benefits
|
|
|
Other
Benefits
|
|
(Millions)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Net
periodic benefit cost
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
9.1
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Interest
cost
|
|
|
17.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
return on plan assets
|
|
|
(18.2 |
) |
|
|
(18.0 |
) |
|
|
(6.4 |
) |
|
|
(6.4 |
) |
Amortization
of transition obligation
|
|
|
-
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
Amortization
of prior-service cost (credit)
|
|
|
2.3
|
|
|
|
|
|
|
|
(1.0 |
) |
|
|
(1.0 |
) |
Amortization
of net loss
|
|
|
2.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
periodic
benefit cost
|
|
$ |
12.5
|
|
|
$ |
13.3
|
|
|
$ |
|
|
|
$ |
|
|
WPSC
records
transition obligations, prior service costs (credits), and net losses that
have
not yet been recognized as a component of net periodic benefit cost as net
regulatory assets, pursuant to SFAS No. 71.
Contributions
to
the plans are made in accordance with legal and tax requirements and do not
necessarily occur evenly throughout the year. For the six months
ended June 30, 2007, $4.4 million of contributions were made to the pension
benefit plan, and no contributions were made to the other postretirement
benefit
plans. WPSC expects to contribute $21.0 million to its pension
plan and $13.4 million to its other postretirement benefit plans in the
remainder of 2007.
NOTE
12--STOCK-BASED COMPENSATION
WPSC
employees may
be granted awards under Integrys Energy Group's stock-based compensation
plans:
the 2007 Omnibus Incentive Compensation Plan ("2007 Omnibus Plan"), the 2005
Omnibus Incentive Compensation Plan (“2005 Omnibus Plan”), the 2001 Omnibus
Incentive Compensation Plan (“2001 Omnibus Plan”), and the 1999 Stock Option
Plan (“Employee Plan”). Under the provisions of the 2007 Omnibus
Plan, the number of shares of Integrys Energy Group stock that may be issued
in
satisfaction of plan awards may not exceed 3,500,000, and no more than 1,500,000
shares of stock can be granted as performance shares or restricted
stock. No additional awards will be issued under the 2005 Omnibus
Plan, the 2001 Omnibus Plan or the Employee Plan, although the plans will
continue to exist for purposes of the existing outstanding stock-based
compensation. The number of shares issuable under each of the
aforementioned stock-based compensation plans, each outstanding award, and
stock
option exercise prices are subject to adjustment, at Integrys Energy Group's
Board of Directors’ discretion, in the event of any stock split, stock dividend,
or other similar transaction. At June 30, 2007, stock options,
performance stock rights, and restricted shares were outstanding under the
aforementioned plans. Compensation cost associated with these awards
is allocated to WPSC and its affiliates based on the percentages used for
allocation of the award recipients' labor costs.
Stock
Options
The
fair value of
Integrys Energy Group stock option awards granted in May 2007 was estimated
using a binomial lattice model. No stock options were granted during
the six months ended June 30, 2006. The expected term of option
awards is calculated based on historical exercise behavior and represents
the
period of time that options granted are expected to be
outstanding. The risk-free interest rate is based on the United
States Treasury yield curve. The expected dividend yield incorporates
the Integrys Energy Group post-merger dividend rate as well as historical
dividend increase patterns. Integrys Energy Group's expected stock
price volatility was estimated using the 10-year historical
volatility. The following table shows the weighted-average fair value
along with the assumptions incorporated into the model:
|
May
2007 Grant
|
Weighted-average
fair value
|
$7.80
|
Expected
term
|
6.6
years
|
Risk-free
interest rate
|
4.65%
|
Expected
dividend yield
|
4.50%
|
Expected
volatility
|
17%
|
Total
pre-tax
compensation cost recognized by WPSC for stock options during the three and
six
months ended June 30, 2007, was $0.2 million and $0.3 million,
respectively. Total pre-tax compensation cost recognized by WPSC for
the three and six months ended June 30, 2006, was immaterial. The
total compensation cost capitalized was immaterial.
Performance
Stock Rights
The
fair value of
Integrys Energy Group performance stock rights granted in May 2007 was
estimated using a Monte Carlo valuation model, incorporating the assumptions
in
the table below. The risk-free interest rate is based on the United
States Treasury yield curve. The expected dividend yield incorporates
the Integrys Energy Group post-merger dividend rate as well as historical
dividend increase patterns. The expected volatility was estimated
using three years of historical data. No performance stock rights
were granted during the six months ended June 30, 2006.
|
May
2007 Grant
|
Expected
term
|
2.8
years
|
Risk-free
interest rate
|
4.71%
|
Expected
dividend yield
|
4.50%
|
Expected
volatility
|
14.50%
|
Pre-tax
compensation cost recorded by WPSC for Integrys Energy Group performance
stock
rights for the three and six months ended June 30, 2007 was $0.3 million
and $0.5 million, respectively. Pre-tax compensation cost recorded by
WPSC for performance stock rights for the three and six months ended
June 30, 2006, was $0.4 million and $0.9 million,
respectively. The total compensation cost capitalized during these
same periods was immaterial.
Restricted
Shares
During
the six
months ended June 30, 2007, $0.2 million of compensation cost was
recorded related to restricted Integrys Energy Group share awards.
NOTE 13--COMPREHENSIVE
INCOME
SFAS
No. 130,
"Reporting Comprehensive Income," requires the reporting of other comprehensive
income in addition to income available for common shareholders. Total
comprehensive income includes all changes in equity during a period except
those
resulting from investments by shareholders and distributions to
shareholders. WPSC's total comprehensive income was equivalent to its
net income for the three and six months ended June 30, 2007, and
2006.
(Millions)
|
|
|
|
|
|
$ |
(0.2 |
) |
Change
related to equity method investment
|
|
|
0.2
|
|
|
|
$ |
-
|
|
NOTE 14--REGULATORY
ENVIRONMENT
Wisconsin
The
PSCW approved
the merger of Integrys Energy Group (WPSC's parent) with PEC as of February
16,
2007. The merger approval order contains several
conditions. One condition is that WPSC will not have a base rate
increase for natural gas or electric service prior to
January 1, 2009. Under this condition, WPSC will be allowed
to adjust rates effective January 1, 2008, for changes in fuel costs related
to
electric generation due to changes in the NYMEX natural gas futures prices,
coal
prices, and transportation costs for coal. WPSC expects to make this
fuel cost filing in the third quarter of 2007, to be effective January 1,
2008. While WPSC had asked for authority to also adjust rates
effective January 1, 2008, for the change in transmission costs from 2007
to
2008, the PSCW did not provide that authority in this order. WPSC
will seek recovery of the increased transmission costs in the upcoming fuel
cost
filing. Another condition of the merger order required WPSC to seek
approval for the formation of a services company within 120 days of the closing
of the merger. On June 8, 2007, Integrys Energy Group and its
regulated utilities filed applications with the ICC, PSCW, MPUC, and MPSC
seeking necessary regulatory approvals or waivers associated with the formation
and operation of the services company. Other conditions imposed in
the order include no recovery of transaction costs in 2008 and 2009, recovery
of
transition costs in 2009 and later years limited to the verified synergy
savings
in those years, WPSC holding ratepayers harmless from any increase in interest
and preferred stock costs demonstrated to be attributable to nonutility
activities and provided that the authorized capital structure is consistent
with
the authorized costs, and WPSC not paying a dividend to Integrys Energy Group
in
an amount greater than 103% of the prior year's dividend.
On
January 11, 2007, the PSCW issued a final written order authorizing a retail
electric rate increase of $56.7 million (6.61%) and a retail natural gas
rate increase of $18.9 million (3.77%), effective
January 12, 2007. The 2007 rates reflect a 10.9% return on
common equity. The PSCW also approved a common equity ratio of 57.46%
in its regulatory capital structure. The 2007 retail electric
rate increase was required primarily because of increased costs associated
with
electric transmission, costs related to the construction of Weston 4 and
the
additional personnel to maintain and operate the plant, and costs to maintain
the Weston 2 generation unit and the De Pere Energy Center. The 2007
retail natural gas rate increase was driven by infrastructure improvements
necessary to ensure the reliability of the natural gas distribution system
and
costs associated with the remediation of former manufactured gas plant
sites.
As
part of its January 2007 final written order, the PSCW determined that it
was
reasonable for WPSC to continue to defer the MISO Day 2 charges associated
with
net congestion and financial transmission rights costs and revenues, and
the
cost differences between marginal losses and average losses through
2007. At June 30, 2007, WPSC had deferred $17.9 million of costs
related to these matters. We expect the PSCW to issue an order
addressing the recoverability of these costs sometime in the third quarter
of
2007. Under this order, costs deferred as of June 30, 2007, should be
recoverable based on this decision.
On
April 25, 2006, WPSC filed with the PSCW a stipulation agreement with various
interveners to refund a portion of the difference between fuel costs that
were
projected in the 2006 Wisconsin retail rate case and actual Wisconsin retail
fuel costs incurred from January 2006 through March 2006 as well as the
projected fuel savings in April through June 2006. This refund
resulted in a credit to customers' bills over the months of May 2006 to
August 2006. On October 2, 2006, WPSC filed for an additional refund
of $15.6 million to reflect additional fuel cost savings. The
PSCW approved this filing and ordered this amount to be refunded based on
November and December usage. Customer refunds of
$28.6 million were made in 2006, related to the stipulation
agreement. On March 16, 2007, the PSCW approved a refund to WPSC
retail electric customers of $14.5 million. This refund had been
accrued at December 31, 2006. The refund resulted in a credit to
customers’ bills over the period mid-March to mid-April. At
June 30, 2007, a regulatory liability of $1.8 million remained to be
refunded to customers in 2008.
On
December 22, 2005, the PSCW issued a final written order authorizing a retail
electric rate increase of $79.9 million (10.1%) and a retail natural gas
rate increase of $7.2 million (1.1%), effective
January 1, 2006. The
2006 rates reflect an 11.0% return on common equity. The PSCW also
approved a common equity ratio of 59.7% in its regulatory capital structure.
