-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FhCPcQsSN07aICIrDM1GhMdRqJAuW94LLYp1M0G8ezxkZpTDY/b3xjOfycvGH9OS qu0N97rLeNYCGu40dcxJ5w== 0000107833-99-000020.txt : 19990325 0000107833-99-000020.hdr.sgml : 19990325 ACCESSION NUMBER: 0000107833-99-000020 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990324 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WISCONSIN PUBLIC SERVICE CORP CENTRAL INDEX KEY: 0000107833 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 390715160 STATE OF INCORPORATION: WI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-03016 FILM NUMBER: 99571272 BUSINESS ADDRESS: STREET 1: 700 N ADAMS ST STREET 2: PO BOX 19001 CITY: GREEN BAY STATE: WI ZIP: 54307-9001 BUSINESS PHONE: 4144331466 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to --------------- --------------- Commission Registrant; State of Incorporation IRS Employer file number Address; and Telephone Number Identification No. - ----------- ---------------------------------- ------------------ 1-11337 WPS RESOURCES CORPORATION 39-1775292 (A Wisconsin Corporation) 700 North Adams Street P. O. Box 19001 Green Bay, WI 54307-9001 920-433-4901 1-3016 WISCONSIN PUBLIC SERVICE CORPORATION 39-0715160 (A Wisconsin Corporation) 700 North Adams Street P. O. Box 19001 Green Bay, WI 54307-9001 920-433-1598 Securities registered pursuant to Section 12(b) of the Act: - ----------------------------------------------------------- Title of Name of each exchange each class on which registered ---------- --------------------- WPS RESOURCES CORPORATION Common Stock, New York Stock Exchange $1 par value Rights to purchase New York Stock Exchange Common Stock pursuant to Rights Agreement dated December 12, 1996 Securities registered pursuant to Section 12(g) of the Act: - ----------------------------------------------------------- WISCONSIN PUBLIC SERVICE CORPORATION Preferred Stock, Cumulative, $100 par value 5.00% Series 6.76% Series 5.04% Series 6.88% Series 5.08% Series Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] State the aggregate market value of the voting stock held by nonaffiliates of - ----------------------------------------------------------------------------- the Registrant. - --------------- WPS RESOURCES CORPORATION $806,498,927 as of March 22, 1999 WISCONSIN PUBLIC SERVICE CORPORATION None Number of shares outstanding of each class of common stock, as of December 31, - ------------------------------------------------------------------------------ 1998 - ---- WPS RESOURCES CORPORATION Common Stock, $1 par value, 26,551,405 shares WISCONSIN PUBLIC SERVICE CORPORATION Common Stock, $4 par value, 23,896,962 shares. WPS Resources Corporation is the sole holder of Wisconsin Public Service Corporation Common Stock. DOCUMENTS INCORPORATED BY REFERENCE (1) Definitive proxy statement for the WPS Resources Corporation Annual Meeting of Shareholders on May 6, 1999 is incorporated into Parts I and III. WPS RESOURCES CORPORATION and WISCONSIN PUBLIC SERVICE CORPORATION FORM 10-K ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION For the Year Ended December 31, 1998 TABLE OF CONTENTS GLOSSARY.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vi PART I 1. BUSINESS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 A. GENERAL WPS Resources Corporation . . . . . . . . . . . . . . . . . . 1 Wisconsin Public Service Corporation. . . . . . . . . . . . . 1 Upper Peninsula Power Company . . . . . . . . . . . . . . . . 2 Regulatory Oversight. . . . . . . . . . . . . . . . . . . . . 2 An Overview of Industry Restructuring . . . . . . . . . . . . 2 General. . . . . . . . . . . . . . . . . . . . . . . . . . 2 Effect on Operations . . . . . . . . . . . . . . . . . . . 3 Regional Merger Activities. . . . . . . . . . . . . . . . . . 3 Year 2000 Compliance. . . . . . . . . . . . . . . . . . . . . 3 Forward-Looking Statements. . . . . . . . . . . . . . . . . . 4 B. ELECTRIC MATTERS Electric Operations . . . . . . . . . . . . . . . . . . . . . 4 Generating Capacity . . . . . . . . . . . . . . . . . . . . . 4 Kewaunee Nuclear Power Plant. . . . . . . . . . . . . . . . . 5 General. . . . . . . . . . . . . . . . . . . . . . . . . . 5 Steam Generator Replacement. . . . . . . . . . . . . . . . 6 Ownership. . . . . . . . . . . . . . . . . . . . . . . . . 6 Formation of a Nuclear Management Company. . . . . . . . . 7 Low-Level Radioactive Waste Storage. . . . . . . . . . . . 7 Depreciation and Decommissioning . . . . . . . . . . . . . 7 Fuel Supply . . . . . . . . . . . . . . . . . . . . . . . . . 8 Electric Generation Mix. . . . . . . . . . . . . . . . . . 8 Fuel Costs . . . . . . . . . . . . . . . . . . . . . . . . 8 Coal . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Nuclear Fuel Cycle . . . . . . . . . . . . . . . . . . . . 9 Spent Nuclear Fuel Disposal. . . . . . . . . . . . . . . . 9 Funding Decontamination and Decommissioning of Federal Facilities . . . . . . . . . . . . . . . . . . . 10 Regulatory Matters in the Wisconsin Jurisdiction . . . . . . 11 Industry Restructuring . . . . . . . . . . . . . . . . . . 11 Independent System Operator. . . . . . . . . . . . . . . . 11 Utility Affiliates . . . . . . . . . . . . . . . . . . . . 12 Advance Plan and Strategic Energy Assessment . . . . . . . 12 Supply Issues. . . . . . . . . . . . . . . . . . . . . . . 13 Customer Rates . . . . . . . . . . . . . . . . . . . . . . 13 i Regulatory Matters in the Michigan Jurisdiction . . . . . . . 13 Industry Restructuring . . . . . . . . . . . . . . . . . . 13 Customer Rates . . . . . . . . . . . . . . . . . . . . . . 14 Regulatory Matters in the FERC Jurisdiction . . . . . . . . . 14 Wholesale Status . . . . . . . . . . . . . . . . . . . . . 14 Industry Restructuring . . . . . . . . . . . . . . . . . . 15 Customer Rates . . . . . . . . . . . . . . . . . . . . . . 15 Transmission Interface . . . . . . . . . . . . . . . . . . 15 Hydroelectric Licenses . . . . . . . . . . . . . . . . . . 16 Other Matters . . . . . . . . . . . . . . . . . . . . . . . . 16 Research and Development . . . . . . . . . . . . . . . . . 16 Customer Segmentation. . . . . . . . . . . . . . . . . . . 16 Electric Financial Summary. . . . . . . . . . . . . . . . . . 16 Electric Operating Statistics . . . . . . . . . . . . . . . . 17 Wisconsin Public Service Corporation . . . . . . . . . . . 17 Upper Peninsula Power Company. . . . . . . . . . . . . . . 18 C. GAS MATTERS Wisconsin Public Service Corporation's Gas Market . . . . . . 19 Gas Supply. . . . . . . . . . . . . . . . . . . . . . . . . . 20 General. . . . . . . . . . . . . . . . . . . . . . . . . . 20 Pipeline Capacity and Storage. . . . . . . . . . . . . . . 20 Supply Contracts . . . . . . . . . . . . . . . . . . . . . 21 Regulatory Matters in the Wisconsin Jurisdiction. . . . . . . 21 Industry Restructuring . . . . . . . . . . . . . . . . . . 21 Cost Recovery Mechanism. . . . . . . . . . . . . . . . . . 22 Customer Rates . . . . . . . . . . . . . . . . . . . . . . 22 Regulatory Matters in the Michigan Jurisdiction . . . . . . . 22 Industry Restructuring . . . . . . . . . . . . . . . . . . 22 Customer Rates . . . . . . . . . . . . . . . . . . . . . . 23 Regulatory Matters in the FERC Jurisdiction . . . . . . . . . 23 Gas Financial Summary . . . . . . . . . . . . . . . . . . . . 24 Gas Operating Statistics. . . . . . . . . . . . . . . . . . . 25 Wisconsin Public Service Corporation . . . . . . . . . . . 25 D. NONREGULATED BUSINESS ACTIVITIES General . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 WPS Energy Services, Inc. . . . . . . . . . . . . . . . . . . 26 WPS Power Development, Inc. . . . . . . . . . . . . . . . . . 27 E. ENVIRONMENTAL MATTERS General . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Air Quality . . . . . . . . . . . . . . . . . . . . . . . . . 28 Water Quality . . . . . . . . . . . . . . . . . . . . . . . . 29 Gas Plant Cleanup . . . . . . . . . . . . . . . . . . . . . . 29 Ash Disposal Site . . . . . . . . . . . . . . . . . . . . . . 30 F. CAPITAL REQUIREMENTS . . . . . . . . . . . . . . . . . . . . . . 30 G. EMPLOYEES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 2. PROPERTIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 A. UTILITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 WPSC's Facilities . . . . . . . . . . . . . . . . . . . . . . 32 UPPCO's Facilities. . . . . . . . . . . . . . . . . . . . . . 33 ii B. NONREGULATED . . . . . . . . . . . . . . . . . . . . . . . . . . 34 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . 34 Spent Nuclear Fuel Disposal. . . . . . . . . . . . . . . . . . . 34 Funding Decontamination and Decommissioning of Federal Facilities . . . . . . . . . . . . . . . . . . . . . 34 Environmental. . . . . . . . . . . . . . . . . . . . . . . . . . 34 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . . 34 4A. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. . . . . . . . . 35 A. EXECUTIVE OFFICERS OF WPS RESOURCES CORPORATION. . . . . . . . . 35 B. EXECUTIVE OFFICERS OF WISCONSIN PUBLIC SERVICE CORPORATION . . . 36 PART II 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . 38 WPS Resources Corporation Common Stock Two-Year Comparison . . . 38 Dividend Restrictions. . . . . . . . . . . . . . . . . . . . . . 38 Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . 39 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . 40 WPS RESOURCES CORPORATION COMPARATIVE FINANCIAL STATEMENTS AND FINANCIAL STATISTICS (1994 TO 1998) A. CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME . . . 40 B. CONSOLIDATED BALANCE SHEETS. . . . . . . . . . . . . . . . . . . 41 C. FINANCIAL STATISTICS . . . . . . . . . . . . . . . . . . . . . . 42 WISCONSIN PUBLIC SERVICE CORPORATION COMPARATIVE FINANCIAL DATA AND FINANCIAL STATISTICS (1996 TO 1998) D. SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . . . . . . 43 E. FINANCIAL STATISTICS . . . . . . . . . . . . . . . . . . . . . . 44 UPPER PENINSULA POWER COMPANY COMPARATIVE FINANCIAL DATA AND FINANCIAL STATISTICS (1996 TO 1998) F. SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . . . . . . 45 G. FINANCIAL STATISTICS . . . . . . . . . . . . . . . . . . . . . . 46 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION . . . . . . . . . . . . . . . . . . . . . . . 47 WPS RESOURCES CORPORATION . . . . . . . . . . . . . . . . . . . 47 WISCONSIN PUBLIC SERVICE CORPORATION. . . . . . . . . . . . . . 67 iii 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . . . . . 78 WPS RESOURCES CORPORATION A. CONSOLIDATED STATEMENTS OF INCOME, COMPREHENSIVE INCOME, AND RETAINED EARNINGS. . . . . . . . . . . . . . . . . . . . . . . . 78 B. CONSOLIDATED BALANCE SHEETS. . . . . . . . . . . . . . . . . . . 79 C. CONSOLIDATED STATEMENTS OF CAPITALIZATION. . . . . . . . . . . . 81 D. CONSOLIDATED STATEMENTS OF CASH FLOWS. . . . . . . . . . . . . . 82 E. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . 83 F. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS . . . . . . . . . . . . 110 WISCONSIN PUBLIC SERVICE CORPORATION G. CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME . . . 111 H. CONSOLIDATED BALANCE SHEETS. . . . . . . . . . . . . . . . . . . 112 I. CONSOLIDATED STATEMENTS OF CAPITALIZATION. . . . . . . . . . . . 114 J. CONSOLIDATED STATEMENTS OF CASH FLOWS. . . . . . . . . . . . . . 115 K. CONSOLIDATED STATEMENTS OF RETAINED EARNINGS . . . . . . . . . . 116 L. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . 117 M. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS . . . . . . . . . . . . 118 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . 119 PART III 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. . . . . . . . . 119 11. EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . . . . . . . . . 119 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. . . 119 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. . . . . . . . . . . 119 PART IV 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . . . . 120 DESCRIPTION OF DOCUMENTS. . . . . . . . . . . . . . . . . . . . . . 122 SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129 SCHEDULE III - CONDENSED PARENT COMPANY FINANCIAL STATEMENTS WPS RESOURCES CORPORATION (PARENT COMPANY ONLY) A. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS . . . . . . . . . . . . 130 B. STATEMENTS OF INCOME AND RETAINED EARNINGS . . . . . . . . . . . 131 C. BALANCE SHEETS . . . . . . . . . . . . . . . . . . . . . . . . . 132 D. STATEMENTS OF CASH FLOWS . . . . . . . . . . . . . . . . . . . . 133 E. NOTES TO PARENT COMPANY FINANCIAL STATEMENTS . . . . . . . . . . 134 iv EXHIBITS 2 Asset Purchase Agreement Among Maine Public Service Company, Maine and New Brunswick Electrical Power Company, Limited and WPS Power Development, Inc. dated as of July 7, 1998 . . . . . . . . . . . . . . . . . . . . 135 3B-1 By-Laws of WPS Resources Corporation as in Effect September 1, 1998. . . . . . . . . . . . . . . . . . . . . . . . 202 3B-2 By-Laws of Wisconsin Public Service Corporation as in Effect September 1, 1998 . . . . . . . . . . . . . . . . . . . . 235 10F-1 WPS Resources Cororation Amended and Restated Deferred Compensation Plan Effective January 1, 1999 WPS Resources Corporation . . . . . . . . . . . . . . . . . 266 11 Statement Regarding Computation of Per Share Earnings WPS Resources Corporation . . . . . . . . . . . . . . . . . 295 21 Subsidiaries of the Registrant . . . . . . . . . . . . . . . . . 296 23 Consent of Independent Public Accountants. . . . . . . . . . . . 297 24 Powers of Attorney . . . . . . . . . . . . . . . . . . . . . . . 298 27 Financial Data Schedule WPS Resources Corporation . . . . . . . . . . . . . . . . . 307 Wisconsin Public Service Corporation. . . . . . . . . . . . 308 v GLOSSARY The following abbreviations and acronyms are used in the text of this Form 10-K: Btu. . . . . . . . . . . . . . . British thermal unit ESI. . . . . . . . . . . . . . . WPS Energy Services, Inc. FERC . . . . . . . . . . . . . . Federal Energy Regulatory Commission ISO. . . . . . . . . . . . . . . Independent system operator MPSC . . . . . . . . . . . . . . Michigan Public Service Commission PDI. . . . . . . . . . . . . . . WPS Power Development, Inc. PSCW . . . . . . . . . . . . . . Public Service Commission of Wisconsin UPEN . . . . . . . . . . . . . . Upper Peninsula Energy Corporation UPPCO. . . . . . . . . . . . . . Upper Peninsula Power Company WPSR . . . . . . . . . . . . . . WPS Resources Corporation WPSC . . . . . . . . . . . . . . Wisconsin Public Service Corporation vi PART I ITEM 1. BUSINESS A. GENERAL WPS RESOURCES CORPORATION WPS Resources Corporation ("WPSR"), a Wisconsin Corporation, was incorporated on December 3, 1993 and operates as a holding company with both regulated utility and nonregulated business units. WPSR's principal wholly-owned subsidiaries are: Wisconsin Public Service Corporation ("WPSC"), a regulated electric and gas utility; Upper Peninsula Power Company ("UPPCO"), a regulated electric utility; and WPS Energy Services, Inc. ("ESI") and WPS Power Development, Inc. ("PDI"), both nonregulated subsidiaries. WPSC, ESI, and PDI are Wisconsin corporations, while UPPCO is a Michigan corporation. WPSC, UPPCO, ESI, and PDI represent approximately 61%, 6%, 33%, and .5% of WPSR's consolidated revenues for 1998 and 84%, 8%, 5%, and 2% of WPSR's consolidated assets at December 31, 1998, respectively. All of WPSR's net income for 1998 was derived from WPSC and UPPCO. Effective September 29, 1998, Upper Peninsula Energy Corporation ("UPEN") merged with and into WPSR, and UPPCO, UPEN's utility and major subsidiary, as well as other nonregulated subsidiaries, became wholly-owned subsidiaries of WPSR. Each of the 2,950,001 outstanding shares of UPEN common stock (no par value) were converted into the right to receive 0.90 shares of WPSR common stock ($1.00 par value), subject to adjustment for fractional shares, as provided in the merger agreement. On January 12, 1999, WPS Resources Capital Corporation was formed as a wholly-owned subsidiary of WPSR. As an intermediate holding company, WPS Resources Capital Corporation became the parent of ESI and PDI and a vehicle to provide financing for ESI and PDI. On a stand-alone basis, WPSR incurred a net loss in 1998 of $2.0 million, compared with a net loss of $2.7 million in 1997. The 1998 and 1997 WPSR stand-alone losses were attributable primarily to expenses associated with the merger with UPEN and increased interest expense resulting from additional financing of subsidiary projects. Within this report, the term "utility" refers to the regulated activities of WPSC and UPPCO, while the term "nonutility" refers to the activities of WPSC and UPPCO which are not regulated. The term "nonregulated" refers to activities other than those of WPSC and UPPCO. WISCONSIN PUBLIC SERVICE CORPORATION At December 31, 1998, WPSC served 381,136 electric retail customers and 224,058 gas retail customers in an 11,000 square-mile service territory in northeastern and central Wisconsin and an adjacent part of Upper Michigan. Additionally, WPSC provides wholesale (full or partial requirements) electric service, either directly or indirectly, to seven municipal utilities, three electric cooperatives, ten investor-owned utilities, six marketers, and one municipal joint action agency. Operating revenues in the year 1998 were derived 97% from Wisconsin customers and 3% from Michigan customers. Of total revenues in 1998, 75% were from electric operations and 25% were from gas -1- operations. Of total electric revenues, 89% were from retail sales and 11% were from wholesale sales. WPSC's retail service areas are principally protected by indeterminate permits secured by statute in Wisconsin and through franchises granted by municipalities in Michigan. UPPER PENINSULA POWER COMPANY At December 31, 1998, UPPCO served 48,272 electric customers in a 4,000 square-mile area of primarily rural countryside in Upper Michigan. Additionally, UPPCO provides wholesale (full or partial requirements) electric service, either directly or indirectly, to five municipal utilities, two electric cooperatives, and two investor-owned utilities. UPPCO derives 100% of its revenues from electric operations. Of total revenues, 92% were from retail sales and 8% were from wholesale sales. REGULATORY OVERSIGHT WPSR is exempt from registration under the Public Utility Holding Company Act of 1935, as amended, but is subject to the various requirements and prohibitions of the Wisconsin Public Utility Holding Company Act. Utility rates, service, and securities issues of WPSC are subject to regulation by the Public Service Commission of Wisconsin ("PSCW"); and WPSC and UPPCO are both subject to the jurisdiction of the Michigan Public Service Commission ("MPSC"). WPSC and UPPCO are also subject to regulation of their wholesale electric rates, hydroelectric projects, and certain other matters by the Federal Energy Regulatory Commission ("FERC"). Both WPSC and UPPCO are subject to limited regulation by local authorities. WPSC and UPPCO follow Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation," and, therefore, their financial statements reflect the different ratemaking principles of the various jurisdictions. The impacts of utility regulation also are reflected, through consolidation, in the financial statements of WPSR. Utility revenues by jurisdiction include: the PSCW 81%, the MPSC 11%, and the FERC 8%. The operation of the Kewaunee Nuclear Power Plant is subject to the jurisdiction of the Nuclear Regulatory Commission. AN OVERVIEW OF INDUSTRY RESTRUCTURING GENERAL In April 1994, the FERC issued Order 888 on open access electric transmission and stranded cost recovery due to wholesale competition. Order 888 directs the creation of power pools and independent system operators ("ISOs") to meet the open access requirements and principles. An ISO is an independent third party that would regulate on a "real-time" basis the operation of the transmission systems in a defined geographic area. With most ISOs, the transmission system assets may be retained by the electric utilities. The ISO would monitor the generation, transmission, and distribution systems, direct the operations of transmission facilities, administer open access transmission tariffs, and direct generation redispatch. Some believe that an ISO may also own transmission assets. -2- An independent transmission company is an alternative to an ISO. An independent transmission company would perform functions that are similar to an ISO; however, an independent transmission company would also own the transmission assets. The FERC has jurisdiction in setting prices for both ISOs and independent transmission companies. In April 1994, the FERC also issued Order 889 which requires that public utilities develop a system to communicate information about their transmission systems and services electronically to all potential customers at the same time. WPSC is included in the system created by the Mid-America Interconnected Network, commonly known as MAIN, one of the existing electric reliability regions in the United States. EFFECT ON OPERATIONS Industry restructuring will create competitive markets which could make the recovery of investment dollars in customer rates less certain. Management, however, believes that its utility assets will continue to be recoverable under such conditions. Management expects that increased competition in a deregulated environment will put greater emphasis on managing costs and put pressure on operating margins at WPSC and UPPCO. Management also believes that no significant changes to depreciable lives of WPSC's and UPPCO's capital assets would be necessary in a competitive environment. At this time, management cannot predict the ultimate results of deregulation. REGIONAL MERGER ACTIVITIES Industry restructuring has been accompanied by merger activity in the region which could impact the competitive environment. Mergers and acquisitions may be a means to gain an advantage in a competitive environment. Recently, mergers have occurred between WPSR and UPEN, as previously described, and between WPL Holdings, Inc., IES Industries, Inc., and Interstate Power Company. Additionally, Wisconsin Energy Corporation acquired ESELCO, Inc., the parent company of the Edison Sault Electric Company. No new Wisconsin utility mergers or acquisitions were announced in 1998. YEAR 2000 COMPLIANCE The Year 2000 issue arises because date sensitive computer software or embedded chips may not recognize a date using "00" as 2000. This may result in system failures or disruption of operations. WPSR has undertaken a program to assess the Year 2000 issue and to bring computer systems into compliance by the year 2000. All systems, including energy production and delivery systems, other embedded systems, and third party systems of suppliers are being evaluated to identify and resolve potential problems. A Year 2000 plan has been developed and communicated to employees, customers, suppliers, and other affected parties which includes awareness, inventory and assessment, remediation, testing, and implementation. The inventory and assessment phase has been completed. Action plans for remediation have been completed. Five major systems of the company (customer information, finance, human resources, materials management, and facility -3- management) are currently Year 2000 compliant. Other critical systems are expected to be compliant by the end of the first quarter of 1999. Worst case scenarios and contingency plans are being developed. The most recent estimated future internal labor and third party cost of Year 2000 compliance is approximately $9.0 million. See further discussion regarding Year 2000 compliance in MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION on page 72. FORWARDING-LOOKING STATEMENTS This report includes forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. The statements speak of plans, goals, beliefs, or expectations of WPSR, WPSC, and their subsidiaries, refer to estimates, or use similar terms. Although WPSR, WPSC, and their subsidiaries believe that their expectations are based on reasonable assumptions, no assurance can be given that actual results may not differ materially from those in the forward-looking statements included in this report for reasons that include: the speed and degree to which competition enters the electric and natural gas industries; state and federal legislative and regulatory initiatives that increase competition, affect cost and investment recovery, and have an impact on rate structures; the economic climate and industrial, commercial, and residential growth in areas served by WPSC, UPPCO, and ESI; the weather and other natural phenomena; the timing and extent of changes in commodity prices and interest rates; conditions in the capital markets; growth in opportunities for ESI and PDI; and the impact of the Year 2000 issue. A forward-looking statement speaks only as of the date on which such statement is made, and WPSR does not undertake to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for WPSR, WPSC, or their subsidiaries to predict all such factors, nor can it assess the impact of each such factor or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement. B. ELECTRIC MATTERS ELECTRIC OPERATIONS The largest Wisconsin communities served by WPSC at the electric retail level are the cities of Green Bay, Oshkosh, Wausau, and Stevens Point. The largest Michigan community served by UPPCO at the electric retail level is the area of Houghton/Hancock. GENERATING CAPACITY In 1998, WPSC reached a firm net design peak of 1,606 megawatts on July 14. Net design peak relates to the 10:00 a.m. to 3:00 p.m. period which is the period most relevant for capacity planning purposes. WPSC reached a firm net actual peak of 1,685 megawatts on July 13. During the actual peak, transactions outside WPSC included firm purchases of 132 megawatts and firm sales of 38 megawatts. Planned generator capability for the 1998 summer -4- period was 1,780 megawatts. WPSC's future supply reserves are estimated to be above the planning criteria of 18% minimum reserves for 1999 and 2000. See "UTILITY" in Part I, Item 2, PROPERTIES, at page 32 for information concerning the generation facilities of WPSC and UPPCO. During 1997, the PSCW authorized De Pere Energy LLC, an affiliate of Polsky Energy Corporation, an independent power producer, to build the De Pere Energy Center, a 179-megawatt combustion turbine generating facility that is scheduled to be operational on June 1, 1999. The energy center will be converted to a combined-cycle unit with a summer rating of 233 megawatts on or after the fifth year of operation, pursuant to the requirements of WPSC's 25-year contract with De Pere Energy LLC to purchase capacity and energy from the center. A combined-cycle unit is a type of combustion turbine in which the hot exhaust gases pass through a heat recovery steam generator to produce steam that drives a steam turbine generator which produces approximately one-third of the power generated. WPSC will furnish the natural gas fuel for the facility pursuant to existing gas tariffs. The energy center will be operated by SkyGen Services LLC, an operating subsidiary of Polsky Energy Corporation. See NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Note 10, Commitments and Contingencies, at page 101, regarding "Long-Term Power Supply." WPSC has contracted for combustion turbine peaking capacity from the De Pere Energy Center beginning June 1, 1999. In 1998, 89% of UPPCO's total energy requirements were purchased; the remainder was supplied by hydroelectric and combustion turbine facilities owned by UPPCO. During 1998, UPPCO purchased firm power of 50 megawatts and 15 megawatts from Commonwealth Edison and WPSC, respectively. In addition, UPPCO purchased non-firm power from WPSC, WP&L, and others. The purchase from Commonwealth represented 50% of UPPCO's total energy requirements in 1998. The purchase contracts are effective through December 31, 1999. UPPCO has contracted for 65 megawatts of capacity and energy from WPSC for the years 2000, 2001, and 2002. WPSC has begun construction of a 9-megawatt wind plant. The project consists of 14 wind turbines installed on private farmlands located in the Town of Lincoln in Kewaunee County, Wisconsin. The wind plant is expected to be on-line by June 30, 1999 at an estimated cost of $10.3 million. WPSC owns 33.1% of the outstanding capital stock of Wisconsin River Power Company which owns and operates two dams and related hydroelectric plants on the Wisconsin River having an aggregate installed capacity of approximately 39 megawatts. KEWAUNEE NUCLEAR POWER PLANT GENERAL The Kewaunee Nuclear Power Plant is a pressurized water reactor plant with a name plate capacity of 562 megawatts. It is operated by WPSC and is jointly owned by WPSC (41.2%), Wisconsin Power and Light Company (41.0%), and Madison Gas and Electric Company (17.8%). The plant's operating license expires in 2013. -5- Kewaunee has achieved the Institute of Nuclear Power Operations' top rating for the seventh time. The Institute of Nuclear Power Operations is an industry group formed in 1979 to promote excellence in the nuclear industry. STEAM GENERATOR REPLACEMENT On April 7, 1998, the PSCW approved WPSC's application for the replacement of the two steam generators at the Kewaunee Nuclear Power Plant. The total cost of replacing the steam generators could be approximately $90.7 million. Pending settlement of ownership issues with Madison Gas and Electric Company, WPSC's share of the cost may be as much as $53.5 million. The replacement work is being planned for mid-year of 2000 and will take approximately 60 days. On October 17, 1998, the plant was shut down for a planned maintenance and refueling outage. Inspection of the plant's two steam generators showed that the repairs made to the tubes in 1997 are holding up well and few additional repairs were needed. In addition to the inspection and repair of the steam generators, a major overhaul was performed on the main turbine generator. After an outage duration of 42 days, the plant was restarted and returned to service on November 27, 1998. OWNERSHIP On September 29, 1998, WPSC and Madison Gas and Electric Company finalized an agreement in which WPSC will acquire Madison Gas and Electric Company's 17.8% share of the Kewaunee Nuclear Power Plant. This agreement, the closing of which is contingent upon regulatory approvals and steam generator replacement, will give WPSC 59.0% ownership in the plant. The other co-owner, Wisconsin Power and Light Company, will maintain its current ownership interest in Kewaunee and will support the replacement of the steam generators. The agreement provides for WPSC to pay Madison Gas and Electric Company its depreciated book value for its share of the plant. Madison Gas and Electric Company will also provide to WPSC a fully funded decommissioning account. WPSC will then assume responsibility for 59% of the costs of decommissioning the plant. Madison Gas and Electric Company retains its obligation for its share of the costs of final disposal of spent nuclear fuel created up to the time of ownership transfer. The agreement also provides Madison Gas and Electric Company an option to purchase power from WPSC for two years following the date of ownership transfer. The amount of power involved in this option is approximately equal to Madison Gas and Electric Company's current share of the power generated by the plant. WPSC has also entered into an agreement with Madison Gas and Electric Company whereby WPSC will construct and operate for Madison Gas and Electric Company an 83-megawatt combustion turbine at WPSC's West Marinette site in northeastern Wisconsin. In entering this agreement, the utilities agreed that the amount owed by WPSC to Madison Gas and Electric Company for the Kewaunee Nuclear Power Plant asset transfer could be credited against the purchase price of the combustion turbine. The construction of the combustion turbine is expected to be completed in the second quarter of 2000. WPSC will supply gas to this unit pursuant to existing gas tariffs. If, for some reason, the Marinette station is not completed, the agreement calls for WPSC to pay for -6- Madison Gas and Electric Company's share of the Kewaunee Nuclear Power Plant with a combination of cash and notes. FORMATION OF NUCLEAR MANAGEMENT COMPANY On February 25, 1999, Northern States Power Company, Wisconsin Electric Power Company, and WPSC announced the formation of a nuclear management company. Alliant Energy, the parent company of Wisconsin Power and Light Company, is seeking approval from the Securities and Exchange Commission to join the management company at a later date. Combined, the four utilities operate seven nuclear generating plants at five locations for a combined generating capacity of approximately 3,760 megawatts, representing between 12% and 25% of the electricity generated by the individual utilities. The new company was formed to sustain long-term safety, optimize reliability, and improve the operational performance of the individual nuclear generating plants. Overall plant operations will continue to be provided by the same plant personnel. The utilities will continue to own their respective plants, be entitled to energy generated at the plants, and retain the financial obligations for their safe operation, maintenance, and decommissioning. Each utility will obtain required state or federal regulatory approvals prior to its participation in the nuclear management company. LOW-LEVEL RADIOACTIVE WASTE STORAGE The Midwest Compact Commission, on June 26, 1997, halted development in Ohio of a six-state, regional disposal facility for low-level radioactive waste. The Midwest Compact Commission, established to implement the federal Low Level Radioactive Waste Policy Act of 1980, cited dwindling regional waste volumes, continued access to existing disposal facilities, and potentially high development costs as the primary reasons for the decision. The Midwest Compact Commission continues to monitor the availability of disposal for the low-level radioactive waste created by all Midwest generators. A site at Barnwell, South Carolina, continues to be available for the storage of low-level radioactive waste from the Kewaunee Nuclear Power Plant. In addition, because of technology advances, waste compaction, and the reduction of waste generated, the Kewaunee plant has on-site low-level radioactive waste storage capacity sufficient to store the amount of low-level waste expected to be generated over a 10-year period. DEPRECIATION AND DECOMMISSIONING In 1997, the PSCW directed the owners of the Kewaunee Nuclear Power Plant to develop depreciation and decommissioning cost levels based on full recovery by the end of 2002, whereas previous decommissioning estimates were based on 2013, the year in which the operating license expires. The order was prompted by the uncertainty regarding the expected useful life of the plant without steam generator replacement. In 1998, after the approval of the project to replace the steam generators, the PSCW ruled that, until the replacement steam generators are installed, WPSC should continue to depreciate and collect decommissioning funds at rates such that costs are recovered in full by 2002. Once the replacement steam generators are installed, the PSCW has directed WPSC to depreciate and collect decommissioning funds such that costs are recovered in full by 2008. Further, the PSCW decided that an accelerated depreciation method should be utilized for calculating -7- depreciation expense. The steam generators are expected to be replaced by mid-2000. A review of the depreciation and decommissioning costs and their rate of recovery will be made in late 1999. At December 31, 1998, the net carrying amount of WPSC's investment in Kewaunee was approximately $35.2 million. The current cost of WPSC's share of the estimated costs to decommission Kewaunee, assuming early retirement, is $192.6 million. Decommissioning trust assets at December 31, 1998 totaled $171.4 million. WPSC's customers in the Wisconsin jurisdiction are responsible for approximately 91% of WPSC's share of the plant's costs. During 1998, $8.2 million of depreciation expense related to unrecovered plant investment was recognized compared with $7.5 million recognized in 1997. During 1998, the decommissioning funding level was $17.2 million compared with $16.1 million in 1997. Customer rates, which became effective in the Wisconsin jurisdiction on February 21, 1997, are designed to recover the accelerated plant depreciation and to provide funds for decommissioning. The increase from 1997 to 1998 reflects the impact of a full year's accrual at the higher rates. During 1998, a new site-specific decommissioning cost study was completed assuming shutdown of the plant in 2013. This study indicates WPSC's share of Kewaunee decommissioning costs to be $190.7 million and forms the basis for a revised decommissioning funding plan that reduces decommissioning funding levels to $8.3 million starting in 1999. Additional discussion of Kewaunee Nuclear Power Plant matters is included in MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION at pages 60 and 65, and the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Notes 1(h), 1(j), 1(k), and 10 at pages 85, 86, 87, and 102, respectively. FUEL SUPPLY ELECTRIC GENERATION MIX WPSC's electric generation mix in 1998 compared with 1997 was: steam plants (coal), 69.2%, up from 68.9%; steam plant (nuclear), 12.5%, up from 8.2%; hydro, 1.7%, down from 3.0%; combined natural gas and fuel oil, 1.8%, up from 1.3%; and purchased power, 14.8%, down from 18.6%. Purchased power represents short-term energy purchases. FUEL COSTS Fuel costs in 1998 compared with 1997, expressed in dollars per million British thermal unit ("Btu"), were: nuclear, $0.42, down from $0.43; coal, $1.04, down from $1.09; natural gas, $2.59, down from $2.96; and No. 2 fuel oil, $3.89, down from $4.27. COAL WPSC's primary fuel source is coal. In 1998, 99% of this coal came from Powder River Basin mines located in Wyoming and Montana. This coal is very low in sulfur and meets the standards of the 1990 Clean Air Act for the Year 2000 and beyond. Further, this coal is the least-cost coal for WPSC from any of the subbituminous coal-producing regions in the United States. -8- The majority of coal for WPSC's wholly-owned plants and the jointly-owned Edgewater and Columbia plants is purchased under relatively short-term contracts of up to three years duration. WPSC has one long-term contract which covers approximately 16% of total requirements and has take-or-pay obligations totaling $130.8 million for the years 1999 through 2016. Coal transportation for these plants is purchased under contracts of up to five years duration. Over 90% of the coal transported to these plants is moved under competitive transportation market conditions which are expected to continue to yield competitive fuel costs for WPSC for the long term. See NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Note 10, COMMITMENTS AND CONTINGENCIES, at page 101, regarding "Coal Contracts." NUCLEAR FUEL CYCLE WPSC purchases uranium concentrates, conversion services, enrichment services, and fabrication services for nuclear fuel assemblies at the Kewaunee Nuclear Power Plant. New fuel assemblies replace used assemblies that are removed from the reactor every 18 months and placed in storage at the plant site pending removal by the United States Department of Energy. Uranium concentrates, conversion services, and enrichment services are purchased at spot market prices, through a bidding process, or using existing contracts. A uranium inventory policy requires that sufficient inventory exist for up to two reactor reloads of fuel. As of December 31, 1998, 947,000 pounds of yellowcake or its equivalent were held in inventory for the plant. Two contracts are in place to provide conversion services for nuclear fuel reloads in 2000 and 2001. A fixed quantity of enrichment services are contracted for through the year 2004. Additional enrichment services will be acquired under a contract which is in effect for the life of the plant or by purchases on the spot market. Fuel fabrication services are contracted well into the next decade and contain contractual clauses covering force majeure and termination provisions. If, for any reason, the Kewaunee plant were forced to suspend operations permanently, fuel-related obligations are as follows: (1) no financial penalties associated with the present uranium supply, conversion service, and enrichment agreements exist, and (2) the fuel fabrication contract contains force majeure and termination for convenience provisions. As of the end of 1998, the maximum exposure would not be expected to exceed $274,000. Uranium inventories could be sold on the spot market. SPENT NUCLEAR FUEL DISPOSAL The federal government has the responsibility to dispose of or permanently store spent nuclear fuel. Spent nuclear fuel is currently being stored at the Kewaunee Nuclear Power Plant. With minor plant modifications planned for 2001, Kewaunee should have sufficient fuel storage capacity until the end of its licensed life in 2013. Legislation is being considered on the federal level to provide for the establishment of an interim storage facility. -9- On January 31, 1998, the United States Department of Energy failed to comply with its obligation to begin removing spent nuclear fuel as required by the Nuclear Waste Policy Act of 1982. WPSC joined other utilities in a motion to enforce the July 1996 mandate of the United States Court of Appeals for the District of Columbia that the Department of Energy had an unconditional obligation to begin accepting, transporting, and disposing of spent nuclear fuel by January 31, 1998. On May 5, 1998, the United States Court of Appeals for the District of Columbia issued a decision denying the motion to enforce the Court's 1996 mandate. The denial centered on the question of whether the Department of Energy could properly use the Nuclear Waste Fund as a source to pay damages the utilities have incurred as a result of the Department of Energy's breach of its obligation and the fact that the question is not ready for review. The Court also indicated that certain items fall outside the scope of the Court's mandate including (1) compelling the Department of Energy to submit a detailed program for disposing of spent fuel from utilities and (2) declaring that the utilities are relieved of their obligation to pay fees to the Nuclear Waste Fund for a permanent spent fuel repository and are authorized to place such fees into escrow until the Department of Energy commences with disposing of spent fuel pursuant to its obligation. The scope of the Court's mandate was limited to defining the nature of the Department of Energy's statutory obligations and did not extend to requiring the Department of Energy to perform under its contracts with the utilities. WPSC is currently evaluating the decision to determine how to proceed with contract remedies. FUNDING DECONTAMINATION AND DECOMMISSIONING OF FEDERAL FACILITIES A surcharge was imposed by the Energy Policy Act of 1992 which requires nuclear power companies to fund the decontamination and decommissioning of certain Department of Energy facilities. Pursuant to the provisions of the Energy Policy Act, WPSC is required to pay a surcharge on uranium enrichment services purchased from the federal government prior to October 23, 1992. WPSC's obligation is approximately $600,000 per year (adjusted for inflation) through the year 2007. WPSC and a number of other nuclear power companies sued the Department of Energy in the United States Court of Federal Claims seeking a refund of the previously paid decontamination and decommissioning surcharge payments. The suits had been stayed pending the outcome of the petition for review filed with the United States Supreme Court by Yankee Atomic Electric Company. Yankee Atomic Electric Company contended that the government should not have the power to impose retroactive financial liability, stating it was a breach of the fixed-price enrichment contracts that Yankee Atomic Electric Company signed prior to enactment of the Energy Policy Act of 1992. Yankee Atomic Electric Company filed suit in the United States Court of Federal Claims and received a favorable decision, only to have it overturned by the Federal Circuit Court of Appeals in May 1997. The United States Supreme Court, on June 26, 1998, declined to review the decision of the United States Court of Appeals for the Federal Circuit, thereby letting stand the decision that held that nuclear power companies must pay a retroactive surcharge on enrichment services purchased from the Department of Energy. -10- Subsequent to the United States Supreme Court's refusal to grant review, WPSC joined with a number of other nuclear power companies in challenging the constitutionality of the Energy Policy Act of 1992 in a Federal District Court in New York. REGULATORY MATTERS IN THE WISCONSIN JURISDICTION INDUSTRY RESTRUCTURING In Wisconsin, electric reliability has replaced restructuring and retail competition as the issue of current focus. The PSCW's first priority is to develop the utility infrastructure necessary to assure reliable electric service and to remove the barriers to competition at the wholesale level. In 1998, the PSCW and the major utilities in Wisconsin, including WPSC, made legislative proposals which address the planning and approval by the PSCW of electric power generation and transmission facilities, regional management of the transmission system, new electric power generation, including the ownership and operation of wholesale merchant plants, new electric power transmission facilities, out-of-state retail electric sales, service standards for electric generation, transmission and distribution facilities, and the allowable assets of public utility holding companies. These proposals resulted in the enactment of the Electric Reliability Act (1997 Wis. Laws 204). INDEPENDENT SYSTEM OPERATOR The Electric Reliability Act requires all Wisconsin utilities that own transmission facilities to transfer control of the operation of their transmission systems to a FERC-approved ISO or to divest their transmission assets by June 30, 2000. WPSC has been working with a number of groups that are attempting to form ISO organizations. The Mid American Power Pool, one of ten National Electric Reliability Council regions, attempted to develop an ISO that would include utilities in portions of Illinois, Minnesota, North Dakota, South Dakota, and Wisconsin. In late 1998, this effort failed to receive the approval of current Mid American Power Pool members. Another group of utilities is attempting to form what is known as the "Midwest ISO." The group filed a FERC application for approval of its ISO in mid-1998. The FERC approved the ISO in part, required a compliance filing for certain issues, and set the rates for hearing. This ISO is presently the only alternative to meet the requirements of the Electric Reliability Act requiring Wisconsin utilities to join a FERC-approved ISO by June 30, 2000. Northern States Power Company and Alliant Energy intend to file with the FERC in the spring of 1999 for approval of an independent transmission company. If approved, this independent transmission company could also meet the requirements of the Electric Reliability Act. In 1998, the PSCW reopened a docket to investigate and determine the structure and benefits of ISOs. The PSCW considered several proposals including the Midwest ISO and the Northern States Power Company independent transmission company, as well as one known as the "Customer ISO" which was -11- submitted by Wisconsin Public Power, Inc. The PSCW order established minimum Wisconsin standards and approved the Customer ISO indicating that the Midwest ISO, as formulated at that time, did not meet all of Wisconsin's standards. The PSCW also rejected the Northern States Power Company independent transmission company as being insufficiently developed, at that time, to determine if it meets the Wisconsin standards. UTILITY AFFILIATES During 1998, the PSCW opened a docket to develop standards of conduct between public utilities and their affiliates. This docket consists of three phases. Phase I will develop policies on the extent that diversification into nonutility activities by utilities should be regulated, limited, or prohibited by the PSCW. Phase I will also form the basis for Phases II and III, which will deal with administrative rulemaking and statutory revisions. In Phase I, a heating, ventilating, and air conditioning alliance is recommending a "separation" approach which restricts the types of allowable activities that can be provided by utilities the costs of which can be recovered in customers rates. Under the separation position, utilities may only engage in activities that are considered to be essential utility services, such as those required by law as well as those services that are provided in response to circumstances which reasonably appear to endanger public or individual human life, health, or safety. Other activities would be allowable if they are: (1) related to utility business, (2) incidental to the utility's business, (3) not provided by others in the market to any significant degree, and (4) their costs can be reasonably allocated. The costs associated with these other activities would not be recovered in customer utility rates. The alliance's position is to restrict regulated utilities to only the delivery of natural gas and electricity, with any other services to be provided by nonregulated affiliates. Principal