The
2006 retail electric rate increase was required primarily because of higher
fuel
and purchased power costs (including costs associated with the Fox Energy
Center
power purchase agreement), and also for costs related to the construction
of
Weston 4, higher transmission expenses, and recovery of a portion of the
costs related to the 2005 Kewaunee outage. Partially offsetting the
items discussed above, retail electric rates were lowered to reflect a refund
to
customers in 2006 of a portion of the proceeds received from the liquidation
of
the nonqualified decommissioning trust fund as a result of the sale of
Kewaunee. The 2006 retail natural gas rate increase was driven by
infrastructure improvements necessary to ensure the reliability of the natural
gas distribution system.
In
WPSC's 2006 rate case (discussed above), the PSCW ruled that the deferred
assets
and liabilities related to the Kewaunee matters should be treated separately
and
determined that Wisconsin retail customers were entitled to be refunded
approximately 85%, or $108 million, of the total $127.1 million of
proceeds received from the liquidation of the nonqualified decommissioning
trust
fund over a two-year period beginning on January 1, 2006 (in addition to
the
refund of carrying costs on the unamortized balance at the authorized pre-tax
weighted average cost of capital). In 2005, the MPSC ruled that
WPSC's Michigan customers were entitled to be refunded approximately 2% of
the
proceeds received from the liquidation of the nonqualified decommissioning
fund
over a 60-month period. Refunding to Michigan customers began in the
third quarter of 2005. In December 2006, the MPSC issued an order
authorizing WPSC to amortize the approximately $2 million balance of the
Michigan portion of the Kewaunee nonqualified decommissioning trust fund
simultaneously with the amortization of approximately $2 million of the
2005 power supply under collections from January 2007 through July
2010. Wholesale customers will receive approximately 13% of the
proceeds received from the liquidation of the nonqualified decommissioning
fund.
On
August 8, 2005, the FERC accepted the proposed refund plan for filing and
implemented the plan effective January 1, 2006, subject to refund upon final
resolution. Settlement discussions between WPSC and wholesale parties
contesting WPSC's refund plan were held both in the fourth quarter of 2005
and
in the first quarter of 2006, and a final agreement was reached with one
FERC
customer in the second quarter of 2006. A refund of approximately
$3 million was made to this customer, offset by a payment received from
this customer of approximately $1 million related to both the loss WPSC
recorded on the sale of Kewaunee and costs incurred related to the 2005 Kewaunee
outage. In the fourth quarter of 2006 a final agreement was reached
between WPSC and the remaining FERC customers to resolve all Kewaunee related
issues, which included the loss on the sale of Kewaunee, the outage costs
related to the 2005 Kewaunee outage, and the refund of the non-qualified
decommissioning trust fund. Based upon this resolution, in December
2006, the FERC Administrative Law Judge certified the settlement as
uncontested. WPSC expects the FERC to issue a final order approving
this settlement in the third quarter of 2007. Pursuant to the
settlement, WPSC will be required to make a lump-sum payment to the remaining
FERC customers of approximately $14 million representing their
contributions to the non-qualified decommissioning trust fund during the
period
in which they received service from WPSC. The settlement would also
require these FERC customers to make two separate lump-sum payments to WPSC
with
respect to the loss from the sale of Kewaunee and the 2005 Kewaunee power
outage. The payments to WPSC total approximately $1 million and
$9 million, respectively, and will be netted against the $14 million
refund due to these customers within 30 days following the FERC's acceptance
of
the settlement.
At
June 30, 2007, WPSC had a $28.6 million regulatory liability
representing the amount of proceeds received from the liquidation of the
nonqualified decommissioning trust fund remaining to be refunded in
2007.
On
February 20, 2005, Kewaunee was temporarily removed from service after a
potential design weakness was identified in its auxiliary feedwater
system. On March 17, 2005, the PSCW authorized WPSC to defer
replacement fuel costs related to the outage. On April 8, 2005, the
PSCW approved deferral of the operating and maintenance costs, including
carrying costs at the most recently authorized pre-tax weighted average cost
of
capital. In the order granted for WPSC's 2006 rate case, which
was
finalized
on
December 22, 2005 (discussed above), the PSCW determined that it was reasonable
for WPSC to recover all deferred costs related to the 2005 Kewaunee forced
outage over a five-year period, beginning on January 1, 2006, including carrying
costs on the unamortized balance at the composite short-term debt
rate. Because the PSCW had initially approved deferral of carrying
costs based upon the weighted average cost of capital, WPSC was required
to
write-off $2.2 million of carrying costs in the fourth quarter of
2005. WPSC also filed with the FERC for approval to defer these costs
in the wholesale jurisdiction and the issue was resolved as part of the
settlement discussed above. For WPSC's Michigan retail customers,
fuel costs are recovered through the Michigan fuel adjustment clause and
no
deferral request was needed. At June 30, 2007,
$34.3 million was left to be collected from WPSC’s retail customers related
to this outage.
In
May 2005, WPSC received notification from its coal transportation suppliers
that
extensive maintenance was required on the railroad tracks that lead into
and out
of the Powder River Basin. The extensive maintenance ended on
November 23, 2005. During the maintenance efforts, WPSC received
approximately 87% of the expected coal deliveries. WPSC took steps to
conserve coal usage and secured alternative coal supplies at its affected
generation facilities during that time. On
September 23, 2005, the PSCW approved WPSC's request for deferred
treatment of the incremental fuel costs resulting from the coal supply
issues. As of June 30, 2007, $4.9 million was deferred
related to this matter. These costs were addressed in WPSC's 2007
retail electric rate case and will be recoverable in 2007 and 2008.
Federal
Through
a series of
orders issued by the FERC, Regional Through and Out Rates for transmission
service between the MISO and the Pennsylvania, New Jersey, Maryland
Interconnection were eliminated effective December 1, 2004. To
compensate transmission owners for the revenue they will no longer receive
due
to this rate elimination, the FERC ordered a transitional pricing mechanism
called the Seams Elimination Charge Adjustment (“SECA”) to be put into
place. Load-serving entities paid these SECA charges during a
16-month transition period from December 1, 2004, through March 31,
2006.
WPSC
has intervened
and protested a number of proposals regarding SECA submitted to the FERC
because
they believe those proposals could result in unjust, unreasonable, and
discriminatory charges for customers. It is anticipated that most of
the SECA rate charges incurred by WPSC and any refunds will be passed on
to
customers through rates. WPSC has reached a settlement in principle
with American Electric Power and Commonwealth Edison, which was certified
by the
settlement judge and now awaits approval by the FERC along with dozens of
other
full and partial settlements. Under the terms of the settlement
agreement, American Electric Power and Commonwealth Edison will refund almost
$1 million of the approximately $4 million of SECA charges paid by
WPSC during the transition period. If FERC does not approve this
settlement, which is deemed unlikely, WPSC has reserved its rights to challenge
various issues in SECA which were not settled by the hearings. WPSC
has also reserved its rights to challenge any briefs on exception to the
Initial
Decision and the FERC's final order in this case if the settlement is not
approved.
NOTE 15--SEGMENTS
OF BUSINESS
WPSC
manages its
reportable segments separately due to their different operating and regulatory
environments. Its principal business segments are the regulated
electric utility operations and the regulated natural gas utility
operations. The tables below present information for the respective
years pertaining to the operations of WPSC segmented by lines of
business.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulated
Utilities
|
|
|
|
|
|
|
|
|
|
|
Segments
of Business
(Millions)
|
|
Electric
Utility(1)
|
|
|
Natural
Gas
Utility(1)
|
|
|
Total
Utility
|
|
|
Other(2)
|
|
|
Reconciling
Eliminations
|
|
|
WPSC
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External
revenues
|
|
$ |
275.6
|
|
|
$ |
77.9
|
|
|
$ |
353.5
|
|
|
$ |
0.3
|
|
|
$ |
(0.3 |
) |
|
$ |
353.5
|
|
Depreciation
and amortization expense
|
|
|
18.9
|
|
|
|
5.7
|
|
|
|
24.6
|
|
|
|
|
|
|
|
(0.2 |
) |
|
|
24.6
|
|
Miscellaneous
income
|
|
|
1.3
|
|
|
|
0.1
|
|
|
|
1.4
|
|
|
|
|
|
|
|
-
|
|
|
|
4.7
|
|
Interest
expense
|
|
|
7.0
|
|
|
|
2.7
|
|
|
|
9.7
|
|
|
|
|
|
|
|
-
|
|
|
|
10.7
|
|
Provision
(benefit) for income taxes
|
|
|
7.8
|
|
|
|
(1.1 |
) |
|
|
6.7
|
|
|
|
|
|
|
|
-
|
|
|
|
8.3
|
|
Preferred
stock dividends of subsidiary
|
|
|
0.6
|
|
|
|
0.2
|
|
|
|
0.8
|
|
|
|
|
|
|
|
-
|
|
|
|
0.8
|
|
Income
(loss) available for common
shareholders
|
|
|
14.1
|
|
|
|
(0.2 |
) |
|
|
13.9
|
|
|
|
(0.1 |
) |
|
|
-
|
|
|
|
13.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months
Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External
Revenues
|
|
$ |
238.9
|
|
|
$ |
68.0
|
|
|
$ |
306.9
|
|
|
$ |
|
|
|
$ |
(0.3 |
) |
|
$ |
306.9
|
|
Depreciation
and amortization expense
|
|
|
18.3
|
|
|
|
5.6
|
|
|
|
23.9
|
|
|
|
|
|
|
|
(0.2 |
) |
|
|
23.9
|
|
Miscellaneous
income
|
|
|
0.6
|
|
|
|
-
|
|
|
|
0.6
|
|
|
|
|
|
|
|
-
|
|
|
|
6.0
|
|
Interest
expense
|
|
|
6.3
|
|
|
|
2.3
|
|
|
|
8.6
|
|
|
|
|
|
|
|
-
|
|
|
|
9.2
|
|
Provision
(benefit) for income taxes
|
|
|
13.4
|
|
|
|
(1.1 |
) |
|
|
12.3
|
|
|
|
|
|
|
|
-
|
|
|
|
13.7
|
|
Preferred
stock dividends of subsidiary
|
|
|
0.6
|
|
|
|
0.2
|
|
|
|
0.8
|
|
|
|
-
|
|
|
|
-
|
|
|
|
0.8
|
|
Income
(loss)
available for common shareholders
|
|
|
23.7
|
|
|
|
(2.2 |
) |
|
|
21.5
|
|
|
|
|
|
|
|
-
|
|
|
|
25.1
|
|
(1)
|
Includes
only
utility operations.
|
(2)
|
Nonutility
operations are included in the Other
column.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulated
Utilities
|
|
|
|
|
|
|
|
|
|
|
Segments
of Business
(Millions)
|
|
Electric
Utility(1)
|
|
|
Natural
Gas
Utility(1)
|
|
|
Total
Utility
|
|
|
Other(2)
|
|
|
Reconciling
Eliminations
|
|
|
WPSC
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External
revenues
|
|
$ |
544.4
|
|
|
$ |
268.7
|
|
|
$ |
813.1
|
|
|
$ |
|
|
|
$ |
(0.7 |
) |
|
$ |
813.1
|
|
Depreciation
and amortization expense
|
|
|
37.8
|
|
|
|
11.4
|
|
|
|
49.2
|
|
|
|
|
|
|
|
(0.3 |
) |
|
|
49.2
|
|
Miscellaneous
income
|
|
|
2.2
|
|
|
|
0.2
|
|
|
|
2.4
|
|
|
|
|
|
|
|
-
|
|
|
|
8.3
|
|
Interest
expense
|
|
|
14.3
|
|
|
|
5.6
|
|
|
|
19.9
|
|
|
|
|
|
|
|
-
|
|
|
|
21.6
|
|
Provision
for income taxes
|
|
|
16.9
|
|
|
|
10.1
|
|
|
|
27.0
|
|
|
|
|
|
|
|
-
|
|
|
|
28.5
|
|
Preferred
stock dividends of subsidiary
|
|
|
1.1
|
|
|
|
0.5
|
|
|
|
1.6
|
|
|
|
|
|
|
|
-
|
|
|
|
1.6
|
|
Income
available for common
shareholders
|
|
|
28.4
|
|
|
|
15.7
|
|
|
|
44.1
|
|
|
|
|
|
|
|
-
|
|
|
|
46.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months
Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External
Revenues
|
|
$ |
468.3
|
|
|
$ |
261.0
|
|
|
$ |
729.3
|
|
|
$ |
|
|
|
$ |
(0.7 |
) |
|
$ |
729.3
|
|
Depreciation
and amortization expense
|
|
|
36.3
|
|
|
|
11.1
|
|
|
|
47.4
|
|
|
|
|
|
|
|
(0.3 |
) |
|
|
47.4
|
|
Miscellaneous
income
|
|
|
1.0
|
|
|
|
0.1
|
|
|
|
1.1
|
|
|
|
|
|
|
|
-
|
|
|
|
9.1
|
|
Interest
expense
|
|
|
13.0
|
|
|
|
4.7
|
|
|
|
17.7
|
|
|
|
|
|
|
|
-
|
|
|
|
19.2
|
|
Provision
for
income taxes
|
|
|
21.4
|
|
|
|
5.4
|
|
|
|
26.8
|
|
|
|
|
|
|
|
-
|
|
|
|
28.7
|
|
Preferred
stock dividends of subsidiary
|
|
|
1.0
|
|
|
|
0.6
|
|
|
|
1.6
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1.6
|
|
Income
available for common shareholders
|
|
|
37.8
|
|
|
|
8.5
|
|
|
|
46.3
|
|
|
|
|
|
|
|
-
|
|
|
|
51.3
|
|
(1) Includes
only utility operations.
(2) Nonutility
operations are included in the Other column.
NOTE 16--NEW
ACCOUNTING PRONOUNCEMENTS
In
September 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements". SFAS No. 157 defines fair value, establishes a
framework for measuring fair value under generally accepted accounting
principles, and expands disclosures about fair value
measurements. SFAS No. 157 emphasizes that fair value is a
market-based measurement, not an entity-specific measurement, and states
that a
fair value measurement should be determined based on the assumptions that
market
participants would use in pricing the asset or liability. The
standard eliminates the current requirement for deferring "day one" gains
on
energy contracts that are not evidenced by quoted market prices or other
current
market transactions. The standard is effective for WPSC beginning
January 1, 2008. We are currently evaluating the impact that SFAS No.
157 will have on our financial statements.
In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities." This standard permits
entities to choose to measure many financial instruments and certain other
items
at fair value, following the provisions of SFAS No. 157. Included
within the scope of the standard are all recognized financial assets and
financial liabilities, except consolidated investments, consolidated interests
in a variable interest entity, obligations for pension and certain other
benefits, leases, and financial instruments that are classified as a component
of shareholder's equity. Also included in the scope of the standard are firm
commitments that would otherwise not be recognized at inception and that
involve
only financial instruments, nonfinancial insurance contracts and warranties
that
the insurer can settle by paying a third party to provide those goods or
services, and host financial instruments resulting from separation of an
embedded nonfinancial derivative instrument from a nonfinancial hybrid
instrument. SFAS No. 159 is effective for WPSC beginning January 1,
2008. We are currently evaluating the impact that SFAS No. 159 will
have on our financial statements.
Item
2.
|
|
|
CONDITION
AND RESULTS OF OPERATIONS
|
INTRODUCTION
WPSC,
a
wholly-owned subsidiary of Integrys Energy Group, Inc., is a regulated electric
and natural gas utility. WPSC derives revenues primarily from the
purchase, production, distribution, and sale of electricity and the purchase,
distribution, and sale of natural gas to retail customers. WPSC also
provides wholesale electric service to numerous utilities and cooperatives
for
resale.
Strategic
Overview
The
focus of WPSC's
business plan is to create long-term value for shareholders and customers
through growth, operational excellence, customer focus, asset management,
risk
management, and the continued emphasis on reliable, competitively priced,
and
environmentally sound energy and energy related services. A
discussion of the essential components of our business strategy is set forth
below.
Maintain
and Grow a Strong Regulated Utility Base– WPSC is focusing on
continued growth in regulated operations. A strong regulated utility
base is important in order to maintain a strong balance sheet, predictable
cash
flows, a desired risk profile, attractive dividends, and quality credit ratings,
which are critical to the success of WPSC and Integrys Energy
Group. WPSC believes the following recent developments have helped,
or will help, maintain and grow its regulated utility base:
·
|
WPSC
is
expanding its regulated generation fleet in order to meet growing
electric
demand and ensure continued reliability. Construction of the
500-megawatt coal-fired Weston 4 base-load power plant located near
Wausau, Wisconsin, continues in partnership with DPC and the plant
is
expected to be commercially operational by June
2008.
|
|
|
·
|
WPSC
continues to invest in environmental projects to improve air quality
and
meet the requirements set by environmental regulators. Capital
projects to construct and upgrade equipment to meet or exceed required
environmental standards are planned each year.
|
|
|
·
|
To
help meet
renewable energy requirements, WPSC is looking to build or buy
a wind
generation facility of approximately 100 megawatts of nameplate
capacity
within the footprint of the MISO.
|
|
|
·
|
WPSC
continues to upgrade electric and natural gas distribution facilities,
related systems, and processes to enhance safety, reliability,
and value
for customers and shareholders.
|
|
|
·
|
For
more
detailed information on WPSC's capital expenditure program see
"Liquidity and Capital Resources, Capital Requirements,"
below.
|
Integrate
Resources to Provide Operational Excellence and Customer Focus–
WPSC is committed to integrating resources and finding the
best, most efficient
processes while maintaining any and all applicable regulatory and legal
restrictions. Through innovative ideas, embracing change, leveraging
individual capabilities and expertise and utilizing creative solutions to
meet
and exceed our customer's expectations, we will contribute value to Integrys
Energy Group's shareholders as well as our customers and assist in lowering
costs for certain activities.
·
|
At
WPSC, we
are optimally sourcing work and combining resources to achieve
best
practices in order to achieve operational excellence and sustainable
value
for customers and Integrys Energy Group shareholders.
|
|
|
·
|
An
initiative
we call "Competitive Excellence" is being deployed across
WPSC. Competitive Excellence strives to eliminate work that
does not provide value for customers. This will create more
efficient processes, improve the effectiveness of employees, and
reduce
costs.
|
Place
Strong Emphasis on Asset and Risk Management– Our asset
management strategy calls for the continuous assessment of our existing assets
as well as a focus on the acquisition of assets that complement our existing
business and strategy. This strategy also calls for a focus on the
disposition of assets, which are either no longer strategic to ongoing
operations, are not performing as needed, or the disposition of which would
reduce our risk profile. We maintain a portfolio approach to risk and
earnings. We continue to evaluate alternatives for the sale of real
estate holdings we have identified as no longer needed for our
operations.
Our
risk management
strategy, in addition to asset risk management, includes the management of
market, credit, and operational risk through the normal course of
business. Forward purchases and sales of electric capacity, energy,
natural gas, and other commodities allow for opportunities to secure prices
in a
volatile energy market. We have also implemented formula based market
tariffs to manage risk in the wholesale market.
Continued
Emphasis on Safe, Reliable, Competitively Priced, and Environmentally Sound
Energy and Energy Related Services – WPSC's mission is
the same as Integrys Energy Group's, to provide customers with the best value
in
energy and related services. By effectively operating a mixed
portfolio of generation assets and investing in new generation, while
maintaining or exceeding environmental standards, we are able to provide
a safe,
reliable, and value priced service to our customers. We concentrate
our efforts on improving and operating efficiently and effectively in order
to
reduce costs and maintain a low risk profile. We actively evaluate
opportunities for adding more renewable generation to provide additional
environmentally sound energy to our portfolio.