concerns being considered include cross-subsidization practices and the shift of the cost of competitive goods and services of the utility to utility customers. The utilities' position is that an allocation method could be used. This approach would allow utilities to engage in nonutility activities that utilize the assets, operations, and expertise associated with the offering of utility service, provided that the associated costs are determined on an incremental basis and are not borne by utility ratepayers. A PSCW order on Phase I is anticipated late in the first quarter of 1999. ADVANCE PLAN AND STRATEGIC ENERGY ASSESSMENT The PSCW's Advance Plan process required electric utilities to submit to the PSCW, on a biennial basis, their plans for developing generation and transmission resources for a 20-year period. Advance Plan 8 was filed with the PSCW on January 15, 1998. An Advance Plan 8 order was issued by the PSCW on January 19, 1999. The PSCW ordered that generation and transmission planning continue, that certain reports and information be filed with the PSCW, that a certain amount of generation from renewable sources be constructed, that a state-wide wind siting study be funded, and that certain requirements concerning electromagnetic fields be modified. -12- The Electric Reliability Act repealed the Advance Plan process. In its place, state law now requires that the PSCW biennially prepare a Strategic Energy Assessment which will evaluate the reliability of Wisconsin's current and future electric supply for a three-year forecasted period. SUPPLY ISSUES In late June of 1998, high temperatures, outages at out-of-state nuclear units, tornado damage to significant transmission systems, and scarce generation resources in the region resulted in unprecedented high prices for wholesale energy. However, WPSC maintained its normal reserve levels and, for the most part, was unaffected. The relatively warm summer and the addition of market-based pricing in the wholesale market resulted in higher energy market prices in 1998 and increased hours of economic buyouts or interruptions for WPSC's large industrial customers who chose to be served at interruptible rates. An economic buyout is an option given interruptible customers who wish to continue to have service in lieu of interruption whereby the customers choose to pay higher rates in return for which they receive continued service. CUSTOMER RATES In the Wisconsin jurisdiction, of the major investor-owned utilities, WPSC is the low-cost electric provider (based on the Edison Electric Institute Summer 1998 Typical Bill Rate Report) with rates being 84% of the state average for residential rates, 79% for commercial rates, and 82% for large industrial rates. WPSC filed for increases in rates on April 1, 1998, in compliance with the PSCW's biennial rate case schedule. On January 14, 1999, the PSCW ordered a $26.9 million (or 6.3%) increase in electric rates for 1999, effective January 15, 1999. The PSCW also allowed a 12.1% return on equity, an increase from the previously authorized return of 11.8%. The electric rates for 2000 will be determined by a rate case reopener in the fall of 1999 to resolve several issues, including certain Kewaunee Nuclear Power Plant issues regarding ownership, depreciation and decommissioning cost recovery after steam generator replacement, the construction of a combustion turbine for Madison Gas and Electric Company, recovery of certain deferred Pulliam 3 generation costs, and anticipated changes in fuel transportation contract costs. The PSCW had approved the deferral of anticipated 1998 Kewaunee steam generator repair costs. During the 1998 refueling outage, inspections found little additional steam generator degradation, and a Nuclear Regulatory Commission technical specification change resulted in minimal steam generator repair costs during this refueling. REGULATORY MATTERS IN THE MICHIGAN JURISDICTION INDUSTRY RESTRUCTURING On June 5, 1997, the MPSC ordered utilities under its jurisdiction to file electric open access plans and related tariffs. This action followed two years of public hearings and the inability to reach consensus among the interested parties. The MPSC order called for generation open access in increments of 2.5% of retail load each year starting in 1997 and ending in -13- 2001. Generation open access is the ability of customers to purchase electric generation from any supplier and to use existing transmission and distribution lines to transport the energy to the purchaser's facilities at the same price that the local supplier would charge itself for such transportation services. Based on MPSC orders, there would be full generation open access for retail load in 2002. Although the MPSC has issued a number of generation open access orders, including orders requiring open access pilot programs in Lower Michigan, little progress has been made on permanent open access in Michigan to date. On February 2, 1999, the MPSC closed out its open access orders affecting the Upper Peninsula utilities, including WPSC and UPPCO. On March 11, 1999, the Michigan Supreme Court heard oral arguments on a challenge to the MPSC's authority to order utilities to provide generation open access on a pilot basis. A decision is expected, later in 1999, which could require the enactment of enabling legislation before generation open access can be implemented. The Upper Peninsula utilities, including WPSC and UPPCO, may file an agreement with the MPSC this spring calling for open access for all Upper Peninsula customers by January 1, 2002. This agreement may include a condition setting the agreement aside if the Supreme Court decides the MPSC does not have the authority to order open access. CUSTOMER RATES WPSC is the lowest cost provider of electric service in Michigan for all customer classes. WPSC's electric rates are 80% of the Michigan residential customer average rate and 87% of the large industrial average rate. Other than power supply cost recovery, WPSC has not had an electric rate increase in Michigan since 1987. UPPCO's retail base rates are frozen until January 1, 2001 as part of the merger agreement between WPSC and UPPCO. This rate freeze does not affect power supply cost recovery. UPPCO is required to obtain MPSC approval each year to recover projected power supply costs. Over or under recovery amounts are deferred on UPPCO's balance sheet, and such deferrals are relieved as refunds or additional billings are recorded. REGULATORY MATTERS IN THE FERC JURISDICTION WHOLESALE STATUS WPSC procures, packages, markets, and sells electric energy, capacity, ancillary services, and other associated energy-related products and services primarily to municipal electric utilities and electric distribution cooperatives. In 1998, WPSC provided 27 wholesale electric customers with either all or a portion of their power supply needs. The customer mix in 1998 included seven municipal customers, three electric cooperatives, ten investor-owned utilities, six marketers, and one municipal joint action agency. The total wholesale sales for resale in 1998 were approximately 2.0 million megawatts of firm and various levels of interruptible service. The total wholesale sales for resale represented 17% of WPSC's electric sales volume in 1998 compared with 16% in 1997. Forces that continue to influence the wholesale electric market are: transmission availability, including transfer capability; the availability of reliable and economically-priced capacity and energy in the region; changing market participation (both suppliers and consumers); state and federal regulatory and legislative agendas; and uncertainties regarding the timing and pace of deregulation. -14- INDUSTRY RESTRUCTURING As part of the FERC's approval of the WPSR/UPEN merger, UPPCO's wheeling tariff filed in response to FERC Order 888 was set for review and approval by the FERC. Settlement discussions with the FERC staff have been ongoing since mid-year 1998. The final tariff will result in a combined WPSC/UPPCO document, with zonal rates for service to delivery points within each utility's service area. The FERC waiver of UPPCO's need to comply with Order 889 was rescinded and, as a result, the power marketing and transmission operations functions for UPPCO will be separated, using WPSC operating personnel. CUSTOMER RATES WPSC has not had a FERC wholesale rate case since 1987. UPPCO's wholesale tariff rates include a base rate charge and are subject to a fuel clause (such clause includes certain purchased power costs), with a 30-day billing lag without reconciliation provisions. Most of UPPCO's wholesale customers are now taking service under special contracts. In 1998, the FERC approved WPSC's settlement with its wholesale customers in regard to open access transmission rates filed in response to FERC Order 888. The open access transmission rates settlement will be in effect for two years beginning with their implementation in 1997. The FERC also approved WPSC's request for authority to use market-based rates. TRANSMISSION INTERFACE Wisconsin Public Power, Inc. requested transmission service across the WPSC and Wisconsin Power and Light Company portions of the constrained Minnesota to eastern Wisconsin interface to serve five of Wisconsin Public Power, Inc.'s municipal customers (Sturgeon Bay, Algoma, Eagle River, New Holstein, and Two Rivers) in the Wisconsin Power and Light Company control area. The interface is owned by Wisconsin Electric Power Company (52%), Wisconsin Power and Light Company (28%), and WPSC (20%). Due to disagreements between the parties as to who had rights to the use of the constrained interface pursuant to the FERC's recently developed first-come, first-served transmission scheduling process, complaints were filed by WPSC, Wisconsin Public Power, Inc. and Madison Gas and Electric Company, who also joined the complaint process in connection with previous applications. The FERC determined that WPSC had legitimate network service contracts but had made an error in applying its rights to extend use of the interface, and granted Wisconsin Public Power, Inc. the requested interface capacity. Wisconsin Public Power, Inc. eventually took the interface capacity from Wisconsin Power and Light Company which was also under FERC orders to provide this transmission service. The complaint included a claim that WPSC used the Capacity Benefit Margin in determining its available transmission capacity. Capacity Benefit Margin is the use of the transmission system to provide reserve generation capacity for reliability of the system. The FERC is expected to address this issue on a national basis during 1999. -15- HYDROELECTRIC LICENSES All of WPSC's hydroelectric facility licenses, issued by FERC, are current. All of the licenses for UPPCO's hydroelectric facilities, except for Bond Falls and Dead River, are current. In 1998, UPPCO reached agreement on the term of a settlement agreement with federal and state agencies and special interest groups with regard to the Bond Falls license. This agreement will provide the basis for the new FERC license which will have a term of 40 years. The new license is expected to be issued in 1999. The Dead River project licensing is progressing. A long-term water lease agreement was reached with the adjacent landowners. The FERC license for the Dead River project is expected in the last quarter of 1999, with a 40-year term from August 1991, the date the FERC claimed jurisdiction over the project. OTHER MATTERS RESEARCH AND DEVELOPMENT Electric research and development expenditures totaled $1.5 million for 1998, $1.3 million for 1997, and $1.9 million for 1996. These expenditures were made for WPSC sponsored projects and were primarily charged to electric operations. CUSTOMER SEGMENTATION Twenty-eight paper mills account for 12% of WPSC's electric revenues. There is no single customer, or small group of customers, the loss of which would have a materially adverse effect on the electric business of WPSC under the current regulatory environment. ELECTRIC FINANCIAL SUMMARY The following table sets forth the revenues, net income, and assets attributable to electric utility operations: ELECTRIC UTILITY OPERATIONS (WPSC AND UPPCO) ============================================================================== (Thousands) Year Ended December 31 - ------------------------------------------------------------------------------ 1998 1997 1996 - ------------------------------------------------------------------------------ Consolidated Electric Operating Revenues $ 543,260 $ 536,885 $ 548,701 Net Income $ 50,488 $ 53,294 $ 59,907 Total Assets $1,117,438 $1,089,875 $1,095,996 ============================================================================== See Note 13 in Notes to Consolidated Financial Statements at pages 107 and 108. The consolidated electric operating revenues, above, reflect the elimination of intercompany sales and do not agree with regulated electric operating revenues shown in Note 13, Segments of Business, which do not reflect such elimination. -16- ELECTRIC OPERATING STATISTICS WISCONSIN PUBLIC SERVICE CORPORATION
============================================================================================================ 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------ Operating revenues (Thousands) Residential and farm $164,961 $163,766 $169,587 Small commercial and industrial 141,203 138,949 144,055 Large commercial and industrial 119,601 120,312 118,997 Resale and other 61,575 56,361 57,867 - ------------------------------------------------------------------------------------------------------------ Total $487,340 $479,388 $490,506 ============================================================================================================ Kilowatt-hour sales (Thousands) Residential and farm 2,627,496 2,565,432 2,570,397 Small commercial and industrial 3,004,134 2,876,832 2,761,278 Large commercial and industrial 3,977,829 3,943,275 3,744,153 Resale and other 1,990,705 1,873,788 1,936,014 - ------------------------------------------------------------------------------------------------------------ Total 11,600,164 11,259,327 11,011,842 ============================================================================================================ Customers served (End of period) Residential and farm 339,881 334,134 328,522 Small commercial and industrial 40,247 39,400 38,376 Large commercial and industrial 211 197 168 Resale and other 853 836 826 - ------------------------------------------------------------------------------------------------------------ Total 381,192 374,567 367,892 ============================================================================================================ Annual average use (Kilowatt-hours) Residential and farm 7,803 7,751 7,905 Small commercial and industrial 75,537 74,082 72,995 Large commercial and industrial 18,978,191 21,606,984 22,115,491 ============================================================================================================ Average kilowatt-hour price (Cents) Residential and farm 6.28 6.38 6.60 Small commercial and industrial 4.70 4.83 5.22 Large commercial and industrial 3.01 3.05 3.18 ============================================================================================================ Production capacity (Summer - kilowatts) Steam 1,307,800 1,326,000 1,325,400 Nuclear 205,200 212,200 213,800 Hydraulic 53,000 53,000 53,100 Combustion turbine 206,340 205,930 208,600 Other 7,800 7,800 4,200 Purchased capacity 14,750 14,750 27,250 - ------------------------------------------------------------------------------------------------------------ Total system capacity 1,794,890 1,819,680 1,832,350 ============================================================================================================ Generation and purchases (Thousands of kilowatt-hours) Steam 8,513,537 8,213,518 7,956,378 Nuclear 1,526,702 973,485 1,305,751 Hydraulic 212,607 351,034 359,750 Purchases and other 1,994,826 2,327,334 2,050,762 - ------------------------------------------------------------------------------------------------------------ Total 12,247,672 11,865,371 11,672,641 ============================================================================================================ Steam fuel costs (Cents per million Btu) Fossil 105.353 110.124 115.132 Nuclear 41.565 43.174 46.674 Total 95.735 103.093 105.439 - ------------------------------------------------------------------------------------------------------------ System peak - firm (kilowatts) 1,685,000 1,607,000 1,578,000 ============================================================================================================ Annual load factor 78.35% 79.42% 78.20% ============================================================================================================
-17- ELECTRIC OPERATING STATISTICS UPPER PENINSULA POWER COMPANY
=========================================================================================================== 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------- Operating revenues (Thousands) Residential and farm $21,894 $22,626 $23,554 Small commercial and industrial 16,688 16,611 16,833 Large commercial and industrial 9,773 9,271 8,405 Resale and other 14,310 11,694 9,586 - ----------------------------------------------------------------------------------------------------------- Total $62,665 $60,202 $58,378 =========================================================================================================== Kilowatt-hour sales (Thousands) Residential and farm 241,517 252,897 259,807 Small commercial and industrial 223,282 223,040 220,609 Large commercial and industrial 225,565 222,143 188,722 Resale and other 148,153 147,297 152,173 - ----------------------------------------------------------------------------------------------------------- Total 838,517 845,377 821,311 =========================================================================================================== Customers served (End of period) Residential and farm 42,783 42,551 42,315 Small commercial and industrial 5,286 5,254 5,155 Large commercial and industrial 9 8 8 Resale and other 194 190 190 - ----------------------------------------------------------------------------------------------------------- Total 48,272 48,003 47,668 =========================================================================================================== Annual average use (Kilowatt-hours) Residential and farm 5,646 5,945 6,140 Small commercial and industrial 42,239 42,454 42,800 Large commercial and industrial 25,062,778 26,708,834 23,072,194 =========================================================================================================== Average kilowatt-hour price (Cents) Residential and farm 9.07 8.95 9.07 Small commercial and industrial 7.48 7.45 7.63 Large commercial and industrial 4.34 4.17 4.45 =========================================================================================================== Production capacity (Summer - kilowatts) Steam 17,700 17,700 17,700 Hydraulic 30,000 30,000 30,000 Combustion turbine 55,000 55,000 55,000 Purchased capacity 55,000 65,000 65,000 - ----------------------------------------------------------------------------------------------------------- Total system capacity 157,700 167,700 167,700 =========================================================================================================== Generation and purchases (Thousands of kilowatt-hours) Steam 4,029 (298) (327) Hydraulic 97,988 138,923 172,391 Purchases and other 5,230 795,599 722,614 - ----------------------------------------------------------------------------------------------------------- Total 107,247 934,224 894,678 =========================================================================================================== Steam fuel costs (Cents per million Btu) Fossil 2.67943 - - - ----------------------------------------------------------------------------------------------------------- System peak - firm (kilowatts) 137,000 138,600 137,000 =========================================================================================================== Annual load factor 74.44% 73.23% 73.23% ===========================================================================================================
-18- C. GAS MATTERS WISCONSIN PUBLIC SERVICE CORPORATION'S GAS MARKET As of December 31, 1998, WPSC provided natural gas distribution service to 218,857 customers in 221 cities, villages, and towns in northeastern and central Wisconsin, and 5,201 customers in and around the city of Menominee, Michigan, for a total of 224,058 gas distribution customers. This represents an increase of 5,759 customers, or 2.6%, compared to December 31, 1997. The principal cities served by WPSC include Green Bay, Oshkosh, Sheboygan, Two Rivers, Marinette, Stevens Point, and Rhinelander, all in Wisconsin, and the city of Menominee in Michigan. WPSC's gas distribution business has a significant seasonal component and is impacted by varying weather conditions from year-to-year. In 1998, 66.0% of WPSC's gas sales and 58.3% of WPSC's total gas system throughput (i.e., total gas delivered by WPSC--includes gas sales and gas delivered for transportation customers) occurred during the five winter months of November through March. Competition with other forms of energy exists in varying degrees, particularly for large commercial and industrial customers who have the ability to switch between natural gas and alternate fuels. WPSC offers interruptible gas sales and gas transportation service for these customers to enable them to reduce their energy costs and use natural gas instead of other fuels. There are currently 282 gas transportation customers on the WPSC system. These customers purchase their gas from other suppliers and contract with WPSC to transport the gas from ANR Pipeline Company to the customer's facilities. Another 134 customers still purchase their gas commodity from WPSC but have elected to do so on an interruptible basis. Additional customers are switching from firm system supply to either interruptible system supply or transportation service each year as the economics and service options become attractive for them. WPSC's gas operations also provide interruptible gas service to WPSC's electric operations for power generation in combustion turbine peaking generators and for start-up, flame stabilization, and peaking use at WPSC's Weston and Pulliam coal-fired steam plants. Gas sales for customer-owned power generation use are provided on an interruptible basis, with the power plants maintaining alternate fuel capability. In 1999, WPSC will begin to provide interruptible gas supplies to the De Pere Energy Center, and in 2000, WPSC will also provide interruptible gas supplies to a combustion turbine owned by Madison Gas and Electric Company. Total gas deliveries by WPSC in 1998, including customer-owned gas transported by WPSC, were 60,944,394 dekatherms, a 9.4% decrease as compared with 1997 due to warmer than normal weather. A dekatherm is equivalent to 10 therms or 1 million Btu of energy. Of the total gas delivered, 26,557,300 dekatherms, or approximately 43.6%, was gas transported for end-user transport customers. WPSC's peak day gas throughput in 1998 occurred on January 13 with 390,971 dekatherms total gas throughput at an average Green Bay temperature of minus 1.6 degrees Fahrenheit. This compares with WPSC's record gas system throughput of 432,928 dekatherms set on February 2, 1996 at an average Green Bay temperature of minus 23.8 degrees Fahrenheit. -19- GAS SUPPLY GENERAL Since the implementation of FERC Order 636 in November 1993, WPSC has had full responsibility for the design, acquisition, and management of gas supplies and the pipeline transportation and storage services required to meet the varying daily, seasonal, and annual load requirements of its customers. WPSC manages a portfolio of gas supply contracts, pipeline transportation, and storage services designed to reliably meet WPSC's varying load pattern at the lowest reasonable cost. PIPELINE CAPACITY AND STORAGE WPSC is presently directly served by a single interstate pipeline, ANR Pipeline Company. Because ANR Pipeline Company's pipeline system in Wisconsin has reached its maximum capacity, and because lower prices are generally available in other areas where there is competition for pipeline services, WPSC is investigating potential suppliers of pipeline services in addition to those offered by ANR Pipeline Company. Previously, WPSC had contemplated the construction of natural gas laterals to connect the WPSC gas distribution system to a proposed Viking Voyageur gas pipeline. However, in May of 1998, that pipeline was placed on hold at the FERC with the Viking Voyageur partners instead contemplating replacing the proposed gas pipeline from Canada with a pipeline from Chicago to Wisconsin. Subsequently, that project was withdrawn. However, similiar projects are being studied by other third parties. At this time, it is not known whether WPSC will be connecting to any pipeline from the Chicago area. WPSC, however, continues to study various options to bring a competitive gas pipeline into the WPSC gas service territory. ANR Pipeline Company's system serving WPSC directly or indirectly accesses three major gas producing areas of North America: (1) the Gulf of Mexico, (2) the mid-continent areas of Oklahoma, Texas, and Kansas, and (3) the Province of Alberta in western Canada. WPSC holds firm long-term transportation capacity on ANR Pipeline Company in roughly equal proportions from each of these three supply areas. The term of these ANR Pipeline Company firm transportation contracts from the Gulf Coast and mid-continent areas extends through October 2003. WPSC holds firm transportation capacity with Viking Gas Transmission Company, to deliver gas on a firm basis from Viking Gas Transmission Company's interconnection with TransCanada Pipelines at Emerson, in the Canadian Province of Manitoba, to the interconnection with ANR Pipeline Company at Marshfield, Wisconsin. The Canadian suppliers, from whom WPSC purchases gas, hold firm capacity on TransCanada Pipelines from Emerson back into the production areas in Alberta, Canada. In 1998, WPSC entered into a project with Wisconsin Electric Power Company - Gas Operations for construction of a pipeline. This jointly-owned eight-inch pipeline is interconnected with Great Lakes Gas Transmission Company in the Upper Peninsula of Michigan near Watersmeet and provides an alternate source of supply into northern Wisconsin. In order to serve this pipeline, WPSC modified and extended the term of portions of its existing pipeline capacity and storage contracts with ANR Pipeline Company and added a new transportation service on Great Lakes Transmission Company's pipeline to -20- deliver up to 7,000 dekatherms per day into the jointly-owned pipeline system during the winter periods. Because of the substantial daily and seasonal swings in gas usage in WPSC's service territory, WPSC also has contracted with ANR Pipeline Company for firm underground storage capacity located in Michigan. There are no known geological formations in Wisconsin capable of being developed into underground storage facilities. Besides providing WPSC the ability to manage significant changes in daily gas demand, storage also provides WPSC the ability to purchase gas from the production areas at high load factors, thus minimizing supply costs. During the summer, gas purchased in excess of market demand is injected into storage. During the winter, gas is withdrawn from storage and combined with gas purchased in the production areas to meet the increased winter demand. Gas from storage provides up to 65% of WPSC's supply on winter peak days, approximately 34% of WPSC's winter sales volumes, and approximately 23% of WPSC's total annual sales volumes. WPSC's total firm storage capacity with ANR Pipeline Company is 11.3 million dekatherms. For peak day needs, WPSC also contracts with third-party suppliers for high deliverability storage in the Gulf Coast and/or mid-continent production areas during the winter. This storage capacity provides a back-up supply of gas into WPSC's transportation contracts when other supplies cannot be delivered due to production supply losses caused by extremely cold weather in the production areas. SUPPLY CONTRACTS WPSC contracts for firm term supplies with approximately 12 to 16 suppliers each year for gas produced in each of the 3 production areas. WPSC initially designed its supply portfolio with terms ranging from one to ten years so that only a portion of WPSC's supply contracts expired in any given year. As long-term contracts expire, WPSC has been replacing them with contracts of a one-year term or less due to the current uncertainty regarding the role of the gas utility in continuing the gas supply function. This will minimize potential stranded gas supply contract costs if retail gas deregulation should proceed quickly in Wisconsin. WPSC's supply portfolio, as of December 31, 1998, contained contracts with remaining terms ranging from five months to five years. Additional supplies are purchased on the monthly spot market as required to supplement supplies from long-term firm contracts. WPSC has been an active spot market purchaser since 1985 and has contracts in place with a number of suppliers of spot market gas. REGULATORY MATTERS IN THE WISCONSIN JURISDICTION INDUSTRY RESTRUCTURING During 1998, there was little progress on gas restructuring issues in Wisconsin because the PSCW's primary focus was on electric reliability issues. The PSCW has an ongoing investigation into gas industry restructuring. Phase I of this investigation addresses the issues of unbundling rates, pricing of contracted service in potential utility bypass situations, and -21- separation of the gas distribution function from the gas supply function. Phase II establishes standards of conduct regarding how gas utilities can interact with their marketing affiliates. Phase III explores the issue of how to determine when a competitive market exists for various segments of customers. This investigation could find that a regulated utility in the Wisconsin jurisdiction cannot sell natural gas in a market which is considered to be competitive. Because of the complexity of the issues involved, industry work groups were formed to study particular issues and bring recommendations back to the PSCW. The work groups will study issues regarding: (1) pipeline capacity, (2) market-based pricing for interruptible customers, (3) end-user price reporting, (4) marketer certification, (5) changes needed in the form of legislation or administrative rules, and (6) essential natural gas services and gas consumer protections. The study is expected to be completed in November of 1999. A separate docket was opened to assist the work group dealing with essential natural gas services and gas consumer protection issues to ensure a customer safety net in the transition to and within a restructured gas industry environment. The work group's report is expected to be completed in early 1999. Based on this report, the PSCW will forward recommendations to the legislature for proposed changes in the law. COST RECOVERY MECHANISM The PSCW investigated alternatives to gas cost recovery mechanisms in light of the evolving natural gas market. In November 1996, the PSCW issued an order which gave gas utilities a choice between continuing under a modified one-for-one gas cost recovery mechanism, or switching to a mechanism called performance-based rates. Under performance-based rates, gas utilities may keep a portion of any cost savings relative to a gas cost target value. WPSC elected to continue under a modified one-for-one mechanism. This mechanism returns all savings to customers and maintains appropriate regulatory oversight. In December 1998, the PSCW issued an order authorizing WPSC's modified one-for-one gas cost recovery mechanism with a start date of January 1, 1999. CUSTOMER RATES On January 14, 1999, the PSCW authorized a $10.3 million, or 5.1%, increase in WPSC's retail natural gas rates. The rates are effective January 15, 1999. WPSC has among the lowest gas rates in Wisconsin with rates being 93% of the state average for residential rates and 91% for commercial rates. WPSC anticipates filing an application with the PSCW on April 1, 2000, for new gas rates to be effective for the years 2001 and 2002. REGULATORY MATTERS IN THE MICHIGAN JURISDICTION INDUSTRY RESTRUCTURING The MPSC is also investigating the deregulation of retail gas markets and expansion of gas transportation service in Michigan. The MPSC decided it would be appropriate to conduct a series of pilot projects to test the development of competitive retail gas markets in Michigan. Michigan's four -22- largest gas utilities were approached by the MPSC regarding development and implementation of pilot programs. Because of the small size and limited number of customers in WPSC's Michigan service territory and the service territories of two other utility companies, the MPSC did not conduct pilot transportation programs for these three utilities. CUSTOMER RATES WPSC has not had a natural gas rate case in Michigan since 1986. REGULATORY MATTERS IN THE FERC JURISDICTION WPSC's involvement in federal regulatory activities in the natural gas area has been through the Wisconsin Distributor Group which is made up of several Wisconsin gas utilities. Over the past several years, the Wisconsin Distributor Group has participated in numerous dockets filed by ANR Pipeline Company, Viking Gas Transmission Company, and the FERC. Although Wisconsin Distributor Group members may file individual interventions, the bulk of the interventions have been done through the group. Past successes by the Wisconsin Distributor Group in various FERC dockets have resulted in substantial refunds for natural gas customers in Wisconsin as well as lower pipeline transportation rates charged by ANR Pipeline Company. WPSC and Wisconsin Distributor Group are participating in several FERC dockets as described below. Viking Gas Transmission Company, supported by its incremental shippers, is seeking rolled-in rate treatment for recent expansions on its pipeline system in a rate case. The impact of this rate treatment would result in a rate increase for existing shippers, such as WPSC, and a rate decrease for incremental shippers. The Wisconsin Distributor Group and existing shippers on Viking Gas Transmission Company's pipeline are proposing phase-in of system expansion costs to minimize rate shock and minimize overall costs to their customers. In a notice of proposed rulemaking on short-term natural gas transportation services, the FERC is seeking to eliminate cost-based regulation in the short-term market and to foster competition as a way to protect against the exercise of market power. The FERC's main focus has been a proposed daily auction of pipeline capacity. Currently, the Wisconsin Distributor Group and WPSC do not support the FERC's proposed mandatory auction. Instead, the Wisconsin Distributor Group and WPSC believe increased reporting and disclosure requirements may be enough to meet the FERC's goal of stimulating competition. In a notice of inquiry on regulation of interstate natural gas transportation services, the FERC is seeking comments on its pricing policies in the existing long-term market and on its pricing policies for new capacity. The Wisconsin Distributor Group and WPSC support the FERC's efforts to formulate pro-competitive, long-term pricing policies to ensure that the FERC continues to fulfill its statutory obligation to protect consumers while also encouraging the evolution of a competitive natural gas industry. -23- GAS FINANCIAL SUMMARY The following table sets forth the amounts of revenues, net income, and assets attributable to gas utility operations: GAS UTILITY OPERATIONS (WPSC) ============================================================================== (Thousands) Year Ended December 31 - ------------------------------------------------------------------------------ 1998 1997 1996 - ------------------------------------------------------------------------------ Consolidated Gas Operating Revenues $165,111 $211,090 $211,357 Net Income $ 5,912 $ 7,878 $ 2,350 Total Assets $246,365 $246,842 $268,622 ============================================================================== See Note 13 in Notes to Consolidated Financial Statements at pages 107 and 108. -24- GAS OPERATING STATISTICS WISCONSIN PUBLIC SERVICE CORPORATION
================================================================================================= 1998 1997 1996 - ------------------------------------------------------------------------------------------------- Operating revenues (Thousands) Residential $ 96,223 $122,782 $122,224 Small commercial and industrial 19,333 23,790 22,392 Large commercial and industrial 37,482 53,517 55,211 Other 12,073 11,001 11,530 - ------------------------------------------------------------------------------------------------- Total $165,111 $211,090 $211,357 ================================================================================================= Therms delivered (Thousands) Residential 172,007 202,558 216,963 Small commercial and industrial 38,104 43,056 46,614 Large commercial and industrial 103,226 127,132 142,033 Other 29,182 21,148 9,709 - ------------------------------------------------------------------------------------------------- Total therm sales 342,519 393,894 415,319 Transportation 265,573 268,114 251,279 - ------------------------------------------------------------------------------------------------- Total 608,092 662,008 666,598 ================================================================================================= Customers served (End of period) Residential 203,665 198,524 192,947 Small commercial and industrial 17,656 16,770 16,133 Large commercial and industrial 2,454 2,780 2,846 Other 1 1 1 Transportation customers 282 224 167 - ------------------------------------------------------------------------------------------------- Total 224,058 218,299 212,094 ================================================================================================= Average annual use (Therms) Residential 858.0 1,037.3 1,146.6 Small commercial and industrial 2,207.5 2,619.4 2,937.2 Large commercial and industrial 40,792.7 45,558.7 51,882.4 ================================================================================================= Average therm price (Cents) Residential 55.94 60.62 56.33 Small commercial and industrial 50.74 55.25 48.04 Large commercial and industrial 36.31 42.10 38.87 =================================================================================================
-25- D. NONREGULATED BUSINESS ACTIVITIES GENERAL The energy marketplace in the United States is moving toward deregulation and a competitive, commodity-driven environment which is leading to a significant change for vertically integrated utilities in general and for WPSR specifically. WPSR has a strategy to participate nationally in both the existing and the new energy marketplaces. WPSR is transitioning from a monopoly environment to a competitive, commodity-driven environment. This involves significant investment in technical support systems such as billing, communications, software, and hardware, in addition to addressing human resource issues relating to training, hiring, and retaining qualified employees and also aligning benefit and incentive packages with a competitive environment. At the end of 1998, WPSR had two principal nonregulated subsidiaries: ESI and PDI. These subsidiaries were formed in 1994 and 1995, respectively, for the purpose of positioning WPSR strategically for participation in nonregulated energy markets. WPS ENERGY SERVICES, INC. ESI is a diversified energy company. ESI targets retail energy sales and related services in midwestern and eastern states with an emphasis on serving commercial, industrial, and wholesale customers. Principal operations are located in Illinois, Michigan, Ohio, and Wisconsin. ESI also is participating in retail pilot projects in each of these states. Wholesale energy sales and related services are provided nationwide. ESI provides electric, natural gas, and alternate fuel products; real-time energy management services; and project management and energy utilization consulting. The gas markets in which ESI participates are characterized by strong competition, narrow margins, and volatile commodity and transportation prices. ESI uses various financial instruments to minimize the risks present in energy markets. See NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Note 1(e) at page 84 regarding "Price Risk Management Activities." Revenues at ESI were $351.3 million in 1998 compared with $189.4 million in 1997, an increase of 85.5%. Electric retail access has been slow to develop in ESI's target market areas. ESI's strategy is to bring electric products and services to existing gas customers. ESI experienced a loss of $6.9 million in 1998 compared with a loss of $4.9 million in 1997, an increase of 40.8%. The primary reasons for the loss at ESI were increased electric and gas trading losses primarily due to market volatility, and higher operating expenses due to expansion of the energy trading business. Partially offsetting these factors was an increase in the gas margin. -26- WPS POWER DEVELOPMENT, INC. PDI develops and owns electric generation projects and provides services to the electric power generation industry nationwide. PDI's services include acquisition and investment analysis, project development, engineering and management services, and operations and maintenance services. PDI's areas of expertise include cogeneration, distributed generation, generation from renewables, and generation plant repowering projects. An emerging trend in the restructuring of the electric utility industry is the divestiture of generation facilities. PDI is continually monitoring and assessing investment opportunities in this area. PDI owns a two-thirds interest in the Stoneman Power Plant, a 55-megawatt merchant steam plant located in Cassville, Wisconsin. The redevelopment of the plant as a 300-megawatt to 500-megawatt gas-fired combined cycle facility is planned for the 2002 time period. PDI was the successful bidder for the purchase of approximately 92 megawatts of hydroelectric and oil-fired facilities from Maine Public Service Company. PDI is awaiting regulatory approvals required to conclude this transaction. The asset acquisition is expected to close in the second quarter of 1999. In 1998, PDI entered into a joint venture with an affiliate of Earthco, a Nevada corporation, to turn residue from coal mining at the Alabama Land & Minerals site in Jasper County, Alabama into briquettes. The project began operation in June 1998 and is eligible to receive federal tax credits because of the briquette's status as a synthetic fuel. PDI experienced a loss of $2.4 million in 1998 compared with a $1.9 million loss in 1997, an increase of 26.3%. The increased loss at PDI was primarily due to additional expenses incurred in 1998 for the start up of new projects. See MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION at page 65 for additional information regarding nonregulated operations. E. ENVIRONMENTAL MATTERS GENERAL WPSC is subject to regulation with regard to the impact of its operations on air and water quality and solid waste disposal, and may be subject to regulation with regard to other environmental considerations by various federal, state, and local authorities. The application of federal and state restrictions to protect the environment involves or may involve review, certification, or issuance of permits by various federal and state authorities, including the United States Environmental Protection Agency and the Wisconsin Department of Natural Resources. Such restrictions (particularly in regard to emissions into the air and water, and solid waste disposal) may limit, prevent, or substantially increase the cost of the operation of WPSC's generating facilities and may require substantial investments in new equipment at existing installations. Such restrictions may also require substantial additional investments for any new projects and may -27- delay or prevent authorization and completion of the projects. WPSC cannot forecast the effects of such regulation upon its generation, transmission, and other facilities, or its operations, but WPSC believes that it is presently meeting existing requirements. AIR QUALITY WPSC's generation plants are in compliance with all current sulfur dioxide, nitrogen oxide, and particulate emission standards. The Federal Clean Air Act Amendments of 1990, hereinafter referred to as the Clean Air Act, required reductions in sulfur dioxide in 1995 (Phase I) to meet limitations based on an emission rate of 2.5 pounds per Btu multiplied by a historical generation baseline for Pulliam Unit 8 and Edgewater Unit 4 generation units. The Clean Air Act requires further reductions beginning in the year 2000 (Phase II). The year 2000 limits are based on an emission rate of 1.2 pounds per million Btu multiplied by a historical generation baseline for all generation units. WPSC's generation facilities met the year 2000 standard in 1995. WPSC achieved compliance with Wisconsin and federal sulfur dioxide emission limitations by switching to low sulfur coal. Because of the emission allowance system included in the Clean Air Act, operations during Phase I produce surplus allowances which will be available to aid in compliance with the requirements of Phase II. To the extent WPSC determines that it will have allowances available beyond its own requirements in both Phase I and Phase II, it will consider the sale of the excess allowances. The PSCW has ordered that profits from the sale of allowances be used to benefit utility customers. The Clean Air Act also requires the installation of low nitrogen oxide burners on several units. Low nitrogen oxide burners were installed at Pulliam Unit 8 early in 1994. Phase I of the Clean Air Act allows units smaller than 100 megawatts, such as Pulliam Unit 7, to be designated Phase I units, thus building up sulfur dioxide credits. Having made this election, low nitrogen oxide burners were installed on Pulliam Unit 7 in 1994. Low nitrogen oxide emissions from Pulliam Units 7 and 8 and Weston Unit 3 are averaged with Weston Units 1 and 2. This averaging plan generates additional emission allowances in Phase I and locks in Phase I nitrogen oxide limits for these units. This should reduce Phase II compliance costs. Expenditures of $1.0 million to $2.0 million for Phase II of the Acid Rain Program are projected through 1999 to assure nitrogen oxide emission compliance at the Pulliam and Weston plants. In September of 1998, the Environmental Protection Agency required certain states, including Wisconsin, to develop plans to reduce the emissions of nitrogen oxides from sources within the state by May of 2003. On a preliminary basis, WPSC projects potential capital costs of between $37.0 million and $96.0 million to comply with possible future regulations. The cumulative incremental annual operating and maintenance expense associated with these possible future regulations projected to be incurred by 2010 range from $29.0 million to $106.0 million. The costs will depend on the state-specific compliance method to be adopted in the future as well as the effectiveness of the various technologies available for nitrogen oxide emission control. Under WPSC's current practice, the capital costs (as reflected in depreciation expenses) and the annual operating costs are -28- anticipated to be recovered through rates charged to customers. On December 24, 1998, WPSC and five other parties filed a petition challenging the Environmental Protection Agency's regulations that required Wisconsin to prepare and submit the Nitrogen Oxide State Implementation Plan (Wisconsin Paper Council v. U.S. Environmental Protection Agency, Case No. 98-4269 (7th Cir. 1998)). On January 22, 1999, the State of Wisconsin moved to intervene in the litigation and challenged the geographic scope of the rule (as applied to Wisconsin) and the time by which nitrogen oxide controls must be implemented by facilities in the state. No decisions have been rendered on the merits of the case. Toxic air provisions in the Act will not be applied until the Environmental Protection Agency determines if those standards need to be applied to utilities. WATER QUALITY WPSC is subject to regulation by the Environmental Protection Agency and the Department of Natural Resources with respect to thermal and other discharges into Lake Michigan and other waters of Wisconsin from WPSC's power plants. Wastewater discharge permits with a term of five years were reissued by the Department of Natural Resources to WPSC for the Kewaunee Nuclear Power Plant in 1995 and for the Pulliam and Weston power plants in 1996. No new permit conditions or associated material costs were imposed compared to permits issued during earlier renewals. Revisions to state water quality rules as a result of the Great Lakes Initiative should not result in any significant changes when wastewater permits are reissued in 2000 for Kewaunee and in 2001 for the Pulliam and Weston plants. GAS PLANT CLEANUP WPSC is investigating the cleanup of eight manufactured gas plant sites which it previously operated in Green Bay, Two Rivers, Oshkosh, Marinette, Sheboygan (two sites), Stevens Point, and Menominee (Michigan). In