·
|
Contract
administration and formal project management tools have enabled
us to
better manage the costs of our construction expenditure
program. These cost reduction initiatives help us provide
competitively priced energy and energy related
services.
|
|
|
·
|
NatureWise®,
our renewable energy program, was recently selected as one of the
top ten
renewable energy programs in the United States for 2006 by the
DOE's
National Renewable Energy Laboratory.
|
|
|
·
|
WPSC's
website was recently named among the top 25 websites for small-
to
mid-size businesses in 2007 by E Source, an information services
company
based in Colorado that provides unbiased independent analysis of
retail
energy markets, services, and technologies. This recognition
demonstrates that WPSC is focused on meeting customers' needs and
providing services they value.
|
|
|
·
|
We
manage our
operations to minimize the impact we might have on the
environment. Our new Weston 4 facility will be one of the most
efficient generating units in the country with state-of-the-art
environmental controls and will allow us to reduce the amount of
emissions
produced for each megawatt-hour of electricity that we
generate. We also expect to maintain or decrease the amount of
greenhouse gases released per megawatt-hour generated, and support
research and development initiatives that will enable further progress
toward decreasing our carbon footprint.
|
|
|
·
|
By
effectively operating a mixed portfolio of generation assets and
investing
in new generation, like Weston 4, WPSC is helping to ensure continued
reliability for our customers.
|
RESULTS
OF
OPERATIONS
Electric
operations
accounted for approximately 67% of WPSC's revenue for the six months ended
June 30, 2007, while natural gas operations accounted for approximately 33%
of WPSC's revenue for the six months ended June 30, 2007.
Second
Quarter 2007 Compared with Second Quarter 2006
Overview
WPSC's
earnings on
common stock for the quarters ended June 30 are shown in the following
table:
Results
(Millions)
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
on
common stock
|
|
$ |
13.8
|
|
|
$ |
25.1
|
|
|
|
(45.0 |
%) |
WPSC's
earnings on
common stock decreased $11.3 million quarter-over-quarter, to
$13.8 million for the quarter ended June 30, 2007, from
$25.1 million for the quarter ended June 30, 2006. As discussed
in more detail below, electric operations had the largest impact on earnings
at
WPSC for the quarter ended June 30, 2007, compared with the same period in
2006.
·
|
Electric
utility earnings decreased $9.6 million, from earnings of
$23.7 million for the quarter ended June 30, 2006, to earnings
of $14.1 million for quarter ended June 30,
2007. WPSC's earnings were negatively impacted by fuel and
purchased power costs that were higher than what was recovered
in rates
during the quarter ended June 30, 2007, compared with fuel and
purchased power costs that were less than what was recovered in
rates
during the same quarter in 2006, driving a $0.6 million quarter-over
quarter decrease in the electric margin decrease at WPSC. For
the quarter ended June 30, 2007, fuel and purchased power prices were
above what was projected in the 2007 rate case primarily due to
higher
commodity costs and unplanned plant outages (which required WPSC
to
purchase higher cost power in the market to serve its
customers). The decrease in WPSC's margin (driven by high fuel
costs), combined with increased operating and maintenance expenses
negatively impacted quarter-over-quarter earnings. Fuel and
purchased power costs are forecasted to be lower than what will
be
recovered in rates during the second half of the year, which should
have a
positive impact on electric utility margin during that
period. Also, the increase in maintenance costs for the planned
outages was recorded as these costs were incurred, while rate recovery
for
these costs occurs over the entire year (mainly during the third
quarter
cooling season). Therefore, the majority of rate recovery
related to the increase in maintenance costs for the planned outages
is
expected to occur during the second half of the year, positively
impacting
earnings during that period.
|
|
|
·
|
Natural
gas
utility operations at WPSC improved $2.0 million, from a loss of
$2.2 million for the quarter ended June 30, 2006, to a loss of
$0.2 million for the quarter ended June 30, 2007. Improved
financial results at WPSC were driven by a retail natural gas rate
increase in 2007 and higher sales volumes, primarily related to
a 9.1%
quarter-over-quarter increase in heating degree days.
|
|
|
·
|
Nonutility
financial results decreased $3.7 million, from earnings of
$3.6 million for the quarter ended June 30, 2006, to a loss of
$0.1 for the quarter ended June 30, 2007, driven primarily by a $1.3
million gain on the sale of WPSC's interest (through a related
party) in
Guardian Pipeline, LLC, which was recognized in the second quarter
of
2006. WPSC also experienced a decrease in quarter-over-quarter
equity earnings from WPSC's investment in Wisconsin River Power
Company. The decrease in equity earnings from Wisconsin River
Power Company was primarily related to a decrease in land sales
in the
second quarter of 2007, compared with the second quarter of
2006.
|
Electric
Utility Operations
|
|
Three
Months Ended June 30,
|
|
Electric
Utility Results (Millions)
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
275.6
|
|
|
$ |
238.9
|
|
|
|
15.4 |
% |
Fuel
and
purchased power
|
|
|
144.9
|
|
|
|
107.6
|
|
|
|
34.7 |
% |
Margin
|
|
$ |
130.7
|
|
|
$ |
131.3
|
|
|
|
(0.5 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
in kilowatt-hours
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
660.7
|
|
|
|
636.4
|
|
|
|
3.8 |
% |
Commercial
and industrial
|
|
|
2,024.9
|
|
|
|
1,945.7
|
|
|
|
4.1 |
% |
Wholesale
|
|
|
922.1
|
|
|
|
891.8
|
|
|
|
3.4 |
% |
Other
|
|
|
7.3
|
|
|
|
7.3
|
|
|
|
- |
% |
Total
sales in kilowatt-hours
|
|
|
3,615.0
|
|
|
|
3,481.2
|
|
|
|
3.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weather
|
|
|
|
|
|
|
|
|
|
|
|
|
Heating
degree days – actual
|
|
|
850
|
|
|
|
779
|
|
|
|
9.1 |
% |
Cooling
degree days – actual
|
|
|
204
|
|
|
|
123
|
|
|
|
65.9 |
% |
Electric
utility
revenue increased $36.7 million (16.3%) for the three months ended
June 30, 2007, compared with the same period in 2006, driven by the
following:
·
|
In
January
2007, the PSCW issued a final written order to WPSC authorizing
a retail
electric rate increase of $56.7 million (6.6%), effective
January 12, 2007, for Wisconsin electric
customers. This retail electric rate increase was required
primarily because of increased costs associated with electric
transmission, costs related to the construction of Weston 4 (including
the
training of additional personnel to maintain and operate the facility),
and costs for major overhauls at Weston 2 and the De Pere Energy
Center.
|
|
|
·
|
Sales
volumes
increased 3.8%, primarily related to a 3.8% increase in sales volumes
to
residential customers and a 4.1% increase in sales volumes to commercial
and industrial customers. The increase in sales volumes to
residential customers was driven by a 65.9% quarter-over-quarter
increase
in cooling degree days and a 9.1% quarter-over-quarter increase
in heating
degree days (a portion of heating load is electric). Volumes to
commercial and industrial customers increased due to higher demand
from
existing customers.
|
The
electric
utility margin decreased $0.6 million (0.5%) for the three months ended
June 30, 2007, compared with the same period in 2006. The
decrease in WPSC's electric margin was driven by fuel and purchased power
costs
that were higher than what was recovered in rates during the quarter ended
June 30, 2007, compared with fuel and purchased power costs that were less
than what was recovered in rates during the same quarter in 2006. For
the quarter ended June 30, 2007, fuel and purchased power prices were above
what was projected in the 2007 rate case primarily due to higher commodity
costs
and unplanned plant outages (which required WPSC to purchase higher cost
power
in the market to serve its customers). On a per-unit basis, fuel and
purchased power costs were approximately 25% higher during the three months
ended June 30, 2007, compared with the same period in
2006. Partially offsetting the decrease in WPSC's electric utility
margin related to fuel and purchased power costs, WPSC's margin was positively
impacted by rate increases (primarily required to support higher operating
expenses) and higher residential and commercial and industrial electric sales
volumes as favorable weather conditions during both the heating and cooling
seasons positively impacted margin by an estimated
$4 million. However, because of the decrease in WPSC's electric
margin (driven by high fuel costs), combined with increased operating and
maintenance expenses, quarter-over-quarter earnings were negatively
impacted.
Natural
Gas
Utility Operations
|
|
Three
Months Ended June 30,
|
|
Natural
Gas Utility Results (Millions)
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
77.9
|
|
|
$ |
68.0
|
|
|
|
14.6 |
% |
Natural
gas
purchase costs
|
|
|
50.6
|
|
|
|
44.2
|
|
|
|
14.5 |
% |
Margins
|
|
$ |
27.3
|
|
|
$ |
23.8
|
|
|
|
14.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Throughput
in therms
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
33.2
|
|
|
|
30.0
|
|
|
|
10.7 |
% |
Commercial
and industrial
|
|
|
18.3
|
|
|
|
15.0
|
|
|
|
22.0 |
% |
Interruptible
|
|
|
4.5
|
|
|
|
5.7
|
|
|
|
(21.1 |
%) |
Interdepartmental
|
|
|
9.7
|
|
|
|
4.4
|
|
|
|
120.5 |
% |
Transport
|
|
|
76.0
|
|
|
|
73.7
|
|
|
|
3.1 |
% |
Total
sales in therms
|
|
|
141.7
|
|
|
|
128.8
|
|
|
|
10.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weather
|
|
|
|
|
|
|
|
|
|
|
|
|
Heating
degree days – actual
|
|
|
850
|
|
|
|
779
|
|
|
|
9.1 |
% |
WPSC's
natural gas
utility revenue increased $9.9 million (14.6%), from $68.0 million for
the three months ended June 30, 2006, to $77.9 million for the
same period in 2007 driven by a retail natural gas rate increase and a 10.0%
increase in natural gas throughput volumes. On January 11, 2007, the
PSCW issued a final written order to WPSC authorizing a retail natural gas
rate
increase of $18.9 million (3.8%), effective
January 12, 2007. This retail natural gas rate increase was
required for infrastructure improvements necessary to ensure the reliability
of
the natural gas distribution system and costs associated with the remediation
of
former manufactured gas plant sites. The increase in natural gas
throughput volumes was driven by a 10.7% increase in residential volumes
and a
10.1% increase in commercial and industrial and interruptible
volumes. The increase in sales volumes to residential customers was
driven by a 9.1% quarter-over-quarter increase in heating degree days and
a 2.9%
quarter-over-quarter increase in the average weather-normalized natural gas
usage per customer.