general, WPSC is proceeding with these projects as the designated responsible party for cleanup, although for two sites, Sheboygan II and Oshkosh, formal agreements have been executed with the Department of Natural Resources covering the investigation and restoration activities. The agreement for Sheboygan II allows WPSC to work with Wisconsin on restoration. The site is not associated with the larger Sheboygan River and Harbor Superfund site. The agreement for Oshkosh was entered into in order to resolve a unilateral administrative order that was issued by the Department of Natural Resources. Work at the Stevens Point site was substantially completed in 1998 with monitoring of the site continuing. Cleanup costs were within the range expected for this site. Total costs of cleanup for the remaining seven sites, as estimated by an environmental consultant, should be in the range of $33.9 million to $41.0 million. The estimates assume removal of significantly contaminated soil and groundwater treatment and monitoring for up to 25 years, depending on site conditions. The cost estimates for five of the sites include removal and disposal of contaminated river sediments. As remedial feasibility studies and initial remedial activities are completed, remediation cost estimates may be adjusted and these adjustments could be significant. Other factors that can affect these estimates are changes in remedial technology, regulatory requirements, and experience gained through cleanup activities. -29- Expenditures for the gas plant sites are estimated to be made over the next 32 years. An initial liability for cleanup of $41.7 million had been established with an offsetting regulatory asset (i.e., a deferred charge). Expenditures have reduced the liability to $39.0 million at December 31, 1998. Based on discussions with regulators and a Wisconsin rate order, management believes that these costs, but not the carrying costs associated with the deferred charges, will be recoverable in future customer rates. WPSC filed with and received an order from the MPSC authorizing WPSC to defer the Michigan portion of these costs, using Wisconsin methods for future cost recovery. The cost estimates presented above do not take into consideration any recovery from insurance carriers or other third parties which WPSC has obtained. Insurance recoveries are deferred as a reduction to the regulatory asset; therefore, neither adjustments to the estimated liability nor insurance recoveries have an immediate impact on net income. To date, WPSC has received insurance settlements of approximately $12.6 million, thereby reducing the regulatory asset to $29.0 million at December 31, 1998. ASH DISPOSAL SITE The ash disposal site for UPPCO's John H. Warden Station was closed to receiving ash in 1993. Subsequent groundwater testing indicated elevated levels of boron and lithium. Supplemental remedial investigations were performed and a revised remedial action plan was developed. The plan will be submitted to the Michigan Department of Environmental Quality for approval in 1999. An estimated liability of $1.5 million and a regulatory asset of $1.3 million has been recorded for future costs associated with this site. F. CAPITAL REQUIREMENTS WPSR's principal utility subsidiary, WPSC, makes large investments in capital assets. Construction expenditures for WPSC are expected to be approximately $250.0 million in the aggregate for the 1999 through 2001 period. This includes expenditures for the replacement of the Kewaunee Nuclear Power Plant's steam generators. In addition, other capital requirements for WPSC for the three-year period include Kewaunee decommissioning trust fund contributions of $16.8 million. WPSC's agreement to purchase electricity from the De Pere Energy Center will be accounted for as a capital lease. While not a capital expenditure, the $77.8 million lease will affect the capital structure beginning in 1999. WPSR's other utility subsidiary, UPPCO, will incur construction expenditures of approximately $23.0 million for the period 1999 through 2001, primarily for electric distribution improvements. Investment expenditures for nonregulated projects are uncertain since there are few firm commitments at this time. Approximately $38.0 million will be incurred in 1999 to purchase generating units located in the State of Maine and in the Canadian Province of New Brunswick. Financing for most nonregulated projects is expected to be obtained through a subsidiary, -30- WPS Resources Capital Corporation, which was formed in January 1999 to obtain funding for those projects. WPSR will use internally-generated funds and short-term borrowing to satisfy most of its capital requirements. WPSR may periodically issue medium-term debt, additional long-term debt, and common stock to reduce short-term debt and to maintain desired capitalization ratios. The specific forms of financing, amounts, and timing will depend on the availability of projects, market conditions, and other factors. At this time, however, it is anticipated that common stock will be issued by WPSR in mid-1999. WPSR began issuing new shares of common stock for the Stock Investment Plan in January 1999. WPSR may also expand its leveraged employee stock ownership plan during the three-year period. See NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Note 10 at page 104 regarding "Future Utility Expenditures." G. EMPLOYEES At December 31, 1998, WPSR, including all of its subsidiaries, employed 2,673 persons. Of this number, 2,372 employees were employed by WPSC and 195 were employed by UPPCO. Of the employees of WPSC, 1,876 were considered electric utility employees and 496 were considered gas utility employees. Local 310 of the International Union of Operating Engineers represents 1,184 of WPSC's employees. On April 24, 1998, WPSC signed a contract with IUOE Local 310. That contract will expire on October 28, 2000. Of the employees of UPPCO, 131 are represented by Local 510 of the International Brotherhood of Electrical Workers, AFL-CIO. The current collective bargaining agreements for Local 510 expire on April 30, 1999. -31- ITEM 2. PROPERTIES A. UTILITY WPSC'S FACILITIES The following table includes information about the electric generation facilities of WPSC, including jointly-owned facilities: Rated Capacity (a) Type Name Location Fuel (Kilowatts) - ------------- ---------------- ------------- ----------- ------------- Steam Pulliam Green Bay, WI Coal 402,400 (b) Weston Wausau, WI Coal or Gas 480,100 (c) Kewaunee Kewaunee, WI Nuclear 210,500 (d) Columbia - Units No. 1 & 2 Portage, WI Coal 340,200 (d) Edgewater Unit No. 4 Sheboygan, WI Coal 110,700 (d) --------- Total Steam 1,543,900 Hydro Various 68,400 (e) (15 Plants) Combustion Various Gas, Oil, 267,096 (f) Turbine (8 Plants) or Diesel & Diesel --------- 1,879,396 Total System ========= (a) Based on winter 1998-1999 capacity ratings. (b) This plant has six units. (c) This plant has three units. Two units burn only coal and the other unit can burn coal or natural gas. (d) These facilities are jointly-owned by WPSC, Wisconsin Power and Light Company, and Madison Gas and Electric Company. The Kewaunee Nuclear Power Plant is operated by WPSC. The Columbia and Edgewater units are operated by Wisconsin Power and Light Company. The capacity indicated is WPSC's portion of total plant capacity based on the percent of ownership. The Kewaunee Nuclear Power Plant's ownership is based on the percent of ownership before the proposed acquisition by WPSC of Madison Gas and Electric Company's share of the plant. (e) Includes 12,900 kilowatts purchased from Wisconsin River Power Company. (f) WPSC and the Marshfield Electric and Water Department jointly own 112,200 kilowatts of combustion turbine peaking capacity which WPSC operates. -32- WPSC owns 56 transmission substations with a transformer capacity of 5,649,710 kilovolt-amperes, 111 distribution substations with a transformer capacity of 3,018,420 kilovolt-amperes, 1,549 miles of electric transmission lines, and 19,556 miles of electric distribution lines. Gas properties include approximately 4,774 miles of main, 70 gate and city regulator stations, and 209,419 lateral services. All gas facilities are located in Wisconsin except for distribution facilities in and near the city of Menominee, Michigan. Substantially all of WPSC's utility plant is subject to a first mortgage lien. UPPCO'S FACILITIES The following table includes information about the electric generation facilities at UPPCO: Rated Capacity (a) Type Name Location Fuel (Kilowatts) - ------------- ---------------- ------------- ----------- ------------ Steam Warden (b) L'Anse, MI Coal/Gas 17,700 Hydro Various (9 plants)(c) Hydro 37,910 Combustion Portage Houghton, MI Oil 27,500 Turbine Gladstone Gladstone, MI Oil 27,500 ------- Total System 110,610 ======= (a) Based on winter-rated capacity. (b) The J. H. Warden station is capable of burning gas and/or coal in any combination. The station was taken out of service on January 1, 1994 and is in standby or inactive reserve status. (c) Included in the nine hydro plants are Escanaba 1, Escanaba 3 and Boney Falls, a total of 7,850 kilowatts. All energy produced at these facilities is sold directly to a paper industry customer located in Escanaba, Michigan. UPPCO owns 806 miles of electric transmission and 2,753 miles of electric distribution lines. Substantially all of UPPCO's utility plant is subject to a first mortgage lien. -33- B. NONREGULATED The following table includes information about the jointly-owned electric generation facilities of PDI: Rated Capacity Type Name Location Fuel (Kilowatts) - ----- -------------- ------------ ---- ----------- Steam Stoneman Cassville, WI Coal 55,000 (a) (a) The Stoneman facility is owned by Mid-American Power, LLC. PDI Stoneman, Inc. (a wholly-owned subsidiary of WPS Power Development, Inc.) and B. M. Stoneman, Inc., (a wholly-owned subsidiary of Burns and McDonnell) own 66-2/3% and 33-1/3%, respectively, of Mid-American Power, LLC. ITEM 3. LEGAL PROCEEDINGS SPENT NUCLEAR FUEL DISPOSAL See the section titled Spent Nuclear Fuel Disposal under Part I, Item 1B, ELECTRIC MATTERS, Fuel Supply, at page 9 for a description of various proceedings relating to spent nuclear fuel. FUNDING DECONTAMINATION AND DECOMMISSIONING OF FEDERAL FACILITIES See the section titled Funding Decontamination and Decommissioning of Federal Facilities under Part I, Item 1B, ELECTRIC MATTERS, Fuel Supply, at page 10 for a description of various proceedings relating to decontamination and decommissioning liabilities. ENVIRONMENTAL See Part I, Item 1E, ENVIRONMENTAL MATTERS, at page 27 for a description of various proceedings relating to environmental matters. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year. -34- ITEM 4A. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information about outside directors is omitted for the reason that such information will be included in a proxy statement for the Annual Meeting of Shareholders of WPSR which is scheduled to be held on May 6, 1999. A. EXECUTIVE OFFICERS OF WPS RESOURCES CORPORATION ("WPSR")
Current Position and Business Effective Name and Age Experience During Past Five Years Date - -------------------------- --------------------------------------------- --------- Larry L. Weyers 53 Chairman, President, and Chief Executive Officer 02-12-98 President and Chief Executive Officer 05-01-97 President and Chief Operating Officer 01-01-96 Patrick D. Schrickel 54 Executive Vice President 12-29-96 Vice President 12-09-93 Phillip M. Mikulsky 50 Senior Vice President-Development 02-12-98 Vice President-Development 09-01-95 Manager-System Operations 10-01-91 * Director-System Operations 09-28-91 * Daniel P. Bittner 55 Vice President and Chief Financial Officer 05-01-97 Vice President 12-29-96 Richard E. James 45 Vice President-Corporate Planning 12-29-96 Vice President-Corporate Planning 08-01-95 * Assistant Vice President-Corporate Planning 05-09-94 * Assistant Vice President-Rates and Economic Evaluation 03-01-92 * Thomas P. Meinz 52 Vice President-Public Affairs 02-12-98 Bernard J. Treml 49 Vice President-Human Resources 02-12-98 Neil A. Siikarla 51 Vice President 06-01-98 Treasurer, Northern States Power - Wisconsin 06-01-92 Glen R. Schwalbach 53 Assistant Vice President-Corporate Planning 12-29-96 Assistant Vice President-Corporate Planning 07-28-96 * Assistant Vice President-Gas Engineering and Supply 06-01-90 * Francis J. Kicsar 59 Secretary 01-01-96 Ralph G. Baeten 55 Treasurer 12-09-93 Diane L. Ford 45 Controller and Chief Accounting Officer 05-01-97 Controller 12-15-93 Barth J. Wolf 41 Assistant Secretary and Manager-Legal Services 07-12-98 George R. Wiesner 41 Assistant Controller 12-15-96 Director-Financial Accounting ESI/PDI 08-25-96 * Financial Reporting Supervisor 05-01-87 *
* Identifies experience with Wisconsin Public Service Corporation ("WPSC") for Richard E. James, Phillip M. Mikulsky, Glen R. Schwalbach, and George R. Wiesner. The other listed officers of WPSR, except for Neil A. Siikarla, are also officers of WPSC and their experience with WPSC is indicated below. -35- B. EXECUTIVE OFFICERS OF WISCONSIN PUBLIC SERVICE CORPORATION ("WPSC")
Current Position and Business Effective Name and Age Experience During Past Five Years Date - -------------------------- --------------------------------------------- --------- Larry L. Weyers 53 Chairman and Chief Executive Officer 02-12-98 President and Chief Executive Officer 05-04-97 President and Chief Operating Officer 01-01-96 Senior Vice President-Power Supply and Engineering 08-01-95 Vice President-Power Supply and Engineering 05-09-94 Vice President-Energy Supply 01-01-92 Patrick D. Schrickel 54 President and Chief Operating Officer 02-12-98 Executive Vice President 12-29-96 Senior Vice President-Finance and Corporate Services 05-09-94 Senior Vice President-Operations 06-01-89 Daniel P. Bittner 55 Senior Vice President-Finance 05-17-98 Senior Vice President-Finance and Corporate Services 12-29-96 Senior Vice President-Customer Service 05-09-94 Senior Vice President-Finance 03-01-92 Clark R. Steinhardt 57 Senior Vice President-Nuclear Power 06-01-91 Charles A. Schrock 45 Senior Vice President-Energy Supply 12-13-98 Vice President-Energy Supply 05-31-98 Manager-Kewaunee Nuclear Power Plant 02-20-95 Manager-Nuclear Engineering 10-01-91 Bradley W. Andress 44 Vice President-Marketing 09-01-98 Vice President-Marketing, Lund Holding Intrntl. 10-28-95 Vice President-Sales, Plastics Inc, Div. of Newell 11-01-94 Vice President-Marketing, Anchor Plastics Division of Newell 08-01-91 Ralph G. Baeten 55 Vice President-Treasurer 08-01-95 Treasurer 03-01-92 Mark L. Marchi 51 Vice President-Nuclear 12-13-98 Site Vice President-Kewaunee Nuclear Power Plant 05-03-98 Manager-Nuclear Business Group 02-20-95 Manager-Kewaunee Nuclear Power Plant 10-01-91 Thomas P. Meinz 52 Vice President-Public Affairs 02-12-98 Vice President-Power Supply and Engineering 02-23-97 Power Supply and Engineering Executive 01-14-96 Senior Corporate Planning Executive 05-09-94 Manager-System Planning and Licensing 03-01-91 Wayne J. Peterson 40 Vice President-Distribution and Customer Service 02-12-98 Assistant Vice President-Customer Service 02-23-97 Manager-System Operations 10-01-95 Site Leader 10-01-94 Electric Superintendent 04-01-92 Bernard J. Treml 49 Vice President-Human Resources 05-09-94 Assistant Vice President-Human Resources 07-01-93 Francis J. Kicsar 59 Secretary 01-01-96 Assistant Secretary 03-01-92 Diane L. Ford 45 Controller 03-01-92
-36-
Current Position and Business Effective Name and Age Experience During Past Five Years Date - -------------------------- --------------------------------------------- --------- Barth J. Wolf 41 Assistant Secretary and Manager-Legal Services 07-12-98 Manager-Legal and Risk Management 05-19-96 * Administrator-Risk Management 03-01-92 *
NOTE: All ages for the officers of WPSR and WPSC are as of December 31, 1998. None of the executives listed above for WPSR or for WPSC are related by blood, marriage, or adoption to any of the other officers listed or to any director of the Registrant. Each officer shall hold office until his or her successor shall have been duly elected and qualified, or until his or her death, resignation, disqualification, or removal. Clark R. Steinhardt retired on January 31, 1999. -37- PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS WPS RESOURCES CORPORATION COMMON STOCK TWO-YEAR COMPARISON Dividends Share Data Per Share* Price Range - ---------- --------- ----------------------- High Low ------- ------- 1998 1st Quarter $ .485 33-13/16 32 2nd Quarter .485 34 29-15/16 3rd Quarter .495 35-3/4 31-5/8 4th Quarter .495 37-1/2 33 ----- Total $1.960 1997 1st Quarter $ .475 28-3/4 26-1/8 2nd Quarter .475 27-7/8 23-3/8 3rd Quarter .485 29-1/4 26-3/4 4th Quarter .485 34-1/4 28-1/16 ----- Total $1.920 * Dividend rates are those of WPS Resources Corporation. DIVIDEND RESTRICTIONS WPSC, WPSR's principal subsidiary, is restricted by a PSCW order to paying normal common stock dividends of no more than 109% of the previous year's common stock dividend without prior notice to the PSCW. Also, Wisconsin law prohibits WPSC from making loans to WPSR and its nonregulated subsidiaries and from guaranteeing their obligations. At December 31, 1998, WPSR had $328.5 million of retained earnings available for dividends. UPPCO's indentures relating to first mortgage bonds contain certain limitations on the payment of cash dividends on common stock. Under the most restrictive of these provisions, approximately $7.9 million of consolidated retained earnings were available at December 31, 1998, for the payment of common stock cash dividends by UPPCO. WPSR made a $34.0 million equity infusion into WPSC during the second quarter of 1998. In December 1998, WPSC paid to WPSR a special common dividend of $20.0 million. The special dividend allowed WPSC's average common equity capitalization ratio to remain at approximately 54.0%, the level approved by the PSCW for ratemaking purposes. -38- COMMON STOCK Listed: New York Stock Exchange Ticker Symbol: WPS Transfer Agent and Registrar: Firstar Bank Milwaukee, N.A. P. O. Box 2077 Milwaukee, Wisconsin 53201 As of December 31, 1998, there were 26,319 common stock shareholders of record. -39- ITEM 6. SELECTED FINANCIAL DATA WPS RESOURCES CORPORATION COMPARATIVE FINANCIAL STATEMENTS AND FINANCIAL STATISTICS (1994 TO 1998) A. CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
======================================================================================================================= Consolidated Statements of Income and Comprehensive Income ======================================================================================================================= Year Ended December 31 (Thousands, except share amounts) 1998 1997 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------- Operating revenues Electric utility $ 543,260 $536,885 $548,701 $550,105 $543,346 Gas utility 165,111 211,090 211,357 174,693 182,058 Nonregulated energy and other 355,365 187,862 156,391 56,155 10,921 - ----------------------------------------------------------------------------------------------------------------------- Total operating revenues 1,063,736 935,837 916,449 780,953 736,325 ======================================================================================================================= Operating expenses Electric production fuels 110,809 107,988 105,449 105,085 111,240 Purchased power 56,447 63,947 55,844 59,339 58,570 Gas purchased for resale 105,908 147,755 149,388 116,253 126,351 Nonregulated energy cost of sales 346,663 182,863 155,133 53,983 10,663 Other operating expenses 172,876 165,982 183,768 169,067 164,981 Maintenance 52,813 44,325 51,782 54,658 53,988 Depreciation and decommissioning 86,274 83,441 70,762 71,345 61,879 Taxes other than income 31,902 31,375 31,671 30,555 30,577 - ----------------------------------------------------------------------------------------------------------------------- Total operating expenses 963,692 827,676 803,797 660,285 618,249 ======================================================================================================================= Operating income 100,044 108,161 112,652 120,668 118,076 - ----------------------------------------------------------------------------------------------------------------------- Other income and (deductions) Allowance for equity funds used during construction 173 154 255 180 116 Other, net 2,505 11,952 (903) 5,852 4,338 - ----------------------------------------------------------------------------------------------------------------------- Total other income and (deductions) 2,678 12,106 (648) 6,032 4,454 ======================================================================================================================= Income before interest expense 102,722 120,267 112,004 126,700 122,530 - ----------------------------------------------------------------------------------------------------------------------- Interest on long-term debt 23,987 26,273 25,494 26,839 27,404 Other interest 4,827 4,910 3,922 2,677 1,856 Allowance for borrowed funds used during construction (177) (167) (299) (80) (149) - ----------------------------------------------------------------------------------------------------------------------- Total interest expense 28,637 31,016 29,117 29,436 29,111 ======================================================================================================================= Distributions - preferred securities of subsidiary trust 1,488 - - - - ======================================================================================================================= Income before income taxes 72,597 89,251 82,887 97,264 93,419 Income taxes 23,445 31,106 27,216 33,494 32,157 Minority interest (611) (797) (348) - - Preferred stock dividends of subsidiary 3,132 3,133 3,134 3,136 3,140 - ----------------------------------------------------------------------------------------------------------------------- Net income 46,631 55,809 52,885 60,634 58,122 ======================================================================================================================= Other comprehensive income - - - - - ======================================================================================================================= Comprehensive income $ 46,631 $ 55,809 $ 52,885 $ 60,634 $ 58,122 ======================================================================================================================= Shares of common stock Outstanding at December 31 26,502 26,518 26,537 26,551 26,551 Average 26,511 26,527 26,545 26,551 26,551 Basic and diluted earnings per average share of common stock $1.76 $2.10 $1.99 $2.28 $2.19 Dividend per share of common stock (2) 1.96 1.92 1.88 1.84 1.80 =======================================================================================================================
(1) These statements give effect to the merger with Upper Peninsula Energy Corporation. (2) Dividend rates are those of WPS Resources Corporation. -40- ITEM 6. SELECTED FINANCIAL DATA WPS RESOURCES CORPORATION COMPARATIVE FINANCIAL STATEMENTS AND FINANCIAL STATISTICS (1994 TO 1998) B. CONSOLIDATED BALANCE SHEETS (1)
======================================================================================================================= Consolidated Balance Sheets ======================================================================================================================= Assets - ----------------------------------------------------------------------------------------------------------------------- At December 31 (Thousands) 1998 1997 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------- Utility plant Electric $1,715,882 $1,685,413 $1,639,490 $1,603,632 $1,567,346 Gas 267,892 251,603 240,791 228,346 202,903 - ----------------------------------------------------------------------------------------------------------------------- Total 1,983,774 1,937,016 1,880,281 1,831,978 1,770,249 Less - Accumulated depreciation and decommissioning 1,206,123 1,113,142 1,028,266 977,163 913,423 - ----------------------------------------------------------------------------------------------------------------------- Total 777,651 823,874 852,015 854,815 856,826 Nuclear decommissioning trusts 171,442 134,108 100,570 82,109 64,147 Construction in progress 42,424 11,776 24,827 18,508 20,577 Nuclear fuel, net 18,641 19,062 19,381 14,275 19,417 - ----------------------------------------------------------------------------------------------------------------------- Net utility plant 1,010,158 988,820 996,793 969,707 960,967 ======================================================================================================================= Current assets 240,712 213,453 233,933 202,399 185,582 Net nonutility and nonregulated plant 41,235 28,188 28,470 9,033 5,878 Regulatory and other assets 218,282 205,343 204,120 212,769 186,544 - ----------------------------------------------------------------------------------------------------------------------- Total assets $1,510,387 $1,435,804 $1,463,316 $1,393,908 $1,338,971 ======================================================================================================================= ======================================================================================================================= Capitalization and Liabilities - ----------------------------------------------------------------------------------------------------------------------- Capitalization Common stock equity $ 517,190 $ 518,764 $ 510,642 $ 505,178 $ 486,682 Preferred stock of subsidiaries 51,200 51,645 51,656 51,703 51,776 Long-term debt 393,921 347,015 349,054 350,098 353,679 - ----------------------------------------------------------------------------------------------------------------------- Total capitalization 962,311 917,424 911,352 906,979 892,137 ======================================================================================================================= Liabilities Short-term borrowings 60,293 40,466 63,192 27,425 22,708 Deferred income taxes 122,642 131,197 135,904 141,518 131,541 Other liabilities and credits 365,141 346,717 352,868 317,986 292,585 - ----------------------------------------------------------------------------------------------------------------------- Total liabilities 548,076 518,380 551,964 486,929 446,834 ======================================================================================================================= Total capitalization and liabilities $1,510,387 $1,435,804 $1,463,316 $1,393,908 $1,338,971 =======================================================================================================================
(1) These statements give effect to the merger with Upper Peninsula Energy Corporation. -41- ITEM 6. SELECTED FINANCIAL DATA WPS RESOURCES CORPORATION COMPARATIVE FINANCIAL STATEMENTS AND FINANCIAL STATISTICS (1994 TO 1998) C. FINANCIAL STATISTICS
=========================================================================================================== Year Ended December 31 1998 1997 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------- Stock price $35-1/4 $33-13/16 $28-1/2 $34 $26-3/4 Book value per share $19.52 $19.56 $19.24 $19.03 $18.33 Return on average equity 9.0% 10.8% 10.3% 12.2% 12.0% Number of common stock shareholders 26,319 27,369 27,922 28,416 29,629 Number of employees 2,673 2,902 3,032 3,002 3,077 - ----------------------------------------------------------------------------------------------------------- Capitalization ratios Common equity including ESOP 53.8 56.6 56.0 55.7 54.6 Preferred stock of subsidiaries 5.3 5.6 5.7 5.7 5.8 Trust preferred securities of subsidiary trust 5.2 - - - - Long-term debt of subsidiaries 35.7 37.8 38.3 38.6 39.6 - ----------------------------------------------------------------------------------------------------------- Weather information Cooling degree days 519 255 352 808 519 Cooling degree days as a percent of normal 107.0% 53.3% 73.6% 170.1% 107.0% Heating degree days 6,530 8,099 8,566 7,813 7,578 Heating degree days as a percent of normal 82.4% 101.6% 107.5% 98.0% 95.5% ===========================================================================================================
Dividends Common Stock Comparison (by quarter) Per Share* High Low - -------------------------------------------------------------------------------------------- 1998 1st quarter $ .485 33-13/16 32 2nd quarter .485 34 29-15/16 3rd quarter .495 35-3/4 31-5/8 4th quarter .495 37-1/2 33 ----- $1.96 - -------------------------------------------------------------------------------------------- 1997 1st quarter $ .475 28-3/4 26-1/8 2nd quarter .475 27-7/8 23-3/8 3rd quarter .485 29-1/4 26-3/4 4th quarter .485 34-1/4 28-1/16 ----- $1.92 ============================================================================================
* Dividend rates are those of WPS Resources Corporation. -42- ITEM 6. SELECTED FINANCIAL DATA WISCONSIN PUBLIC SERVICE CORPORATION COMPARATIVE FINANCIAL STATEMENTS AND FINANCIAL STATISTICS (1996 TO 1998) D. SELECTED FINANCIAL DATA
========================================================================================================== (Millions) 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------- Operating revenues $ 652.5 $ 690.5 $ 701.9 Net income 57.2 64.7 60.4 Total assets (at December 31) 1,267.6 1,234.0 1,258.9 Long-term debt, net (at December 31) 304.0 307.6 310.8 ==========================================================================================================
-43- ITEM 6. SELECTED FINANCIAL DATA WISCONSIN PUBLIC SERVICE CORPORATION COMPARATIVE FINANCIAL STATEMENTS AND FINANCIAL STATISTICS (1996 TO 1998) E. FINANCIAL STATISTICS
========================================================================================================== (Millions) 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------- Coverage - ---------------------------------------------------------------------------------------------------------- Times interest earned before income taxes 4.48 4.48 4.36 Times interest earned after income taxes 3.29 3.30 3.21 Times interest and preferred dividends earned after income taxes 2.93 2.97 2.88 ========================================================================================================== Capitalization ratios Common equity including ESOP 57.6 56.0 55.3 Preferred stock 6.1 6.3 6.3 Long-term debt 36.3 37.7 38.4 ========================================================================================================== Percent long-term debt to net utility plant 33.5 34.7 34.8 ========================================================================================================== Average rate Bonds 7.2 7.0 7.0 Preferred stock 6.1 6.1 6.1 ========================================================================================================== Number of preferred stock shareholders 2,501 2,734 2,965 ========================================================================================================== Weather information Cooling degree days 519 255 352 Cooling degree days as a percent of normal 107.0% 53.3% 73.6% Heating degree days 6,530 8,099 8,566 Heating degree days as a percent of normal 82.4% 101.6% 107.5% ==========================================================================================================
-44- ITEM 6. SELECTED FINANCIAL DATA UPPER PENINSULA POWER COMPANY COMPARATIVE FINANCIAL STATEMENTS AND FINANCIAL STATISTICS (1996 TO 1998) F. SELECTED FINANCIAL DATA
========================================================================================================== (Millions) 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------- Operating revenues $ 62.7 $ 60.2 $ 58.4 Net income 3.5 3.7 5.2 Total assets (at December 31) 127.3 131.3 124.9 Long-term debt, net (at December 31) 38.8 38.9 39.0 ==========================================================================================================
-45- ITEM 6. SELECTED FINANCIAL DATA UPPER PENINSULA POWER COMPANY COMPARATIVE FINANCIAL STATEMENTS AND FINANCIAL STATISTICS (1996 TO 1998) G. FINANCIAL STATISTICS
========================================================================================================== (Millions) 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------- Coverage - ---------------------------------------------------------------------------------------------------------- Times interest earned before income taxes 2.31 2.34 3.05 Times interest earned after income taxes 1.81 1.87 2.32 Times interest and preferred dividends earned after income taxes - 1.87 2.31 ========================================================================================================== Capitalization ratios Common equity 47.6 50.4 50.4 Preferred stock - 0.6 0.6 Long-term debt 52.4 49.0 49.0 ========================================================================================================== Percent long-term debt to net utility plant 38.2 37.9 37.5 ========================================================================================================== Average rate Bonds 8.9 8.9 8.9 Preferred stock - 4.9 5.0 ========================================================================================================== Number of preferred stock shareholders - 48 53 ==========================================================================================================
-46- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION RESULTS OF OPERATIONS - WPS RESOURCES CORPORATION WPS Resources Corporation ("WPSR") is a holding company. Approximately 69% of WPSR's assets at December 31, 1998, approximately 52% of its 1998 revenues, and 87% of its 1998 net income were derived from electric utility operations. WPSR's wholly-owned subsidiaries include two regulated utilities, Wisconsin Public Service Corporation ("WPSC"), an electric and gas utility, and Upper Peninsula Power Company ("UPPCO"), an electric utility, and two primary nonregulated subsidiaries, WPS Energy Services, Inc. ("ESI"), and WPS Power Development, Inc. ("PDI"). 1998 COMPARED WITH 1997 WPS RESOURCES CORPORATION OVERVIEW WPSR's results of operations and financial position for 1998 and 1997 include the effects of the merger with Upper Peninsula Energy Corporation ("UPEN") which was effective September 29, 1998, and accounted for as a pooling of interests. In accordance with the terms of the merger, each of the 2,950,001 outstanding shares of UPEN common stock (no par value) were converted into 0.90 shares of WPSR common stock, subject to adjustment for cash payments for fractional shares. In conjunction with this merger, WPSR expensed transaction charges of approximately $1.6 million in 1998 and $2.7 million in 1997. These merger transaction charges consist of the following: Merger Charges (Millions) ----------------------------------------------------- 1998 1997 ----------------------------------------------------- Investment Bankers $0.8 $0.9 Legal 0.7 0.9 Accounting - 0.2 Other 0.1 0.7 ----------------------------------------------------- Total $1.6 $2.7 ===================================================== In addition, UPPCO, UPEN's primary subsidiary, recorded severance costs of $1.1 million and an additional $0.5 million in other merger-related expenses in 1998. WPSR consolidated operating revenues were $1.1 billion in 1998 compared with $935.8 million in 1997, an increase of 13.7%. Net income was $46.6 million in 1998 and $55.8 million in 1997, a decrease of 16.5%. Basic and diluted earnings per share were $1.76 in 1998 compared with $2.10 in 1997, a decrease of 16.2%. The primary reasons for the decrease in earnings, as explained below, were the impact of unusually warm winter weather, the effects of a full year electric rate decrease at WPSC, higher maintenance expenses at WPSC, decreased other income, higher other operating expenses, and a decrease in WPSC's gas margin. Partially offsetting these factors were an increase in electric utility margins and an increase in nonregulated margins. -47- OVERVIEW OF UTILITY OPERATIONS (WPSC AND UPPCO) Revenues at WPSC were $652.5 million in 1998 compared with $690.5 million in 1997, a decrease of 5.5%. Earnings were $54.1 million in 1998 and $61.6 million in 1997, a decrease of 12.2%. The primary reasons for the decrease in earnings at WPSC were the impact of unusually warm winter weather, increased maintenance expenses, a decrease in other income, an increase in other operating expenses, and a decrease in the gas margin. Partially offsetting these factors were an increase in the electric utility margin and a decrease in interest expense. Revenues at UPPCO were $62.7 million in 1998 compared with $60.2 million in 1997, an increase of 4.2%. Earnings were $3.5 million in 1998 compared with $3.7 million in 1997, a decrease of 5.4%. The primary reasons for the decrease in earnings at UPPCO were higher maintenance and other operating expenses partially offset by an increase in the electric margin. ELECTRIC UTILITY OPERATIONS (WPSC AND UPPCO) WPSR consolidated electric utility margins increased $11.1 million, or 3.0%, primarily due to increased kilowatt-hour ("kWh") sales of 3.0% to WPSC customers as a result of a 103.5% increase in cooling degree days in 1998. Partially offsetting the increase in electric margins in 1998 was the impact on WPSC of a Public Service Commission of Wisconsin ("PSCW") rate order which was effective for the entire year in 1998 but was only effective in 1997 for the period after February 21, 1997. This order authorized an 8.1% electric revenue reduction. ========================================================================== WPSR Consolidated Electric Margins (Thousands) - -------------------------------------------------------------------------- 1998 1997 1996 - -------------------------------------------------------------------------- Revenues $543,260 $536,885 $548,701 Fuel and purchased power 167,256 171,935 161,293 - -------------------------------------------------------------------------- Margin $376,004 $364,950 $387,408 ========================================================================== Sales in kWh (Thousands)* 12,172,432 11,993,358 11,828,788 ========================================================================== * Does not include UPPCO unbilled kWh. WPSR consolidated electric utility revenues increased $6.4 million, or 1.2%, largely due to increased revenues of $4.8 million from WPSC's wholesale customers and $1.5 million from WPSC's commercial and industrial customers as a result of the warmer weather. Also included in 1998 electric revenues are surcharge revenues at WPSC of $3.8 million related to the recovery of the deferred costs for the 1997 Kewaunee Nuclear Power Plant ("Kewaunee") steam generator repairs. Partially offsetting these increases to revenues were the electric rate reduction and a $1.0 million refund of WPSC's transmission revenues as the result of a 1998 Federal Energy Regulatory Commission ("FERC") settlement related to open access transmission tariff rates. -48- WPSR consolidated electric production fuel expense increased $2.8 million, or 2.6%, primarily as a result of increased generation expense. Kewaunee was out of service for the first six months of 1997 as the result of an extended outage to repair steam generators, thus, in comparison, the higher generation expense in 1998. WPSC is currently the operator and 41.2% owner of Kewaunee. WPSR consolidated purchased power expense decreased $7.5 million, or 11.7%, primarily due to decreased purchase requirements at WPSC in the first half of 1998. Purchase requirements at WPSC in the first half of 1997 were higher due to lack of production at Kewaunee in the first and second quarters of 1997 as a result of an extended outage. Kewaunee was also off-line in 1998 for a six-week scheduled refueling outage. Also contributing to lower purchased power expense at WPSC was a $1.2 million credit to purchased power expense in the fourth quarter of 1998 related to the settlement of litigation involving a contract with a power supplier. The PSCW allows WPSC to pass changes in the cost of fuel and purchased power, within a specified range, on to its customers through a fuel adjustment clause. GAS UTILITY OPERATIONS (WPSC) WPSR consolidated gas margin decreased $4.1 million in 1998, or 6.5%, primarily due to a 19.4% reduction in heating degree days. ========================================================================== WPSR Consolidated Gas Margins (Thousands) - -------------------------------------------------------------------------- 1998 1997 1996 - -------------------------------------------------------------------------- Revenues $165,111 $211,090 $211,357 Purchase costs 105,908 147,755 149,388 - -------------------------------------------------------------------------- Margin $ 59,203 $ 63,335 $ 61,969 ========================================================================== Volume in therms (Thousands) 608,092 662,008 666,598 ========================================================================== Gas operating revenues decreased $46.0 million, or 21.8%. This decrease was due to unusually mild weather in 1998 resulting in lower gas therm sales for 1998 of 8.1%. Also contributing to the decrease in gas operating revenues was a reduction in revenues of $7.5 million for refunds from ANR Pipeline Company which WPSC passed on to its gas customers in the second quarter of 1998. Gas purchase costs decreased $41.8 million, or 28.3%. This decrease was due to reduced customer demand as a result of the mild weather during 1998. Also contributing to the decrease in gas costs was a $7.5 million refund from ANR Pipeline Company which was credited to gas expense in the second quarter of 1998. Under current regulatory practice, the PSCW allows WPSC to pass changes in the cost of gas on to customers through a purchased gas adjustment clause ("PGAC"). -49- OTHER UTILITY EXPENSES/INCOME (WPSC AND UPPCO) Other operating expenses at WPSC increased $4.1 million, or 3.1%, primarily due to higher benefit costs in 1998. Other operating expenses at UPPCO increased $0.6 million, or 3.6%, primarily as the result of the accrual of $1.1 million in merger-related severance expense in 1998. Other operating expenses at UPPCO in 1997 included costs incurred related to the termination of UPPCO's Presque Isle Plant Operating Agreement with Wisconsin Electric Power Company ("WEPCO"). UPPCO had staffed and operated WEPCO's Presque Isle Power Plant through December 31, 1997, at which time the operating agreement was terminated. Maintenance expense at WPSC increased $7.8 million, or 18.6%, primarily as a result of increased expenses at Kewaunee during the second and fourth quarters of 1998. This increase was partly due to the recognition in the second quarter of 1998 of the 1997 deferred expenses for Kewaunee steam generator repairs. The PSCW approved deferral of the repairs in 1997, the cost of which has been collected in the second quarter of 1998 through a $3.8 million electric revenue surcharge. In addition, maintenance expense at Kewaunee increased in the fourth quarter of 1998 due to a scheduled refueling outage. Depreciation and decommissioning expenses at WPSC increased $2.4 million, or 3.1%, due to an increased plant base and to the accelerated recovery of investment in Kewaunee and accelerated funding of Kewaunee decommissioning costs. Accelerated recovery of investment and funding began on February 21, 1997 and, therefore, was effective for all of 1998 but only a portion of 1997. Other income at WPSC decreased $5.8 million, or 46.3%, primarily due to one-time gains on sales of nonutility property which occurred in 1997. These gains represented an increase in earnings for 1997 of approximately $0.11 per share. OVERVIEW OF NONREGULATED OPERATIONS Nonregulated operations primarily consist of the gas and electric sales at ESI, an energy marketing subsidiary. Nonregulated operations also include those of WPSR as a holding company and those of PDI which develops electric generation projects, invests in generating projects, and provides services to the electric power generation industry. Nonregulated operations experienced a loss of $11.0 million in 1998 compared with a loss of $9.5 million in 1997. Although nonregulated margins continue to grow, losses are being experienced due to gas and electric trading losses and expenses associated with the expansion of customer base. OVERVIEW OF WPS ENERGY SERVICES, INC. Revenues at ESI were $351.3 million in 1998 compared with $189.4 million in 1997, an increase of 85.5%. ESI experienced a loss of $6.9 million in 1998 compared with a loss of $4.9 million in 1997. The primary reasons for the increased loss at ESI were increased electric and gas trading losses primarily due to market volatility, and higher operating expenses due to expansion of -50- the energy trading business. Partially offsetting these factors was an increase in the gas margin. NONREGULATED MARGINS (ESI) Gas margins at ESI were $4.0 million in 1998 compared with $1.9 million in 1997, an increase of 110.5%. Electric margins at ESI remained fairly stable. Gas revenues at ESI were $330.0 million in 1998 compared with $182.3 million in 1997, an increase of $147.7 million, or 81.0%. This increase was the result of sales volume growth and expansion to additional geographic areas. Electric revenues at ESI were $20.5 million in 1998 and $6.4 million in 1997, an increase of $14.1 million, or 220.3%. This increase was also the result of sales volume growth. ESI's cost of sales were $346.4 million in 1998 and $186.6 million in 1997, an increase of $159.8 million, or 85.6%. This increase was primarily due to increased gas purchases and purchased power of $145.6 million and $14.2 million, respectively, as a result of customer growth and higher costs of purchases. OTHER NONREGULATED EXPENSES/INCOME (ESI) Other operating expenses at ESI increased $1.1 million, or 13.6%, due to expansion of the business. ESI experienced gas trading losses of $4.9 million in 1998 and $1.4 million in 1997 largely due to market volatility. ESI also experienced electric trading losses of $1.2 million in 1998 primarily due to losses in the third quarter related to the unprecedented market volatility in the electric trading market. PRICE RISK MANAGEMENT ACTIVITIES (ESI) WPSR has not experienced significant price risk activities at its utility operations which are not recoverable through customer rates; however, price risk is experienced at ESI. ESI utilizes derivative financial and commodity instruments ("derivatives"), including futures and forward contracts, to reduce market risk associated with fluctuations in the price of natural gas and electricity sold under firm commitments with certain of its customers. ESI also utilizes derivatives, including price swap agreements, call and put option contracts, and futures and forward contracts, to manage market risk associated with a portion of its anticipated supply requirements. In addition, ESI utilizes derivatives, within specified guidelines, for trading purposes. Gains or losses on derivatives associated with firm commitments are recognized as adjustments to the cost of sales or to revenues when the related transactions affect earnings. Gains and losses on derivatives associated with forecasted transactions are recognized when such forecasted transactions affect earnings. At December 31, 1998, $7.2 million in losses related to firm commitments and forecasted transactions were deferred. If it is no longer probable that a forecasted transaction will occur, any gain or loss on the derivative instrument as of such date is immediately recognized in earnings. Derivatives for trading purposes are marked to market each accounting period, and gains and losses are recognized as a component of other income at that time. In 1998 and 1997, trading losses of $6.1 million and $1.4 million, respectively, were recognized. -51- At December 31, 1998, ESI had outstanding 22.0 million notional dekatherms of natural gas under futures and option agreements and 1.3 million notional dekatherms of natural gas under basis swap agreements for purposes of managing market risk. The financial instruments outstanding at December 31, 1998 expire at various times through August 2000. ESI has certain gas sales commitments through August 2000 with a range of sale prices from $2.36 to $2.38 per dekatherm and a range of associated gas purchase costs of $2.29 to $2.31 per dekatherm. As of December 31, 1998, the fair value of trading instruments included assets of $0.7 million. Except for a minimal level of electric trading instruments, financial instruments used for trading in 1998 and 1997 were natural gas derivatives. At December 31, 1998, ESI had outstanding 13.6 million notional dekatherms of natural gas under futures and option agreements and 1.6 million notional dekatherms of natural gas under basis swap agreements for trading purposes. ============================================================================ Gas Commodity Position (contract amounts in millions) - ---------------------------------------------------------------------------- Carrying Fair Amount Value - ---------------------------------------------------------------------------- Inventory $5.9 $5.9 Fixed-price purchase obligations $115.0 Fixed-price sales obligations $99.8 ============================================================================ Related Derivatives - ---------------------------------------------------------------------------- Expected Maturity ----------------- Fair 1999 2000 Total Value - ---------------------------------------------------------------------------- Futures NYMEX - Hedging Long (billion cubic feet) 34.8 2.2 Weighted average settlement price (per dekatherm) $2.26 $2.32 Contract amount $78.8 $5.1 $83.9 $70.5 Short (billion cubic feet) 18.4 0.8 Weighted average settlement price (per dekatherm) $2.18 $2.50 Contract amount $40.0 $2.1 $42.1 $35.9 - ---------------------------------------------------------------------------- Futures NYMEX - Trading Long (billion cubic feet) 33.5 Weighted average settlement price (per dekatherm) $2.28 Contract amount $76.3 $76.3 $61.0 Short (billion cubic feet) 37.0 Weighted average settlement price (per dekatherm) $2.25 Contract amount $83.2 $83.2 $67.2 - ---------------------------------------------------------------------------- -52- ============================================================================ Related Derivatives (continued) - ---------------------------------------------------------------------------- Expected Maturity ----------------- Fair 1999 2000 Total Value - ---------------------------------------------------------------------------- Fixed-Float Futures Swap - Hedging Long (billion cubic feet) 7.2 3.4 Weighted average settlement price (per dekatherm) $2.21 $2.28 Contract amount $15.9 $7.8 $23.7 $22.2 Short (billion cubic feet) 1.5 0.1 Weighted average settlement price (per dekatherm) $2.12 $2.18 Contract amount $3.1 $0.3 $3.4 $3.0 - ---------------------------------------------------------------------------- Fixed-Float Futures Swap - Trading Long (billion cubic feet) 6.0 Weighted average settlement price (per dekatherm) $2.21 Contract amount $13.1 $13.1 $11.3 Short (billion cubic feet) 3.1 0.1 Weighted average settlement price (per dekatherm) $2.15 $1.85 Contract amount $6.8 $0.2 $7.0 $6.0 - ---------------------------------------------------------------------------- Options - Hedging Long calls (billion cubic feet) 0.6 Weighted average strike price (per dekatherm) $2.46 Contract amount $1.6 $1.6 $0.2 Long puts (billion cubic feet) 0.6 Weighted average strike price (per dekatherm) $1.87 Contract amount $1.1 $1.1 $0.0 Short calls (billion cubic feet) 0.7 Weighted average strike price (per dekatherm) $2.43 Contract amount $1.7 $1.7 $0.2 Short puts (billion cubic feet) 0.8 0.5 Weighted average strike price (per dekatherm) $2.25 $2.43 Contract amount $1.8 $1.1 $2.9 $0.3 - ---------------------------------------------------------------------------- -53- ============================================================================ Related Derivatives (continued) - ---------------------------------------------------------------------------- Expected Maturity ----------------- Fair 1999 2000 Total Value - ---------------------------------------------------------------------------- Options - Trading Long calls (billion cubic feet) 2.2 Weighted average strike price (per dekatherm) $2.27 Contract amount $5.1 $5.1 $0.3 Long puts (billion cubic feet) 5.9 Weighted average strike price (per dekatherm) $2.05 Contract amount $12.0 $12.0 $0.7 Short calls (billion cubic feet) 1.5 Weighted average strike price (per dekatherm) $2.17 Contract amount $3.2 $3.2 $0.2 Short puts (billion cubic feet) 5.0 0.5 Weighted average strike price (per dekatherm) $2.14 $2.30 Contract amount $10.7 $1.0 $11.7 $0.9 - ---------------------------------------------------------------------------- Basis Swaps - Hedging Long (billion cubic feet) 12.2 0.9 Weighted average settlement price (per dekatherm) $0.17 $0.29 Contract amount $2.1 $0.3 $2.4 $1.5 Short (billion cubic feet) 13.5 0.5 Weighted average settlement price (per dekatherm) $0.20 $0.09 Contract amount $2.7 $2.7 $1.5 - ---------------------------------------------------------------------------- Basis Swaps - Trading Long (billion cubic feet) 80.5 2.6 Weighted average settlement price (per dekatherm) $0.25 $0.24 Contract amount $20.9 $0.6 $21.5 $9.3 Short (billion cubic feet) 82.1 3.8 Weighted average settlement price (per dekatherm) $0.25 $0.23 Contract amount $20.4 $0.9 $21.3 $9.7 ============================================================================ OTHER NONREGULATED OPERATIONS Losses at PDI were $2.4 million in 1998 compared with $1.9 million in 1997. The increase in losses at PDI was primarily due to additional expenses incurred in 1998 for the start-up of new projects. Other operating expenses at PDI increased $1.1 million, or 25.4%, due to higher project expenses. Other income at WPSR included a dividend on a venture capital investment of -54- $2.0 million in the first quarter of 1998 compared with $0.2 million in the first quarter of 1997. 