WPSC's
natural gas
margin increased $3.5 million (14.7%), from $23.8 million in the
second quarter of 2006, to $27.3 million in the second quarter of
2007. As discussed in more detail above, the increase in WPSC's
margin was driven by the retail natural gas rate increase (primarily required
to
support higher operating expenses), and an increase in throughput volumes
to
higher margin residential and commercial and industrial
customers. While the margin impact of the quarter-over-quarter
increase in average weather-normalized sales volumes is difficult to quantify,
the colder weather conditions contributed approximately an additional
$1 million to WPSC's margin.
Operating
Expenses
|
|
Three
Months Ended June 30,
|
|
Operating
Expenses (Millions)
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
Operating
and
maintenance expense
|
|
$ |
93.6
|
|
|
$ |
77.8
|
|
|
|
20.3 |
% |
Depreciation
and amortization expense
|
|
|
24.6
|
|
|
|
23.9
|
|
|
|
2.9 |
% |
Taxes
other
than income taxes
|
|
|
11.2
|
|
|
|
10.9
|
|
|
|
2.8 |
% |
Operating
and
Maintenance Expense
Operating
and
maintenance expenses increased $15.8 million for the quarter ended
June 30, 2007, compared with the same quarter in 2006. The
following items were the most significant contributors to the change in
operating and maintenance expense at WPSC:
·
|
Maintenance
expenses at WPSC increased $6.3 million, primarily due to major
overhauls planned at the Weston 2 generation station and the De
Pere
Energy Center and due to three unplanned outages at the Weston
3
generation station.
|
|
|
·
|
Electric
transmission expenses at WPSC increased $4.5 million, primarily
related to higher rates charged by MISO and ATC due to additional
transmission investment, a trend WPSC expects will
continue.
|
|
|
·
|
WPSC
was
allocated external costs to achieve merger synergies of $1.0 million
in the second quarter of 2007.
|
|
|
·
|
The
remaining
increase in operating and maintenance expense at WPSC was related
to an
increase in wages and benefit costs
|
|
|
Three
Months Ended June 30,
|
|
Other
income (expense) (Millions)
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
Miscellaneous
income
|
|
$ |
4.7
|
|
|
$ |
6.0
|
|
|
|
(21.7 |
%) |
Interest
expense
|
|
|
(10.7 |
) |
|
|
(9.2 |
) |
|
|
16.3 |
% |
Miscellaneous
income
The
$1.3 million decrease in miscellaneous income for the quarter ended
June 30, 2007, compared with the same quarter in 2006, was driven primarily
by a $1.3 million gain on the sale of WPSC's interest in Guardian Pipeline,
LLC,
which was recognized in the second quarter of 2006. WPSC also
experienced a decrease in quarter-over-quarter equity earnings from WPSC's
investment in Wisconsin River Power Company. These items were
partially offset by interest income received from ATC related to the
transmission interconnection WPSC is constructing on their behalf.
Interest
expense
Interest
expense
increased $1.5 million during the quarter ended June 30, 2007,
compared with the quarter ended June 30, 2006. Subsequent to
June 30, 2006, increased borrowings at WPSC were primarily utilized to fund
the construction of Weston 4.
Six
Months
2007 Compared with Six Months 2006
Overview
WPSC's
earnings on
common stock for the six months ended June 30 are shown in the following
table:
Results
(Millions)
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
on
common stock
|
|
$ |
46.0
|
|
|
$ |
51.3
|
|
|
|
(10.3 |
%) |
WPSC's
earnings on
common stock were $46.0 million for the six months ended June 30,
2007, compared with $51.3 million for the six months ended
June 30, 2006. The following were the major factors impacting earnings and
are discussed in more detail below:
·
|
Electric
utility earnings decreased $9.4 million (24.9%), from earnings of
$37.8 million for the six months ended June 30, 2006, to
earnings of $28.4 million for the six months ended June 30,
2007. WPSC's earnings were negatively impacted by fuel and
purchased power costs that were higher than what was recovered
in rates
during the six months ended June 30, 2007, compared with fuel and
purchased power costs that were less than what was recovered in
rates
during the same period in 2006. For the six months ended
June 30, 2007, fuel and purchased power prices
|
|
were
above
what was projected in the 2007 rate case due to higher commodity
costs and
unanticipated plant outages (which required WPSC to purchase higher
cost
power in the market to serve its customers). Because of the
high fuel and purchased power costs, the increase in margin was not
large
enough to offset increased operating and maintenance expenses, negatively
impacting period-over-period earnings. Fuel and purchased power
costs are forecasted to be lower than what will be recovered in rates
during the second half of the year, which should have a positive
impact on
electric utility margin during that period. Also, the increase
in maintenance costs for the planned outages was recorded as these
costs
were incurred, while rate recovery for these costs occurs over the
entire
year. Therefore, the majority of rate recovery related to the
increase in maintenance costs for the planned outages is expected
to occur
during the second half of the year, positively impacting earnings
during
that period. |
|
|
·
|
Natural
gas
utility earnings at WPSC increased $7.2 million (84.7%), from
earnings of $8.5 million for the six months ended June 30, 2006,
to earnings of $15.7 million for the six months ended June 30,
2006. Higher earnings at WPSC's natural gas utility were driven
by an increase in throughput volumes to higher margin residential
and
commercial and industrial customers. The increase in sales
volumes to residential customers was driven by a 7.3% period-over-period
increase in heating degree days and a 5.9% period-over-period increase
in
the average weather-normalized natural gas usage per
customer.
|
|
|
·
|
Earnings
related to WPSC's nonutility operations decreased $3.1 million
(62.0%), from earnings of $5.0 million for the six months ended
June 30, 2006, to earnings of $1.9 million for the six months
ended June 30, 2007, driven primarily by a $1.3 million gain on the
sale of WPSC's interest (through a related party) in Guardian Pipeline,
LLC, which was recognized in the second quarter of 2006. WPSC
also experienced a decrease in quarter-over-quarter equity earnings
from
WPSC's investment in Wisconsin River Power Company. The
decrease in equity earnings from Wisconsin River Power Company
was
primarily related to a decrease in land sales in the second quarter
of
2007, compared with the second quarter of
2006.
|
Electric
Utility Operations
|
|
Six
Months Ended June 30,
|
|
Electric
Utility Results (Millions)
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
544.4
|
|
|
$ |
468.3
|
|
|
|
16.3 |
% |
Fuel
and
purchased power
|
|
|
280.3
|
|
|
|
219.8
|
|
|
|
27.5 |
% |
Margin
|
|
$ |
264.1
|
|
|
$ |
248.5
|
|
|
|
6.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
in kilowatt-hours
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
1,420.9
|
|
|
|
1,355.8
|
|
|
|
4.8 |
% |
Commercial
and industrial
|
|
|
3,993.6
|
|
|
|
3,904.9
|
|
|
|
2.3 |
% |
Wholesale
|
|
|
1,814.7
|
|
|
|
1,728.2
|
|
|
|
5.0 |
% |
Other
|
|
|
17.6
|
|
|
|
17.3
|
|
|
|
1.7 |
% |
Total
sales in kilowatt-hours
|
|
|
7,246.8
|
|
|
|
7,006.2
|
|
|
|
3.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weather
|
|
|
|
|
|
|
|
|
|
|
|
|
Heating
degree days – actual
|
|
|
4,402
|
|
|
|
4,101
|
|
|
|
7.3 |
% |
Cooling
degree days – actual
|
|
|
204
|
|
|
|
123
|
|
|
|
65.9 |
% |
Electric
utility
revenue increased $76.1 million (16.3%) for the six months ended
June 30, 2007, compared with the six months ended June 30, 2006,
driven by the following:
·
|
In
January
2007, the PSCW issued a final written order to WPSC authorizing
a retail
electric rate increase of $56.7 million (6.6%), effective
January 12, 2007, for Wisconsin electric
customers.
|
·
|
Sales
volumes
increased 3.4%, primarily related to a 4.8% increase in sales volumes
to
residential customers. The increase in sales volumes to
residential customers was driven by a 65.9% period-over-period
increase in
cooling degree days and a 7.3% period-over-period increase in heating
degree days (a portion of heating load is electric). Volumes to
commercial and industrial, wholesale, and other customers increased
due to
higher demand from existing
customers.
|
WPSC's
electric
utility margin increased $15.6 million (6.3%) for the six months ended
June 30, 2007, compared with the six months ended June 30,
2006. As discussed above, WPSC's margin was positively impacted by
rate increases (primarily required to support higher operating expenses)
and
higher electric sales volumes, primarily to residential and commercial and
industrial customers. Favorable weather conditions during both the
heating and cooling seasons positively impacted margin by an estimated
$5 million. These items were partially offset by fuel and
purchased power costs that were higher than what was recovered in rates during
the six months ended June 30, 2007, compared with fuel and purchased power
costs that were less than what was recovered in rates during the same period
in
2006. For the six months ended June 30, 2007, fuel and purchased
power prices were above what was projected in the 2007 rate case primarily
due
to higher commodity costs and unplanned plant outages (which required WPSC
to
purchase higher cost power in the market to serve its customers). On
a per-unit basis, fuel and purchased power costs were approximately 21% higher
during the six months ended June 30, 2007, compared with the same period in
2006. Because of the high fuel and purchased power costs, the
increase in margin was not large enough to offset increases in operating
and
maintenance expenses (discussed below), negatively impacting period-over-period
earnings.