1997 COMPARED WITH 1996 WPS RESOURCES CORPORATION OVERVIEW WPSR consolidated operating revenues were $935.8 million in 1997 and $916.4 million in 1996, an increase of 2.1%. Net income increased 5.5% to $55.8 million in 1997 from $52.9 million in 1996. Basic and diluted earnings per share were $2.10 in 1997 compared with $1.99 in 1996, an increase of 5.5%. The primary reasons for the increase in earnings were decreased operating and maintenance expenses, increased other income, an increased nonregulated energy margin, and an increased gas utility margin. Partially offsetting these factors were a decrease in the electric utility margin, an increase in depreciation and decommissioning expense, and an increase in income tax expense. OVERVIEW OF UTILITY OPERATIONS (WPSC AND UPPCO) Revenues at WPSC were $690.5 million in 1997 compared with $701.9 million in 1996, a decrease of 1.6%. Earnings were $61.6 million in 1997 and $57.3 million in 1996, an increase of 7.5%. The primary reasons for the increase in earnings at WPSC were a decrease in operating and maintenance expenses, an increase in other income, and an increase in the gas utility margin. Offsetting these factors were a decrease in the electric utility margin, an increase in depreciation and decommissioning expense, and an increase in income tax expense. Revenues at UPPCO were $60.2 million in 1997 compared with $58.4 million in 1996, an increase of 3.1%. Earnings were $3.7 million in 1997 and $5.2 million in 1996, a decrease of 28.8%. The primary reason for the decrease in earnings at UPPCO was a decrease in the electric utility margin. ELECTRIC UTILITY OPERATIONS (WPSC AND UPPCO) WPSR consolidated electric utility margins decreased $22.5 million, or 5.8%, primarily due to implementation of a PSCW rate order at WPSC which authorized a $35.5 million, or 8.1%, electric revenue reduction. A second factor contributing to decreased margins was increased replacement power costs as a result of an extended outage at Kewaunee. A surcharge authorized by the PSCW partially offset increases in replacement power costs in the latter part of the first quarter and in the second quarter of 1997. In spite of a 27.6% decrease in cooling degree days, WPSR consolidated electric kWh sales increased by 1.5% primarily due to increased demand by WPSC's commercial and industrial customers. WPSC's commercial and industrial kWh sales increased 4.8%, while wholesale kWh sales decreased 3.4%. WPSR consolidated electric utility revenues decreased $11.8 million, or 2.2%, primarily due to the electric rate decrease at WPSC. WPSR consolidated electric production fuel expense increased $2.5 million, or 2.4%. Nuclear fuel expense at WPSC was $2.0 million lower than in 1996 due to decreased generation at Kewaunee in the first and second quarters of 1997 as a result of an extended outage. Steam fuel expense at WPSC was higher by $1.0 million and combustion turbine generation expense was -55- higher by $3.2 million due to increased generation requirements from these sources during the extended outage at Kewaunee. WPSR consolidated purchased power expense increased $8.1 million, or 14.5%, primarily due to increased purchase requirements and higher costs of purchased power at WPSC during the extended outage at Kewaunee. The PSCW allows WPSC to pass changes in the cost of fuel and purchased power, within a specified range, on to its customers through a fuel adjustment clause. WPSC is required to file an application to adjust rates either higher or lower when costs are plus or minus 2% from forecasted costs on an annual basis. The additional fuel costs in 1997 did not result in WPSC being outside this 2% window. GAS UTILITY OPERATIONS (WPSC) WPSR consolidated gas margin increased $1.4 million, or 2.2%, primarily due to WPSC's implementation of a PSCW rate order which authorized a $5.7 million, or 2.7%, increase in gas revenues. Gas operating revenues remained relatively stable reflecting the rate increase offset by a 5.5% reduction in heating degree days. Gas revenues also reflect a one-time reduction of $0.9 million in the first quarter of 1997 as a result of a PSCW directive to change the accounting treatment for previous customer line extensions. This reduction represented a decrease of approximately $.02 per share after income tax effects. Gas purchase costs showed a net decrease of $1.6 million, or 1.1%, primarily due to reduced purchases because of decreased demand as a result of the reduction in heating degree days. The PSCW allows WPSC to pass changes in the cost of gas on to customers through a PGAC. OTHER UTILITY EXPENSES/INCOME (WPSC AND UPPCO) Other operating expenses at WPSC decreased $24.1 million, or 15.2%. Cost saving initiatives and decreased amortization of deferred demand-side management expenditures resulted in lower customer service and sales expenses of $9.5 million. Administrative expenses decreased $5.8 million due to cost saving measures and reduced postretirement medical, dental, and other benefit expenses. Generation operating expenses were lower by $7.3 million primarily as a result of the completion in 1996 of an amortization of deferred expenses related to a previous coal contract settlement. Gas operating expenses decreased $1.5 million as the result of a PSCW directive requiring gas servicing revenues and expenses to be classified as other income and deductions beginning in 1997. Maintenance expense at WPSC decreased $7.1 million, or 14.5%. Electric transmission and distribution expenses decreased $3.4 million as a result of cost saving initiatives and less maintenance of overhead lines in 1997 due to less storm damage. Maintenance expenses were $1.9 million lower at Kewaunee in 1997 because Kewaunee was out of service in 1996 for scheduled maintenance. Gas distribution expenses were lower by $0.9 million due to cost saving initiatives and decreased maintenance activities. Steam costs decreased $0.6 million at WPSC's coal-fired plants due to changes in maintenance schedules as a result of the extended outage at Kewaunee. -56- Depreciation and decommissioning expenses at WPSC increased $12.0 million, or 18.8%, largely due to the accelerated recovery of investment in Kewaunee and accelerated funding of Kewaunee decommissioning costs. Other income at WPSC increased $7.5 million, or 141.7%, primarily due to gains in 1997 on the sale of nonutility property of $4.8 million which represented an increase of approximately $.11 per share after income tax effects. Also included in other income in 1997 was interest of $2.2 million resulting from an income tax audit settlement. Income tax expense increased $1.9 million reflecting higher net income in 1997. OVERVIEW OF NONREGULATED OPERATIONS Nonregulated operations experienced a loss of $9.5 million in 1997 compared with a loss of $9.6 million in 1996. Operating losses at the nonregulated subsidiaries were anticipated by management as the companies developed infrastructure and financed additional working capital needed to support growth. Losses were also incurred at the WPSR holding company in 1997 due to expenses incurred as a result of the merger with UPEN. OVERVIEW OF WPS ENERGY SERVICES, INC. Revenues at ESI were $189.4 million in 1997 compared with $161.8 million in 1996, an increase of 17.1%. ESI incurred a loss of $4.9 million in 1997 and a loss of $6.3 million in 1996. NONREGULATED MARGINS (ESI) Gas margins at ESI were a positive $2.1 million in 1997 and a negative $1.1 million in 1996, an increase of $3.2 million. In 1996, customer commitments at ESI were not fully hedged during a period of volatile gas commodity markets and certain gas suppliers defaulted which negatively impacted margins. Electric margins at ESI increased $0.9 million in 1997. Gas sales at ESI increased $26.2 million in 1997, or 17.1%, as a result of customer growth. Electric sales at ESI increased $5.6 million in 1997, or 716.0%, also as a result of customer growth. Gas purchases and purchased power expense increased $20.5 million and $4.7 million, respectively, in 1997. OTHER NONREGULATED EXPENSES/INCOME (ESI) Other operating expenses at ESI increased $1.3 million, or 19.4%, due to expansion of the business and the development of infrastructure as ESI positions itself for the future. Although increased margins more than offset other operating expenses, interest costs increased due to the financing of additional working capital needed to support the growth of ESI. ESI experienced trading losses of $1.4 million in 1997 and $2.5 million in 1996. -57- OTHER NONREGULATED OPERATIONS PDI incurred a loss of $1.9 million in 1997 and a loss of $4.0 million in 1996. Other operating expenses at PDI increased $0.4 million as a result of expansion of the business and operation of the Stoneman Power Plant ("Stoneman"). Project revenues at PDI partially offset costs related to the investigation of possible energy-related investments and a loss from Stoneman operations. PDI also experienced a loss of $4.0 million in 1996 related to the write-off of an investment in an industrial processing facility. This write-off represented a decrease in 1996 earnings of $.09 per share after income tax effects. Other operating expenses at WPSR increased $2.7 million in 1997 due to expenses associated with the UPEN merger. BALANCE SHEET - WPSR 1998 COMPARED WITH 1997 Nuclear decommissioning trusts increased $37.3 million due to continued funding and favorable investment returns. Construction in progress increased $30.6 million largely as a result of construction expenditures related to the Kewaunee steam generator replacement project, the combustion turbine project at West Marinette, and the transmission line for the De Pere Energy Center project. Customer receivables increased $21.1 million primarily as a result of increased sales at ESI. Net nonutility and nonregulated plant increased $13.0 million as a result of the acquisition of additional assets at PDI. Investments and other assets increased $18.5 million primarily due to an increased unrealized gain on the nuclear decommissioning trust at WPSC and an increased unrealized loss on hedging activities at ESI. Commercial paper increased $26.9 million due to increased operational cash needs at WPSC and WPSR. Cash requirements exceeded internally generated funds at both WPSC and WPSR. Accounts payable increased $25.7 million due to increased payables at WPSC related to the 1998 Kewaunee refueling outage and other construction projects, and higher payables at ESI as a result of increased sales activity. FINANCIAL CONDITION - WPSR INVESTMENTS AND FINANCING WPSR made a $34.0 million equity infusion into WPSC during the second quarter of 1998. WPSC retired $50.0 million of first-mortgage bonds on July 1, 1998 and issued $50.0 million of senior notes secured by first-mortgage bonds on December 14, 1998. A special common stock dividend of $20.0 million was paid by WPSC to WPSR in December 1998. The special dividend allowed WPSC's average equity capitalization ratio to remain at approximately 54%, the level approved by the PSCW for ratemaking. Short-term borrowings increased $26.9 million during 1998 as a result of cash requirements in excess of internally generated funds. Pretax interest coverage was 4.48 times for the 12 months ended December 31, 1998 for WPSC. WPSC's bond ratings are AA+ (Standard & Poor's and Duff & Phelps) and Aa2 (Moody's). -58- WPSR will use internally-generated funds and short-term borrowing to satisfy most of its capital requirements. WPSR may periodically issue additional long-term debt and common stock to reduce short-term debt and to maintain desired capitalization ratios. The specific forms of financing, amounts, and timing will depend on the availability of projects, market conditions, and other factors. At this time, however, it is anticipated that common stock will be issued by WPSR in mid-1999. WPSR began issuing new shares of common stock for the Stock Investment Plan in January 1999. WPSR may also expand its leveraged employee stock ownership plan during the next three-year period. WPSC makes large investments in capital assets. Construction expenditures for WPSC are expected to be approximately $250.0 million in the aggregate for the 1999 through 2001 period. This includes expenditures for the replacement of Kewaunee steam generators. In addition, other capital requirements for WPSC for the three-year period will include Kewaunee decommissioning trust fund contributions of $16.8 million. WPSC's agreement to purchase electricity from the De Pere Energy Center, a gas-fired cogeneration facility, will be accounted for as a capital lease. The De Pere Energy Center lease will be capitalized at $77.8 million in 1999. While not a capital expenditure, this will affect the capital structure. UPPCO will incur construction expenditures of about $23.0 million in the aggregate for the period 1999 through 2001, primarily for electric distribution improvements. Investment expenditures for nonregulated projects are uncertain since there are few firm commitments at this time. Approximately $38.0 million will be incurred in 1999 to purchase generating units located in the State of Maine and the Canadian Province of New Brunswick. Financing for most nonregulated projects is expected to be obtained through a new subsidiary, WPS Resources Capital Corporation, which was formed in January 1999 to obtain funding for those projects. On July 30, 1998, WPSR Capital Trust I ("Trust"), a Delaware business trust of which WPSR owns all of the outstanding $1.5 million trust common securities, issued $50.0 million of trust preferred securities to the public. The sole asset of the Trust is $51.5 million of WPSR subordinated debentures due in 2038. The terms and interest payments on these debentures correspond to the terms and distributions on the trust preferred securities. REGULATORY WPSC received a rate order in the Wisconsin jurisdiction on January 15, 1999. The impact is a $26.9 million increase in electric revenues and a $10.3 million increase in gas revenues on an annual basis. The new rates will be effective for 1999 and 2000. The PSCW authorized a 12.1% return on WPSC equity for 1999 and 2000. -59- MERGER On September 29, 1998, UPEN merged with and into WPSR, and UPPCO, UPEN's utility subsidiary, became a wholly-owned subsidiary of WPSR. The exchange of stock qualifies as a tax-free transaction and the transaction has been accounted for as a pooling of interests. KEWAUNEE On September 29, 1998, WPSC and Madison Gas and Electric Company ("MG&E") finalized an arrangement in which WPSC will acquire MG&E's 17.8% share of Kewaunee. This agreement, the closing of which is contingent upon regulatory approvals and steam generator replacement scheduled for the spring of 2000, will give WPSC 59.0% ownership in Kewaunee. The arrangement provides that the book value of MG&E's share of Kewaunee at the time of the transfer could be credited against the purchase price of a planned 83-megawatt, natural gas-fired, combustion-turbine electric generation station to be built near Marinette, Wisconsin. WPSC had previously agreed to build this station for MG&E. If, for some reason, the Marinette station is not completed, the arrangement calls for WPSC to pay for MG&E's share of Kewaunee with a combination of cash and notes. MG&E has agreed to retain certain of its obligations related to the period of time that it had been an owner of Kewaunee. MG&E will effectively transfer its nuclear decommissioning funds to WPSC to pay for MG&E's share of the currently estimated decommissioning costs of the plant at the closing for the asset swap. WPSC and Wisconsin Power and Light Company, the joint owners of the plant after the described change in ownership, will be responsible for the decommissioning of the plant. YEAR 2000 COMPLIANCE The Year 2000 issue arises because software programs, computer hardware, and equipment that have date sensitive software or embedded chips may recognize a date using "00" as the year 1900 rather than the year 2000. This may result in system failures or other disruptions of operations. WPSR and its subsidiary companies are committed to eliminating or minimizing adverse effects of the Year 2000 computer compliance issue on their business operations, including the products and services provided to customers, and to maintaining WPSR's reputation as an efficient and reliable supplier of energy. WPSR, however, is unable to guarantee that there will be no adverse effects as a result of the Year 2000 computer compliance issue because many aspects of compliance are beyond WPSR's direct control. WPSR has undertaken a program to assess Year 2000 compliance and to bring computer systems into compliance by the year 2000. All systems, including energy production and delivery systems, other embedded systems, and third party systems of suppliers are being evaluated to identify and resolve potential problems. A Year 2000 project plan which includes awareness, inventory and assessment, remediation, testing, and implementation has been developed. The formal awareness phase of the Year 2000 project which includes understanding and communication of the issue to employees, customers, suppliers, and other -60- affected parties has essentially been completed. The Year 2000 issue has been communicated to WPSR employees and customers via several media. All WPSR business unit leaders have been made aware of the Year 2000 project plan and their roles in implementing the plan. Communication and response to Year 2000 inquiries continue. The inventory and assessment phase which includes identification of all information and non-information technology systems and of non-compliant systems, applications, and hardware, has been completed. Action plans for remediation, which includes modifications to bring systems into compliance, and action plans for testing including validation of compliance have been completed. Modifications of major in-house supported systems to correct Year 2000 problems have been underway since 1996. WPSR's Information Technology Department has identified five major systems. All of these systems (customer information, finance, human resources, materials management, and facility management) are currently Year 2000 compliant. In addition, non-information technology systems have been identified and ranked as to the risk posed by non-compliance. Non-information technology systems include computer and embedded systems related to WPSR's power plant operating, system operating, hydraulic, transmission, and other operating functions. All systems ranked as "critical," "severe," or "high" are scheduled to be Year 2000 compliant by the end of the first quarter of 1999. WPSR has hired an external consulting group to monitor the progress of its Year 2000 compliance activities. The consulting group's responsibilities include performing a status check on WPSR's ability to achieve Year 2000 compliance. In addition, WPSR is identifying, contacting, and assessing suppliers and other business partners for Year 2000 readiness, as these external parties may have the potential to impact WPSR's Year 2000 readiness. WPSR is also working to address Year 2000 issues related to all joint ownership facilities. At the present time, WPSR is not aware of problems that would materially impact the company's operations. However, WPSR has no means of ensuring that all third parties will be Year 2000 compliant in a timely manner, and the inability of these parties to resolve successfully their Year 2000 issues could have a material impact on the operations of WPSR's subsidiaries. Due to fewer expenditures for hardware and software than originally anticipated, the estimate of total Year 2000 project costs has been reduced to $9.0 million. This estimate is considered reasonable and has been approved for rate recovery by the PSCW. This estimate includes internal labor costs of $4.5 million, software replacement costs for non-compliant products of $2.0 million, and contract labor costs of $2.5 million. Expenditures for the Year 2000 project incurred through December 31, 1998, are $2.2 million. Major expenditures for hardware, software, and other equipment were made in the fourth quarter of 1998 and additional expenditures will be made in the first quarter of 1999. The failure to correct a material Year 2000 problem could result in an interruption in, or the failure of, certain normal business activities or operations which could materially affect WPSR's results of operations. However, due to the general uncertainty inherent in the Year 2000 issue, WPSR -61- is unable to determine at this time whether the consequences of Year 2000 failures will have a material impact on operations. A preliminary identification of potential risks related to the failure to be in compliance by the Year 2000 has been made. A better understanding of actual risks will be developed during the remediation, testing, and contingency planning processes. The development of WPSR's contingency planning process is intended to minimize the problems associated with these risks. WPSR is assessing the potential impact of failure to achieve Year 2000 compliance with respect to each of the following: - Generation availability - System monitoring and control functions - Ability to restart generators that are out of service for planned or unplanned outages - Company-owned voice/data communications - Transmission facilities - System protection - Critical operating data (i.e., generation plant data) - Electric and gas distribution systems - Pipelines' constraints to the supply or pressure of natural gas - Major support systems Contingency plans for dealing with Year 2000 issues will be developed by April 1999 for each application that has been identified as "critical" or "severe." In addition, a proposal for a "quick response team" concept has been drafted, and a process for handling unexpected Year 2000 problems will be formalized in early 1999. A most reasonably likely worst case Year 2000 scenario will be identified and addressed by a crisis management team in early 1999. The team plans to conduct a crisis management drill using a Year 2000 scenario. TRENDS - WPSR ACCOUNTING STANDARDS WPSC and UPPCO follow Statement of Financial Accounting Standards ("SFAS") No. 71, "Accounting for the Effects of Certain Types of Regulation," and their financial statements reflect the effects of the different ratemaking principles followed by the various jurisdictions regulating each utility. For WPSC these include the PSCW, 89% of revenues; the Michigan Public Service Commission ("MPSC"), 3% of revenues; and the FERC, 8% of revenues. In addition, Kewaunee is regulated by the Nuclear Regulatory Commission. Environmental matters are primarily governed by the United States Environmental Protection Agency and the Wisconsin Department of Natural Resources. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement requires all derivatives to be measured at fair value and recognized as either assets or liabilities in the statement of financial position. The accounting for changes in the fair value of a derivative is dependent upon the use of the derivative and its resulting designation. Unless specific hedge accounting criteria are met, changes in the derivative's fair value must be recognized currently in earnings. This statement is effective for fiscal periods beginning after June 15, 1999. WPSR will be adopting the requirements -62- of this statement on January 1, 2000, and has not yet determined the method of adoption or its impact. However, the requirements of this statement could increase volatility in earnings and other comprehensive income. In March 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This statement requires the capitalization of certain costs related to software developed or obtained for internal use. The statement is effective for periods beginning after December 15, 1998. WPSR will be adopting the requirements of this statement in January 1999. Although the total impact of WPSR's adoption of this statement has not been determined, WPSC's adoption of this statement is expected to result in a reduction in operating expenses which will be considered in the ratemaking process. The capitalized software costs will then be charged to amortization expense in future years. In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on the Costs of Start-up Activities." This statement provides guidance on the financial reporting of start-up costs and organization costs. Costs of start-up activities and organization costs are required to be expensed as incurred. The statement is effective for periods beginning after December 15, 1998. WPSR will be adopting the requirements of this statement in 1999 and does not anticipate any material impact to its financial statements. UTILITY RESTRUCTURING Electric reliability issues have replaced restructuring and retail competition issues in Wisconsin, and the PSCW announced that its first priority is to develop the utility infrastructure necessary to assure reliable electric service and to remove the barriers to competition at the wholesale level. In 1998, the PSCW and the major utilities in Wisconsin, including WPSC, made legislative proposals to address reliability and restructuring concerns, including market power, among other issues. This resulted in the Electric Reliability Bill (1997 Wis. Laws 204) ("Act 204"). Act 204 contains provisions which relate to the planning and approval by the PSCW of electric power generation and transmission facilities, the regional management of the transmission system, new electric power generation, including the ownership and operation of wholesale merchant plants, new electric power transmission facilities, out-of-state retail electric sales, service standards for electric generation, transmission, and distribution facilities, and the allowable assets of public utility holding companies. On June 5, 1997, the MPSC ordered utilities under its jurisdiction to file electric open access plans and related tariffs. The MPSC order called for generation open access in increments of 2.5% of retail load each year starting in 1997 and ending in 2001. The MPSC order requires full generation open access for retail load in 2002. WPSC and UPPCO submitted plans which provide retail open access starting in 2000 when the MPSC order requires open access for 10% of retail load. The plans then continue on the MPSC schedule including full open access in 2002. Should electric deregulation occur such that WPSC and UPPCO would no longer qualify to reflect the effects of ratemaking under SFAS No. 71 in their financial statements, no impairment of significant recorded assets or reduction in reported equity is anticipated. WPSC and UPPCO do not have any significant assets which are foreseen as being potentially stranded and no -63- potential disparity between the depreciable lives of capital assets and those lives applicable to a competitive environment has been identified. Increased competition is likely to put pressure on electric utility margins. At this time, however, management cannot predict the ultimate results of deregulation. Part of electric utility restructuring involves establishing independent system operators ("ISOs"). An ISO is an independent third party which potentially owns the transmission facilities, oversees the operations of transmission facilities, administers open access transmission tariffs, and directs power dispatch. WPSC is working with several groups which are attempting to form ISOs. Both the PSCW and the MPSC continue to review gas industry restructuring. In a current docket, the PSCW is addressing gas restructuring issues including unbundling of rates, pricing of contracted services in potential utility bypass situations, and the separation of gas utilities from their nonregulated gas marketing affiliates. The MPSC is conducting pilot studies to test the development of competitive retail gas markets in Michigan. WPSC has historically recovered gas costs through a PGAC. The PSCW has recently allowed utilities to select either an incentive gas cost recovery mechanism or a modified one-for-one mechanism for gas cost recovery. WPSC has selected the modified one-for-one gas cost recovery plan, and implementation of the new mechanism, which is similar to the recovery received under the existing PGAC, began in January 1999. ENVIRONMENTAL WPSC continues to investigate the environmental cleanup of eight manufactured gas plant sites. The cleanup of WPSC's Stevens Point manufactured gas plant site has been substantially completed with monitoring of the site continuing. Costs of this cleanup were within the range expected for this site. Future investigation and cleanup costs for the remaining seven sites is estimated to be in the range of $33.9 million to $41.0 million. These estimates may be adjusted in the future contingent upon remedial technology, regulatory requirements, and experience gained through cleanup activities. An initial liability for cleanup of $41.7 million had been established with an offsetting regulatory asset (deferred charge). Of this amount, approximately $2.7 million has been spent to date. Management believes that cleanup costs net of insurance recoveries, but not the carrying costs associated with the cleanup expenditures, will be recoverable in current and future customer rates. WPSC has received $12.6 million in insurance recoveries which have been recorded as a reduction in the regulatory asset. WPSC is in compliance with both the Phase I and II sulfur dioxide and nitrogen oxide emission limits established by the Federal Clean Air Act Amendments of 1990. Additional capital expenditures of $1.0 million to $2.0 million are projected through 1999 for Wisconsin and for federal air quality compliance. Management believes that all costs incurred for additional compliance will be recoverable in future customer rates. In late September 1998, the United States Environmental Protection Agency ("EPA") required certain states, including Wisconsin to develop plans to reduce the emissions of nitrogen oxides ("NOx") from sources within the -64- state by late 2003. On a preliminary basis, WPSC projects potential capital costs of between $37.0 million and $96.0 million to comply with possible future regulations. The cumulative incremental annual operating and maintenance expense associated with these possible future regulations projected to be incurred by 2010 range from $29.0 million to $106.0 million. The costs will depend on the state-specific compliance method to be adopted in the future as well as the effectiveness of the various technologies available for NOx emission control. Under WPSC's current practice, the capital costs (as reflected in depreciation expenses) and the annual operating costs are anticipated to be recovered through future customer rates. On December 24, 1998, WPSC joined other parties in a petition challenging the EPA's regulations that require Wisconsin to prepare and submit a NOx implementation plan. On January 22, 1999, the State of Wisconsin intervened in the litigation and challenged the geographic scope of the rule and the required timing for implementation of NOx controls within the state. No decisions have yet been rendered. KEWAUNEE On September 29, 1998, WPSC and MG&E finalized an arrangement in which WPSC will acquire MG&E's 17.8% share of Kewaunee. This agreement, the closing of which is contingent upon regulatory approval and steam generator replacement scheduled for the spring of 2000, will give WPSC 59.0% ownership in Kewaunee. On October 17, 1998, Kewaunee was shut down for a planned maintenance and refueling outage. Inspection of the plant's two steam generators showed that the repairs made in 1997 were holding up well and few additional repairs were needed. In addition to the inspection and repair of the steam generators, a major overhaul was performed on the main turbine generator. The plant was back in operation on November 27, 1998. NONREGULATED ACTIVITIES ESI incurred a $6.9 million loss in 1998 and a $4.9 million loss in 1997. A primary strategy for ESI is to gain market presence which is reflected in a 117.1% growth in revenues during the three-year period 1996 through 1998, from $161.8 million in 1996 to $351.3 million in 1998. To support this growth, significant expenditures were made for personnel additions and system improvements. These expenditures, coupled with extreme gas market volatility, contributed to the losses incurred at ESI. Gas market volatility was reflected in the NYMEX gas futures prices per dekatherm which, in 1998, ranged from a high of $2.73 to a low of $1.61. In 1997, gas futures prices ranged from a high of $3.55 to a low of $1.82. Gas market volatility has a direct impact on revenue and trading income. PDI expects to improve the overall performance of its investment in Stoneman due to a multi-year capacity sales agreement. Stoneman was also grandfathered by the PSCW as a merchant plant which increases the probability that PDI will repower the plant as a 300-megawatt to 500-megawatt gas-fired combined cycle generating facility. Operational problems related to the bonding process at ECO Coal Pelletization #12, LLC are being addressed with expected resolution before the second quarter of 1999. -65- IMPACT OF INFLATION - WPSR WPSR's current financial statements are prepared in accordance with generally accepted accounting principles and report operating results in terms of historic cost. They provide a reasonable, objective, and quantifiable statement of financial results; but they do not evaluate the impact of inflation. Under rate treatment prescribed by utility regulatory commissions, WPSC's and UPPCO's projected operating costs are recoverable in revenues. Because forecasts are prepared assuming inflation, the majority of inflationary effects on normal operating costs are recoverable in rates. However, in these forecasts, WPSC and UPPCO are only allowed to recover the historic cost of plant via depreciation. -66- RESULTS OF OPERATIONS - WISCONSIN PUBLIC SERVICE CORPORATION WPSC is a regulated electric and gas utility. Electric operations accounted for 75% of 1998 revenues, while gas contributed 25% to 1998 revenues. 1998 COMPARED WITH 1997 WISCONSIN PUBLIC SERVICE CORPORATION OVERVIEW Revenues at WPSC were $652.5 million in 1998 compared with $690.5 million in 1997, a decrease of 5.5%. Earnings were $54.1 million in 1998 and $61.6 million in 1997, a decrease of 12.2%. The primary reasons for the decrease in earnings at WPSC were the impact of unusually warm winter weather, increased maintenance expenses, a decrease in other income, an increase in other operating expenses, and a decrease in the gas margin. Partially offsetting these factors were an increase in the electric utility margin and a decrease in interest expense. ELECTRIC UTILITY OPERATIONS WPSC's electric utility margins increased $8.6 million, or 2.6%, primarily due to increased kWh sales of 3.0% to WPSC customers as a result of a 103.5% increase in cooling degree days in 1998. Partially offsetting the increase in electric margins in 1998 was the impact of a PSCW rate order on WPSC which was effective for the entire year in 1998 but was only effective in 1997 for the period after February 21, 1997. This order authorized an 8.1% electric revenue reduction. ========================================================================== WPSC Electric Margins (Thousands) - -------------------------------------------------------------------------- 1998 1997 1996 - -------------------------------------------------------------------------- Revenues $487,340 $479,388 $490,506 Fuel and purchased power 152,783 153,414 143,155 - -------------------------------------------------------------------------- Margin $334,557 $325,974 $347,351 ========================================================================== Sales in kWh (Thousands) 11,600,164 11,259,327 11,011,842 ========================================================================== Electric utility revenues increased $8.0 million, or 1.7%, largely due to increased revenues of $4.8 million from WPSC's wholesale customers and $1.5 million from WPSC's commercial and industrial customers as a result of the warmer weather. Also included in 1998 electric revenues are surcharge revenues at WPSC of $3.8 million related to the recovery of the deferred costs for the 1997 Kewaunee steam generator repairs. Partially offsetting these increases to revenues were the electric rate reduction and a $1.0 million refund of WPSC's transmission revenues as the result of a FERC settlement related to open access transmission tariff rates. -67- Electric production fuel expense increased $2.9 million, or 2.7%, primarily as a result of increased generation expense. Kewaunee was out of service for the first six months of 1997 as the result of an extended outage to repair steam generators, thus, in comparison, the higher generation expense in 1998. Purchased power expense decreased $3.5 million, or 7.7%, primarily due to decreased purchase requirements in the first half of 1998. Purchase requirements in the first half of 1997 were higher due to lack of production at Kewaunee in the first and second quarters of 1997 as a result of an extended outage. Also contributing to lower purchased power expense was a $1.2 million credit to purchased power expense in the fourth quarter of 1998 related to the settlement of litigation involving a contract with a power supplier. The PSCW allows WPSC to pass changes in the cost of fuel and purchased power, within a specified range, on to its customers through a fuel adjustment clause. GAS UTILITY OPERATIONS WPSC's gas margin decreased $3.1 million in 1998, or 4.9%, primarily due to a 19.4% reduction in heating degree days. ======================================================================== WPSC Gas Margins (Thousands) - ------------------------------------------------------------------------ 1998 1997 1996 - ------------------------------------------------------------------------ Revenues $165,111 $211,090 $211,357 Purchase costs 104,608 147,493 149,388 - ------------------------------------------------------------------------ Margin $ 60,503 $ 63,597 $ 61,969 ======================================================================== Volume in therms (Thousands) 608,092 662,008 666,598 ======================================================================== Gas operating revenues decreased $46.0 million, or 21.8%. This decrease was due to unusually mild weather in 1998 resulting in lower gas therm sales for 1998 of 8.1%. Also contributing to the decrease in gas operating revenues was a reduction in revenues of $7.5 million for refunds from ANR Pipeline Company which WPSC passed on to its gas customers in the second quarter of 1998. Gas purchase costs decreased $42.9 million, or 29.1%. This decrease was due to reduced customer demand as a result of the mild weather during 1998. Also contributing to the decrease in gas costs was a $7.5 million refund from ANR Pipeline Company which was credited to gas expense in the second quarter of 1998. Under current regulatory practice, the PSCW allows WPSC to pass changes in the cost of gas on to customers through a PGAC. -68- OTHER UTILITY EXPENSES/INCOME Other operating expenses at WPSC increased $4.1 million, or 3.1%, primarily due to higher benefit costs in 1998. Maintenance expense increased $7.8 million, or 18.6%, primarily as a result of increased expenses at Kewaunee during the second and fourth quarters of 1998. This increase was partly due to the recognition in the second quarter of 1998 of the 1997 deferred expenses for Kewaunee steam generator repairs. The PSCW approved deferral of the repairs in 1997, the cost of which has been collected in the second quarter of 1998 through a $3.8 million electric revenue surcharge. In addition, maintenance expense at Kewaunee increased in the fourth quarter of 1998 due to a scheduled refueling outage. Depreciation and decommissioning expenses increased $2.4 million, or 3.1%, due to an increased plant base and to the accelerated recovery of investment in Kewaunee and accelerated funding of Kewaunee decommissioning costs. Accelerated recovery of investment and funding began on February 21, 1997 and, therefore, was effective for all of 1998 but only a portion of 1997. Other income decreased $5.8 million, or 46.3%, primarily due to one-time gains on sales of nonutility property which occurred in 1997. These gains represented an increase in earnings for 1997 of approximately $0.11 per share. 1997 COMPARED WITH 1996 WISCONSIN PUBLIC SERVICE CORPORATION OVERVIEW Revenues at WPSC were $690.5 million in 1997 compared with $701.9 million in 1996, a decrease of 1.6%. Earnings were $61.6 million in 1997 and $57.3 million in 1996, an increase of 7.5%. The primary reasons for the increase in earnings were a decrease in operating and maintenance expenses, an increase in other income, and an increase in the gas utility margin. Offsetting these factors were a decrease in the electric utility margin, an increase in depreciation and decommissioning expense, and an increase in income tax expense. ELECTRIC UTILITY OPERATIONS WPSC's electric utility margins decreased $21.4 million, or 6.2%, primarily due to implementation of a PSCW rate order which authorized a $35.5 million, or 8.1%, electric revenue reduction. A second factor contributing to decreased margins was increased replacement power costs as a result of an extended outage at Kewaunee. A surcharge authorized by the PSCW partially offset increases in replacement power costs in the latter part of the first quarter and in the second quarter of 1997. In spite of a 27.6% decrease in cooling degree days, electric kWh sales increased by 2.2% primarily due to increased demand by WPSC's commercial and industrial customers. Commercial and industrial kWh sales increased 4.8%, while wholesale kWh sales decreased 3.4%. Electric operating revenues decreased $11.1 million, or 2.3%, primarily due to the electric rate decrease. Electric production fuel expense increased $2.1 million, or 2.0%. Nuclear fuel expense was $2.0 million lower than in 1996 due to decreased -69- generation at Kewaunee in the first and second quarters of 1997 as a result of an extended outage. Steam fuel expense was higher by $1.0 million and combustion turbine generation expense was higher by $3.2 million due to increased generation requirements from these sources during the extended outage at Kewaunee. Purchased power expense increased $8.1 million, or 21.6%, primarily due to increased purchase requirements and higher costs of purchased power during the extended outage at Kewaunee. The PSCW allows WPSC to pass changes in the cost of fuel and purchased power, within a specified range, on to its customers through a fuel adjustment clause. WPSC is required to file an application to adjust rates either higher or lower when costs are plus or minus 2% from forecasted costs on an annual basis. The additional fuel costs in 1997 did not result in WPSC being outside this 2% window. GAS UTILITY OPERATIONS WPSC's gas margin increased $1.4 million, or 2.2%, primarily due to the implementation of a PSCW rate order which authorized a $5.7 million, or 2.7%, increase in gas revenues. Gas operating revenues remained relatively stable reflecting the rate increase offset by a 5.5% reduction in heating degree days. Gas revenues also reflect a one-time reduction of $0.9 million in the first quarter of 1997 as a result of a PSCW directive to change the accounting treatment for previous customer line extensions. This reduction represented a decrease of approximately $.02 per share after income tax effects. Gas purchase costs showed a net decrease of $1.6 million, or 1.1%, primarily due to reduced purchases because of decreased demand as a result of the reduction in heating degree days. The PSCW allows WPSC to pass changes in the cost of gas on to customers through a PGAC. OTHER UTILITY EXPENSES/INCOME Other operating expenses decreased $24.1 million, or 15.2%. Cost saving initiatives and decreased amortization of deferred demand-side management expenditures resulted in lower customer service and sales expenses of $9.5 million. Administrative expenses decreased $5.8 million due to cost saving measures and reduced postretirement medical, dental, and other benefit expenses. Generation operating expenses were lower by $7.3 million primarily as a result of the completion in 1996 of an amortization of deferred expenses related to a previous coal contract settlement. Gas operating expenses decreased $1.5 million as the result of a PSCW directive requiring gas servicing revenues and expenses to be classified as other income and deductions beginning in 1997. Maintenance expense decreased $7.1 million, or 14.5%. Electric transmission and distribution expenses decreased $3.4 million as a result of cost saving initiatives and less maintenance of overhead lines in 1997 due to less storm damage. Maintenance expenses were $1.9 million lower at Kewaunee in 1997 because Kewaunee was out of service in 1996 for scheduled maintenance. Gas distribution expenses were lower by $0.9 million due to cost saving initiatives and decreased maintenance activities. Steam costs decreased -70- $0.6 million at WPSC's coal-fired plants due to changes in maintenance schedules as a result of the extended outage at Kewaunee. Depreciation and decommissioning expenses increased $12.0 million, or 18.8%, largely due to the accelerated recovery of investment in Kewaunee and accelerated funding of Kewaunee decommissioning costs. Other income increased $7.5 million, or 141.7%, primarily due to gains in 1997 on the sale of nonutility property of $4.8 million which represented an increase of approximately $.11 per share after income tax effects. Also included in other income in 1997 was interest of $2.2 million resulting from an income tax audit settlement. Income tax expense increased $1.9 million reflecting higher net income in 1997. BALANCE SHEET - WPSC 1998 COMPARED WITH 1997 Nuclear decommissioning trusts increased $37.3 million due to continued funding and favorable investment returns. Construction in progress increased $28.7 million largely as a result of construction expenditures related to the Kewaunee steam generator replacement project, the combustion turbine project at West Marinette, and the transmission line for the De Pere Energy Center project. Commercial paper increased $9.5 million due to increased operational cash needs at WPSC. Cash requirements exceeded internally generated funds. Accounts payable increased $14.2 million due to increased payables related to the 1998 Kewaunee refueling outage and other construction projects, and other long-term liabilities increased $20.2 million due to an increased liability for postretirement health care and higher deposits from the joint owners of Kewaunee as a result of the refueling outage. FINANCIAL CONDITION - WPSC INVESTMENTS AND FINANCING WPSR made a $34.0 million equity infusion in WPSC during the second quarter of 1998. WPSC retired $50.0 million of first-mortgage bonds on July 1, 1998 and issued $50.0 million of senior notes secured by first-mortgage bonds on December 14, 1998. A special common stock dividend of $20.0 million was paid by WPSC to WPSR in December 1998. The special dividend allowed WPSC's average equity capitalization ratio to remain at approximately 54%, the level approved by the PSCW for ratemaking. Short-term borrowings increased $9.5 million during 1998 as a result of cash requirements in excess of internally generated funds. Pretax interest coverage was 4.48 times for the 12 months ended December 31, 1998. WPSC's bond ratings are AA+ (Standard & Poor's and Duff & Phelps) and Aa2 (Moody's). WPSC makes large investments in capital assets. Construction expenditures for WPSC are expected to be approximately $250.0 million in the aggregate for the 1999 through 2001 period. This includes expenditures for the replacement of Kewaunee steam generators. -71- In addition, other capital requirements for WPSC for the three-year period include Kewaunee decommissioning trust fund contributions of $16.8 million. WPSC's agreement to purchase electricity from the De Pere Energy Center, a gas-fired cogeneration facility, will be accounted for as a capital lease. The De Pere Energy Center lease will be capitalized at $77.8 million in 1999. At the same time, a capital lease obligation of the same amount will be recorded which will affect WPSC's capital structure. REGULATORY WPSC received a rate order in the Wisconsin jurisdiction on January 15, 1999. The impact is a $26.9 million increase in electric revenues and a $10.3 million increase in gas revenues on an annual basis. The new rates will be effective for 1999 and 2000. The PSCW authorized a 12.1% return on WPSC equity for 1999 and 2000. KEWAUNEE On September 29, 1998, WPSC and MG&E finalized an arrangement in which WPSC will acquire MG&E's 17.8% share of Kewaunee. This agreement, the closing of which is contingent upon regulatory approvals and steam generator replacement scheduled for the spring of 2000, will give WPSC 59.0% ownership in Kewaunee. The arrangement provides that the book value of MG&E's share of Kewaunee at the time of the transfer could be credited against the purchase price of a planned 83-megawatt, natural gas-fired, combustion-turbine electric generating station to be built near Marinette, Wisconsin. WPSC had previously agreed to build this station for MG&E. If, for some reason, the Marinette station is not completed, the arrangement calls for WPSC to pay for MG&E's share of Kewaunee with a combination of cash and notes. MG&E has agreed to retain certain of its obligations related to the period of time that it had been an owner of Kewaunee. MG&E will effectively transfer its nuclear decommissioning funds to WPSC to pay for MG&E's share of the currently estimated decommissioning costs of the plant at the closing for the asset swap. WPSC and Wisconsin Power and Light Company, the joint owners of the plant after the described change in ownership, will be responsible for the decommissioning of the plant. YEAR 2000 COMPLIANCE The Year 2000 issue arises because software programs, computer hardware, and equipment that have date sensitive software or embedded chips may recognize a date using "00" as the year 1900 rather than the year 2000. This may result in system failures or other disruptions of operations. WPSC is committed to eliminating or minimizing adverse effects of the Year 2000 computer compliance issue on its business operations, including the products and services provided to customers, and to maintaining WPSC's reputation as an efficient and reliable supplier of energy. WPSC, however, is unable to guarantee that there will be no adverse effects as a result of the Year 2000 computer compliance issue because many aspects of compliance are beyond WPSC's direct control. -72- WPSC has undertaken a program to assess Year 2000 compliance and to bring computer systems into compliance by the year 2000. All systems, including energy production and delivery systems, other embedded systems, and third party systems of suppliers are being evaluated to identify and resolve potential problems. A Year 2000 project plan which includes awareness, inventory and assessment, remediation, testing, and implementation has been developed. The formal awareness phase of the Year 2000 project which includes understanding and communication of the issue to employees, customers, suppliers, and other affected parties has essentially been completed. The Year 2000 issue has been communicated to WPSC employees and customers via several media. All WPSC business unit leaders have been made aware of the Year 2000 project plan and their roles in implementing the plan. Communication and response to Year 2000 inquiries continue. The inventory and assessment phase which includes identification of all information and non-information technology systems and of non-compliant systems, applications, and hardware, has been completed. Action plans for remediation, which include modifications to bring systems into compliance, and action plans for testing including validation of compliance have been completed. Modifications of major in-house supported systems to correct Year 2000 problems have been underway since 1996. WPSC's Information Technology Department has identified five major systems. All of these systems (customer information, finance, human resources, materials management, and facility management) are currently Year 2000 compliant. In addition, non-information technology systems have been identified and ranked as to the risk posed by non-compliance. Non-information technology systems include computer and embedded systems related to WPSC's power plant operating, system operating, hydraulic, transmission, and other operating functions. All systems ranked as "critical," "severe," or "high" are scheduled to be Year 2000 compliant by the end of the first quarter of 1999. WPSC has hired an external consulting group to monitor the progress of its Year 2000 compliance activities. The consulting group's responsibilities include performing a status check on WPSC's ability to achieve Year 2000 compliance. In addition, WPSC is identifying, contacting, and assessing suppliers and other business partners for Year 2000 readiness, as these external parties may have the potential to impact WPSC's Year 2000 readiness. WPSC is also working to address Year 2000 issues related to all joint ownership facilities. At the present time, WPSC is not aware of problems that would materially impact the company's operations. However, WPSC has no means of ensuring that all third parties will be Year 2000 compliant in a timely manner, and the inability of these parties to successfully resolve their Year 2000 issues could have a material impact on company operations. Due to fewer expenditures for hardware and software than originally anticipated, the estimate of total Year 2000 project costs has been reduced to $9.0 million. This estimate is considered reasonable and has been approved for rate recovery by the PSCW. This estimate includes internal labor costs of $4.5 million, software replacement costs for non-compliant products of -73- $2.0 million, and contract labor costs of $2.5 million. Expenditures for the Year 2000 project incurred through December 31, 1998, are $2.2 million. Major expenditures for hardware, software, and other equipment were made in the fourth quarter of 1998 and additional expenditures will be made in the first quarter of 1999. The failure to correct a material Year 2000 problem could result in an interruption in, or the failure of, certain normal business activities or operations which could materially affect WPSC's results of operations. However, due to the general uncertainty inherent in the Year 2000 issue, WPSC is unable to determine at this time whether the consequences of Year 2000 failures will have a material impact on operations. A preliminary identification of potential risks related to the failure to be in compliance by the Year 2000 has been made. A better understanding of actual risks will be developed during the remediation, testing, and contingency planning processes. The development of WPSC's contingency planning process is intended to minimize the problems associated with these risks. WPSC is assessing the potential impact of failure to achieve Year 2000 compliance with respect to each of the following: - Generation availability - System monitoring and control functions - Ability to restart generators that are out of service for planned or unplanned outages - Company-owned voice/data communications - Transmission facilities - System protection - Critical operating data (i.e., generation plant data) - Electric and gas distribution systems - Pipelines' constraints to the supply or pressure of natural gas - Major support systems Contingency plans for dealing with Year 2000 issues will be developed by April 1999 for each application that has been identified as "critical" or "severe." In addition, a proposal for a "quick response team" concept has been drafted, and a process for handling unexpected Year 2000 problems will be formalized in early 1999. A most reasonably likely worst case Year 2000 scenario will be identified and addressed by a crisis management team in early 1999. The team plans to conduct a crisis management drill using a Year 2000 scenario. TRENDS - WPSC ACCOUNTING STANDARDS WPSC follows SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation," and its financial statements reflect the effects of the different ratemaking principles followed by the various jurisdictions regulating the utility. For WPSC these include the PSCW, 89% of revenues; the MPSC, 3% of revenues; and the FERC, 8% of revenues. In addition, Kewaunee is regulated by the Nuclear Regulatory Commission. Environmental matters are primarily governed by the United States Environmental Protection Agency and the Wisconsin Department of Natural Resources. -74- In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement requires all derivatives to be measured at fair value and recognized as either assets or liabilities in the statement of financial position. The accounting for changes in the fair value of a derivative is dependent upon the use of the derivative and its resulting designation. Unless specific hedge accounting criteria are met, changes in the derivative's fair value must be recognized currently in earnings. This statement is effective for fiscal periods beginning after June 15, 1999. WPSC will be adopting the requirements of this statement on January 1, 2000, and has not yet determined the method of adoption or its impact. However, the requirements of this statement could increase volatility in earnings and other comprehensive income. In March 1998, the AICPA issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This statement requires the capitalization of certain costs related to software developed or obtained for internal use. The statement is effective for periods beginning after December 15, 1998. WPSC will be adopting the requirements of this statement in January 1999. While the total impact of WPSC's adoption of this statement has not been determined, WPSC's adoption of this statement is expected to result in a reduction in operating expenses which will be considered in the ratemaking process. The capitalized software costs will then be charged to amortization expense in future years. In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on the Costs of Start-up Activities." This statement provides guidance on the financial reporting of start-up costs and organization costs. Costs of start-up activities and organization costs are required to be expensed as incurred. The statement is effective for periods beginning after December 15, 1998. WPSC will be adopting the requirements of this statement in 1999 and does not anticipate any material impact to its financial statements. UTILITY RESTRUCTURING Electric reliability issues have replaced restructuring and retail competition issues in Wisconsin, and the PSCW announced that its first priority is to develop the utility infrastructure necessary to assure reliable electric service and to remove the barriers to competition at the wholesale level. In 1998, the PSCW and the major utilities in Wisconsin, including WPSC, made legislative proposals to address reliability and restructuring concerns, including market power, among other issues. This resulted in the Electric Reliability Bill (1997 Wis. Laws 204) ("Act 204"). Act 204 contains provisions which relate to the planning and approval by the PSCW of electric power generation and transmission facilities, the regional management of the transmission system, new electric power generation, including the ownership and operation of wholesale merchant plants, new electric power transmission facilities, out-of-state retail electric sales, service standards for electric generation, transmission, and distribution facilities, and the allowable assets of public utility holding companies. On June 5, 1997, the MPSC ordered utilities under its jurisdiction to file electric open access plans and related tariffs. The MPSC order called for generation open access in increments of 2.5% of retail load each year starting in 1997 and ending in 2001. The MPSC order requires full generation open access for retail load in 2002. WPSC submitted a plan which provides retail open access starting in 2000 when the MPSC order requires open access -75- for 10% of retail load. The plan then continues on the MPSC schedule including full open access in 2002. Should electric deregulation occur such that WPSC would no longer qualify to reflect the effects of ratemaking under SFAS No. 71 in its financial statements, no impairment of significant recorded assets or reduction in reported equity is anticipated. WPSC does not have any significant assets which are foreseen as being potentially stranded and no potential disparity between the depreciable lives of capital assets and those lives applicable to a competitive environment has been identified. Increased competition is likely to put pressure on electric utility margins. At this time, however, management cannot predict the ultimate results of deregulation. Part of electric utility restructuring involves establishing ISOs. An ISO is an independent third party which oversees the operations of transmission facilities, administers open access transmission tariffs, and directs power dispatch. WPSC is working with several groups which are attempting to form ISOs. Both the PSCW and the MPSC continue to review gas industry restructuring. In a current docket, the PSCW is addressing gas restructuring issues including unbundling of rates, pricing of contracted services in potential utility bypass situations, and the separation of gas utilities from their nonregulated gas marketing affiliates. The MPSC is conducting pilot studies to test the development of competitive retail gas markets in Michigan. WPSC has historically recovered gas costs through a PGAC. The PSCW has recently allowed utilities to select either an incentive gas cost recovery mechanism or a modified one-for-one mechanism for gas cost recovery. WPSC has selected the modified one-for-one gas cost recovery plan and implementation of the new mechanism, which is similar to the recovery received under the existing PGAC, began in January 1999. ENVIRONMENTAL WPSC continues to investigate the environmental cleanup of eight manufactured gas plant sites. The cleanup of WPSC's Stevens Point manufactured gas plant site has been substantially completed with monitoring of the site continuing. Costs of this cleanup were within the range expected for this site. Future investigation and cleanup costs for the remaining seven sites is estimated to be in the range of $33.9 million to $41.0 million. These estimates may be adjusted in the future contingent upon remedial technology, regulatory requirements, and experience gained through cleanup activities. An initial liability for cleanup of $41.7 million had been established with an offsetting regulatory asset (deferred charge). Of this amount, approximately $2.7 million has been spent to date. Management believes that cleanup costs net of insurance recoveries, but not the carrying costs associated with the cleanup expenditures, will be recoverable in current and future customer rates. WPSC has received $12.6 million in insurance recoveries which have been recorded as a reduction in the regulatory asset. WPSC is in compliance with both the Phase I and II sulfur dioxide and nitrogen oxide emission limits established by the Federal Clean Air Act Amendments of 1990. Additional capital expenditures of $1.0 million to -76- $2.0 million are projected through 1999 for Wisconsin and federal air quality compliance. Management believes that all costs incurred for additional compliance will be recoverable in future customer rates. In late September 1998, the EPA required certain states, including Wisconsin to develop plans to reduce the emissions of NOx from sources within the state by late 2003. On a preliminary basis, WPSC projects potential capital costs of between $37.0 million and $96.0 million to comply with possible future regulations. The cumulative incremental annual operating and maintenance expense associated with these possible future regulations projected to be incurred by 2010 range from $29.0 million to $106.0 million. The costs will depend on the state-specific compliance method to be adopted in the future as well as the effectiveness of the various technologies available for NOx emission control. Under WPSC's current practice, the capital costs (as reflected in depreciation expenses) and the annual operating costs are anticipated to be recovered through future customer rates. On December 24, 1998, WPSC joined other parties in a petition challenging the EPA's regulations that require Wisconsin to prepare and submit a NOx implementation plan. On January 22, 1999, the State of Wisconsin intervened in the litigation and challenged the geographic scope of the rule and the required timing for implementation of NOx controls within the state. No decisions have yet been rendered. KEWAUNEE On September 29, 1998, WPSC and MG&E finalized an arrangement in which WPSC will acquire MG&E's 17.8% share of Kewaunee. This agreement, the closing of which is contingent upon regulatory approval and steam generator replacement scheduled for the spring of 2000, will give WPSC 59.0% ownership in Kewaunee. On October 17, 1998, Kewaunee was shut down for a planned maintenance and refueling outage. Inspection of the plant's two steam generators showed that the repairs made in 1997 were holding up well and few additional repairs were needed. In addition to the inspection and repair of the steam generators, a major overhaul was performed on the main turbine generator. The plant was back in operation on November 27, 1998. IMPACT OF INFLATION - WPSC WPSC's current financial statements are prepared in accordance with generally accepted accounting principles and report operating results in terms of historic cost. They provide a reasonable, objective, and quantifiable statement of financial results; but they do not evaluate the impact of inflation. Under rate treatment prescribed by utility regulatory commissions, WPSC's projected operating costs are recoverable in revenues. Because forecasts are prepared assuming inflation, the majority of inflationary effects on normal operating costs are recoverable in rates. However, in these forecasts, WPSC is only allowed to recover the historic cost of plant via depreciation. -77- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA WPS RESOURCES CORPORATION A. CONSOLIDATED STATEMENTS OF INCOME, COMPREHENSIVE INCOME, AND RETAINED EARNINGS (1)
================================================================================================= Year Ended December 31 (Thousands, except share amounts) 1998 1997 1996 - ------------------------------------------------------------------------------------------------- Operating revenues Electric utility $ 543,260 $536,885 $548,701 Gas utility 165,111 211,090 211,357 Nonregulated energy and other 355,365 187,862 156,391 - ------------------------------------------------------------------------------------------------- Total operating revenues 1,063,736 935,837 916,449 ================================================================================================= Operating expenses Electric production fuels 110,809 107,988 105,449 Purchased power 56,447 63,947 55,844 Gas purchased for resale 105,908 147,755 149,388 Nonregulated energy cost of sales 346,663 182,863 155,133 Other operating expenses 172,876 165,982 183,768 Maintenance 52,813 44,325 51,782 Depreciation and decommissioning 86,274 83,441 70,762 Taxes other than income 31,902 31,375 31,671 - ------------------------------------------------------------------------------------------------- Total operating expenses 963,692 827,676 803,797 ================================================================================================= Operating income 100,044 108,161 112,652 - ------------------------------------------------------------------------------------------------- Other income and (deductions) Allowance for equity funds used during construction 173 154 255 Other, net 2,505 11,952 (903) - ------------------------------------------------------------------------------------------------- Total other income and (deductions) 2,678 12,106 (648) ================================================================================================= Income before interest expense 102,722 120,267 112,004 - ------------------------------------------------------------------------------------------------- Interest on long-term debt 23,987 26,273 25,494 Other interest 4,827 4,910 3,922 Allowance for borrowed funds used during construction (177) (167) (299) - ------------------------------------------------------------------------------------------------- Total interest expense 28,637 31,016 29,117 ================================================================================================= Distributions - preferred securities of subsidiary trust 1,488 - - ================================================================================================= Income before income taxes 72,597 89,251 82,887 Income taxes 23,445 31,106 27,216 Minority interest (611) (797) (348) Preferred stock dividends of subsidiaries 3,132 3,133 3,134 - ------------------------------------------------------------------------------------------------- Net income 46,631 55,809 52,885 ================================================================================================= Other comprehensive income - - - ================================================================================================= Comprehensive income 46,631 55,809 52,885 ================================================================================================= Retained earnings at beginning of year 339,508 333,375 329,150 Cash dividends on common stock (50,985) (49,676) (48,660) - ------------------------------------------------------------------------------------------------- Retained earnings at end of year $ 335,154 $339,508 $333,375 ================================================================================================= Average shares of common stock 26,511 26,527 26,545 Basic and diluted earnings per average share of common stock $1.76 $2.10 $1.99 Dividend per share of common stock (2) 1.96 1.92 1.88 =================================================================================================
(1) These statements give effect to the merger with Upper Peninsula Energy Corporation. (2) Dividend rates are those of WPS Resources Corporation. The accompanying notes are an integral part of these statements. -78- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA WPS RESOURCES CORPORATION B. CONSOLIDATED BALANCE SHEETS (1)
============================================================================================ Assets - -------------------------------------------------------------------------------------------- At December 31 (Thousands) 1998 1997 - -------------------------------------------------------------------------------------------- Utility plant Electric $1,715,882 $1,685,413 Gas 267,892 251,603 - -------------------------------------------------------------------------------------------- Total 1,983,774 1,937,016 Less - Accumulated depreciation and decommissioning 1,206,123 1,113,142 - -------------------------------------------------------------------------------------------- Total 777,651 823,874 Nuclear decommissioning trusts 171,442 134,108 Construction in progress 42,424 11,776 Nuclear fuel, less accumulated amortization 18,641 19,062 - -------------------------------------------------------------------------------------------- Net utility plant 1,010,158 988,820 ============================================================================================ Current assets Cash and equivalents 7,134 8,495 Customer and other receivables, net of reserves 117,206 96,100 Accrued utility revenues 34,175 30,750 Fossil fuel, at average cost 13,152 10,622 Gas in storage, at average cost 20,795 22,080 Materials and supplies, at average cost 21,788 20,761 Prepayments and other 26,462 24,645 - -------------------------------------------------------------------------------------------- Total current assets 240,712 213,453 ============================================================================================ Regulatory assets 70,041 79,849 Net nonutility and nonregulated plant 41,235 28,188 Pension assets 60,018 55,790 Investments and other assets 88,223 69,704 ============================================================================================ Total $1,510,387 $1,435,804 ============================================================================================
(1) These statements give effect to the merger with Upper Peninsula Energy Corporation. -79- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA WPS RESOURCES CORPORATION B. CONSOLIDATED BALANCE SHEETS CONTINUED (1)
============================================================================================ Capitalization and Liabilities - -------------------------------------------------------------------------------------------- At December 31 (Thousands) 1998 1997 - -------------------------------------------------------------------------------------------- Capitalization Common stock equity $ 517,190 $ 518,764 Preferred stock of subsidiary with no mandatory redemption 51,200 51,200 Preferred stock of subsidiary with mandatory redemption - 445 Company-obligated mandatorily redeemable trust preferred securities of subsidiary trust holding solely WPSR 7.00% subordinated debentures 50,000 - Long-term debt 343,037 347,015 - -------------------------------------------------------------------------------------------- Total capitalization 961,427 917,424 ============================================================================================ Current liabilities Long-term debt due within one year 884 260 Notes payable 12,703 19,500 Commercial paper 47,590 20,706 Accounts payable 115,490 89,747 Accrued taxes 2,838 10,114 Accrued interest 7,594 8,711 Other 9,095 12,415 - -------------------------------------------------------------------------------------------- Total current liabilities 196,194 161,453 ============================================================================================ Long-term liabilities and deferred credits Accumulated deferred income taxes 122,642 131,197 Accumulated deferred investment tax credits 27,150 29,461 Regulatory liabilities 50,474 56,487 Environmental remediation liabilities 40,478 40,848 Other long-term liabilities 112,022 98,934 - -------------------------------------------------------------------------------------------- Total long-term liabilities and deferred credits 352,766 356,927 ============================================================================================ Commitments and contingencies (See Note 10) - - ============================================================================================ Total $1,510,387 $1,435,804 ============================================================================================
(1) These statements give effect to the merger with Upper Peninsula Energy Corporation. The accompanying notes are an integral part of these statements. -80- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA WPS RESOURCES CORPORATION C. CONSOLIDATED STATEMENTS OF CAPITALIZATION (1)
================================================================================================= At December 31 (Thousands, except share amounts) 1998 1997 - ------------------------------------------------------------------------------------------------- Common stock equity Common stock, $1 par value, 100,000,000 shares authorized; 26,551,405 shares outstanding $ 26,551 $ 26,551 Premium on capital stock 163,438 163,454 Retained earnings 335,154 339,508 Shares in deferred compensation trust, 49,477 and 33,430 shares at an average cost of $30.42 and $28.44 per share at December 31, 1998 and 1997, respectively (1,505) (951) ESOP loan guarantees (6,448) (9,798) - ------------------------------------------------------------------------------------------------- Total common stock equity 517,190 518,764 ================================================================================================= Preferred stock - Wisconsin Public Service Corporation Cumulative, $100 par value, 1,000,000 shares authorized; with no mandatory redemption Series Shares Outstanding ------ ------------------ 5.00% 132,000 13,200 13,200 5.04% 30,000 3,000 3,000 5.08% 50,000 5,000 5,000 6.76% 150,000 15,000 15,000 6.88% 150,000 15,000 15,000 - ------------------------------------------------------------------------------------------------- Total preferred stock of subsidiary with no mandatory redemption 51,200 51,200 ================================================================================================= Preferred stock - Upper Peninsula Power Company Cumulative redeemable, $100 par value, 300,000 shares authorized (issuable in series), issued and outstanding Shares Outstanding -------------------------------- Series 1998 1997 ------ ---- ---- 5.25% - 853 - 85 4.70% - 3,600 - 360 - ------------------------------------------------------------------------------------------------- Total preferred stock of subsidiary with mandatory redemption - 445 ================================================================================================= Company-obligated mandatorily redeemable trust preferred securities of subsidiary trust holding solely WPSR 7.00% subordinated debentures 50,000 - ================================================================================================= Long-term debt First mortgage bonds - Wisconsin Public Service Corporation Series Year Due ------ -------- 5-1/4% 1998 - 50,000 7.30% 2002 50,000 50,000 6.80% 2003 50,000 50,000 6-1/8% 2005 9,075 9,075 6.90% 2013 22,000 22,000 8.80% 2021 53,100 53,100 7-1/8% 2023 50,000 50,000 6.08% 2028 50,000 - First mortgage bonds - Upper Peninsula Power Company Series Year Due ------ -------- 7.94% 2003 15,000 15,000 10.0% 2008 6,000 6,000 9.32% 2021 18,000 18,000 Installment sales contract for air pollution control equipment - Upper Peninsula Power Company Term Bonds Year Due ---------- -------- 6.90% 1999 120 230 - ------------------------------------------------------------------------------------------------- Total 323,295 323,405 Unamortized discount and premium on bonds, net (817) (890) - ------------------------------------------------------------------------------------------------- Total first mortgage bonds 322,478 322,515 - ------------------------------------------------------------------------------------------------- ESOP loan guarantees 6,448 9,798 Notes payable to bank, secured by nonregulated plant 10,943 10,710 Senior secured note 3,886 4,037 Other long-term debt 166 215 - ------------------------------------------------------------------------------------------------- Total long-term debt 343,921 347,275 Less amounts due within one year (884) (260) - ------------------------------------------------------------------------------------------------- Net long-term debt 343,037 347,015 ================================================================================================= Total capitalization $961,427 $917,424 =================================================================================================
(1) These statements give effect to the merger with Upper Peninsula Energy Corporation. The accompanying notes are an integral part of these statements. -81- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA WPS RESOURCES CORPORATION D. CONSOLIDATED STATEMENTS OF CASH FLOWS (1)
================================================================================================= Year Ended December 31 (Thousands) 1998 1997 1996 - ------------------------------------------------------------------------------------------------- Cash flows from operating activities Net income $ 46,631 $ 55,809 $ 52,885 Adjustments to reconcile net income to net cash from operating activities Depreciation and decommissioning 86,274 83,441 70,762 Amortization of nuclear fuel and other 16,257 14,665 28,691 Deferred income taxes (11,940) (6,220) (7,579) Investment tax credit restored (2,311) (1,949) (1,961) Allowance for equity funds used during construction (173) (154) (255) Pension income (9,669) (12,548) (12,953) Postretirement liability 4,491 6,424 8,047 Other, net (9,220) (7,535) 5,329 Changes in Customer and other receivables (21,106) 17,343 (27,316) Accrued utility revenues (3,425) 4,636 2,200 Fossil fuel inventory (2,530) (2,112) 477 Gas in storage 1,285 (2,093) (9,911) Accounts payable 25,743 (10,794) 30,184 Accrued taxes (7,276) 1,937 (594) Environmental remediation insurance recovery - 12,374 200 Miscellaneous current and accrued liabilities (4,004) (3,373) (4,352) Gas refunds 684 (318) (6,175) - ------------------------------------------------------------------------------------------------- Net cash from operating activities 109,711 149,533 127,679 ================================================================================================= Cash flows from (used for) investing activities Construction of utility plant and nuclear fuel expenditures (94,734) (58,258) (84,750) Purchase of other property and equipment (16,075) (8,057) (29,441) Decommissioning funding (17,239) (16,059) (8,978) Purchase of investments and acquisitions - - (728) Other 4,046 5,086 (270) - ------------------------------------------------------------------------------------------------- Net cash used for investing activities (124,002) (77,288) (124,167) ================================================================================================= Cash flows from (used for) financing activities Issuance of long-term debt 50,233 1,789 15,296 Redemption of long-term debt (53,660) - (6,900) Issuance of notes payable 196,353 97,260 145,525 Redemption of notes payable (203,150) (109,360) (129,625) Issuance of mandatorily redeemable trust preferred securities 50,000 - - Issuance of commercial paper 2,157,808 700,540 345,339 Redemption of commercial paper (2,130,924) (711,184) (325,489) Cash dividends on common stock (50,985) (49,698) (48,683) Other (2,745) (1,139) (715) - ------------------------------------------------------------------------------------------------- Net cash from (used for) financing activities 12,930 (71,792) (5,252) ================================================================================================= Net increase (decrease) in cash and equivalents (1,361) 453 (1,740) ================================================================================================= Cash and equivalents at beginning of year 8,495 8,042 9,782 ================================================================================================= Cash and equivalents at end of year $ 7,134 $ 8,495 $ 8,042 ================================================================================================= Cash paid during year for Interest, less amount capitalized $ 26,879 $ 26,669 $ 26,146 Income taxes 44,553 37,366 34,210 Preferred stock dividends of subsidiary 3,132 3,133 3,134 =================================================================================================
(1) These statements give effect to the merger with Upper Peninsula Energy Corporation. The accompanying notes are an integral part of these statements. -82- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA WPS RESOURCES CORPORATION AND WISCONSIN PUBLIC SERVICE CORPORATION E. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) NATURE OF OPERATIONS--WPS Resources Corporation ("WPSR") is a holding company. Approximately 67% of WPSR's 1998 revenues, 92% of WPSR's assets, and all of its 1998 net income were derived from WPSR's utility subsidiaries. WPSR's primary wholly-owned subsidiary, Wisconsin Public Service Corporation ("WPSC"), is an electric and gas utility engaged in the supply and distribution of electric power and natural gas in its franchised service territory. WPSR's other wholly-owned utility subsidiary, Upper Peninsula Power Company ("UPPCO"), is an electric utility engaged in the supply and distribution of electric energy in the Upper Peninsula of Michigan. WPSR also provides gas and electric marketing and energy-related services in nonregulated markets through its wholly-owned subsidiary, WPS Energy Services, Inc. ("ESI"). WPS Power Development, Inc. ("PDI"), another wholly-owned subsidiary of WPSR, participates in the development of electric generation projects, provides service to the electric power generation industry, and owns a two-thirds interest in a merchant generating plant, the Stoneman Power Plant ("Stoneman"). PDI also has signed agreements to purchase hydro, steam, and diesel generation facilities from Maine Public Service Company pending approval by the Maine Public Service Commission. WPSR's other nonregulated subsidiaries include Upper Peninsula Building Development Company and Penvest, Inc. In January 1999, WPSR formed a new subsidiary, WPS Resources Capital Corporation, which will obtain the financing for most nonregulated projects. Effective September 29, 1998, Upper Peninsula Energy Corporation ("UPEN") merged with and into WPSR, and UPPCO, UPEN's major subsidiary, became a wholly-owned subsidiary of WPSR. The consolidated financial statements have been restated to give effect to the merger as if the companies had been combined in the earliest period presented. See Note 12 for additional information related to the merger. The term "utility" refers to the regulated activities of WPSC and UPPCO, while the term "nonutility" refers to the activities of WPSC and UPPCO which are not regulated. The term "nonregulated" refers to activities other than those of WPSC and UPPCO. (b) USE OF ESTIMATES--The preparation of WPSR's financial statements is in conformity with generally accepted accounting principles. Management may make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses -83- during the reporting period. Actual results could differ from those estimates. (c) ACQUISITIONS AND NONREGULATED INVESTMENTS--At ESI, the price paid in excess of the fair value of identifiable assets acquired in 1995 is being amortized over a five-year period. (d) CONSOLIDATION--WPSR consolidates all majority-owned subsidiaries. All significant intercompany transactions and accounts have been eliminated. (e) PRICE RISK MANAGEMENT ACTIVITIES--WPSR has not experienced significant price risk activities at its utility operations which are not recoverable through customer rates, however, price risk is experienced at ESI. ESI utilizes derivative financial and commodity instruments ("derivatives"), including futures and forward contracts, to reduce market risk associated with fluctuations in the price of natural gas and electricity sold under firm commitments with certain of its customers. ESI also utilizes derivatives, including price swap agreements, call and put option contracts, and futures and forward contracts, to manage market risk associated with a portion of its anticipated supply requirements. In addition, ESI utilizes derivatives, within specified guidelines, for trading purposes. Gains or losses on derivatives associated with firm commitments are recognized as adjustments to the cost of sales or to revenues when the related transactions affect earnings. Gains and losses on derivatives associated with forecasted transactions are recognized when such forecasted transactions affect earnings. At December 31, 1998, $7.2 million in losses related to firm commitments and forecasted transactions were deferred. If it is no longer probable that a forecasted transaction will occur, any gain or loss on the derivative instrument as of such date is immediately recognized in earnings. Derivatives for trading purposes are marked to market each accounting period, and gains and losses are recognized as a component of other income at that time. In 1998 and 1997, trading losses of $6.1 million and $1.4 million, respectively, were recognized. At December 31, 1998, ESI had outstanding 22.0 million notional dekatherms of natural gas under futures and option agreements and 1.3 million notional dekatherms of natural gas under basis swap agreements for purposes of managing market risk. The financial instruments outstanding at December 31, 1998 expire at various times through August 2000. ESI has certain gas sales commitments through August 2000 with a range of sale prices from $2.36 to $2.38 per dekatherm and a range of associated gas purchase costs of $2.29 to $2.31 per dekatherm. As of December 31, 1998, the fair value of trading instruments included assets of $0.7 million. Except for a minimal level of electric trading instruments, financial instruments used for trading in 1998 and 1997 were natural gas derivatives. At -84- December 31, 1998, ESI had outstanding 13.6 million notional dekatherms of natural gas under futures and option agreements and 1.6 million notional dekatherms of natural gas under basis swap agreements for trading purposes. (f) UTILITY PLANT--Utility plant is stated at the original cost of construction which includes an allowance for funds used during construction ("AFUDC"). Approximately 50% of WPSC's retail jurisdictional construction work in progress ("CWIP") expenditures are subject to AFUDC using a rate based on WPSC's overall cost of capital. Major new generating facilities earn AFUDC on total CWIP expenditures. For 1998, WPSC's AFUDC retail rate was approximately 10.4%. AFUDC is recorded on WPSC's wholesale jurisdictional electric CWIP at debt and equity percentages specified in the Federal Energy Regulatory Commission ("FERC") Uniform System of Accounts. For 1998, WPSC's AFUDC wholesale rate was approximately 5.5%. UPPCO has not had significant construction projects in recent years and, therefore, has not capitalized AFUDC. Substantially all of WPSC's and UPPCO's utility plant assets are subject to first mortgage liens. (g) PROPERTY ADDITIONS, MAINTENANCE, AND RETIREMENTS OF UTILITY PLANT--The cost of renewals and betterments of units of property (as distinguished from minor items of property) is capitalized as an addition to the utility plant accounts. Except for land, no gain or loss is recognized in connection with ordinary retirements of utility property units. The cost of units of property retired, sold, or otherwise disposed of, plus removal cost, less salvage, are charged to the accumulated provision for depreciation. Maintenance and repair costs and replacement and renewal costs associated with items not qualifying as units of property are generally charged to operating expense. Nonutility property and nonregulated property follow a similar policy except that gains and losses are recognized in connection with retirements. (h) DEPRECIATION--Straight-line composite depreciation expense is recorded over the estimated useful life of utility property and includes estimated salvage and cost of removal. Except for the Kewaunee Nuclear Power Plant ("Kewaunee"), WPSC's rates approved by the Public Service Commission of Wisconsin ("PSCW") on January 1, 1994, and by the Michigan Public Service Commission ("MPSC") on January 1, 1994 remained in effect through 1998. New rates have been approved by the PSCW to be effective January 1, 1999. The estimated effect of the new rates on 1999 depreciation expense is a decrease of approximately $1.0 million. UPPCO's depreciation rates approved by the MPSC on January 1, 1994 remain in effect through 2001. A new depreciation study will be filed with the MPSC in late 2000, with new rates effective January 1, 2002. -85- Depreciation expense includes accruals for nuclear decommissioning which are not included in the annual composite rates shown below. An explanation of this item is included in Note 1(k). ============================================================ WPSR 1998 1997 1996 ------------------------------------------------------------ Annual composite depreciation rates Electric 3.57% 3.55% 3.36% Gas 3.26% 3.26% 3.35% ============================================================ WPSC ------------------------------------------------------------ Annual composite depreciation rates Electric 3.55% 3.52% 3.33% Gas 3.26% 3.26% 3.35% ============================================================ Nonutility property and nonregulated property are depreciated using straight-line depreciation. Most assets have depreciation lives ranging from five to ten years. Property at Stoneman is depreciated using various lives, certain of which are as long as 40 years. Depreciation for Kewaunee is presently being accrued based on a 1997 PSCW order allowing for full cost recovery of the remaining unrecovered investment in Kewaunee by the end of 2002. The PSCW depreciation rate order authorizing new rates for 1999 also includes a change in methodology for recovery of Kewaunee investment after new steam generators have been installed, estimated to be mid-year 2000. At that time, the unrecovered basis of Kewaunee, including the new steam generators, will be recovered over an 8.5 year remaining life through 2008 using the sum-of-the-years depreciation method. (i) IMPAIRMENT--WPSR follows the provisions of Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." SFAS No. 121 requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment losses resulting from application of this statement are reported in income in the period in which the recognition criteria are first applied and met. This statement does not have a material impact on the current carrying amount of WPSR's assets. (j) NUCLEAR FUEL--The cost of nuclear fuel is amortized to electric production fuel expense based on the quantity of heat produced for the generation of electric energy by Kewaunee. Costs amortized to electric fuel expense (which assume no salvage values for uranium and plutonium) include an amount for ultimate disposal and are recovered through current customer rates. As required by the -86- Nuclear Waste Policy Act of 1982, a contract has been signed with the United States Department of Energy ("DOE") for the ultimate storage of the fuel; and quarterly payments, based on generation, are made to the DOE for fuel storage. Interim storage space for spent nuclear fuel is provided at Kewaunee, and expenses associated with this storage are recognized as current operating costs. Currently, there is on-site storage capacity for spent fuel through the year 2013. As of December 31, 1998 