Natural
Gas
Utility Operations
|
|
Six
Months Ended June 30,
|
|
Gas
Utility Results (Millions)
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
268.7
|
|
|
$ |
261.0
|
|
|
|
3.0 |
% |
Natural
gas
purchase costs
|
|
|
186.4
|
|
|
|
192.4
|
|
|
|
(3.1 |
%) |
Margins
|
|
$ |
82.3
|
|
|
$ |
68.6
|
|
|
|
20.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Throughput
in therms
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
145.4
|
|
|
|
127.8
|
|
|
|
13.8 |
% |
Commercial
and industrial
|
|
|
79.7
|
|
|
|
72.2
|
|
|
|
10.4 |
% |
Interruptible
|
|
|
10.7
|
|
|
|
13.3
|
|
|
|
(19.5 |
%) |
Interdepartmental
|
|
|
14.7
|
|
|
|
8.8
|
|
|
|
67.0 |
% |
Transport
|
|
|
182.6
|
|
|
|
173.6
|
|
|
|
5.2 |
% |
Total
sales in therms
|
|
|
433.1
|
|
|
|
395.7
|
|
|
|
9.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weather
|
|
|
|
|
|
|
|
|
|
|
|
|
Heating
degree days - actual
|
|
|
4,402
|
|
|
|
4,101
|
|
|
|
7.3 |
% |
WPSC's
natural gas
utility revenue increased $7.7 million from $261.0 million for the six
months ended June 30, 2006, to $268.7 million for the same period
in 2007, driven by a retail natural gas rate increase and a 9.5% increase
in
natural gas throughput volumes. On January 11, 2007, the PSCW issued
a final written order to WPSC authorizing a retail natural gas rate increase
of
$18.9 million (3.8%) effective January 12, 2007. The
increase in natural gas throughput volumes was driven by a 13.8% increase
in
residential volumes and a 5.7% increase in commercial and industrial and
interruptible volumes. The increase in sales volumes to residential
customers was driven by a 7.3% increase in heating degree days and a 5.9%
increase in the average weather-normalized natural gas usage per
customer.
WPSC's
natural gas
margin increased $13.7 million, from $68.6 million during the six
months ended June 30, 2006, to $82.3 million in the six months ended
June 30, 2007. As discussed in more detail above, the increase
in WPSC's margin was driven by the retail natural gas rate increase (primarily
required to support higher operating expenses), and an increase in throughput
volumes to higher margin residential and commercial and industrial
customers. While the margin impact of the increase in
average
weather-normalized
sales volumes is difficult to quantify, the colder weather conditions
contributed approximately an additional $3 million to WPSC's
margin.
Operating
Expenses
|
|
Six
Months Ended June 30,
|
|
Operating
Expenses (Millions)
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
Operating
and
maintenance expense
|
|
$ |
185.8
|
|
|
$ |
156.7
|
|
|
|
18.6 |
% |
Depreciation
and amortization expense
|
|
|
49.2
|
|
|
|
47.4
|
|
|
|
3.8 |
% |
Taxes
other
than income taxes
|
|
|
22.5
|
|
|
|
21.8
|
|
|
|
3.2 |
% |
Operating
and
Maintenance Expense
Operating
and
maintenance expenses increased $29.1 million for the six months ended
June 30, 2007, compared with the same period in 2006. The
following items were the most significant contributors to the change in
operating and maintenance expense at WPSC:
·
|
Maintenance
expenses at WPSC increased $10.2 million, primarily due to major
overhauls planned at the Weston 2 and 3 generation stations and
the De
Pere Energy Center and due to three unplanned outages at the Weston
3
generation station.
|
|
|
·
|
Electric
transmission expenses at WPSC increased $8.2 million, primarily
related to higher rates charged by MISO and ATC due to additional
transmission investment, a trend WPSC expects will
continue.
|
|
|
·
|
WPSC
was
allocated external costs to achieve merger synergies of $6.8 million
for the six months ended June 30, 2007.
|
|
|
·
|
The
remaining
increase in operating and maintenance expense at WPSC was related
to an
increase in wages and benefit costs
|
Depreciation
and Amortization Expense
Depreciation
expense increased $1.8 million for the six months ended June 30, 2007,
compared with the same period in 2006. Approximately $1 million
of the period-over-period increase in depreciation and amortization expense
was
driven by software amortization related to a new customer billing
system.
|
|
Six
Months Ended June 30,
|
|
Other
income (expense) (Millions)
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
Miscellaneous
income
|
|
$ |
8.3
|
|
|
$ |
9.1
|
|
|
|
(8.8 |
%) |
Interest
expense
|
|
|
(21.6 |
) |
|
|
(19.2 |
) |
|
|
12.5 |
% |
Miscellaneous
income
As
discussed above, the $0.8 million decrease in miscellaneous income for the
six months ended June 30, 2007, compared with the same period in 2006, was
driven primarily by a $1.3 million gain on the sale of WPSC's interest in
Guardian Pipeline, LLC, which was recognized in the second quarter of
2006. WPSC also experienced a decrease in quarter-over-quarter equity
earnings from WPSC's investment in Wisconsin River Power
Company. These items were partially offset by interest income
received from ATC related to the transmission interconnection WPSC is
constructing on their behalf.
Interest
expense
Interest
expense
increased $2.4 million during the six months ended June 30, 2007,
compared with the same period in 2006. Subsequent to June 30,
2006, increased borrowings at WPSC were primarily utilized to fund the
construction of Weston 4.
LIQUIDITY
AND CAPITAL RESOURCES
WPSC
believes that
its cash, operating cash flows, and borrowing ability because of strong credit
ratings, when taken together, provide adequate resources to fund ongoing
operating requirements and future capital expenditures related to expansion
of
existing businesses and development of new projects. However, WPSC's
operating cash flow and access to capital markets can be impacted by
macroeconomic factors outside its control. In addition, WPSC's
borrowing costs can be impacted by its short-term and long-term debt ratings
assigned by independent rating agencies, which in part are based on certain
credit measures such as interest coverage and leverage
ratios. Currently, WPSC believes these ratings continue to be among
the best in the energy industry (see "Financing Cash Flows - Credit
Ratings" below for more information).
Operating
Cash Flows
During
the six
months ended June 30, 2007, net cash provided by operating activities was
$155.1 million, compared with $138.1 million for the same period
in 2006. The $17.0 million period-over-period increase was
largely driven by a $38.1 million decrease in cash used for accounts
payable during the six months ended June 30, 2007, compared with the six
months ended June 30, 2006, primarily as a result of lower natural gas
prices. Natural gas prices decreased $14.6% on a per-unit basis
during the six months ended June 30, 2007, compared with the six months
ended June 30, 2006. The positive impact of the change in
accrued taxes and prepaid federal income taxes was substantially offset by
the
negative impact of the change in customer and other receivables. The
increase in customer and other receivables was primarily related to intercompany
receivables recorded during the six months ended June 30, 2007, to collect
the taxes that were previously paid as well as taxes accrued by WPSC on behalf
of related parties.
Investing
Cash Flows
Net
cash used for
investing activities was $93.2 million during the six months ended
June 30, 2007, compared with $135.6 million during the six
months ended June 30, 2006. The $42.4 million
period-over-period decrease in cash used for investing activities was primarily
related to a $51.5 million decrease in capital expenditures, primarily
related to Weston 4, as explained below. WPSC also liquidated
$22.0 million of restricted funds withdrawn from an escrow account, which
were used for the payment of the outstanding principal balance of first mortgage
bonds in January 2007. These items were partially offset by
expenditures related to interconnection facilities that WPSC is constructing
on
behalf of ATC (ATC will reimburse WPSC for expenditures related to these
interconnection facilities when they are completed).
Capital
Expenditures
Capital
expenditures by business segment for the six months ended June 30 are as
follows:
(Millions)
|
|
2007
|
|
|
2006
|
|
Electric
utility
|
|
$ |
81.9
|
|
|
$ |
129.5
|
|
Natural
gas
utility
|
|
|
11.1
|
|
|
|
15.0
|
|
WPSC
consolidated
|
|
$ |
93.0
|
|
|
$ |
144.5
|
|
The
decrease in
capital expenditures at the electric utility for the six months ended
June 30, 2007, as compared with the same period in 2006, is mainly due
to lower capital expenditures associated with the construction of Weston
4. Weston 4 is expected to be commercially operational
by June 2008.
Financing
Cash Flows
Net
cash used for
financing activities was $62.3 million during the six months ended
June 30, 2007, compared with $4.3 million for the same
period in 2006. The change was primarily driven by the fact that WPSC
made a $25 million equity contribution to Integrys Energy Group during the
six months ended June 30, 2007, compared with receiving a $30 million
equity contribution from Integrys Energy Group during the six months ended
June 30, 2006. The equity payments/contributions were necessary
in order to comply with WPSC's allowed capital structure as determined by
the
PSCW, and was made possible by an increase operating cash flows and a decrease
in capital expenditures for the six months ended June 30, 2007, compared to
the same period in 2006 (discussed above).
As
prescribed by the PSCW, WPSC may not pay normal common stock dividends of
more
than 103% of the previous year's common stock dividend without the PSCW's
approval. In addition, WPSC's Restated Articles of Incorporation
limit the amount of common stock dividends that WPSC can pay to certain
percentages of its prior 12-month net income, if its common stock and common
stock surplus accounts constitute less than 25% of its total
capitalization.
Significant
Financing Activities
WPSC
had
outstanding commercial paper borrowings of $69.4 million and
$85.0 million at June 30, 2007, and 2006,
respectively. WPSC had other outstanding short-term debt of
$10.0 million at both June 30, 2007, and 2006.
In
January 2007, WPSC used the proceeds from the $22.0 million of 3.95% senior
notes issued in December 2006 to the Village of Weston, Wisconsin, to repay
the
outstanding principal balance of the 6.90% first mortgage bonds which were
to
mature in 2013.
Credit
Ratings
WPSC
uses
internally generated funds and commercial paper borrowing to satisfy most
of its
capital requirements. WPSC also periodically issues long-term debt,
receives equity contributions from Integrys Energy Group, and makes payments
for
return of capital to Integrys Energy Group to reduce short-term debt, fund
future growth, and maintain capitalization ratios as authorized by the
PSCW. The specific forms of long-term financing, amounts, and timing
depend on the availability of projects, market conditions, and other
factors.
The
credit ratings
at June 30, 2007, for WPSC are listed in the table below.
Credit
Ratings
|
Standard
& Poor's
|
Moody's
|
Senior secured debt
Preferred stock
Commercial paper
Credit facility
|
A
BBB+
A-2
-
|
Aa3
A3
P-1
A1
|
We
believe these ratings continue to be among the best in the energy industry
and
allow us to access commercial paper and long-term debt markets on favorable
terms. Credit ratings are not recommendations to buy, are subject to
change, and each rating should be evaluated independently of any other
rating.