and 1997, the accumulated provisions for nuclear fuel totaled $156.6 million and $151.2 million, respectively. (k) NUCLEAR DECOMMISSIONING--Nuclear decommissioning costs to date have been accrued over the estimated service life of Kewaunee, recovered currently from customers in rates, and deposited in external trusts. Such costs totaled $17.2 million in 1998, $16.1 million in 1997, and $9.0 million in 1996. The increase in 1997 was the result of the PSCW's approval of the acceleration of Kewaunee depreciation and decommissioning funding as described in Note 1(h). Based on the standard cost escalation assumptions required by a July 1994 PSCW order, the undiscounted amount of WPSC's decommissioning costs forecasted to be expended between the years 2003 and 2039 is $614.0 million under the revised funding plan which became effective in 1997. In developing the funding plan, a long-term after-tax earnings rate of approximately 5.5% was assumed. WPSC's share of Kewaunee decommissioning is estimated to be $192.6 million in current dollars based on a site-specific study. The study, which was performed in 1992, uses immediate dismantlement as the method of decommissioning beginning after a dormant period extending from 2002 until 2015. As of December 31, 1998, the market value of the external nuclear decommissioning trusts totaled $171.4 million. A new site-specific study, which assumed shutdown in 2013, was completed during 1998 with WPSC's share of Kewaunee decommissioning estimated to be $190.7 million. Based on that study, WPSC's contributions for 1999 under the 1999 PSCW rate order will be $8.3 million. Depreciation expense includes future decommissioning costs collected in customer rates and an offsetting charge for earnings from external trusts. As of December 31, 1998, the accumulated provision for depreciation and decommissioning included accumulated provisions for decommissioning totaling $171.4 million. Realized trust earnings totaled $3.3 million, $3.7 million, and $3.0 million, and unrealized trust earnings totaled $16.8 million, $13.8 million, and $6.5 million for the years ended December 31, 1998, 1997, and 1996, respectively. Unrealized gains, net of tax, in external trusts are reflected as an increase to the decommissioning reserve, since decommissioning expense will be recognized as the gains are realized, in accordance with regulatory requirements. Investments in the nuclear decommissioning trusts are recorded at market value. The investments classified as utility plant are -87- presented net of related income tax effects on unrealized gains and represent the amount of assets available to accomplish decommissioning. The nonqualified trust investments designated to pay income taxes when unrealized gains become realized are classified as other assets. An offsetting regulatory liability reflects the expected reduction in future rates as unrealized gains in the nonqualified trust are realized. (l) CASH AND EQUIVALENTS--WPSR considers short-term investments with an original maturity of three months or less to be cash equivalents. (m) REVENUE AND CUSTOMER RECEIVABLES--WPSR accrues revenues related to electric and gas service, including estimated amounts for service rendered but not billed. Automatic fuel adjustment clauses are used for FERC wholesale-electric and MPSC retail-electric portions of WPSC's and UPPCO's businesses. The PSCW retail-electric portion of WPSC's business uses a "cost variance range" approach. This range is based on a specific estimated fuel cost for the forecast year. If WPSC's actual fuel costs fall outside this range, a hearing may be held and an adjustment to future rates may result. WPSC has a purchased gas adjustment clause ("PGAC") which allows it to pass changes in the cost of gas purchased from its suppliers on to system gas customers, subject to PSCW and MPSC review. The continued use of a PGAC for all Wisconsin utilities has been reexamined by the PSCW, and utilities were given the choice between continuing under a modified one-for-one gas cost recovery plan or switching to an incentive gas cost recovery mechanism. The PSCW has approved a modified one-for-one gas cost recovery plan for WPSC which is similar to the gas cost recovery under the existing PGAC. Implementation of the modified one-for-one gas cost recovery plan began in January 1999. Billings to UPPCO's customers under MPSC jurisdiction include base rate charges and a power supply cost recovery ("PSCR") factor. Approximately 40% of UPPCO's operating expense is power supply costs. UPPCO receives MPSC approval each year to recover projected power supply costs by establishment of PSCR factors. These factors are subject to annual reconciliation to actual costs and permit 100% recovery of allowed power supply costs. Any over or under recovery is deferred on UPPCO's balance sheet, and such deferrals are relieved as refunds or additional billings are made. WPSC and UPPCO are required to provide service and grant credit to customers within their service territories and are precluded from discontinuing service to residential customers during certain periods of the year. WPSC and UPPCO continually review their customers' credit-worthiness and obtain deposits or refund deposits accordingly. Approximately 11% of WPSR's total revenues are from companies in the paper products industry. -88- (n) REGULATORY ASSETS AND LIABILITIES--WPSC and UPPCO are subject to the provisions of SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation." Regulatory assets represent probable future revenue associated with certain incurred costs which will be recovered from customers through the ratemaking process. Regulatory liabilities represent costs previously collected that are refundable in future customer rates. The following regulatory assets and liabilities were reflected in the Consolidated Balance Sheets as of December 31: ============================================================ WPSR (Thousands) 1998 1997 ------------------------------------------------------------ Regulatory assets Demand-side management expenditures $23,860 $31,360 Environmental remediation costs (net of insurance recoveries) 30,285 29,882 Coal and rail contract buy-out costs 616 2,293 Debt refinancing costs 1,810 2,078 Enrichment facility fee 5,056 5,544 Kewaunee steam generator resleeving costs - 3,577 Other 8,414 5,115 ------------------------------------------------------------ Total $70,041 $79,849 ============================================================ Regulatory liabilities Income tax related items $29,617 $32,596 Pensions - 2,443 Conservation costs (2,866) 6,491 Unrealized gain on decommissioning trust 16,397 11,348 Kewaunee deferred revenue 4,009 2,518 Deferred gain on emission allowance sales 3,304 1,352 Other 13 (261) ------------------------------------------------------------ Total $50,474 $56,487 ============================================================ -89- ============================================================ WPSC (Thousands) 1998 1997 ------------------------------------------------------------ Regulatory assets Demand-side management expenditures $23,860 $31,360 Environmental remediation costs (net of insurance recoveries) 29,021 29,249 Coal and rail contract buy-out costs 616 2,293 Debt refinancing costs 1,623 1,859 Enrichment facility fee 5,056 5,544 Kewaunee steam generator resleeving costs - 3,577 Other 8,159 4,662 ------------------------------------------------------------ Total $68,335 $78,544 ============================================================ Regulatory liabilities Income tax related items $22,734 $26,119 Pensions - 2,443 Conservation costs (2,866) 6,491 Unrealized gain on decommissioning trust 16,397 11,348 Kewaunee deferred revenue 4,009 2,518 Deferred gain on emission allowance sales 3,304 1,352 Other 13 8 ------------------------------------------------------------ Total $43,591 $50,279 ============================================================ As of December 31, 1998, the majority of WPSC's regulatory assets are being recovered through rates charged to customers over periods ranging from two to ten years. Recovery periods for UPPCO's regulatory assets are up to 26 years. Carrying costs for all WPSC's regulatory assets are being recovered except for those associated with environmental costs. No carrying costs are being recovered for UPPCO's regulatory assets. Based on prior and current rate treatment of such costs, management believes it is probable that WPSC and UPPCO will continue to recover from ratepayers the regulatory assets described above. See Notes 8 and 9 for specific information on pension and deferred tax regulatory liabilities. See Note 10 for information on environmental remediation deferred costs. (o) INVESTMENTS AND OTHER ASSETS--Investments include ownership interests in Wisconsin River Power Company and Wisconsin Valley Improvement Company. Income related to these investments is included in other income and deductions using the equity method of accounting. Other assets include operating deposits for jointly-owned plants, the cash surrender value of life insurance policies, the long-term portion of energy conservation loans to customers, and the decommissioning trust investments designated for payment of income taxes. -90- (p) RECLASSIFICATIONS--Certain prior year financial statement amounts have been reclassified to conform to current year presentation. (q) RETIREMENT OF DEBT--Historically, gains or losses resulting from the settlement of long-term utility debt obligations have been deferred and amortized concurrent with rate recovery as required by regulators. (r) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES--In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement requires all derivatives to be measured at fair value and recognized as either assets or liabilities in the statement of financial position. The accounting for changes in the fair value of a derivative is dependent upon the use of the derivative and its resulting designation. Unless specific hedge accounting criteria are met, changes in the derivative's fair value must be recognized currently in earnings. This statement is effective for fiscal periods beginning after June 15, 1999. WPSR will be adopting the requirements of this statement on January 1, 2000, and has not yet determined the method of adoption or its impact. However, the requirements of this statement could increase volatility in earnings and other comprehensive income. (s) INTERNALLY-DEVELOPED SOFTWARE--In March 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This statement requires the capitalization of certain costs related to software developed or obtained for internal use. The statement is effective for periods beginning after December 15, 1998. WPSR will be adopting the requirements of this statement in 1999. While the total impact of WPSR's adoption of this statement has not been determined, WPSC's adoption of this statement is expected to result in a reduction in operating expenses, which has been substantially considered in the ratemaking process. The capitalized software costs will then be amortized to operating expense in future years. (t) COSTS OF START-UP ACTIVITIES--In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on the Costs of Start-up Activities." This statement provides guidance on the financial reporting of start-up costs and organization costs. Costs of start-up activities and organization costs are required to be expensed as incurred. The statement is effective for periods beginning after December 15, 1998. WPSR will be adopting the requirements of this statement in 1999 and does not anticipate any material impact to its financial statements. -91- NOTE 2--JOINTLY-OWNED UTILITY FACILITIES Information regarding WPSC's share of major jointly-owned electric generating facilities in service at December 31, 1998 is set forth below:
=========================================================================================== WPSC (Thousands, West Marinette Columbia Edgewater except for percentages) Unit No. 33 Energy Center Unit No. 4 Kewaunee ------------------------------------------------------------------------------------------- Ownership 68% 31.8% 31.8% 41.2% Plant capacity (Megawatts) 83.5 335.2 104.9 221.0 Utility plant in service $15,917 $112,307 $22,542 $133,099 Accumulated depreciation $ 2,774 $ 63,592 $13,504 $ 97,930 In-service date 1993 1975 and 1978 1969 1974 ===========================================================================================
WPSC's share of direct expenses for these plants is included in the corresponding operating expenses in the consolidated statements of income. WPSC has supplied its own financing for all jointly-owned projects. Upon closing of an agreement with Madison Gas and Electric Company ("MG&E"), which is contingent upon steam generator replacement, WPSC will acquire MG&E's 17.8% share of Kewaunee. This will increase WPSC's ownership in Kewaunee to 59.0%. See Note 10 for additional information regarding Kewaunee. NOTE 3--SHORT-TERM DEBT AND LINES OF CREDIT To provide short-term borrowing flexibility and security for commercial paper outstanding, WPSR and its subsidiaries maintain bank lines of credit. Most of these lines of credit require a fee. The information in the table below relates to short-term debt and lines of credit for the years indicated:
================================================================================================ (Thousands, except for percentages) 1998 1997 1996 ------------------------------------------------------------------------------------------------ As of end of year Commercial paper outstanding $47,590 $20,706 $31,350 Average discount rate on outstanding commercial paper 4.84% 6.55% 5.73% Notes payable outstanding $12,703 $19,500 $31,600 Average interest rate on notes payable 5.88% 7.06% 6.16% Available lines of credit $62,102 $27,500 $55,900 ================================================================================================ For the year Maximum amount of short-term debt $102,033 $80,017 $75,250 Average amount of short-term debt $50,939 $37,609 $31,254 Average interest rate on short-term debt 5.93% 6.06% 5.18% ================================================================================================
NOTE 4--LONG-TERM DEBT First mortgage bonds are secured by utility plant assets. In July 1998, WPSC retired the entire $50.0 million issue of the 5-1/4% First Mortgage Bonds. In December 1998, WPSC issued $50.0 million of 6.08% senior notes due in 2028 secured by a pledge of first mortgage bonds. The 1998 notes become unsecured if WPSC were to call all of its outstanding first -92- mortgage bonds. These notes would then be secured by WPSC's general credit and not by WPSC's assets. As of December 31, 1998, $8.1 million has been drawn against PDI's revolving credit note of $11.5 million which is secured by the assets of Stoneman. An additional $3.3 million, which is to be paid in the year 2000, has been committed against this note. The note, which is guaranteed by WPSR, is due in the year 2000 or when the plant is converted to a 300-megawatt to 500-megawatt gas-fired combined cycle facility. NOTE 5--COMPANY-OBLIGATED MANDATORILY REDEEMABLE TRUST PREFERRED SECURITIES OF SUBSIDIARY TRUST On July 30, 1998, WPSR Capital Trust I ("Trust"), a Delaware business trust of which WPSR owns all of the outstanding trust common securities, issued $50.0 million of trust preferred securities to the public. The sole asset of the Trust is $51.5 million principal amount of subordinated debentures due June 30, 2038, and bearing interest at 7.0% per annum, issued by WPSR. The terms and interest payments on these debentures correspond to the terms and distributions on the trust preferred securities. The Trust has been consolidated into the WPSR financial statements. The interest payments are reflected as distributions - preferred securities of subsidiary trust in the Consolidated Statement of Income and are tax deductible by WPSR. WPSR may elect to defer interest payments on the debentures for a period up to 20 consecutive quarters, causing distributions on the trust preferred securities to be deferred as well. In case of a deferral, interest and distributions will continue to accrue, along with quarterly compounding interest on the deferred amounts. WPSR may redeem all or a portion of the debentures after July 30, 2003, requiring an equal amount of trust securities to be redeemed at face value plus accrued and unpaid distributions. WPSR has entered into a limited guarantee of payment of distributions, redemption payments, and payments in liquidation with respect to the trust preferred securities. This guarantee, when considered together with WPSR's obligations under the related debentures and indenture and the applicable declaration of trust, provide a full and unconditional guarantee by WPSR of amounts due on the outstanding trust preferred securities. NOTE 6--COMMON EQUITY Under WPSR's Stock Investment Plan, WPSR's common stock has been purchased in the open market to satisfy shareholder and employee purchase requirements. Beginning in January 1999, WPSR began issuing new shares for the Stock Investment Plan. In December 1996, WPSR adopted a Shareholder Rights Plan designed to enhance the ability of the Board of Directors to protect shareholders and WPSR if efforts are made to gain control of WPSR in a manner that is not in the best interests of WPSR and its shareholders. The plan gives existing shareholders, under certain circumstances, the right to purchase stock at a discounted price. The rights expire on December 11, 2006. -93- At December 31, 1998, WPSR had $328.5 million of retained earnings available for dividends. WPSC is restricted by a PSCW order to paying normal common stock dividends of no more than 109.0% of the previous year's common stock dividend without PSCW approval. Also, Wisconsin law prohibits WPSC from making loans to WPSR and its subsidiaries and from guaranteeing their obligations. UPPCO's indentures relating to first mortgage bonds contain certain limitations on the payment of cash dividends on common stock. Under the most restrictive of these provisions, approximately $7.9 million of consolidated retained earnings were available at December 31, 1998, for the payment of common stock cash dividends by UPPCO. WPSR made a $34.0 million equity infusion into WPSC during the second quarter of 1998. In December 1998, WPSC paid to WPSR a special common dividend of $20.0 million. The special dividend allowed WPSC's average common equity capitalization ratio to remain at approximately 54.0%, the level approved by the PSCW for ratemaking. NOTE 7--FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate such value: Cash, Short-Term Investments, Energy Conservation Loans, Notes Payable, and Outstanding Commercial Paper: The carrying amount approximates fair value due to the short maturity of those investments and obligations. Nuclear Decommissioning Trusts: The value of WPSC's nuclear decommissioning trust investments is recorded at market value. Long-Term Debt, Preferred Stock, and ESOP Loan Guarantees: The fair value of WPSC's long-term debt, preferred stock, and ESOP loan guarantees is estimated based on the quoted market price for the same or similar issues or on the current rates offered to WPSC for debt of the same remaining maturity. -94- The estimated fair values of WPSR's financial instruments as of December 31 were:
================================================================================================= (Thousands) 1998 1997 ------------------------------------------------------------------------------------------------- Carrying Amount Fair Value Carrying Amount Fair Value ------------------------------------------------------------------------------------------------- Cash and cash equivalents $ 7,134 $ 7,134 $ 8,495 $ 8,495 Energy conservation loans 7,810 7,810 7,195 7,195 Nuclear decommissioning trusts - utility plant 171,442 171,442 134,108 134,108 Nuclear decommissioning trusts - other assets 16,397 16,397 11,348 11,348 Notes payable 12,703 12,703 19,500 19,500 Commercial paper 47,590 47,590 20,706 20,706 ESOP loan guarantees 6,448 6,702 9,798 10,243 Trust preferred securities 50,000 50,250 - - Long-term debt 337,473 366,038 337,477 360,506 Preferred stock 51,200 53,026 51,645 49,040 Gas commodity instruments 41,800 34,600 504 436 =================================================================================================
NOTE 8--EMPLOYEE BENEFIT PLANS WPSC and UPPCO have non-contributory retirement plans covering substantially all employees under which annual contributions may be made to an irrevocable trust established to provide retired employees with a monthly payment if conditions relating to age and length of service have been met. The WPSC pension plans are fully funded, and no contributions were made in 1998, 1997, or 1996. The WPSC and UPPCO pension plans and other benefit plans were merged effective December 31, 1998. The net accrued benefit liability assumed by WPSC at December 31, 1998 was $5.7 million. WPSC and UPPCO also currently offer medical, dental, and life insurance benefits to employees, retirees, and their dependents. The expenses for active employees are expensed as incurred. The company funds these benefits through irrevocable trusts as allowed for income tax purposes. These funded amounts have been expensed and recovered through customer rates. The non-administrative plan is a collectively bargained plan and, therefore, is tax exempt. The investments in the trust covering administrative employees are subject to federal unrelated business income taxes at a 39.6% tax rate. All pension costs and postretirement plan costs are accounted for under SFAS Nos. 87 and 106, respectively, which require the cost of these benefits to be accrued as expense over the period in which the employee renders service. The transition obligation for current and future retirees is recognized over 20 years beginning in 1993. The following tables provide a reconciliation of the changes in the plans' benefit obligations and fair value of assets over the three one-year periods ending December 31, 1998, 1997, and 1996, and a statement of the funded status as of December 31, of each year: -95-
===================================================================================== (Thousands) 1998 1997 1996 ------------------------------------------------------------------------------------- Reconciliation of benefit obligation - pension ------------------------------------------------------------------------------------- Obligation at January 1 $350,669 $299,587 $301,840 Service cost 9,014 7,019 7,404 Interest cost 25,264 22,919 22,493 Participant contributions - - - Plan amendments 5,762 7,224 - Actuarial (gain) loss 26,085 28,989 (17,296) Acquisitions - - - Benefit payments (17,430) (15,911) (14,854) Curtailments - 842 - ------------------------------------------------------------------------------------- Obligation at December 31 $399,364 $350,669 $299,587 ===================================================================================== Reconciliation of benefit obligation - other ------------------------------------------------------------------------------------- Obligation at January 1 $127,705 $116,354 $123,665 Service cost 3,874 3,500 3,816 Interest cost 9,126 9,496 9,594 Participant contributions - - - Plan amendments - 6,803 - Actuarial (gain) loss 2,599 34 (16,418) Acquisitions - - - Benefit payments (4,489) (4,174) (4,303) Curtailments - (4,308) - ------------------------------------------------------------------------------------- Obligation at December 31 $138,815 $127,705 $116,354 =====================================================================================
-96-
===================================================================================== (Thousands) 1998 1997 1996 ------------------------------------------------------------------------------------- Reconciliation of fair value of plan assets - pension ------------------------------------------------------------------------------------- Fair value of plan assets at January 1 $537,756 $470,176 $431,130 Actual return on plan assets 89,618 79,731 51,833 Acquisitions - - - Employer contributions 539 3,783 2,067 Participant contributions - - - Plan expenses paid - (23) - Benefit payments (17,430) (15,911) (14,854) ------------------------------------------------------------------------------------- Fair value of plan assets at December 31 $610,483 $537,756 $470,176 ------------------------------------------------------------------------------------- Funded status at December 31 $211,119 $187,087 $170,589 Unrecognized transition (asset) obligation (13,467) (17,043) (20,620) Unrecognized prior-service cost 19,336 15,523 9,467 Unrecognized (gain) loss (156,972) (132,227) (116,172) ------------------------------------------------------------------------------------- Net amount recognized $ 60,016 $ 53,340 $ 43,264 ===================================================================================== Reconciliation of fair value of plan assets - other ------------------------------------------------------------------------------------- Fair value of plan assets at January 1 $121,930 $104,367 $ 88,950 Actual return on plan assets 21,161 20,376 18,198 Acquisitions - - - Employer contributions 1,239 1,361 1,522 Participant contributions - - - Plan expenses paid - - - Benefit payments (4,489) (4,174) (4,303) ------------------------------------------------------------------------------------- Fair value of plan assets at December 31 $139,841 $121,930 $104,367 ===================================================================================== Funded status at December 31 $ 1,026 $ (5,776) $(11,986) Unrecognized transition (asset) obligation 39,434 42,286 47,663 Unrecognized prior-service cost 4,259 4,583 (1,897) Unrecognized (gain) loss (87,011) (78,496) (64,432) ------------------------------------------------------------------------------------- Net amount recognized $(42,292) $(37,403) $(30,652) =====================================================================================
The net amounts recognized for 1997 and 1996 pension benefits have been reduced for an additional unrecognized regulatory liability related to pension costs. The entire regulatory liability was recognized by year-end 1998. The following table provides the amounts recognized in the statement of financial position as of December 31 of each year: -97-
===================================================================================== (Thousands) 1998 1997 1996 ------------------------------------------------------------------------------------- Prepaid benefit cost - pension ------------------------------------------------------------------------------------- Prepaid benefit cost $ 60,016 $ 52,867 $ 43,877 Accrued benefit liability - (2,525) (2,208) Intangible asset - 2,998 1,595 Accumulated other income - - - ------------------------------------------------------------------------------------- Net amount recognized $ 60,016 $ 53,340 $ 43,264 ===================================================================================== Prepaid benefit cost - other ------------------------------------------------------------------------------------- Prepaid benefit cost $ - $ - $ - Accrued benefit liability (42,292) (37,403) (30,652) Intangible asset - - - Accumulated other income - - - ------------------------------------------------------------------------------------- Net amount recognized $(42,292) $(37,403) $(30,652) =====================================================================================
The following table provides the components of net periodic benefit cost for the plans for fiscal years 1998, 1997, and 1996:
===================================================================================== (Thousands) 1998 1997 1996 ------------------------------------------------------------------------------------- Net periodic benefit cost - pension ------------------------------------------------------------------------------------- Service cost $ 9,014 $ 7,019 $ 7,404 Interest cost 25,264 22,919 22,493 Expected return on plan assets (38,282) (33,883) (33,283) Amortization of transition (asset) obligation (3,576) (3,576) (3,576) Amortization of prior-service cost 1,950 921 1,023 Amortization of net (gain) loss (507) (781) (122) ------------------------------------------------------------------------------------- Net periodic benefit cost $ (6,137) $ (7,381) $ (6,061) Curtailment (gain) loss - 1,088 - ------------------------------------------------------------------------------------- Net periodic benefit cost after curtailments $ (6,137) $ (6,293) $ (6,061) ===================================================================================== Net periodic benefit cost - other ------------------------------------------------------------------------------------- Service cost $ 3,874 $ 3,500 $ 3,816 Interest cost 9,126 9,496 9,594 Expected return on plan assets (7,356) (6,378) (6,076) Amortization of transition (asset) obligation 2,852 3,010 3,010 Amortization of prior-service cost 324 324 (131) Amortization of net (gain) loss (2,692) (2,196) (670) ------------------------------------------------------------------------------------- Net periodic benefit cost $ 6,128 $ 7,756 $ 9,543 Curtailment (gain) loss - 356 - ------------------------------------------------------------------------------------- Net periodic benefit cost after curtailments $ 6,128 $ 8,112 $ 9,543 =====================================================================================
Under a contract with Wisconsin Electric Power Company ("WEPCO"), UPPCO had operated WEPCO's Presque Isle Power Plant in Michigan since 1988. This contract terminated on December 31, 1997, and all employees at the plant became employees of WEPCO. In 1997, UPPCO recognized a $1.1 million pension curtailment loss and a $0.4 million other benefit plan curtailment loss from the termination of the Presque Isle Power Plant operating agreement. The assumptions used in the measurement of WPSR's benefit obligation are shown in the following table: -98-
===================================================================================== 1998 1997 1996 ------------------------------------------------------------------------------------- Weighted average assumptions as of December 31 - pension ------------------------------------------------------------------------------------- Discount rate 6.75% 7.25% 7.75% Expected return on plan assets 8.75% 8.75% 8.50% Rate of compensation increase 5.50% 5.50% 5.50% ===================================================================================== Weighted average assumptions as of December 31 - other ------------------------------------------------------------------------------------- Discount rate 6.75% 7.25% 7.75% Expected return on plan assets 8.75% 8.75% 8.50% Rate of compensation increase N/A N/A N/A =====================================================================================
The assumed health care cost trend rates for 1998 are 8.0% for medical and 7.5% for dental, both decreasing to 5.0% by the year 2006. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A 1.0% change in assumed health care cost trend rates would have the following effects: ======================================================================= 1.0% 1.0% (Thousands) Increase Decrease ----------------------------------------------------------------------- Effect on total of service and interest cost components of net periodic postretirement health care benefit cost $ 2,521 $ (1,955) Effect on the health care component of the accumulated postretirement benefit obligation $24,684 $(19,591) ======================================================================= WPSC has a leveraged Employee Stock Ownership Plan and Trust ("ESOP") that held 1,955,468 shares of WPSR common stock (market value of approximately $68.9 million) at December 31, 1998. At that date, the ESOP also had one loan guaranteed by WPSC and secured by common stock. Principal and interest on the loan are to be paid using contributions from WPSC and dividends on WPSR common stock held by the ESOP. Shares in the ESOP are allocated to participants as the loan is repaid. Tax benefits from dividends paid to the ESOP are recognized as a reduction in WPSC's cost of providing service to customers. The PSCW has allowed WPSC to include in cost of service an additional employer contribution to the plan. The net effect of the tax benefits and of the employer contribution is an approximately equal sharing of the tax benefits of the program between customers and employees. NOTE 9--INCOME TAXES WPSR accounts for income taxes using the liability method as prescribed by SFAS No. 109, "Accounting for Income Taxes." Under the liability method, deferred income tax liabilities are established for all temporary differences in the book and tax bases of assets and liabilities based upon enacted tax laws and rates applicable to the periods in which the taxes become payable. Taxes provided in prior years at rates greater than current rates are being refunded to -99- customers prospectively as the temporary differences reverse. The net regulatory liability totaled $29.6 million as of December 31, 1998. As of December 31, 1998 and 1997, WPSR had the following significant temporary differences that created deferred tax assets and liabilities: =================================================================== (Thousands) 1998 1997 ------------------------------------------------------------------- Deferred tax assets Plant related $ 76,400 $ 68,175 Customer advances 10,599 8,187 Conservation escrow (1,057) 2,859 Capital losses/state net operating losses 3,652 1,345 Employee benefits 28,021 22,772 Other 9,351 3,019 ------------------------------------------------------------------- Total $126,966 $106,357 =================================================================== Deferred tax liabilities Plant related $210,418 $201,239 Demand-side management expenditures 9,421 12,383 Employee benefits 24,009 17,786 Other 5,760 6,146 ------------------------------------------------------------------- Total $249,608 $237,554 =================================================================== Net deferred tax liabilities $122,642 $131,197 =================================================================== -100- Previously deferred investment tax credits are being amortized as a reduction to income tax expense over the life of the related utility plant. The components of income tax expense are set forth in the tables below:
========================================================================================= (Thousands, except for percentages) 1998 1997 1996 ----------------------------------------------------------------------------------------- Rate Amount Rate Amount Rate Amount ----------------------------------------------------------------------------------------- Statutory federal income tax 35.0% $25,623 35.0% $31,525 35.0% $29,140 State income taxes, net 5.9 4,344 5.4 4,862 5.1 4,275 Investment tax credit restored (2.6) (1,924) (2.2) (1,949) (2.4) (1,961) Rate difference on reversal of income tax temporary differences (2.4) (1,761) (2.1) (1,888) (1.9) (1,579) Dividends paid to ESOP (1.9) (1,414) (1.5) (1,381) (1.7) (1,424) Section 29 credits (1.0) (751) (0.2) (220) (0.3) (220) Other differences, net (1.0) (672) 0.2 157 (1.1) (1,015) ----------------------------------------------------------------------------------------- Effective income tax 32.0% $23,445 34.6% $31,106 32.7% $27,216 ========================================================================================= Current provision Federal $29,492 $31,444 $28,478 State 7,779 7,527 7,729 ----------------------------------------------------------------------------------------- Total current provision 37,271 38,971 36,207 Deferred (benefit) provision (11,902) (5,916) (7,030) Investment tax credit restored, net (1,924) (1,949) (1,961) ----------------------------------------------------------------------------------------- Total income tax expense $23,445 $31,106 $27,216 =========================================================================================
NOTE 10--COMMITMENTS AND CONTINGENCIES COAL CONTRACTS To ensure a reliable, low-cost supply of coal, WPSC entered into a long-term contract that has take-or-pay obligations totaling $130.8 million from 1999 through 2016. The obligations are subject to force majeure provisions which provide WPSC other options if the specified coal does not meet emission limits which may be mandated in future legislation. In the opinion of management, any amounts paid under the take-or-pay obligations described above would be considered costs of service subject to recovery in customer rates. PURCHASED POWER WPSC has several take-or-pay contracts for either capacity or energy related to purchased power. These contracts total $68.2 million through April 2003. UPPCO has purchased power contracts with external suppliers for 50 megawatts totaling $12.3 million through 1999. Management expects to recover these costs in future customer rates. LONG-TERM POWER SUPPLY In November 1995, WPSC signed a 25-year agreement to purchase power from SkyGen Energy LLC, an independent power producer proposing to build a cogeneration facility and sell electrical power to WPSC. In October 1997, the PSCW issued a Certificate of Public Convenience and Necessity -101- authorizing construction of the project. Phase I of the project, which is expected to be operational during 1999, will be accounted for as a capitalized lease with the capitalized amount being approximately $77.8 million. If Phase II becomes operational (Phase II is currently projected to be operational within five years of the start of Phase I), an additional plant asset of approximately $76.0 million will be recorded. FUTURE NONREGULATED COMMITMENTS PDI has signed agreements with Maine Public Service Company to purchase, for approximately $38.0 million, hydro, steam, and diesel units in the State of Maine and in New Brunswick, Canada, with a total capacity of approximately 92 megawatts. PDI is currently awaiting approval of the purchase by the Maine Public Service Commission. GAS COSTS WPSC has natural gas supply and transportation contracts that require total estimated demand payments of $186.2 million through October 2008. In April 1992, the FERC issued Order No. 636 which required natural gas pipelines to restructure their sales and transportation services. As a result, WPSC was obligated to pay for a portion of ANR Pipeline Company's transition costs through various FERC approved surcharges. Though there may be additional transition costs, which could be significant, the amount and timing of these costs are unknown at this time. Management fully expects to recover these costs in future customer rates since the PSCW and MPSC have allowed such recovery to date. NUCLEAR LIABILITY The Price-Anderson Act provides for the payment of funds for public liability claims arising out of a nuclear incident. In the event of a nuclear incident involving any of the nation's licensed reactors, WPSC is subject to a proportional assessment which is approximately $36.3 million per incident, not to exceed $4.1 million per incident, per calendar year. These amounts represent WPSC's 41.2% ownership share in Kewaunee. NUCLEAR PLANT OPERATION On September 29, 1998, WPSC and MG&E finalized an arrangement in which WPSC will acquire, at MG&E's book value, MG&E's 17.8% share of Kewaunee including MG&E's decommissioning trust assets and assuming MG&E's share of the decommissioning obligation. This agreement, the closing of which is contingent upon regulatory approval and steam generator replacement scheduled for the spring of 2000, will give WPSC 59.0% ownership in Kewaunee. The net book value of WPSC's share of Kewaunee at December 31, 1998 is $35.2 million. In addition, the current cost of WPSC's share of the estimated costs to decommission Kewaunee, assuming early retirement, exceeds the trust assets at December 31, 1998 by $21.2 million. If retired early, Kewaunee would be placed in a dormant state following the -102- transfer of spent fuel to temporary storage facilities. Under this plan, Kewaunee would remain intact with minimal monitoring and maintenance until physical decommissioning begins. Actual decommissioning would probably not begin until approximately 2015. On January 3, 1997, the PSCW accepted WPSC's recommendation to accelerate recovery of the Wisconsin retail portion of both the current undepreciated plant balance and the unfunded decommissioning costs over a six-year period, 1997 through 2002. The PSCW depreciation rate order authorizing new rates for 1999 includes a change in methodology for recovery of Kewaunee investment after new steam generators have been installed, estimated to be mid-year 2000. At that time, the unrecovered basis of the Kewaunee plant, including the new steam generators, will be recovered over an 8.5 year remaining life through 2008 using the sum-of-the-years depreciation method. On October 17, 1998, Kewaunee was shut down for a planned maintenance and refueling outage. Inspection of the plant's two steam generators showed that the repairs made in 1997 were holding up well and few additional repairs were needed. In addition to the inspection and repair of the steam generators, a major overhaul was performed on the main turbine generator. The plant was back in operation on November 27, 1998. CLEAN AIR REGULATIONS WPSC is in compliance with both the Phase I and Phase II sulfur dioxide and nitrogen oxide emission limits established by the Federal Clean Air Act Amendments of 1990. Additional capital expenditures of $1.0 million to $2.0 million are projected through 1999 for Wisconsin and federal air quality compliance. Management believes that all costs incurred for additional compliance will be recoverable in future customer rates. In late September 1998, the United States Environmental Protection Agency ("EPA") required certain states, including Wisconsin, to develop plans to reduce the emissions of nitrogen oxides ("NOx") from sources within the state by late 2003. On a preliminary basis, WPSC projects potential capital costs of between $37.0 million and $96.0 million to comply with possible future regulations. The cumulative incremental annual operating and maintenance expense associated with these possible future regulations projected to be incurred by 2010 range from $29.0 million to $106.0 million. The costs will depend on the state-specific compliance method to be adopted in the future as well as the effectiveness of the various technologies available for NOx emission control. Under WPSC's current practice, the capital costs (as reflected in depreciation expenses) and the annual operating costs are anticipated to be recovered through future customer rates. On December 24, 1998, WPSC joined other parties in a petition challenging the EPA's regulations that require Wisconsin to prepare and submit a NOx implementation plan. On January 22, 1999, the State of Wisconsin intervened in the litigation and challenged the geographic scope of the rule and the required timing for implementation of NOx controls within the state. No decisions have yet been rendered. -103- MANUFACTURED GAS PLANT REMEDIATION WPSC continues to investigate the environmental cleanup of eight manufactured gas plant sites. The cleanup of WPSC's Stevens Point manufactured gas plant site has been substantially completed with monitoring of the site continuing. Costs of this cleanup were within the range expected for this site. Future investigation and cleanup costs for the remaining seven sites is estimated to be in the range of $33.9 million to $41.0 million. These estimates may be adjusted in the future contingent upon remedial technology, regulatory requirements, and experience gained through cleanup activities. An initial liability for cleanup of $41.7 million had been established with an offsetting regulatory asset (deferred charge). Of this amount, approximately $2.7 million has been spent to date. Management believes that cleanup costs net of insurance recoveries, but not the carrying costs associated with the cleanup expenditures, will be recoverable in current and future customer rates. WPSC has received $12.6 million in insurance recoveries which have been recorded as a reduction in the regulatory asset. FUTURE UTILITY EXPENDITURES Management estimates 1999 utility plant construction expenditures at WPSC to be approximately $107.4 million and construction expenditures at UPPCO to be approximately $6.7 million. Demand-side management ("DSM") expenditures at WPSC are estimated to be $11.1 million. No additional DSM expenditures will be deferred in 1999, and the outstanding deferred asset balance at December 31, 1998 of $23.9 million will be amortized over the next four years consistent with rate recovery. NOTE 11--REGULATORY ENVIRONMENT WPSC received a rate order in the Wisconsin retail jurisdiction on January 15, 1999. The impact is a $26.9 million increase in electric revenues and a $10.3 million increase in gas revenues on an annual basis. The new rates will be effective for 1999 and 2000. WPSC was granted a 12.1% return on equity for 1999 and 2000. UPPCO is subject to a rate freeze through 2000. NOTE 12--MERGER WITH UPPER PENINSULA ENERGY CORPORATION Effective September 29, 1998, UPEN merged with and into WPSR, and UPPCO, UPEN's utility and major subsidiary, as well as UPEN's other nonregulated subsidiaries, became wholly-owned subsidiaries of WPSR. The merger qualifies as a tax-free transaction and the transaction has been accounted for as a pooling of interests. The foregoing consolidated financial statements have been restated to give effect to the merger as if the companies had combined in the earliest period presented. Certain adjustments have been made to conform the presentation of UPEN's financial information with that of WPSR. In accordance with the terms of the merger, each of the 2,950,001 outstanding shares of UPEN common stock (no par value) were converted into the right to receive 0.90 shares of WPSR common stock. Taking into -104- account the cash paid for fractional shares, an additional 2,654,443 shares are being issued pursuant to the merger. The summary below depicts selected unaudited financial data for 1998 and 1997 as reported prior to the consummation of the merger and restated to reflect the effect of the merger under the pooling of interests method. -105-
=============================================================================================== Selected Restated Financial Data WPSR UPEN WPSR (Quarterly Data, Unaudited) (prior to (prior to (restated restatement restatement for pooling (In thousands, except per share data) for pooling) for pooling) of interests) - ----------------------------------------------------------------------------------------------- First Quarter 1997 Operating revenues (1) $263,013 $16,303 $279,199 Net income $ 18,235 $ 1,924 $ 20,159 Average outstanding shares 23,880 2,969 26,534 Basic and diluted earnings per share $0.76 $0.65 $0.76 Second Quarter 1997 Operating revenues (1) $191,360 $13,796 $204,820 Net income $ 9,571 $ 666 $ 10,237 Average outstanding shares 23,875 2,969 26,529 Basic and diluted earnings per share $0.40 $0.22 $0.39 Third Quarter 1997 Operating revenues (1) $185,225 $14,893 $198,843 Net income $ 12,903 $ (147) $ 12,756 Average outstanding shares 23,870 2,954 26,524 Basic and diluted earnings per share $0.54 $ (0.05) $0.48 Fourth Quarter 1997 Operating revenues (1) $238,742 $15,112 $252,975 Net income $ 13,033 $ (376) $ 12,657 Average outstanding shares 23,866 2,950 26,520 Basic and diluted earnings per share $0.55 $(0.12) $0.47 Year-End December 31, 1997 Operating revenues (1) $878,340 $60,104 $935,837 Net income $ 53,742 $ 2,067 $ 55,809 Average outstanding shares 23,873 2,960 26,527 Basic and diluted earnings per share $2.25 $0.70 $2.10 First Quarter 1998 Operating revenues (1) $276,809 $15,573 $291,226 Net income $ 17,101 $ 851 $ 17,952 Average outstanding shares 23,862 2,950 26,516 Basic and diluted earnings per share $0.72 $0.29 $0.68 Second Quarter 1998 Operating revenues (1) $219,620 $13,889 $232,054 Net income $ 9,879 $ 586 $ 10,465 Average outstanding shares 23,858 2,950 26,512 Basic and diluted earnings per share $0.41 $0.20 $0.39 Third Quarter 1998 Operating revenues $247,928 Net income $ 11,799 Average outstanding shares 26,508 Basic and diluted earnings per share $0.45 Fourth Quarter 1998 Operating revenues $292,528 Net income $ 6,415 Average outstanding shares 26,505 Basic and diluted earnings per share $0.24 Year-End December 31, 1998 Operating revenues $1,063,736 Net income $ 46,631 Average outstanding shares 26,511 Basic and diluted earnings per share $1.76 ===============================================================================================
(1) Restatement includes adjustment for intercompany sales. -106- NOTE 13--SEGMENTS OF BUSINESS Effective December 31, 1998, WPSR adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." WPSR's reportable segments are managed separately due to their different operating and regulatory environments. WPSR's principal business segments are the regulated electric utility operations of WPSC and UPPCO and the regulated gas utility operations of WPSC. The other reportable business segment, ESI, participates in nonregulated energy marketing operations. The tables below and on the following page present information for the respective years pertaining to WPSR's operations segmented by lines of business.