On
February 21, 2007, Standard & Poor's lowered the corporate credit rating on
all WPSC's ratings by one notch as they stated "WPSC's liquidity is being
pressured by its ongoing construction program."
On
February 21, 2007, Moody's downgraded WPSC's senior secured rating to Aa3
from
Aa2, its senior unsecured bank credit facility to A1 from Aa3, and its preferred
stock to A3 from A2. Moody's also confirmed WPSC's commercial paper
rating at Prime-1. Moody's actions to downgrade are due to their
concerns about the company's capital expenditure program leading to increased
debt levels and pressured financial metrics in the near term.
Rating
agencies use
a number of both quantitative and qualitative measures in determining a
company's credit rating. These measures include business risk,
liquidity risk, competitive position, capital mix, financial condition,
predictability of cash flows, management strength, and future
direction. Some of the quantitative measures can be analyzed through
a few key financial ratios, while the qualitative measures are more
subjective.
WPSC
holds credit
lines to back 100% of its commercial paper borrowing and letters of
credit. A significant decrease in the commercial paper credit ratings
could adversely affect the company by increasing the interest rates at which
it
can borrow and potentially limiting the availability of funds to the company
through the commercial paper market. A restriction in the company's
ability to use commercial paper borrowing to meet working capital needs would
require it to secure funds through alternate sources resulting in higher
interest expense, higher credit line fees, and a potential delay in the
availability of funds.
Future
Capital Requirements and Resources
Contractual
Obligations
The
following table
summarizes the contractual obligations of WPSC, including its
subsidiary.
|
|
|
|
|
Payments
Due By Period
|
|
Contractual
Obligations
(Millions)
|
|
Total
Amounts
Committed
|
|
|
2007
|
|
|
|
2008- 2009
|
|
|
|
2010-
2011
|
|
|
2012
and Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt principal and interest payments
|
|
$ |
1,018.0
|
|
|
$ |
16.7
|
|
|
$ |
66.7
|
|
|
$ |
216.7
|
|
|
$ |
717.9
|
|
Operating
lease obligations
|
|
|
17.8
|
|
|
|
2.6
|
|
|
|
6.8
|
|
|
|
4.5
|
|
|
|
3.9
|
|
Commodity
purchase obligations
|
|
|
1,728.6
|
|
|
|
179.7
|
|
|
|
564.5
|
|
|
|
432.8
|
|
|
|
551.6
|
|
Purchase
orders
|
|
|
287.0
|
|
|
|
248.4
|
|
|
|
38.6
|
|
|
|
-
|
|
|
|
-
|
|
Minimum
pension funding
|
|
|
350.9
|
|
|
|
38.8
|
|
|
|
64.6
|
|
|
|
40.0
|
|
|
|
207.5
|
|
Total
contractual cash obligations
|
|
$ |
3,402.3
|
|
|
$ |
486.2
|
|
|
$ |
741.2
|
|
|
$ |
694.0
|
|
|
$ |
1,480.9
|
|
Long-term
debt
principal and interest payments represent bonds issued, notes issued, and
loans
made to WPSC. We record all principal obligations on the balance
sheet. The costs of commodity purchase obligations are expected to be
recovered in future customer rates. Purchase orders include
obligations related to normal business operations and large construction
obligations, including 100% of Weston 4 obligations. The sale of a
30% interest in Weston 4 to DPC was completed in November 2005, but WPSC
retains
the legal obligation to initially remit payment to third parties for 100%
of all
construction costs incurred, 30% of which will subsequently be billed to
DPC. Minimum pension funding represents expected pension and
postretirement funding obligations.
Capital
Requirements
WPSC
makes large
investments in capital assets. Net construction expenditures are
expected to be approximately $833 million in the aggregate for the 2007
through 2009 period. The largest of these expenditures is for wind
generation projects (to help meet renewable energy requirements) and
distribution projects (which include replacement of utility poles, transformers,
meters, and other assets).
WPSC
is expected to
incur costs of approximately $236 million from 2007 through 2009 related
to wind
generation projects and approximately $272 million during the same time
period for distribution projects.
As
part of its regulated utility operations, on September 26, 2003, WPSC
submitted an application for a Certificate of Public Convenience and Necessity
to the PSCW seeking approval to construct Weston 4, a 500-megawatt coal-fired
generation facility near Wausau, Wisconsin. The facility is estimated
to cost approximately $779 million (including the acquisition of coal
trains), of which WPSC is responsible for slightly more than 70% (approximately
$549 million) of the costs. In November 2005, DPC purchased a
30% ownership interest in Weston 4, remitting proceeds of $95.1 million for
its share of the construction costs (including carrying charges) as of the
closing date of the sale. WPSC is responsible for slightly more than
70% of the costs because of certain common facilities that will be installed
as
part of the project. WPSC will have a greater than 70% interest in
these common facilities. DPC will be billed by WPSC for 30% of all
remaining costs to complete the construction of the plant. As of
June 30, 2007, WPSC has incurred a total cost of approximately
$476 million related to its ownership interest in the
project. WPSC expects to incur additional construction costs through
the date the plant goes into service of approximately $73 million in
addition to approximately $49 million to complete the funding of
construction of the transmission facilities required to support
Weston 4. ATC will reimburse WPSC for the construction costs of
these transmission facilities and related carrying costs when Weston 4 becomes
commercially operational, which is expected to occur by June
2008.
Other
significant
anticipated construction expenditures for WPSC during the three-year period
from
2007 through 2009 include approximately $75 million related to a natural
gas pipeline expansion project, approximately $56 million of expenditures
at WPSC generation plants to ensure continued reliability of these facilities,
approximately $49 million related to environmental projects, and corporate
services infrastructure projects of approximately $37 million.
All
projected
capital and investment expenditures are subject to periodic review and revision
and may vary significantly from the estimates depending on a number of factors,
including, but not limited to, industry restructuring, regulatory constraints,
market volatility, and economic trends.
Capital
Resources
As
of June 30, 2007, WPSC was in compliance with all of the covenants under
its lines of credit and other debt obligations.
For
the period 2007
through 2009, WPSC plans to use internally generated funds net of forecasted
dividend payments, cash proceeds from asset sales, and debt and equity
financings to fund capital requirements. WPSC plans to maintain
current debt to equity ratios at appropriate levels to support current credit
ratings and corporate growth. Management believes WPSC has adequate
financial flexibility and resources to meet its future needs.
See
Note 5,
"Short-Term Debt and Lines of Credit," for more information on WPSC's
credit facilities and other short-term credit agreements.
Other
Future Considerations
Services
Company
As
part of the regulatory approval process associated with its merger with PEC,
Integrys Energy Group agreed to formally propose the formation of a centralized
service company to provide administrative and general support services to
Integrys Energy Group's six regulated utilities, including WPSC. These services
will include categories such as legal, accounting and finance, environmental,
information technology, purchasing and warehousing, human resources,
administrative services (e.g., real estate, printing, etc.), external/regulatory
affairs, natural gas services, and natural gas supply, among others. In
addition, many of these same services will also be provided to Integrys Energy
Group's nonregulated subsidiaries. The creation of a centralized service
company
will require WPSC to move many of the
employees
supporting these functions into the new service company along with many of
the
employees who provided these services from PEC, PGL, and Integrys Energy
Group.
Certain assets will also be transferred by affiliates (primarily WPSC, PGL,
and
PEC) to the service company. On June 6, 2007, the service company entity,
Integrys Business Support was established. Integrys Business Support
will become an operational centralized service company upon receipt of necessary
regulatory approvals or waivers in a form acceptable to Integrys Energy
Group. On June 8, 2007, Integrys Energy Group and its regulated
utilities, including WPSC, filed applications with the ICC, PSCW, MPUC, and
MPSC
seeking necessary regulatory approvals or waivers associated with the formation
and operation of the service company. The requested approvals will relate
to and
include the categories of services to be delivered by Integrys Business Support,
the contracts and arrangements governing the provision of such inter-company
services, the transfer of assets and employees to Integrys Business Support,
and
the methodologies for allocating the costs for these services to the entities
who take these services. The required regulatory approvals or waivers were
requested with the intent that the service company can become operational
by
January 1, 2008. In states where action is required, prehearing
conferences have been held and hearing dates have been scheduled during
September and October in anticipation of year-end
approvals. Discovery from regulatory staffs and respective
interveners is currently in progress.
Asset
Management Strategy
WPSC
continues to
evaluate alternatives for the sale of the balance of its identified real
estate
holdings no longer needed for operation.
Regulatory
Matters and Rate Trends
To
mitigate the volatility of fuel costs in 2007 and beyond, WPSC is employing
risk
management techniques pursuant to its PSCW approved Risk Plan and Policy,
including the use of derivative instruments such as futures and
options.
In
WPSC's retail electric rate proceeding for 2006, the PSCW applied a "financial
harm" test when considering the rate recovery of certain costs previously
authorized for deferred accounting treatment. The PSCW has not
applied a financial harm test previously when considering the rate recovery
of
costs that were previously authorized for deferral. In WPSC's rate
proceeding for 2006, after applying the financial harm test, the PSCW disallowed
rate recovery of the 2004 extended outage at Kewaunee. The PSCW also
disallowed recovery of 50% of the pre-tax loss realized on the sale of
Kewaunee. None of these disallowed costs were found to be imprudent
by the PSCW. Notwithstanding the PSCW's decision on these Kewaunee
related deferred costs, WPSC still believes it is probable that all regulatory
assets recorded at June 30, 2007, will be able to be collected from
ratepayers.
Forecasting
and
monitoring of fuel costs has become increasingly difficult for both the PSCW
and
WPSC. These challenges can be attributed to the implementation of the
MISO Day 2 market and volatility in natural gas prices. In 2005, the
PSCW received several applications from various Wisconsin electric utilities
under the PSCW Chapter 116 fuel rules for large rate increases due to increased
natural gas prices. In response, on February 7, 2006, the PSCW opened
Docket 01-AC-224 to review the fuel rules. On February 1, 2007, the
five utilities subject to the current fuel rules filed proposed changes to
the
fuel rules with the PSCW. The primary proposed change was to replace
the trigger mechanism with a true "dead band" of 1%, which would limit a
utility's annual exposure or opportunity to a maximum of 1% of fuel
costs. Discussion with the PSCW staff and other utilities
continue.