================================================================================================ Nonutility and Segments of Business (Thousands) Regulated Utilities Nonregulated Operations - ------------------------------------------------------------------------------------------------ 1998 Electric Gas ESI PDI and Other - ------------------------------------------------------------------------------------------------ Income Statement Operating revenues $ 550,004 $165,111 $351,258 $ 9,506 Depreciation and decommissioning 75,974 7,751 1,148 1,401 Other income (expense) 5,461 114 (5,765) 4,791 Interest expense 22,820 4,323 592 4,914 Income taxes 27,534 4,429 (4,783) (3,735) Net income (loss) 50,488 5,912 (6,869) (2,900) Balance Sheet Total assets 1,117,438 246,365 71,839 175,123 Cash expenditures for long-lived assets 64,444 30,537 291 15,537 ================================================================================================
Reconciling WPSR Eliminations Consolidated - ------------------------------------------------------------------------------------------------ Income Statement Operating revenues $ (12,143) $1,063,736 Depreciation and decommissioning - 86,274 Other income (expense) (1,923) 2,678 Interest expense (4,012) 28,637 Income taxes - 23,445 Net income (loss) - 46,631 Balance Sheet Total assets (100,378) 1,510,387 Cash expenditures for long-lived assets - 110,809 ================================================================================================
-107-
================================================================================================ Nonutility and Segments of Business (Thousands) Regulated Utilities Nonregulated Operations - ------------------------------------------------------------------------------------------------ 1997 Electric Gas ESI PDI and Other - ------------------------------------------------------------------------------------------------ Income Statement Operating revenues $ 539,590 $211,090 $189,404 $ 5,426 Depreciation and decommissioning 74,016 7,349 1,048 1,028 Other income (expense) 7,395 (701) (1,158) 6,402 Interest expense 25,266 4,841 905 2,265 Income taxes 29,461 4,211 (3,315) 749 Net income (loss) 53,294 7,878 (4,949) (414) Balance Sheet Total assets 1,089,875 246,842 44,779 75,836 Cash expenditures for long-lived assets 48,592 14,592 78 3,053 ================================================================================================
Reconciling WPSR Eliminations Consolidated - ------------------------------------------------------------------------------------------------ Income Statement Operating revenues $ (9,673) $ 935,837 Depreciation and decommissioning - 83,441 Other income (expense) 168 12,106 Interest expense (2,261) 31,016 Income taxes - 31,106 Net income (loss) - 55,809 Balance Sheet Total assets (21,528) 1,435,804 Cash expenditures for long-lived assets - 66,315 ================================================================================================
Nonutility and Segments of Business (Thousands) Regulated Utilities Nonregulated Operations - ------------------------------------------------------------------------------------------------ 1996 Electric Gas ESI PDI and Other - ------------------------------------------------------------------------------------------------ Income Statement Operating revenues $ 548,884 $211,357 $161,838 $ 3,380 Depreciation and decommissioning 61,996 7,128 1,054 584 Other income (expense) 4,993 58 (2,411) (3,306) Interest expense 24,339 4,229 774 1,533 Income taxes 31,655 2,499 (4,838) (2,100) Net income (loss) 59,907 2,350 (6,307) (3,065) Balance Sheet Total assets 1,095,996 268,622 51,823 79,190 Cash expenditures for long-lived assets 73,910 24,304 388 15,589 ================================================================================================
Reconciling WPSR Eliminations Consolidated - ------------------------------------------------------------------------------------------------ Income Statement Operating revenues $ (9,010) $ 916,449 Depreciation and decommissioning - 70,762 Other income (expense) 18 (648) Interest expense (1,758) 29,117 Income taxes - 27,216 Net income (loss) - 52,885 Balance Sheet Total assets (32,315) 1,463,316 Cash expenditures for long-lived assets - 114,191 ================================================================================================
-108- NOTE 14--QUARTERLY FINANCIAL INFORMATION (Unaudited) (1)
====================================================================================================================== (Thousands, except for share amounts) Three Months Ended - ---------------------------------------------------------------------------------------------------------------------- 1998 March June September December Total - ---------------------------------------------------------------------------------------------------------------------- Operating revenues $291,226 $232,054 $247,928 $292,528 $1,063,736 Net income $ 17,952 $ 10,465 $ 11,799 $ 6,415 $ 46,631 Average number of shares of common stock 26,516 26,512 26,508 26,505 26,511 Basic and diluted earnings per share $.68 $.39 $.45 $.24 $1.76 ====================================================================================================================== - ---------------------------------------------------------------------------------------------------------------------- 1997 March June September December Total - ---------------------------------------------------------------------------------------------------------------------- Operating revenues $279,199 $204,820 $198,843 $252,975 $ 935,837 Net income $ 20,159 $ 10,237 $12,756 $ 12,657 $ 55,809 Average number of shares of common stock 26,534 26,529 26,524 26,520 26,527 Basic and diluted earnings per share $.76 $.39 $.48 $.47 $2.10 ======================================================================================================================
(1) Schedule gives effect to the merger with Upper Peninsula Energy Corporation. Because of various factors which affect the utility business, the quarterly results of operations are not necessarily comparable. -109- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA WPS RESOURCES CORPORATION F. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of WPS Resources Corporation: We have audited the accompanying consolidated balance sheets and consolidated statements of capitalization of WPS Resources Corporation (a Wisconsin corporation) and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, comprehensive income and retained earnings and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of WPS Resources Corporation and subsidiaries as of December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP Milwaukee, Wisconsin January 28, 1999 -110- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA WISCONSIN PUBLIC SERVICE CORPORATION G. CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
================================================================================================================ Year Ended December 31 (Thousands) 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------- Operating revenues Electric $487,340 $479,388 $490,506 Gas 165,111 211,090 211,357 - ---------------------------------------------------------------------------------------------------------------- Total operating revenues 652,451 690,478 701,863 ================================================================================================================ Operating expenses Electric production fuels 110,443 107,538 105,418 Purchased power 42,340 45,876 37,737 Gas purchased for resale 104,608 147,493 149,388 Other operating expenses 138,232 134,113 158,167 Maintenance 49,425 41,661 48,734 Depreciation and decommissioning 78,206 75,819 63,835 Federal income taxes 23,642 26,460 25,267 Investment tax credit restored (1,742) (1,768) (1,778) State income taxes 7,291 7,569 7,732 Gross receipts tax and other 26,403 26,396 26,869 - ---------------------------------------------------------------------------------------------------------------- Total operating expense 578,848 611,157 621,369 ================================================================================================================ Operating income 73,603 79,321 80,494 - ---------------------------------------------------------------------------------------------------------------- Other income and (deductions) Allowance for equity funds used during construction 173 129 139 Other, net 6,765 12,591 5,123 Income taxes (331) (1,110) (294) - ---------------------------------------------------------------------------------------------------------------- Total other income and (deductions) 6,607 11,610 4,968 ================================================================================================================ Income before interest expense 80,210 90,931 85,462 - ---------------------------------------------------------------------------------------------------------------- Interest expense Interest on long-term debt 20,400 22,530 22,512 Other interest 2,801 3,759 2,688 Allowance for borrowed funds used during construction (177) (100) (128) - ---------------------------------------------------------------------------------------------------------------- Total interest expense 23,024 26,189 25,072 ================================================================================================================ Net income 57,186 64,742 60,390 ================================================================================================================ Preferred stock dividend requirements 3,111 3,111 3,111 Earnings on common stock 54,075 61,631 57,279 ================================================================================================================ Other comprehensive income - - - ================================================================================================================ Comprehensive income $ 54,075 $ 61,631 $ 57,279 ================================================================================================================
The accompanying WPS Resources Corporation notes are an integral part of these statements. -111- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA WISCONSIN PUBLIC SERVICE CORPORATION H. CONSOLIDATED BALANCE SHEETS
=========================================================================================== Assets - ------------------------------------------------------------------------------------------- At December 31 (Thousands) 1998 1997 - ------------------------------------------------------------------------------------------- Utility plant Electric $1,534,711 $1,506,470 Gas 267,892 251,603 - ------------------------------------------------------------------------------------------- Total 1,802,603 1,758,073 Less - Accumulated depreciation and decommissioning 1,120,058 1,032,149 - ------------------------------------------------------------------------------------------- Total 682,545 725,924 Nuclear decommissioning trusts 171,442 134,108 Construction in progress 35,996 7,266 Nuclear fuel, less accumulated amortization 18,641 19,062 - ------------------------------------------------------------------------------------------- Net utility plant 908,624 886,360 =========================================================================================== Current assets Cash and equivalents 1,882 3,921 Customer and other receivables, net of reserves 63,193 55,893 Accrued utility revenues 30,877 30,750 Fossil fuel, at average cost 12,433 9,964 Gas in storage, at average cost 14,855 17,194 Materials and supplies, at average cost 20,054 18,793 Prepayments and other 19,491 20,155 - ------------------------------------------------------------------------------------------- Total current assets 162,785 156,670 =========================================================================================== Regulatory assets 68,335 78,544 Net nonutility plant 2,888 2,972 Pension assets 60,018 52,792 Investments and other assets 64,932 56,616 =========================================================================================== Total $1,267,582 $1,233,954 ===========================================================================================
-112- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA WISCONSIN PUBLIC SERVICE CORPORATION H. CONSOLIDATED BALANCE SHEETS (CONTINUED)
========================================================================================== Capitalization and Liabilities - ------------------------------------------------------------------------------------------ At December 31 (Thousands) 1998 1997 - ------------------------------------------------------------------------------------------ Capitalization Common stock equity $ 481,708 $ 457,121 Preferred stock with no mandatory redemption 51,200 51,200 Long-term debt to parent 14,061 14,321 Long-term debt 289,972 293,298 - ------------------------------------------------------------------------------------------ Total capitalization 836,941 815,940 ========================================================================================== Current liabilities Note payable 10,000 10,000 Commercial paper 25,000 15,500 Accounts payable 60,680 46,453 Accrued interest and taxes 2,590 11,315 Other 6,564 10,049 - ------------------------------------------------------------------------------------------ Total current liabilities 104,834 93,317 ========================================================================================== Long-term liabilities and deferred credits Accumulated deferred income taxes 118,476 127,512 Accumulated deferred investment tax credits 24,772 26,901 Regulatory liabilities 43,591 50,279 Environmental remediation liabilities 39,028 40,215 Other long-term liabilities 99,940 79,790 - ------------------------------------------------------------------------------------------ Total long-term liabilities and deferred credits 325,807 324,697 ========================================================================================== Commitments and contingencies (See Note 10) ========================================================================================== Total $1,267,582 $1,233,954 ==========================================================================================
The accompanying WPS Resources Corporation notes are an integral part of these balance sheets. -113- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA WISCONSIN PUBLIC SERVICE CORPORATION I. CONSOLIDATED STATEMENTS OF CAPITALIZATION
=============================================================================================== At December 31 (Thousands, except share amounts) 1998 1997 - ----------------------------------------------------------------------------------------------- Common stock equity Common stock $ 95,588 $ 95,588 Premium on capital stock 107,842 73,842 Retained earnings 284,726 297,489 ESOP loan guarantees (6,448) (9,798) - ----------------------------------------------------------------------------------------------- Total common stock equity 481,708 457,121 =============================================================================================== Preferred stock Cumulative, $100 par value, 1,000,000 shares authorized with no mandatory redemption - Series Shares Outstanding ------ ------------------ 5.00% 132,000 13,200 13,200 5.04% 30,000 3,000 3,000 5.08% 50,000 5,000 5,000 6.76% 150,000 15,000 15,000 6.88% 150,000 15,000 15,000 - ----------------------------------------------------------------------------------------------- Total preferred stock 51,200 51,200 =============================================================================================== Long-term debt to parent Series Year Due ------ -------- 8.76% 2015 5,808 5,914 7.35% 2016 8,253 8,407 - ----------------------------------------------------------------------------------------------- Total long-term debt to parent 14,061 14,321 =============================================================================================== Long-term debt First mortgage bonds Series Year Due ------ -------- 5-1/4% 1998 - 50,000 7.30% 2002 50,000 50,000 6.80% 2003 50,000 50,000 6-1/8% 2005 9,075 9,075 6.90% 2013 22,000 22,000 8.80% 2021 53,100 53,100 7-1/8% 2023 50,000 50,000 6.08% 2028 50,000 - - ----------------------------------------------------------------------------------------------- Total 284,175 284,175 Unamortized discount and premium on bonds, net (817) (890) - ----------------------------------------------------------------------------------------------- Total first mortgage bonds 283,358 283,285 - ----------------------------------------------------------------------------------------------- ESOP loan guarantees 6,448 9,798 Other long-term debt 166 215 - ----------------------------------------------------------------------------------------------- Total long-term debt 289,972 293,298 =============================================================================================== Total capitalization $836,941 $815,940 ===============================================================================================
The accompanying WPS Resources Corporation notes are an integral part of these statements. -114- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA WISCONSIN PUBLIC SERVICE CORPORATION J. CONSOLIDATED STATEMENTS OF CASH FLOWS
================================================================================================================== Year Ended December 31 (Thousands) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------ Cash flows from operating activities: Net income $ 57,186 $ 64,742 $ 60,390 Adjustments to reconcile net income to net cash from operating activities - Depreciation and decommissioning 78,206 75,819 63,835 Amortization of nuclear fuel and other 15,634 14,665 27,687 Deferred income taxes (12,421) (5,846) (6,623) Investment tax credit restored (2,129) (1,767) (1,778) Allowance for equity funds used during construction (173) (129) (139) Pension income (9,669) (11,432) (12,413) Postretirement liability 9,743 4,952 7,150 Other, net (489) (9,046) 1,826 Changes in - Customer and other receivables (7,300) 10,341 (4,078) Accrued utility revenues (127) 4,576 2,260 Fossil fuel inventory (2,469) (1,740) 477 Gas in storage 2,339 (754) (6,537) Accounts payable and accrued taxes 6,561 (13,883) 9,225 Environmental remediation insurance recovery - 12,374 200 Miscellaneous and accrued liabilities (5,019) (1,957) (1,015) Gas refunds 684 (318) (6,175) - ------------------------------------------------------------------------------------------------------------------ Net cash from operating activities 130,557 140,597 134,292 ================================================================================================================== Cash flows from (used for) investing activities: Construction of utility plant and nuclear fuel expenditure (89,544) (58,258) (84,750) Decommissioning funding (17,239) (16,059) (8,978) Purchase of other property and equipment (270) (111) (2,050) Other 4,565 6,080 949 - ------------------------------------------------------------------------------------------------------------------ Net cash used for investing activities (102,488) (68,348) (94,829) ================================================================================================================== Cash flows from (used for) financing activities: Redemption of long term debt (53,659) - (6,900) Proceeds from issuance of long-term debt 50,000 - - Proceeds of long-term debt from parent - - 8,668 Proceeds from issuance of commercial paper 290,521 257,100 153,300 Redemptions of commercial paper (281,021) (270,600) (135,800) Equity infusion from parent 34,000 - - Preferred stock dividends (3,111) (3,111) (3,111) Common stock dividends (66,838) (55,882) (55,926) - ------------------------------------------------------------------------------------------------------------------ Net cash used for financing activities (30,108) (72,493) (39,769) ================================================================================================================== Net increase (decrease) in cash and equivalents (2,039) (244) (306) ================================================================================================================== Cash and equivalents at beginning of year 3,921 4,165 4,471 ================================================================================================================== Cash and equivalents at end of year $ 1,882 $ 3,921 $ 4,165 ================================================================================================================== Cash paid during year for: Interest, less amount capitalized $ 20,905 $ 22,311 $ 22,100 Income taxes $ 48,781 $ 41,151 $ 35,662 ==================================================================================================================
The accompanying WPS Resources Corporation notes are an integral part of these statements. -115- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA WISCONSIN PUBLIC SERVICE CORPORATION K. CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
==================================================================================================== Year Ended December 31 (Thousands) 1998 1997 1996 - ---------------------------------------------------------------------------------------------------- Balance at beginning of year $297,489 $291,740 $290,387 Add - Net income 57,186 64,742 60,390 - ---------------------------------------------------------------------------------------------------- 354,675 356,482 350,777 - ---------------------------------------------------------------------------------------------------- Deduct - Cash dividends declared on preferred stock 5.00% Series ($5.00 per share) 660 660 660 5.04% Series ($5.04 per share) 151 151 151 5.08% Series ($5.08 per share) 254 254 254 6.76% Series ($6.76 per share) 1,014 1,014 1,014 6.88% Series ($6.88 per share) 1,032 1,032 1,032 Dividends declared on common stock 46,838 45,882 44,926 Dividend to parent 20,000 10,000 11,000 - ---------------------------------------------------------------------------------------------------- 69,949 58,993 59,037 - ---------------------------------------------------------------------------------------------------- Balance at end of year $284,726 $297,489 $291,740 ====================================================================================================
The accompanying WPS Resources Corporation notes are an integral part of these statements. -116- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA WISCONSIN PUBLIC SERVICE CORPORATION L. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Notes to Consolidated Financial Statements for Wisconsin Public Service Corporation are incorporated in the Notes to Consolidated Financial Statements for WPS Resources Corporation at page 83 of this report. -117- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA WISCONSIN PUBLIC SERVICE CORPORATION M. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of Wisconsin Public Service Corporation: We have audited the accompanying consolidated balance sheets and consolidated statements of capitalization of Wisconsin Public Service Corporation (a Wisconsin corporation) and subsidiary as of December 31, 1998 and 1997, and the related consolidated statements of income, comprehensive income and retained earnings and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Wisconsin Public Service Corporation and subsidiary as of December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP Milwaukee, Wisconsin January 28, 1999 -118- ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information about WPSR's directors and those Class B directors seeking re-election may be found on pages 4 and 5 of WPSR's March 22, 1999 Proxy Statement. Such information is incorporated by reference as if fully set forth herein. Information regarding the executive officers, which is not a part of WPSR's Proxy Statement, is set forth in Part I, Item 4A, at page 35. ITEM 11. EXECUTIVE COMPENSATION Information required under Item 11 regarding compensation paid by WPSR to its Chief Executive Officer and other executive officers of WPSR may be found in WPSR's March 22, 1999 Proxy Statement, which information is incorporated by reference herein. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information concerning principal securities holders and securities holdings of management which may be found on pages 2 and 3 of WPSR's March 22, 1999 Proxy Statement is incorporated by reference as if fully set forth herein. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS There have been no transactions since the beginning of fiscal year 1998, or any currently proposed transactions, or series of similar transactions, to which WPSR or any of its subsidiaries was or is to be party in which the amount exceeds $60,000 and in which any director, executive officer, any nominee for election as a director, any security holder owning of record or beneficially more than 5% of the Common Stock of WPSR, or any member of the immediate family of any of the foregoing persons had or will have a direct material interest. -119- PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents filed as part of this report: (1) The following financial consolidated statements are included in Part II at Item 8 above: Description Pages in 10-K ----------- ------------- WPS RESOURCES CORPORATION Consolidated Statements of Income, Comprehensive Income, and Retained Earnings for the three years ended December 31, 1998, 1997, and 1996 78 Consolidated Balance Sheets as of December 31, 1998 and 1997 79 Consolidated Statements of Capitalization as of December 31, 1998 and 1997 81 Consolidated Statements of Cash Flows for the three years ended December 31, 1998, 1997, and 1996 82 Notes to Consolidated Financial Statements 83 Report of Independent Public Accountants 110 WISCONSIN PUBLIC SERVICE CORPORATION Consolidated Statements of Income and Comprehensive Income for the three years ended December 31, 1998, 1997, and 1996 111 Consolidated Balance Sheets as of December 31, 1998 and 1997 112 Consolidated Statements of Capitalization as of December 31, 1998 and 1997 114 Consolidated Statements of Cash Flows for the three years ended December 31, 1998, 1997, and 1996 115 Consolidated Statements of Retained Earnings 116 Notes to Consolidated Financial Statements 117 Report of Independent Public Accountants 118 -120- (2) Financial statement schedules. The following financial statement schedules are included in Part IV of this report. Schedules not included herein have been omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. Description Pages in 10-K ----------- ------------- Schedule III - Condensed Parent Company Only Financial Statements A. Report of Independent Public 130 Accountants B. Statements of Income and Retained Earnings 131 C. Balance Sheets 132 D. Statements of Cash Flows 133 E. Notes to Parent Company Financial Statements 134 (3) All exhibits, including those incorporated by reference. -121- Exhibit Number Description of Documents - ------- ------------------------ 2* Asset Purchase Agreement Among Maine Public Service Company, Main and New Brunswick Electrical Power Company, Limited and WPS Power Development, Inc. dated as of July 7, 1998. 3A-1 Restated Articles of Incorporation of WPS Resources Corporation. (Incorporated by reference to Appendix B to Amendment No. 1 to the Company's Registration Statement on Form S-4, filed February 28, 1994 [Reg. No. 33-52199]). 3A-2 Articles of Incorporation of Wisconsin Public Service Corporation as effective May 26, 1972 and amended through May 31, 1988 (Incorporated by reference to Exhibit 3A to Form 10-K for the year ended December 31, 1991); Articles of Amendment to Articles of Incorporation dated June 9, 1993 (Incorporated by reference to Exhibit 3 to Form 8-K filed June 10, 1993). 3B-1 By-Laws of WPS Resources Corporation as in effect September 1, 1998. 3B-2 By-Laws of Wisconsin Public Service Corporation as in effect September 1, 1998. 4A Copy of Rights Agreement, dated December 12, 1996 between WPS Resources Corporation and Firstar Trust Company (Incorporated by reference to Exhibit 4.1 to Form 8-A filed December 13, 1996 [File No.1-11337]). 4B Copy of First Mortgage and Deed of Trust, dated as of January 1, 1941 from Wisconsin Public Service Corporation to First Wisconsin Trust Company, Trustee (Incorporated by reference to Exhibit 7.01 - File No. 2-7229); Supplemental Indenture, dated as of November 1, 1947 (Incorporated by reference to Exhibit 7.02 - File No. 2-7602); Supplemental Indenture, dated as of November 1, 1950 (Incorporated by reference to Exhibit 4.04 - File No. 2-10174); Supplemental Indenture, dated as of May 1, 1953 (Incorporated by reference to Exhibit 4.03 - File No. 2-10716); Supplemental Indenture, dated as of October 1, 1954 (Incorporated by reference to Exhibit 4.03 - File No. 2-13572); Supplemental Indenture, dated as of December 1, 1957 (Incorporated by reference to Exhibit 4.03 - File No. 2-14527); Supplemental Indenture, dated as of October 1, 1963 (Incorporated by reference to Exhibit 2.02B - File No. 2-65710); Supplemental Indenture, dated as of June 1, 1964 (Incorporated by reference to Exhibit 2.02B - File No. 2-65710); Supplemental Indenture, dated as of November 1, 1967 (Incorporated by reference to Exhibit 2.02B - File No. 2-65710); Supplemental Indenture, dated as of April 1, 1969 (Incorporated by reference to Exhibit 2.02B - File No. 2-65710); Fifteenth Supplemental - ----------------------- * Schedules and exhibits to this document are not being filed herewith. The registrant agrees to furnish supplementally a copy of any such schedule or exhibit to the Securities and Exchange Commission upon request. -122- Exhibit Number Description of Documents - ------- ------------------------ Indenture, dated as of May 1, 1971 (Incorporated by reference to Exhibit 2.02B - File No. 2-65710); Sixteenth Supplemental Indenture, dated as of August 1, 1973 (Incorporated by reference to Exhibit 2.02B - File No. 2-65710); Seventeenth Supplemental Indenture, dated as of September 1, 1973 (Incorporated by reference to Exhibit 2.02B - File No. 2-65710); Eighteenth Supplemental Indenture, dated as of October 1, 1975 (Incorporated by reference to Exhibit 2.02B - File No. 2-65710); Nineteenth Supplemental Indenture, dated as of February 1, 1977 (Incorporated by reference to Exhibit 2.02B - File No. 2-65710); Twentieth Supplemental Indenture, dated as of July 15, 1980 (Incorporated by reference to Exhibit 4B to Form 10-K for the year ended December 31, 1980); Twenty-First Supplemental Indenture, dated as of December 1, 1980 (Incorporated by reference to Exhibit 4B to Form 10-K for the year ended December 31, 1980); Twenty-Second Supplemental Indenture dated as of April 1, 1981 (Incorporated by reference to Exhibit 4B to Form 10-K for the year ended December 31, 1981); Twenty-Third Supplemental Indenture, dated as of February 1, 1984 (Incorporated by reference to Exhibit 4B to Form 10-K for the year ended December 31, 1983); Twenty-Fourth Supplemental Indenture, dated as of March 15, 1984 (Incorporated by reference to Exhibit 1 to Form 10-Q for the quarter ended June 30, 1984); Twenty-Fifth Supplemental Indenture, dated as of October 1, 1985 (Incorporated by reference to Exhibit 1 to Form 10-Q for the quarter ended September 30, 1985); Twenty-Sixth Supplemental Indenture, dated as of December 1, 1987 (Incorporated by reference to Exhibit 4A-1 to Form 10-K for the year ended December 31, 1987); Twenty-Seventh Supplemental Indenture, dated as of September 1, 1991 (Incorporated by reference to Exhibit 4 to Form 8-K filed September 18, 1991); Twenty-Eighth Supplemental Indenture, dated as of July 1, 1992 (Incorporated by reference to Exhibit 4B - File No. 33-51428); Twenty-Ninth Supplemental Indenture, dated as of October 1, 1992 (Incorporated by reference to Exhibit 4 to Form 8-K filed October 22, 1992); Thirtieth Supplemental Indenture, dated as of February 1, 1993 (Incorporated by reference to Exhibit 4 to Form 8-K filed January 27, 1993); Thirty-First Supplemental Indenture, dated as of July 1, 1993 (Incorporated by reference to Exhibit 4 to Form 8-K filed July 7, 1993); Thirty-Second Supplemental Indenture, dated as of November 1, 1993 (Incorporated by reference to Exhibit 4 to Form 10-Q for the quarter ended September 30, 1993); Thirty-Third Supplemental Indenture, dated as of December 1, 1998 (Incorporated by reference to Exhibit 4D to Form 8-K filed December 18, 1998). All references to periodic reports are to those of Wisconsin Public Service Corporation (File No. 1-3016). -123- Exhibit Number Description of Documents - ------- ------------------------ 4C Amended and Restated Declaration of Trust of WPSR Capital Trust I dated as of July 30, 1998 among WPS Resources Corporation as sponsor, State Street Bank and Trust Company as Administrative Trustee, First Union Trust Company, National Association, as Delaware Trustee, and Daniel P. Bittner and Ralph G. Baeten, as Administrative Trustees (Incorporated by reference to Exhibit 4.1 to Form 8-K filed August 6, 1998) (File No. 1-11337). 4D Indenture dated as of July 30, 1998, between WPS Resources Corporation and State Street Bank and Trust Company, as trustee (Incorporated by reference to Exhibit 4.2 to Form 8-K filed August 6, 1998); First Supplemental Indenture dated as of July 30, 1998, between WPS Resources Corporation and State Street Bank and Trust Company, as trustee (Incorporated by reference to Exhibit 4.3 to Form 8-K filed August 6, 1998). References to periodic reports are to those of WPS Resources Corporation. (File No. 1-11337). 4E Trust Preferred Securities Guarantee Agreement dated as of July 30, 1998, between WPS Resources Corporation and State Street Bank and Trust Company, guarantee trustee (Incorporated by reference to Exhibit 4.4 to Form 8-K filed August 6, 1998) (File No. 1-11337). 4F Indenture, dated as of December 1, 1998, between Wisconsin Public Service Corporation and Firstar Bank Milwaukee, N.A., National Association (Incorporated by reference to Exhibit 4A to Form 8-K filed December 18, 1998); First Supplemental Indenture, dated as of December 1, 1998 between Wisconsin Public Service Corporation and Firstar Bank Milwaukee, N.A., National Association (Incorporated by reference to Exhibit 4C to Form 8-K filed December 18, 1998). References to periodic reports are to those of Wisconsin Public Service Corporation. (File No. 1-03016). 10A Copy of Joint Power Supply Agreement among Wisconsin Public Service Corporation, Wisconsin Power and Light Company, and Madison Gas and Electric Company, dated February 2, 1967 (Incorporated by reference to Exhibit 4.09 in File No. 2-27308). 10B Copy of Joint Power Supply Agreement (Exclusive of Exhibits) among Wisconsin Public Service Corporation, Wisconsin Power and Light Company, and Madison Gas and Electric Company dated July 26, 1973 (Incorporated by reference to Exhibit 5.04A in File No. 2-48781). 10C Settlement and Ownership Transfer Agreement dated September 29, 1998 between Wisconsin Public Service Corporation and Madison Gas and Electric Company (Incorporated by reference to Exhibit 99-2 to Form 8-K/A filed March 2, 1999) (File No. 1-03016). -124- Exhibit Number Description of Documents - ------- ------------------------ 10D-1 Copy of Basic Generating Agreement, Unit 4, Edgewater Generating Station, dated June 5, 1967, between Wisconsin Power and Light Company and Wisconsin Public Service Corporation (Incorporated by reference to Exhibit 4.10 in File No. 2-27308). 10D-2 Copy of Agreement for Construction and Operation of Edgewater 5 Generating Unit, dated February 24, 1983, between Wisconsin Power and Light Company, Wisconsin Electric Power Company, and Wisconsin Public Service Corporation (Incorporated by reference to Exhibit 10C-1 to Form 10-K of Wisconsin Public Service Corporation for the year ended December 31, 1983 [File No. 1-3016]). 10D-3 Amendment No. 1 to Agreement for Construction and Operation of Edgewater 5 Generating Unit, dated December 1, 1988 (Incorporated by reference to Exhibit 10C-2 to Form 10-K of Wisconsin Public Service Corporation for the year ended December 31, 1988 [File No. 1-3016]). 10E Copy of revised Agreement for Construction and Operation of Columbia Generating Plant among Wisconsin Public Service Corporation, Wisconsin Power and Light Company, and Madison Gas and Electric Company, dated July 26, 1973 (Incorporated by reference to Exhibit 5.07 in File No. 2-48781). 10F Copy of Guaranty and Agreements and Note Agreements for Wisconsin Public Service Corporation Employee Stock Ownership Plan and Trust (ESOP) dated November 1, 1990 (Incorporated by reference to Exhibits 10.1 and 10.2 to Form 8-K of Wisconsin Public Service Corporation filed November 2, 1990 [File No. 1-3016]). 10G-1 Copy of Power Purchase Agreement Between De Pere Energy LLC and Wisconsin Public Service Corporation dated November 8, 1995 and amended by a Letter Agreement dated February 18, 1997. (Incorporated by reference to Exhibit 10F-1 to the Form 10-K for the year ended December 31, 1997 [File No. 1-3016]). EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS 10H-1 Copy of amended and restated WPS Resources Corporation Deferred Compensation Plan for executives and non-employee directors, effective January 1, 1999. 10H-2 Copy of Form of Executive Employment and Severance Agreement entered into between WPS Resources Corporation and each of the following: Ralph G. Baeten, Daniel P. Bittner, Diane L. Ford, Richard E. James, Thomas P. Meinz, Phillip M. Mikulsky, Wayne J. Peterson, Patrick D. Schrickel, Charles A. Schrock, Clark R. Steinhardt, Bernard J. Treml, and Larry L. Weyers (Incorporated by reference to Exhibit 10.6 to Form 10-Q for the quarter ended June 30, 1997, filed July 25, 1997 [File No. 1-11337]). -125- Exhibit Number Description of Documents - ------- ------------------------ 10H-3 Copy of WPS Resources Corporation Short-Term Variable Pay Plan effective January 1, 1998. (Incorporated by reference to Exhibit 10G-3 in the Form 10-K for the year ended December 31, 1997 [File No. 1-11337]). -126- Exhibit Number Description of Document Pages in 10-K ------- ----------------------- ------------- 2* Asset Purchase Agreement Among Maine Public Service Company, Maine and New Brunswick Electrical Power Company, Limited and WPS Power Development, Inc. dated as of July 7, 1998 135 3B-1 By-Laws of WPS Resources Corporation as in Effect September 1, 1998 202 3B-2 By-Laws of Wisconsin Public Service Corporation as in Effect September 1, 1998 235 10F-1 WPS Resources Corporation Amended and Restated Deferred Compensation Plan Effective January 1, 1999 WPS Resources Corporation 266 11 Statement Regarding Computation of Per Share Earnings WPS Resources Corporation 295 21 Subsidiaries of the Registrant 296 23 Consent of Independent Public Accountants 297 24 Powers of Attorney 298 27 Financial Data Schedule WPS Resources Corporation 307 Wisconsin Public Service Corporation 308 - ----------------------- * Schedules and exhibits to this document are not being filed herewith. The registrant agrees to furnish supplementally a copy of any such schedule or exhibit to the Securities and Exchange Commission upon request. -127- (b) Reports on Form 8-K A Current Report on Form 8-K dated September 29, 1998 filed by WPS Resources Corporation and Wisconsin Public Service Corporation on October 6, 1998. The report included under Item 5 the announcement of completion of the merger of Upper Peninsula Energy Company and WPS Resources Corporation effective at the close of business on September 29, 1998 and the finalization of an arrangement for Wisconsin Public Service Corporation to buy Madison Gas and Electric Company's share of the Kewaunee Nuclear Power Plant. A Current Report on Form 8-K dated December 10, 1998 and filed December 11, 1998 by WPS Resources Corporation and Wisconsin Public Service Corporation (1) transmitting a press release announcing that unseasonably warm weather in November and early December will have a negative impact on its fourth quarter earnings and a Settlement and Ownership Transfer Agreement between WPSC and Madison Gas and Electric Company regarding Kewaunee ownership issues, (2) disclosing certain costs to comply with Environmental Protection Agency nitrogen oxide regulations, and (3) disclosing authorization by the WPSR Board of Directors to issue up to one million shares for WPSR's Stock Investment Plan in lieu of open market purchases. (A Current Report on Form 8-K/A dated December 10, 1998 and filed on March 1, 1999 indicating that portions of Exhibit 99-2, the settlement and ownership transfer agreement between Wisconsin Public Service Corporation and Madison Gas and Electric Company, had been omitted based upon a request for confidential treatment. The non-public information has been filed separately with the Securities and Exchange Commission.) A Current Report on Form 8-K dated December 14, 1998 and filed December 18, 1998 by Wisconsin Public Service Corporation transmitting certain documents relating to the offering of Senior Notes, 6.08% Series due December 1, 2028 (the "Senior Notes"), registered with the Securities and Exchange Commission on Form S-3 (Reg. No. 333-67979). -128- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. WPS RESOURCES CORPORATION and WISCONSIN PUBLIC SERVICE CORPORATION (Registrants) By /s/ L. L. Weyers ------------------------------------------------------------------- L. L. Weyers L. L. Weyers Chairman, President, and Chairman and Chief Executive Officer Chief Executive Officer WPS Resources Corporation Wisconsin Public Service Corporation Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date - ------------------------------------------------------------------------------ A. Dean Arganbright Director March 24, 1999 Michael S. Ariens Director Richard A. Bemis Director Daniel A. Bollom Director M. Lois Bush Director Clarence R. Fisher Director Robert C. Gallagher Director By /s/ L. L. Weyers Kathryn M. Hasselblad-Pascale Director -------------------------- James L. Kemerling Director L. L. Weyers Attorney-in-Fact /s/ L. L. Weyers Principal Executive March 24, 1999 - ---------------------------------Officer and Director L. L. Weyers /s/ D. P. Bittner Principal Financial March 24, 1999 - ---------------------------------Officer D. P. Bittner /s/ D. L. Ford Principal Accounting March 24, 1999 - ---------------------------------Officer D. L. Ford -129- SCHEDULE III - CONDENSED PARENT COMPANY FINANCIAL STATEMENTS WPS RESOURCES CORPORATION (PARENT COMPANY ONLY) A. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE III - CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS To the Board of Directors of WPS Resources Corporation: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements of WPS Resources Corporation included in this Form 10-K, and have issued our report thereon dated January 28, 1999. Our audit was made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. Supplemental Schedule III is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not a part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in our audit of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. /s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP Milwaukee, Wisconsin January 28, 1999 -130- SCHEDULE III - CONDENSED PARENT COMPANY FINANCIAL STATEMENTS WPS RESOURCES CORPORATION (PARENT COMPANY ONLY) B. STATEMENTS OF INCOME AND RETAINED EARNINGS
================================================================================================= Year Ended December 31 (Thousands) 1998 1997 1996 - ------------------------------------------------------------------------------------------------- Income Equity in earnings of subsidiaries after dividends $(26,752) $ (1,195) $ (7,518) Cash dividends from subsidiaries 75,370 59,679 59,916 - ------------------------------------------------------------------------------------------------- Income from subsidiaries 48,618 58,484 52,398 - ------------------------------------------------------------------------------------------------- Investment income and other 4,516 2,880 2,293 - ------------------------------------------------------------------------------------------------- Total income 53,134 61,364 54,691 ================================================================================================= Operating expenses 4,557 5,122 1,054 - ------------------------------------------------------------------------------------------------- Income before interest expense 48,577 56,242 53,637 Interest expense 2,914 583 457 - ------------------------------------------------------------------------------------------------- Income before income taxes 45,663 55,659 53,180 Income taxes (968) (150) 295 - ------------------------------------------------------------------------------------------------- Net Income 46,631 55,809 52,885 ================================================================================================= Retained earnings, beginning of year 339,508 333,375 329,150 Common stock dividend (50,985) (49,676) (48,660) - ------------------------------------------------------------------------------------------------- Retained earnings at end of year $335,154 $339,508 $333,375 =================================================================================================
-131- SCHEDULE III - CONDENSED PARENT COMPANY FINANCIAL STATEMENTS WPS RESOURCES CORPORATION (PARENT COMPANY ONLY) C. BALANCE SHEETS
======================================================================================= At December 31 (Thousands) 1998 1997 - --------------------------------------------------------------------------------------- Assets - --------------------------------------------------------------------------------------- Current assets Cash and equivalents $ 919 $ 23 Accounts receivable - affiliates 1,564 434 Other receivables 1,160 748 Notes receivable - affiliates (note 1) 25,091 4,498 - --------------------------------------------------------------------------------------- Total current assets 28,734 5,703 ======================================================================================= Long-term notes receivable - affiliates (note 2) 15,538 15,950 ======================================================================================= Investments in subsidiaries, at equity Wisconsin Public Service Corporation 481,707 457,121 WPS Energy Services, Inc. 13,124 4,495 WPS Power Development, Inc. 10,314 7 Upper Peninsula Power Company 35,260 40,283 Other 6,297 4,358 - --------------------------------------------------------------------------------------- Total investments in subsidiaries, at equity 546,702 506,264 ======================================================================================= Net equipment 1,177 321 Other investments 4,442 3,330 Deferred income taxes 169 45 - --------------------------------------------------------------------------------------- Total assets $596,762 $531,613 ======================================================================================= ======================================================================================= Liabilities and Capitalization - --------------------------------------------------------------------------------------- Current liabilities Notes payable $ 22,590 $ 5,206 Commercial paper 2,400 - Accounts payable - affiliates 1,545 5,303 Accounts payable 602 1,699 Dividends payable 749 626 Other 186 15 - --------------------------------------------------------------------------------------- Total current liabilities 28,072 12,849 ======================================================================================= Other liabilities - - ======================================================================================= Capitalization Common stock, $1 par value, 100,000,000 shares authorized; 26,551,405 shares outstanding 26,551 26,551 Premium on capital stock 163,438 163,454 Retained earnings 335,154 339,508 ESOP loan guarantees (6,448) (9,798) Shares in deferred compensation trust (1,505) (951) Advances from affiliates 51,500 - - --------------------------------------------------------------------------------------- Total capitalization 568,690 518,764 ======================================================================================= Total liabilities and capitalization $596,762 $531,613 =======================================================================================
-132- SCHEDULE III - CONDENSED PARENT COMPANY FINANCIAL STATEMENTS WPS RESOURCES CORPORATION (PARENT COMPANY ONLY) D. STATEMENTS OF CASH FLOWS
================================================================================================= Year Ended December 31 (Thousands) 1998 1997 1996 - ------------------------------------------------------------------------------------------------- Operating Net income $ 46,631 $ 55,809 $ 52,885 Add equity in earnings of subsidiaries after dividends 26,752 1,195 7,518 Deferred income taxes (124) 7 46 Other - net (17) 3 1,883 Changes in other items Receivables (1,542) (25) (442) Accounts payable (4,855) 3,441 304 Other 295 (393) 51 - ------------------------------------------------------------------------------------------------- Net cash - operating 67,140 60,037 62,245 ================================================================================================= Investing Notes receivable - affiliates (20,181) 10,809 (20,280) Capital contributions - affiliates (62,340) (8,709) (6,434) Investments - other (1,968) (54) (2,792) - ------------------------------------------------------------------------------------------------- Net cash - investing (84,489) 2,046 (29,506) ================================================================================================= Financing Proceeds from short-term debt 196,050 537,970 333,975 Payments on short-term debt (193,650) (549,944) (319,314) Proceeds from commercial paper 1,867,287 - - Payments on commercial paper (1,849,903) - - Proceeds from intercompany debt 50,000 - - Purchase of deferred compensation stock (554) (507) (443) Common stock dividends (50,985) (49,676) (48,660) - ------------------------------------------------------------------------------------------------- Net cash - financing 18,245 (62,157) (34,442) ================================================================================================= Net change in cash 896 (74) (1,703) Cash, beginning of period 23 97 1,800 - ------------------------------------------------------------------------------------------------- Cash, end of period $ 919 $ 23 $ 97 =================================================================================================