On
June 29, 2006, the PSCW opened Docket 05-EI-139 to address the recovery of
costs associated with the MISO Day 2 market. Testimony has been filed
and hearings were held February 13, 2007. As of June 30, 2007,
WPSC had recorded a regulatory asset of $17.9 million for unrecovered MISO
Day 2 costs. We expect the PSCW to issue an order addressing the
recoverability of these costs sometime in the third quarter of
2007. Under this order, costs deferred as of June 30, 2007, should be
recoverable based on this decision.
For
a discussion of
regulatory filings and decisions, see Note 14, "Regulatory
Environment," in WPSC’s Notes to Consolidated Financial
Statements.
Seams
Elimination Charge Adjustment
For
a discussion of
SECA, see Note 14, "Regulatory Environment," in WPSC’s Notes to
Consolidated Financial Statements.
Peshtigo
River
Land Donation
In
closing its audit of Integrys Energy Group’s 2004 and 2005 income tax
examination, the IRS issued a report denying the deduction claimed in those
years related to the value of the Peshtigo River land donated to the WDNR
in
2004. Through subsequent discussion with IRS Appeals, this matter has
been tentatively settled in our favor. Subsequent to June 30, 2007,
we received draft settlement documentation and adjusted tax calculations
for
2004-2005 tax years. We expect that once that settlement is
concluded, we will record approximately $1 million of additional tax
benefit.
Michigan
Single
Business Tax
On
August 9, 2006, the Michigan legislature approved a voters' legislative
initiative to repeal the Michigan Single Business Tax for tax years beginning
after December 31, 2007. This legislation was later signed into
law by Michigan's Governor. On June 28, 2007, the Michigan
legislature passed a bill that will replace the Single Business Tax with
an
effective date of January 1, 2008. The Governor signed the
legislation on July 12, 2007. We are reviewing the new law but have
yet to determine its effect.
Environmental
See
Note 9,
"Commitments and Contingencies," in WPSC’s Condensed Notes to
Consolidated Financial Statements for a detailed discussion of environmental
considerations.
Wisconsin
Energy Efficiency and Renewables Act
In
March 2006, Wisconsin's Governor signed 2005 Wisconsin Act 141 (2005 Senate
Bill
459), the Energy Efficiency and Renewables Act, which requires Wisconsin
electric providers to increase the amount of renewable electricity they sell
by
2% above their current level before 2010 and 6% above their current level
by
2015. The goal is to have 10% of the state's electricity generated
from renewable sources by 2015, which is intended to increase the use of
renewable energy in Wisconsin, promote the development of renewable energy
technologies, and strengthen the state's energy efficiency
programs. As of June 30, 2007, approximately 4% of WPSC’s
generation in Wisconsin is from renewable sources. WPSC continuously
evaluates alternatives for cost effective renewable energy sources and will
secure reliable and efficient renewable energy sources to meet both requirements
by their respective dates.
Michigan
21st
Century Energy Plan
On
January 31, 2007, the MPSC Chairman presented the “21st Century Energy Plan” to
Michigan's Governor. The plan recognizes the increased need for
energy in the next 20 years. The plan proposes an alternative method
of receiving pre-construction approval for significant generation plant
additions versus the alternative of building a generation plant and then
seeking
approval for recovery of costs. The plan calls for legislation to
implement a 10% renewable energy portfolio standard by 2015 as well as a
statewide energy efficiency program. Discussions have moved to the
legislature and several bills have been drafted, though none have been enacted
at this time.
Midwest
Independent Transmission System Operator
WPSC
is a member of
the MISO, which operates an electric wholesale market in the Midwest, including
Wisconsin and the Upper Peninsula of Michigan. The market pricing is
based on a locational marginal pricing system. The pricing mechanism
expanded the market from a physical market to also include financial instruments
and is intended to send price signals to indicate to stakeholders where
generation or transmission system expansion is needed.
MISO
participants
offer their generation and bid their customer load into the market on an
hourly
basis. This results in net receipts from, or net obligations to, MISO
for each hour of each day. MISO aggregates these hourly transactions
and currently provides updated settlement statements which may reflect
billing adjustments and result in an increase or decrease to the net receipt
from or net obligation to MISO. The billing adjustments may or
may not be recovered through the rate recovery process. Market
participants may dispute the updated settlement statements and related
charges. At the end of each month, the amount due from or payable to
MISO is estimated for those operating days where a 7-day settlement statement
is
not yet available. Thus, significant changes in the estimates and new
information provided by MISO in subsequent settlement statements or through
tariff interpretation changes could have a material impact on our results
of
operations with potential adjustments back to the start of the
market.
CRITICAL
ACCOUNTING POLICIES
We
have reviewed our critical accounting policies for new critical accounting
estimates and other significant changes. We found that the
disclosures made in our Annual Report on Form 10-K for the year ended
December 31, 2006, are still current and that there have been no
significant changes.
Item
3. Quantitative and Qualitative
Disclosures about Market Risk
WPSC
has potential
market risk exposure related to commodity price risk (including regulatory
recovery risk), interest rate risk, equity return risk, and principal
preservation risk. WPSC is exposed to interest rate risk resulting
primarily from its short-term commercial paper borrowing and projected near-term
debt financing needs. Exposure to equity return and principal
preservation risk is the result of funding liabilities (accumulated benefit
obligations) related to employee benefits through various external trust
funds. Exposure to commodity price risk results from the impact of
market fluctuations on the prices of certain commodities, including but not
limited to coal, electricity, and natural gas, which are used and/or sold
in the
normal course of business. WPSC has risk management policies in place
to monitor and assist in controlling these market risks and uses derivative
instruments to manage some of these exposures.
Due
to decreases in
short-term commercial paper borrowings in the first six months of 2007, WPSC
has
decreased its exposure to variable interest rates. Based on the
variable rate debt of WPSC outstanding at June 30, 2007, a hypothetical
increase in market interest rates of 100 basis points in 2007 would increase
annual interest expense by $0.8 million. Comparatively, based on
the variable rate debt outstanding at June 30, 2006, an increase in interest
rates of 100 basis points would have increased interest expense in 2006 by
$1.0 million. This sensitivity analysis was performed assuming a constant
level of variable rate debt during the period and an immediate increase in
interest rates, with no other changes for the remainder of the
period. In the event of a significant change in interest rates,
management would take action to mitigate WPSC’s exposure to the
change.
Other
than the
above-mentioned changes, WPSC's market risks have not changed materially
from
the market risks reported in the 2006 Form 10-K.
Evaluation
of Disclosure Controls and Procedures
As
of the end of the period covered by this Quarterly Report on Form 10-Q, WPSC's
management evaluated, with the participation of WPSC's Principal Executive
Officer and Chief Financial Officer, the effectiveness of the design and
operation of WPSC's disclosure controls and procedures (as defined in the
Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) and have
concluded that, WPSC's disclosure controls and procedures were effective
as of
the date of such evaluation in timely alerting them to material information
relating to WPSC (including its consolidated subsidiaries) required to be
included in its periodic Securities and Exchange Commission filings,
particularly during the period in which this Quarterly Report on Form 10-Q
was
being prepared.
Changes
in
Internal Controls
There
were no
changes in WPSC's internal controls over financial reporting (as such term
is
defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act
of
1934) that occurred during the quarter ended June 30, 2007, that have materially
affected, or are reasonably likely to materially affect, the internal control
over financial reporting for WPSC.
For
information on
material legal proceedings and matters related to WPSC and its subsidiaries,
see
Note 9 - "Commitments and Contingencies" in the Condensed
Notes to the Consolidated Financial Statements.
Local
310 of the
International Union of Operating Engineers represents union employees of
WPSC.
The current Local 310 collective bargaining agreement expired on
October 21, 2006. In March 2007, the Local 310 membership voted
against the tentative agreement reached by WPSC and Local 310 negotiation
teams.
Negotiations resumed in April 2007. WPSC and Local 310 continue
to operate under the expired labor agreement.
There
were no
material changes in the risk factors previously disclosed in the 2006 Annual
Report on Form 10-K for WPSC filed on February 28, 2007.
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Exhibits
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The
following
documents are attached as exhibits:
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12.1
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Ratio
of
Earnings to Fixed Charges and Ratio of Earnings to Fixed Charges
and
Preferred Dividends
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31.1
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Certification
of Principal Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act and Rule 13a-14(a) or 15d-14(a) under the Securities
Exchange Act of 1934 for Wisconsin Public Service
Corporation
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31.2
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Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act and Rule 13a-14(a) or 15d-14(a) under the Securities Exchange
Act of
1934 for Wisconsin Public Service Corporation
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32.1
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Written
Statement of the Principal Executive Officer and Chief Financial
Officer
Pursuant to 18 U.S.C. Section 1350 for Wisconsin Public Service
Corporation
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Pursuant
to
the requirements of the Securities Exchange Act of 1934, the registrant,
Wisconsin Public Service Corporation, has duly caused this report
to be
signed on its behalf by the undersigned thereunto duly
authorized.
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Wisconsin
Public Service Corporation
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/s/
Diane
L.
Ford
Diane
L.
Ford
Vice
President and Corporate Controller
(Duly
Authorized Officer and
Chief
Accounting Officer)
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WISCONSIN
PUBLIC SERVICE CORPORATION
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Exhibit
No.
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Description
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12.1
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Ratio
of
Earnings to Fixed Charges and Ratio of Earnings to Fixed Charges
and
Preferred Dividends
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|
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31.1
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Certification
of Principal Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act and Rule 13a-14(a) or 15d-14(a) under the Securities
Exchange Act of 1934 for Wisconsin Public Service
Corporation
|
|
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31.2
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Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act and Rule 13a-14(a) or 15d-14(a) under the Securities Exchange
Act of
1934 for Wisconsin Public Service Corporation
|
|
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32.1
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Written
Statement of the Principal Executive Officer and Chief Financial
Officer
Pursuant to 18 U.S.C. Section 1350 for Wisconsin Public Service
Corporation
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