-133- SCHEDULE III - CONDENSED PARENT COMPANY FINANCIAL STATEMENTS WPS RESOURCES CORPORATION (PARENT COMPANY ONLY) E. NOTES TO PARENT COMPANY FINANCIAL STATEMENTS The following are supplemental notes to the WPS Resources Corporation (parent company only) financial statements and should be read in conjunction with the WPS Resources Corporation Consolidated Financial Statements and Notes thereto included herein: SUPPLEMENTAL NOTES Note 1 WPS Resources Corporation ("WPSR") has short-term notes receivable from WPS Energy Services, Inc. ("ESI"), WPS Power Development, Inc., and Upper Peninsula Power Company, Inc. for $10.0 million, $4.0 million and $11.1 million, respectively. Notes payable of $3.5 million bear interest at 6.9%. The balance of these notes bear interest at the prime or commercial paper rates. Note 2 WPSR has long-term notes receivable from Wisconsin Public Service Corporation for $5.8 million and $8.3 million bearing interest at 8.76% and 7.35%, respectively. The notes are to be repaid in monthly payments of $51,670 and $63,896 through January 2015 and May 2016, respectively. WPSR also has a long-term note receivable from ESI totaling $1.5 million and bearing interest at 7-7/8%. The note is to be repaid in quarterly payments of $69,076 through October 2005. -134- EX-2 2 EXHIBIT 2 ASSET PURCHASE AGREEMENT AMONG MAINE PUBLIC SERVICE COMPANY, MAINE AND NEW BRUNSWICK ELECTRICAL POWER COMPANY, LIMITED AND WPS POWER DEVELOPMENT, INC. Dated As Of: July 7, 1998 -135- TABLE OF CONTENTS Page ARTICLE I DEFINITIONS . . . . . . . . . . . . . . . . . . . . .1 1.1 Definitions. . . . . . . . . . . . . . . . . . . . . .1 ARTICLE II PURCHASE AND SALE. . . . . . . . . . . . . . . . . 12 2.1 The Purchase and Sale. . . . . . . . . . . . . . . . 12 2.2 Excluded Assets. . . . . . . . . . . . . . . . . . . 12 2.3 Assumed Obligations. . . . . . . . . . . . . . . . . 13 2.4 Excluded Liabilities . . . . . . . . . . . . . . . . 15 ARTICLE III PURCHASE PRICE. . . . . . . . . . . . . . . . . . 18 3.1 Purchase Price . . . . . . . . . . . . . . . . . . . 18 3.2 Purchase Price Adjustment. . . . . . . . . . . . . . 18 3.3 Allocation of Purchase Price and Assumed Obligations. . . . . . . . . . . . . . . . . . . . . 18 3.4 HST Election . . . . . . . . . . . . . . . . . . . . 19 3.5 Proration. . . . . . . . . . . . . . . . . . . . . . 19 ARTICLE IV THE CLOSING. . . . . . . . . . . . . . . . . . . . 20 4.1 Time and Place of Closing. . . . . . . . . . . . . . 20 4.2 Payment of Purchase Price. . . . . . . . . . . . . . 20 4.3 Deliveries by the Sellers. . . . . . . . . . . . . . 20 4.4 Deliveries by the Buyer. . . . . . . . . . . . . . 22 ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE SELLERS . . . 23 5.1 Organization; Qualification. . . . . . . . . . . . . 23 5.2 Authority Relative to this Agreement . . . . . . . . 23 5.3 Consents and Approvals; No Violation . . . . . . . . 24 5.4 Reports. . . . . . . . . . . . . . . . . . . . . . . 25 5.5 Financial Statements . . . . . . . . . . . . . . . . 25 5.6 Undisclosed Liabilities. . . . . . . . . . . . . . . 25 5.7 Absence of Certain Changes or Events . . . . . . . . 25 5.8 Title to and Condition of Properties . . . . . . . . 26 -136- 5.9 Leases . . . . . . . . . . . . . . . . . . . . . . . 27 5.10 Insurance. . . . . . . . . . . . . . . . . . . . . . 28 5.11 Environmental Matters. . . . . . . . . . . . . . . . 28 5.12 Labor Matters. . . . . . . . . . . . . . . . . . . . 29 5.13 ERISA; Benefit Plans.. . . . . . . . . . . . . . . . 29 5.14 Condemnation . . . . . . . . . . . . . . . . . . . . 31 5.15 Certain Contracts and Arrangements . . . . . . . . . 32 5.16 Legal Proceedings, etc . . . . . . . . . . . . . . . 32 5.17 Permits. . . . . . . . . . . . . . . . . . . . . . . 33 5.18 Regulation as a Utility. . . . . . . . . . . . . . . 33 5.19 Taxes. . . . . . . . . . . . . . . . . . . . . . . . 33 5.20 Sufficiency of Purchased Assets. . . . . . . . . . . 34 5.21 Buyer's Knowledge. . . . . . . . . . . . . . . . . . 34 ARTICLE VI REPRESENTATIONS AND WARRANTIES OF THE BUYER. . . . 34 6.1 Organization . . . . . . . . . . . . . . . . . . . . 34 6.2 Authority Relative to this Agreement . . . . . . . . 34 6.3 Consents and Approvals; No Violation . . . . . . . . 35 6.4 Regulation as a Utility. . . . . . . . . . . . . . . 36 6.5 Disclosure . . . . . . . . . . . . . . . . . . . . . 36 ARTICLE VII COVENANTS OF THE PARTIES. . . . . . . . . . . . . 36 7.1 Conduct of Business Relating to the Purchased Assets . . . . . . . . . . . . . . . . . . . . . . . 36 7.2 Access to Information. . . . . . . . . . . . . . . . 38 7.3 Expenses . . . . . . . . . . . . . . . . . . . . . . 40 7.4 Further Assurances . . . . . . . . . . . . . . . . . 40 7.5 Public Statements. . . . . . . . . . . . . . . . . . 41 7.6 Consents and Approvals; Financing. . . . . . . . . . 41 7.7 Fees and Commissions . . . . . . . . . . . . . . . . 42 7.8 Tax Matters. . . . . . . . . . . . . . . . . . . . . 42 7.9 Supplements to Schedules . . . . . . . . . . . . . . 43 7.10 Employees. . . . . . . . . . . . . . . . . . . . . . 43 7.11 Risk of Loss . . . . . . . . . . . . . . . . . . . . 47 7.12 Real Estate Title; Title Insurance; Surveys. . . . . 48 7.13 Wyman Agreements . . . . . . . . . . . . . . . . . . 49 ARTICLE VIII CONDITIONS PRECEDENT . . . . . . . . . . . . . . 50 8.1 Conditions to Each Party's Obligations . . . . . . . 50 8.2 Conditions to Obligations of the Buyer . . . . . . . 50 8.3 Conditions to Obligations of the Sellers . . . . . . 52 -ii- -137- ARTICLE IX INDEMNIFICATION. . . . . . . . . . . . . . . . . . 53 9.1 Indemnification. . . . . . . . . . . . . . . . . . . 53 9.2 Defense of Claims. . . . . . . . . . . . . . . . . . 55 ARTICLE X TERMINATION AND ABANDONMENT . . . . . . . . . . . . 57 10.1 Termination. . . . . . . . . . . . . . . . . . . . . 57 10.2 Procedure and Effect of Termination. . . . . . . . . 57 ARTICLE XI MISCELLANEOUS PROVISIONS . . . . . . . . . . . . . 58 11.1 Amendment and Modification . . . . . . . . . . . . . 58 11.2 Waiver of Compliance; Consents . . . . . . . . . . . 58 11.3 Notices. . . . . . . . . . . . . . . . . . . . . . . 58 11.4 Assignment . . . . . . . . . . . . . . . . . . . . . 59 11.5 Governing Law. . . . . . . . . . . . . . . . . . . . 59 11.6 Counterparts . . . . . . . . . . . . . . . . . . . . 60 11.7 Interpretation . . . . . . . . . . . . . . . . . . . 60 11.8 Schedules and Exhibits . . . . . . . . . . . . . . . 60 11.9 Entire Agreement . . . . . . . . . . . . . . . . . . 60 -iii- -138- EXHIBITS: Bill of Sale A Buy-Back Agreement B Continuing Site Agreement C Instrument of Assumption (MPS Liabilities) D-1 Instrument of Assumption (MNB Liabilities) D-2 Interconnection Agreements E Form of Opinion (Sellers' U.S. Counsel) G-1 Form of Opinion (Sellers' Canadian Counsel) G-2 Form of Opinion (Buyer's U.S. Counsel) H SCHEDULES: Canadian Personal Property 1.1(a)(7)(iii) FERC Licenses 1.1(a)(32) NEB Licenses 1.1(a)(51) Permitted Encumbrances 1.1(a)(55) Transferable Permits 1.1(a)(70) U.S. Personal Property 1.1(a)(72)(iii) Excluded Facilities and Equipment 2.2(d) Qualifications and Licenses to do Business 5.1 Consents, Approvals, Violations, Defaults of Sellers 5.3 Undisclosed Liabilities 5.6 Material Changes and Events 5.7 Title Exceptions 5.8(a) Condition of Assets 5.8(b) Real Estate 5.8(c) Real Property Leases 5.9 Insurance Exceptions 5.10 Environmental Permits, Agreements and Consent Order 5.11 Employment Claims and Exceptions 5.12 Benefit Plans 5.13(a) ERISA Fundings Obligations and Exceptions 5.13(b) Real Estate Condemnation 5.14 Contracts, Agreements, and Personal Property Leases 5.15(a) Exception to Contractual Obligations 5.15(b) Material Defaults 5.15(c) Legal Proceedings 5.16 Material Permits (other than Environmental Permits) Violations of Material Permits, Related Laws, Statutes, Etc. 5.17 Tax Exceptions 5.19 Consents, Approvals, Violations and Defaults of Buyer 6.3 Index of Disclosure Materials 6.5 Maintenance and Capital Expenditures 7.1 -iv- -139- Buyer's Environmental Testing 7.2 Employees 7.10(a) Labor Agreements 7.10(b) -v- -140- THIS ASSET PURCHASE AGREEMENT, dated as of July 7, 1998 (this "Agreement"), by and among MAINE PUBLIC SERVICE COMPANY, a Maine corporation ("MPS"), MAINE AND NEW BRUNSWICK ELECTRICAL POWER COMPANY, LIMITED, a New Brunswick corporation ("MNB", and together with MPS, the "Sellers"), and WPS POWER DEVELOPMENT, INC., a Wisconsin corporation ("PDI" or the "Buyer"), W I T N E S S E T H: WHEREAS, the Buyer desires to purchase (or to cause its designee to purchase), and the Sellers desire to sell, the U.S. Assets and the Canadian Assets (each as defined herein and together, the "Purchased Assets"), and the Buyer has agreed to assume (or to cause its designee to assume) the Assumed Obligations (as defined herein), in each case upon the terms and conditions hereinafter set forth in this Agreement; NOW, THEREFORE, in consideration of the mutual covenants, representations, warranties and agreements hereinafter set forth, and intending to be legally bound hereby, the parties hereto agree as follows: ARTICLE I DEFINITIONS 1.1 Definitions. (a) As used in this Agreement, the following terms have the meanings specified in this Section 1.1(a). (1) "Affiliate" has the meaning set forth in Rule 12b-2 of the General Rules and Regulations under the Exchange Act. (2) "assessment" includes a reassessment. (3) "Bill of Sale" means a bill of sale to be delivered by a Seller at the Closing with respect to the Purchased Assets of such Seller which constitute personal property and which are to be transferred at the Closing, substantially in the form of Exhibit A hereto. (4) "Business Day" means any day other than Saturday, Sunday and any day which is a legal holiday or a day on which banking institutions in Portland, Maine are authorized by law or other governmental action to close. (5) "Buy-Back Agreement" means the Buy-Back Agreement substantially in the form of Exhibit B hereto, dated the date of the Closing, pursuant to which the Buyer or its designee agrees to sell to MPS, and MPS agrees to purchase from the Buyer or its designee, energy and capacity as provided therein. -141- (6) "Buyer Representatives" means the Buyer's accountants, employees, counsel, environmental consultants, financial advisors and other authorized representatives. (7) "Canadian Assets" means, subject to Section 2.2, all of the right, title and interest in, to and under the real and personal property, tangible or intangible, owned by either of the Sellers and constituting the Tinker Generating Station or used principally for generation purposes in connection with such dams and reservoirs and which are located in Aroostook Junction, New Brunswick, or which constitute transmission and distribution assets located in New Brunswick, Canada, including, but not limited to, the following assets owned by either of the Sellers: (i) the Real Estate (including all buildings, structures, fixtures and other improvements thereon, all applicable easements and other access rights, and all other rights and privileges belonging or appertaining thereto) described on Schedule 5.8(c) as associated with the Canadian Assets (the "Canadian Real Property"); (ii) inventories of supplies, materials and critical spares located on or in transit to the Canadian Real Property on the Closing Date; (iii) the machinery, equipment, vehicles, furniture and other personal property located on the Canadian Real Property on the Closing Date, including, without limitation, the items of personal property included in Schedule 1.1(a)(7)(iii) as being associated with the Canadian Assets, and all warranties against manufacturers or vendors relating thereto, to the extent assignable to the Buyer or its designee and subject to the receipt of any necessary consents; (iv) the contracts, agreements, and real and personal property leases listed on Schedules 5.9, 5.15(a) and 7.10(b) as being associated with the Canadian Assets; (v) the Transferable Permits listed on Schedule 1.1(a)(70) as being associated with the Canadian Assets; and (vi) all books, operating records, operating, safety and maintenance manuals, engineering design plans, blueprints and as-built plans, specifications, procedures and similar items relating specifically to the aforementioned assets other than books of account. (8) "Capital Expenditures" means those capital expenditures which are identified as capital expenditures with respect to the Purchased Assets and in the amounts identified on Schedule 7.1. (9) "Capital Improvements" means those modifications or improvements to the Purchased Assets described on Schedule 7.1 as associated with the Capital Expenditures. -2- -142- (10) "Caribou Fossil Assets" means those portions of Caribou Station relating to the generation of electricity through fossil fuels. (11) "Caribou Hydro Assets" means those portions of the Caribou Station relating to the generation of electricity through hydro power. (12) "Caribou Station" means the electric generating facility located in Caribou, within the County of Aroostook, Maine and known as the Caribou Station. (13) "CERCLA" means the Federal Comprehensive Environmental Response, Compensation and Liability Act, as amended. (14) "Closing" means the closing of the sale of the Purchased Assets and the assumption of the Assumed Obligations as described in Section 4.1 hereof. (15) "Closing Date" means the actual date of the Closing. (16) "Closing Documents" means, collectively, this Agreement, the Bills of Sale, the Buy-Back Agreement, the Continuing Site Agreement, the Instruments of Assumption, the Interconnection Agreements, and each of the documents, instruments, certificates, opinions, and agreements which are required to be delivered pursuant hereto and thereto. (17) "COBRA" means the health care continuation coverage provisions of the Consolidated Omnibus Budget Reconciliation Act of 1986, as amended. (18) "Code" means the Internal Revenue Code of 1986, as amended. (19) "Confidentiality Agreement" means the Confidentiality Agreement, dated October 20, 1997, between MPS and PDI. (20) "Continuing Site Agreement" means the Continuing Site/Interconnection Agreement in substantially the form of Exhibit C hereto, dated the date of the Closing, between MPS and the Buyer or its designee. (21) "DEP" means the Maine Department of Environmental Protection. (22) "designee of the Buyer", "Buyer's designee", "its designee" (when referring to the Buyer), and any similar phrase, means one or more wholly owned, direct or indirect subsidiaries of the Buyer formed in a jurisdiction of the United States to own all title and interests in and to the U.S. Assets, the Canadian Assets, or both. (23) "Easements" means, with respect to the Purchased Assets, the reservations of easements to be included in the deeds of conveyance with respect to such assets, or, in the case of the Flo's Inn Station, the easement to be granted to Buyer or its designee, substantially as set forth in Schedule 5.8(c) hereto. -3- -143- (24) "Encumbrances" means any mortgages, pledges, liens, security interests, conditional and installment sale agreements, activity and use limitations, conservation easements, deed restrictions, encumbrances and charges of any kind. (25) "Environmental Laws" means all federal, state, provincial, foreign and local laws, regulations, rules, ordinances, codes, decrees, judgments, directives, or judicial or administrative orders relating to pollution or protection of the environment, natural resources or human health and safety, including, without limitation, laws relating to Releases or threatened Releases of Hazardous Substances (including, without limitation, into or through ambient air, surface water, groundwater, land surface and subsurface strata) or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, Release, transport or handling of Hazardous Substances, including without limitation the Clean Water Act (United States), the Clean Air Act (United States), the Resource Conservation and Recovery Act (United States), the Toxic Substances Control Act (United States), CERCLA (United States), Fisheries Act (Canada), Environmental Assessment Act (Canada), Navigable Waters Protection Act (Canada), Clean Air Environmental Act (New Brunswick, Canada), Clean Water Act (New Brunswick, Canada), and Pesticides Control Act (New Brunswick, Canada), in each case as amended, and their state or provincial and local counterparts. (26) "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. (27) "ERISA Affiliate" means any corporation that is or ever has been a member of a controlled group of corporations with the Sellers, any trade or business (whether or not incorporated) that is or ever has been under common control with the Sellers, any member of a current or former affiliated service group including the Sellers, and any entity that is or ever has been required to be treated as a single employer with the Sellers, under Section 414(b), (c), (m), or (o) of the Code. (28) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (29) "Excise Tax Act (Canada)" means the Excise Tax Act, R.S.C 1985 c.E-15, as amended. (30) "Federal Power Act" means the Federal Power Act of 1935. (31) "FERC" means the Federal Energy Regulatory Commission. (32) "FERC Licenses" means the licenses identified in Schedule 1.1(a)(32) hereto. (33) "Flo's Inn Station" means the electric generating facilities located in Presque Isle, within the County of Aroostook, Maine and known as the Flo's Inn Generating Station. -4- -144- (34) "generally accepted accounting principles" means generally accepted accounting principles in the United States. (35) "Hazardous Substances" means (a) any petrochemical or petroleum products, oil or coal ash, radioactive materials, radon gas, asbestos in any form that is or could become friable, urea formaldehyde foam insulation and transformers or other equipment that contain dielectric fluid which may contain levels of polychlorinated biphenyls; (b) any chemicals, materials or substances defined as or included in the definition of "hazardous substances", "hazardous wastes", "hazardous materials", "restricted hazardous materials", "extremely hazardous substances", "toxic substances", "contaminants" or "pollutants" or words of similar meaning and regulatory effect; or (c) any other chemical, material or substance, exposure to which is prohibited, limited or regulated by any applicable Environmental Law. (36) "HIPAA" means the Health Insurance Portability and Accountability Act of 1996, as amended. (37) "Holding Company Act" means the Public Utility Holding Company Act of 1935, as amended. (38) "Houlton Station" means the electric generating facilities located in Houlton, Maine and known as the Houlton Station. (39) "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. (40) "HST" means the tax levied under Part IX of the Excise Tax Act (Canada). (41) "Income Tax" means any federal, state, provincial, local or foreign Tax (a) based upon, measured by or calculated with respect to net income, profits or receipts (including, without limitation, capital gains Taxes and minimum Taxes) or (b) based upon, measured by or calculated with respect to multiple bases (including, without limitation, corporate franchise taxes) if one or more of the bases on which such Tax may be based, measured by or calculated with respect to, is described in clause (a), in each case together with any interest, penalties, or additions to such Tax. (42) "Indentures" means: (i) the Indenture of Mortgage and Deed of Trust, dated as of October 1, 1945, between MPS and First Trust of Illinois (successor to Continental Illinois National Bank and Trust Company of Chicago), as Trustee, as supplemented; and (ii) the Indenture of Second Mortgage and Deed of Trust, dated as of October 1, 1985, between MPS and IBJ Schroder Bank & Trust Company (successor to J. Henry Schroder Bank & Trust Company), as Trustee, as supplemented. -5- -145- (43) "Instruments of Assumption" means the Instrument of Assumption substantially in the form of Exhibit D-1 hereto relating to the assumption by the Buyer or its designee of the liabilities and obligations of MPS described therein and the Instrument of Assumption substantially in the form of Exhibit D-2 hereto relating to the assumption by the Buyer or its designee of the liabilities and obligations of MNB described therein, in each case, to be delivered at the Closing. (44) "Interconnection Agreements" means the Interconnection Agreements substantially in the form of Exhibit E, dated the date of the Closing, between MPS and the Buyer or its designee. (45) "Knowledge", "to the knowledge of", and any similar phrase, (i) when referring to the Sellers, means the actual and conscious knowledge of the following members of management of MPS: Paul R. Cariani, Frederick C. Bustard, Stephen A. Johnson, Edward Howard, Larry E. LaPlante, David Holabird, or Peter Louridas after reasonable inquiry by them of selected employees of the Sellers whom they believe, in good faith, to be the persons generally responsible for the subject matters to which the knowledge is pertinent; and (ii) when referring to Buyer, the actual and conscious knowledge of the following persons: Gerald L. Mroczkowski, Richard J. Suslick, Keith M. Uffelman, Richard R. Heidel, Thomas G. Balzola, Lisa M. Cribben, and Gregory W. Egtvedt, after reasonable inquiry by them of selected employees of Buyer whom they believe, in good faith, to be the persons generally responsible for the subject matters to which the knowledge is pertinent. (46) "Labor Agreement" means a collective bargaining agreement or other employment-related agreement identified on Schedule 7.10(b). (47) "Maintenance Expenditures" means those maintenance expenditures which are identified as maintenance expenditures with respect to the Purchased Assets and in the amounts identified on Schedule 7.1. (48) "Maintenance and Capital Expenditures Amount" means the aggregate amount of all funds actually expended on, or for which liabilities were accrued in accordance with generally accepted accounting principles applied on a consistent basis with respect to, Maintenance Expenditures and Capital Expenditures by the Sellers, if any, during the period beginning on the date hereof and ending on the Closing Date, but not in excess of the aggregate amount set forth in Schedule 7.1. (49) "Material Adverse Effect" means any change or changes in, or effect on, the Purchased Assets, the operation, maintenance or condition (financial or otherwise) of the Purchased Assets, or the business of the Sellers in connection therewith after the date of this Agreement, or any change or changes in, or effect on, the Assumed Obligations after the date of this Agreement, in each case that is, individually, or in the aggregate are materially adverse to the Purchased Assets, the operation, maintenance, or condition (financial or otherwise) of the Purchased Assets, the business of the Sellers, or the intended business of the Buyer as contemplated herein in connection therewith, or to the -6- -146- Assumed Obligations, taken as a whole, other than (i) any change or effect resulting from changes in the international, national, U.S., Canadian, regional or local wholesale or retail markets for electric power, (ii) any change or effect resulting from changes in the international, national, U.S., Canadian, regional or local markets for any fuel used at the Purchased Assets, (iii) any change or effect resulting from changes in the North American, national, U.S., Canadian, regional or local electric transmission systems, (iv) any changes or effects resulting from changes in U.S., Canadian, state, provincial or local laws, regulations or ordinances affecting the Purchased Assets, and (v) any materially adverse change in or effect on the Purchased Assets, the operation, maintenance or condition (financial or otherwise) of the Purchased Assets, the business of the Sellers (or of the Buyer after the Closing, as the case may be) in connection therewith, or the Assumed Obligations which is cured (including by the payment of money) by the Sellers to the reasonable satisfaction of the Buyer before the Termination Date. Notwithstanding the foregoing, the term "Material Adverse Effect" with respect to matters affecting the Real Estate and the Easements shall be measured not from the date of this Agreement but shall initially be measured without reference to any time period and, with respect to matters identified after the sixty-day period referred to in Section 7.12(b), shall be measured from the effective date of the title insurance commitments delivered on the Initial Title Review Date referred to in Section 7.12(a). (50) "Millinocket Facility" means the hydro electric storage dam located on Millinocket Lake in the unorganized territory, T7 R9 WELS, Piscataquis County, Maine and known as the Millinocket Facility. (51) "NEB Licenses" means the licenses, permits and certificates identified in Schedule 1.1(a)(51) hereto. (52) "NPDES" means the National Pollutant Discharge Elimination System. (53) "Pension Benefits Act" means the Pension Benefits Act, S.N.B. 1987, C. P- 5.1. (54) "Permits" means all licenses, permits, exemptions, approvals and authorizations of any nature issued by any local, state, provincial, federal or foreign governmental agency applicable to the construction, ownership, operation, maintenance or repair of the Purchased Assets or any part thereof or to the performance of the Assumed Obligations. (55) "Permitted Encumbrances" means (i) those Encumbrances set forth in Schedule 1.1(a)(55); (ii) the Easements; (iii) those exceptions to title to the Purchased Assets listed in Schedule 5.8(a); (iv) all exceptions, restrictions, easements, charges, rights of way and monetary and non-monetary encumbrances which are set forth in the FERC Licenses and the NEB Licenses, except for such Encumbrances that secure indebtedness; (v) with respect to any date before the Closing Date, Encumbrances created by the Indentures; (vi) statutory liens for current taxes or assessments not yet due or delinquent or, with respect to any date before the Closing Date, the validity of which is being -7- -147- contested in good faith by appropriate proceedings; (vii) mechanics', carriers', workers', repairers' and other similar liens arising or incurred in the ordinary course of business relating to obligations as to which there is no default on the part of the Sellers or, with respect to any date before the Closing Date, the validity of which is being contested in good faith by appropriate proceedings; (viii) zoning, entitlement, conservation restriction and other land use and environmental regulations by governmental authorities which do not materially detract from the value of the Purchased Assets as currently used or materially interfere with the present use of the Purchased Assets or, individually or in the aggregate, create a Material Adverse Effect; and (ix) such other liens, imperfections in or failure of title, charges, easements, restrictions and encumbrances which do not materially detract from the value of the Purchased Assets as currently used or materially interfere with the present use of the Purchased Assets and neither secure indebtedness, nor individually or in the aggregate create a Material Adverse Effect. (56) "Person" means any individual, partnership, limited liability company, joint venture, corporation, trust, unincorporated organization or governmental entity or any department or agency thereof. (57) "Proprietary Information" has the meaning referred to in Section 7.2(b). (58) "PUC" means the Maine Public Utilities Commission. (59) "Release" means release, spill, leak, discharge, dispose of, pump, pour, emit, empty, inject, leach, dump or allow to escape into or through the environment. (60) "SEC" means the Securities and Exchange Commission. (61) "Securities Act" means the Securities Act of 1933, as amended. (62) "Sellers' Agreements" means those agreements listed on Schedules 5.9 and 5.15(a) and the Labor Agreements. (63) "Sellers' Employee Transition Plan" means the Sellers' Employee Transition Plan in the form approved by the Buyer and the PUC on or before the Closing Date. (64) "Sellers' Representatives" means the Sellers' accountants, employees, counsel, financial advisors and other authorized representatives. (65) "Squa Pan Station" means the hydro-electric facility located in Masardis, within the County of Aroostook, Maine and known as Squa Pan Station. (66) "Subsidiary" when used in reference to any other Person means any entity of which outstanding securities having ordinary voting power to elect a majority of the Board of Directors or other Persons performing similar functions of such entity are owned directly or indirectly by such other Person. -8- -148- (67) "Tax" or "Taxes" means all taxes, charges, fees, levies, penalties or other assessments imposed by any United States or foreign federal, state, provincial, or local taxing authority, including, but not limited to, HST, income, excise, property, sales, transfer, franchise, payroll, withholding, social security or other taxes, including any interest, penalties or additions attributable thereto. (68) "Tax Return" means any return, report, information return or other document (including any related or supporting information) required to be supplied to any authority with respect to Taxes. (69) "Tinker Generating Station" means the hydroelectric facility located in Aroostook Junction, New Brunswick, Canada and known as the Tinker Generating Station, together with the related diesel generating assets and the transmission and distribution facilities owned by MNB and located in New Brunswick, Canada. (70) "Transferable Permits" means those Permits and Environmental Permits and any applications pertaining thereto set forth in Schedule 1.1(a)(70), to the extent assignable to the Buyer or its designee and subject to the receipt of any necessary consents and approvals. (71) "Transferring Employee Records" means all personnel files related to the Sellers' personnel who will become employees of the Buyer. (72) "U.S. Assets" means, subject to the Easements in favor of MPS and Section 2.2, all of Sellers' right, title and interest in, to and under the real and personal property, tangible or intangible, and constituting the Flo's Inn Station, the Houlton Station, the Millinocket Facility, the Squa Pan Station and the Caribou Station or used principally for generation purposes in connection with the Flo's Inn Station, the Houlton Station, the Millinocket Facility, the Squa Pan Station or the Caribou Station, or used principally in connection with the Tinker Generating Station, but not including any of MPS's transmission and distribution assets, and including MPS's entire interest in the Wyman Station, and, in the case of any hydroelectric facilities, including any generating assets which are located within the applicable FERC project license boundary, and together with, in each case, all of MPS's right, title and interest under any private and special laws of Maine relating to any of the U.S. Assets or the Canadian Assets, including, but not limited to, the following assets owned by MPS or MNB: (i) the Real Estate (including all buildings, structures, fixtures and other improvements thereon, all applicable easements and other access rights and all other rights and privileges belonging or appertaining thereto) described on Schedule 5.8(c) as associated with the Millinocket Facility, the Squa Pan Station, the Flo's Inn Station, the Caribou Station, or the Tinker Generating Station, but not the Houlton Station, and, with respect to the Flo's Inn Station, only to the extent of the Easement therefor (the "U.S. Real Property"); -9- -149- (ii) all inventories of fuels, supplies, materials and critical spares located on or in transit to the U.S. Real Property on the Closing Date; (iii) the machinery, equipment, vehicles, furniture and other personal property located on the U.S. Real Property or the Houlton Station on the Closing Date, including, without limitation, the items of personal property included in Schedule 1.1(a)(72)(iii) as being associated with any of the Flo's Inn Station, the Houlton Station, the Millinocket Facility, the Squa Pan Station or the Caribou Station, and all warranties against manufacturers or vendors relating thereto, to the extent assignable to the Buyer or its designee and subject to the receipt of any necessary consents; (iv) the contracts, agreements, and real and personal property leases listed on Schedules 5.9, 5.15(a) and 7.10(b) as being associated with any of the Flo's Inn Station, the Millinocket Facility, the Squa Pan Station or the Caribou Station; (v) the Transferable Permits listed on Schedule 1.1(a)(70) as being associated with any of the Flo's Inn Station, the Millinocket Facility, the Squa Pan Station or the Caribou Station; (vi) all books, operating records, operating, safety and maintenance manuals, engineering design plans, blueprints and as-built plans, specifications, procedures and similar items of the Sellers relating specifically to the aforementioned assets other than books of account; and (vii) MPS's entire interest in Unit 4 of Wyman Station, as affected by the Wyman Agreements, and MPS's associated rights in and to the categories of assets disclosed in clauses (i) through (vi) hereof relating to Unit 4 of Wyman Station. (73) "WARN Act" means the Federal Worker Adjustment Retraining and Notification Act of 1988. (74) "Wyman Agreements" means (i) the William F. Wyman Unit No. 4 Agreement for Joint Ownership, Construction and Operation, dated as of November 1, 1974, by and among Central Maine Power Company, Bangor Hydro-Electric Company, MPS, Boston Edison Company, Fitchburg Gas and Electric Light Company, Montaup Electric Company, New England Power Company, New Bedford Gas and Edison Light Company, Newport Electric Corporation, Public Service Company of New Hampshire, Central Vermont Public Service Corporation, Green Mountain Power Corporation, City of Burlington Electric Department, Village of Lyndonville Electric Department, and Massachusetts Municipal Wholesale Electric Company, as amended by Amendments Nos. 1, 2 and 3 dated, respectively, June 30, 1975, August 16, 1976, and December 31, 1978, and (ii) the William F. Wyman Unit No. 4 Transmission Agreement, dated as of November -10- -150- 1, 1974, by and among MPS and the other parties to the agreement described in clause (i) above. (75) "Wyman Station" means the electric generating facilities known as the W.F. Wyman Station and located in Yarmouth, Maine. (b) Each of the following terms has the meaning specified in the Section set forth opposite such term: Term Section Adjustment Amount 3.2(a) Adjustment Statement 3.2(a) Assumed Obligations 2.3(b) Benefit Plans 5.13(a) Buyer Benefit Plans 7.10(e) Buyer Required Regulatory Approvals 6.3(b) Buyer's Window 7.10(a) Buyer's 401(k) Plan 7.10(f) Closing 4.1 Closing Date 4.1 Conditions 4.1 Direct Claim 9.2(c) Employees 7.10(a) Environmental Permits 5.11(a) ERISA Affiliate Plans 2.4(10) Excluded Assets 2.2 Excluded Liabilities 2.4 Final Order 8.1(c) IBEW 7.10(a) IBEW Agreements 7.10(b) Indemnifiable Loss 9.1(a) Indemnifying Party 9.1(d) Indemnitee 9.1(c) Independent Appraiser 3.3 Inventory Adjustment Amount 3.2(a) Inventory Survey 3.2(a) Observers 7.1(d)(1) Pension Plans 5.13(a) Purchased Assets Recitals Purchase Price 3.1 Real Estate 5.8(c) Replacement Welfare Plans 7.10(d) Required Permits 5.17 Sellers Balance Sheets 5.5 Sellers Required Regulatory Approvals 5.3(b) Sellers' Non-Union 401(k) Plan 7.10(f) -11- -151- Termination Date 10.l(b) Third Party Claim 9.2(a) Transferred Employees 7.10(a) Transferred IBEW Employees 7.10(b) Transferred Non-Union Employees 7.10(c) Transition Committee 7.1(c) Welfare Plans 5.13(a) ARTICLE II PURCHASE AND SALE 2.1 The Purchase and Sale. (a) Upon the terms and subject to the satisfaction of the conditions contained in this Agreement, at the Closing the Sellers will sell, assign, convey, transfer and deliver to the Buyer or its designee, and the Buyer or its designee will purchase and acquire from Seller, free and clear of all Encumbrances (except for Permitted Encumbrances) all of the Sellers' right, title and interest in, to and under the real and personal property, tangible or intangible, owned by the Sellers and constituting the Purchased Assets. (b) At the Closing, the Buyer or its designee and MPS will execute and deliver to one another the Buy-Back Agreement, the Continuing Site Agreement, and the Interconnection Agreements. 2.2 Excluded Assets. Notwithstanding any provision herein to the contrary, the Purchased Assets shall not include the following assets of the Sellers (herein referred to as the "Excluded Assets"): (a) all cash, cash equivalents, bank deposits, accounts receivable, and any income, sales, payroll or other tax receivables; (b) certificates of deposit, shares of stock, securities, bonds, debentures, evidences of indebtedness, and except in respect of MPS's interest in the Wyman Station, interests in joint ventures, partnerships, limited liability companies and other entities; (c) the names Maine Public Service Company, Maine and New Brunswick Electrical Power Company Limited, or any related or similar names, and any trade names, trademarks, service marks, copyrights or logos; (d) the transmission, distribution, substation and communication facilities and related support equipment, including but not limited to those described or referred to in Schedule 2.2(d), other than any transmission and distribution assets owned by MNB and located in Canada; (e) any refund, credit or other amount due (i) related to real or personal property Taxes paid prior to the Closing Date in respect of the Purchased Assets, whether such refund is -12- -152- received as a payment or as a credit against future real or personal property Taxes payable, or (ii) arising under any Sellers' Agreement and relating to a period before the Closing Date; (f) all personnel records other than Transferring Employee Records; (g) the real property interests associated with the Houlton Station; and (h) the portion of the Caribou Facility consisting of the real property under and near the electrical substations and related equipment at the Caribou Station being retained by MPS, being approximately 0.27 acres between the diesel plant and the filter plant, the exact description of which portion shall be agreed upon by MPS and Buyer. 2.3 Assumed Obligations. (a) On the Closing Date, the Buyer shall deliver to the Sellers the Instruments of Assumption pursuant to which the Buyer or its designee shall assume and agree to discharge all of the liabilities and obligations of the Sellers, direct or indirect, known or unknown, absolute or contingent, which relate to Purchased Assets, other than the Excluded Liabilities, in accordance with the respective terms and subject to the respective conditions thereof, including without limitation, the following liabilities and obligations: (1) all liabilities and obligations of the Sellers under (a) the Sellers' Agreements (other than the Labor Agreements) and the Transferable Permits associated with the Purchased Assets in accordance with the terms thereof, (b) the contracts, leases and other agreements entered into by the Sellers with respect to the Purchased Assets which would be required to be disclosed on Schedule 5.15(a) but for the exception provided in clause (iii) of Section 5.15(a) of this Agreement, in accordance with the terms thereof, and (c) the contracts, leases and other agreements entered into by the Sellers with respect to the Purchased Assets after the date hereof consistent with the terms of this Agreement; except in each case, to the extent such liabilities and obligations, but for a breach or default by the Sellers, would have been paid, performed or otherwise discharged on or prior to the Closing Date or to the extent the same arise out of any such breach or default or out of any event which after the giving of notice would constitute a default; (2) except in respect of any of the liabilities or obligations described in Section 2.4, any liability, obligation or responsibility under or related to former, current or future Environmental Laws or the common law, whether such liability or obligation or responsibility is known or unknown, contingent or accrued, arising as a result of or in connection with (a) any violation or alleged violation of any Environmental Law after the Closing Date, with respect to the ownership or operation of the Purchased Assets; (b) compliance with applicable Environmental Laws after the Closing Date with respect to the ownership or operation of the Purchased Assets; (c) loss of life, injury to persons or property or damage to natural resources caused (or allegedly caused) by the presence or Release of Hazardous Substances at, on, in, under, or migrating from the Purchased Assets after the Closing Date, including, but not limited to, Hazardous Substances -13- -153- contained in building materials at the Purchased Assets or in the soil, surface water, sediments, groundwater, landfill cells, or in other environmental media at the Purchased Assets; (d) loss of life, injury to persons or property or damage to natural resources caused (or allegedly caused) by the off-site disposal, storage, transportation, discharge, Release, recycling, or the arrangement for such activities, of Hazardous Substances, after the Closing Date, in connection with the ownership or operation of the Purchased Assets; (e) the investigation and/or remediation of Hazardous Substances that are present or have been Released at, on, in, under, or migrating from the Purchased Assets after the Closing Date, including, but not limited to, Hazardous Substances contained in building materials at the Purchased Assets or in the soil, surface water, sediments, groundwater, landfill cells, or in other environmental media at the Purchased Assets; (f) the investigation and/or remediation of Hazardous Substances that are disposed, stored, transported, discharged, Released, recycled, or the arrangement of such activities, after the Closing Date, in connection with the ownership or operation of the Purchased Assets, at any off-site location; and (g) any violation or alleged violation of Environmental Law, and any loss of life, injury to persons or property or damage to natural resources caused (or allegedly caused) by (i) acts by the Buyer or its designee or their respective employees, invitees or agents at any of the Purchased Assets on or after the date of this Agreement and prior to the Closing Date; (ii) acts or omissions by a party other than a Seller or its employees, invitees or agents at any of the Purchased Assets after the Closing Date which cause a condition not in violation of an Environmental Law or not in need of remediation under an Environmental Law on the Closing Date to be in violation of such Environmental Law or in need of remediation under such Environmental Law (including, without limitation, the Release or destabilization of Hazardous Substances which are in a stable or contained state and are in compliance with all applicable Environmental Laws on the Closing Date); or (iii) acts or omissions by a party other than a Seller or its employees, invitees or agents at any of the Purchased Assets after the Closing Date that exacerbate or aggravate any condition in violation of an Environmental Law or in need of remediation under an Environmental Law on the Closing Date, to the extent of any such exacerbation or aggravation; provided, however, that the mere discovery by the Buyer of a condition in violation of an Environmental Law or in need of remediation under an Environmental Law on the Closing Date (including, without limitation, the discovery of a Hazardous Substance in violation of an Environmental Law or in need of remediation under an Environmental Law), in and of itself and without any other act or omission by the Buyer, shall not be included in this subclause (g); (3) all liabilities and obligations associated with the Purchased Assets in respect of Taxes for which the Buyer is liable pursuant to Section 3.5; (4) any liabilities and obligations associated with the Purchased Assets for which the Buyer has indemnified the Sellers pursuant to Section 9.1; (5) all liabilities and obligations with respect to the Employees of either of the Sellers to be employed at the Purchased Assets after the Closing Date for which the Buyer is responsible pursuant to Section 7.10; and -14- -154- (6) with respect to the Purchased Assets, any Tax that may be imposed by any state or local government on the ownership, sale, operation or use of the Purchased Assets for any period after the Closing Date. (b) All of the foregoing liabilities and obligations to be assumed by the Buyer or its designee under Section 2.3(a) (excluding any Excluded Liabilities) are referred to herein as the "Assumed Obligations." It is understood and agreed that nothing in this Section 2.3 shall constitute a waiver or release of any claims arising out of the contractual relationships between the Sellers and the Buyer or its designee. 2.4 Excluded Liabilities. Except as otherwise specifically provided in this Agreement, neither the Buyer nor its designee shall assume or be obligated to pay, perform, or otherwise discharge any of the following liabilities or obligations: (1) any liabilities or obligations of the Sellers in respect of any Excluded Assets or other assets of the Sellers which are not Purchased Assets; (2) any liabilities or obligations of the Sellers in respect of Taxes for any period on or before the Closing Date; (3) any liability, obligation or responsibility under or related to former, current or future Environmental Laws or the common law, whether such liability or obligation or responsibility is known or unknown, contingent or accrued, arising as a result of or in connection with (a) any violation or alleged violation by either of the Sellers of any environmental Law, on or before the Closing Date, arising from the use, operation, or maintenance of the Purchased Assets by the Sellers; (b) compliance by either of the Sellers with applicable Environmental Laws on or before the Closing Date arising from the use, operation, or maintenance of the Purchased Assets by the Sellers; (c) loss of life, injury to persons or property or damage to natural resources caused (or allegedly caused) by the presence, due to or resulting from any act or omission of either of the Sellers, or Release by either of the Sellers of Hazardous Substances at, on, in, under, adjacent to or migrating from the Purchased Assets on or before the Closing Date, including, but not limited to, Hazardous Substances contained in building materials at or adjacent to the Purchased Assets or in the soil, surface water, sediments, groundwater, landfill cells, or in other environmental media at the Purchased Assets; (d) loss of life, injury to persons or property or damage to natural resources caused (or allegedly caused) by the off-site disposal, storage, transportation, discharge, Release, recycling, or the arrangement for such activities, of Hazardous Substances, by either of the Sellers on or before the Closing Date, in connection with the ownership or operation of the Purchased Assets; (e) the investigation and/or remediation by either of the Sellers of Hazardous Substances that are present or have been Released on or before the Closing Date at, on, in, under, adjacent to or migrating from the Purchased Assets, including, but not limited to, Hazardous Substances contained in building materials at the Purchased Assets or in the soil, surface water, sediments, groundwater, landfill cells or in other environmental media at or adjacent to the Purchased Assets; (f) the investigation and/or remediation by either of the Sellers of Hazardous Substances that are disposed, stored, transported, discharged, -15- -155- Released, recycled, or the arrangement of such activities, on or before the Closing Date, in connection with the ownership or operation of the Purchased Assets, at any off-site location; or (g) any of the circumstances described in subclauses (a) through (f) above if committed, done, or caused by, or due to or resulting from any act or omission of, any party other than the Sellers (other than the Buyer or its designee or their respective employees, invitees or agents) if the Sellers have knowledge thereof (notwithstanding the Buyer's knowledge thereof) on or prior to the Closing Date; the Sellers agree and acknowledge that the Excluded Liabilities described in this Section 2.4(3) shall include, without limitation, the liabilities disclosed in Schedule 5.11, as amended from time to time pursuant to Section 7.9, and any liabilities of the nature described in subclauses (a) through (g) above discovered by the Buyer in accordance with this Agreement and disclosed to the Sellers prior to the Closing Date, other than any of the foregoing that was committed, done or caused by or due to or resulting from any act of the Buyer or its employees, invitees or agents; (4) any liabilities, obligations or responsibilities relating to the following, provided, however, that the Buyer or its designee may have responsibility therefor under an Easement, an Interconnection Agreement, the Continuing Site Agreement or otherwise than as an Assumed Obligation: (a) the property, equipment or machinery retained by either Seller and kept within the switchyards and substations for which the Sellers will retain an Easement, (b) the transmission lines delineated in the Easements or (c) any of Sellers' operations on, or usage of, the Easements, including, without limitation, liabilities, obligations or responsibilities arising as a result of or in connection with (1) any violation or alleged violation by either of the Sellers of any Environmental Law or (2) loss of life, injury to persons or property or damage to natural resources; (5) any liabilities or obligations required to be accrued by the Sellers in accordance with generally accepted accounting principles and the FERC Uniform System of Accounts on or before the Closing Date with respect to liabilities related to the Purchased Assets; (6) any liabilities or obligations (a) relating to any claim, action, suit or proceeding pending against either of the Sellers as of the Closing Date, notwithstanding the disclosure thereof in any Schedule, or any subsequent claim, action, suit or proceeding arising out of or relating to such pending matters, (b) resulting from any act or omission of either of the Sellers occurring on or prior to the Closing Date, (c) resulting from the use, operation, or maintenance of the Purchased Assets by either of the Sellers on or prior to the Closing Date, or (d) resulting from property damage or personal injuries (including death) arising in connection with the use, operation, or maintenance of the Purchased Assets by either of the Sellers on or prior to the Closing Date; (7) any fines or penalties imposed by a governmental agency resulting from (A) an investigation or proceeding pending on or prior to the Closing Date or (B) illegal acts, willful misconduct or gross negligence of the Sellers prior to the Closing Date; -16- -156- (8) any payment obligations of the Sellers for goods delivered or services rendered prior to the Closing; (9) any liabilities or obligations imposed upon, assumed or retained by the Sellers or any of their Affiliates pursuant to any of the Closing Documents; (10) any liabilities, obligations or responsibilities relating to any Benefit Plan (as defined in Section 5.13(a) hereof), or to any "employee pension benefit plan", as defined in Section 3(2) of ERISA, or to any "pension plan", as defined in Section 1(1) of the Pension Benefits Act, whether or not terminated, established, maintained or contributed to by any of the Sellers or any of their ERISA Affiliates at any time or to which any of the Sellers or any of their ERISA Affiliates are or have been obligated to contribute to at any time ("ERISA Affiliate Plan"); including any liability (A) to the Pension Benefit Guaranty Corporation under Title IV of ERISA; (B) relating to a multiemployer plan; (C) with respect to non-compliance with COBRA or HIPAA; (D) with respect to noncompliance with any other applicable provision of the Code, ERISA, or the Pension Benefits Act or any other applicable laws; or (E) with respect to any suit, proceeding or claim which is brought against the Buyer with respect to any Benefit Plan or ERISA Affiliate Plan, against any Benefit Plan or ERISA Affiliate Plan, or against any fiduciary or former fiduciary of any such Benefit Plan or ERISA Affiliate Plan; and (11) any liabilities, obligations or responsibilities relating to the employment or termination of employment by the Sellers of any individual (including, but not limited to, any employee of the Sellers), except as expressly assumed by the Buyer pursuant to Section 7.10. All such liabilities and obligations not being assumed pursuant to this Section 2.4 are herein called the "Excluded Liabilities". The parties agree and acknowledge that the Sellers shall be entitled exclusively to control, at Sellers' sole cost and expense, any litigation, administrative or regulatory proceeding, and any investigation or remediation activities (including without limitation any environmental mitigation or remediation activities), arising out of or related to any Excluded Liabilities, and the Buyer agrees promptly to notify the Sellers of the institution or commencement of any of the foregoing if and when Buyer obtains knowledge thereof, and to cooperate fully, at Sellers' sole cost and expense, with the Sellers in connection therewith; provided, that all such remediation activities conducted after the Closing Date shall be coordinated with the Buyer and conducted in a manner as not to interfere unreasonably with Buyer's activities at the Purchased Assets (including, without limitation, Buyer's operation and maintenance of the Purchased Assets). -17- -157- ARTICLE III PURCHASE PRICE 3.1 Purchase Price. The purchase price for the Purchased Assets shall be an amount equal to the sum of (a) $37,425,000, and (b) the Adjustment Amount (collectively, the "Purchase Price"). 3.2 Purchase Price Adjustment. (a) Within ten (10) Business Days after the Closing, the Sellers shall prepare and deliver to the Buyer a statement (the "Adjustment Statement") which reflects (i) the net book value, as reflected on the books of the Sellers as of the Closing Date of all fuel inventory (FERC account no. 151) used at or in connection with the Purchased Assets except the Wyman Station (the "Inventory Adjustment Amount"), and (ii) the Maintenance and Capital Expenditures Amount. The Inventory Adjustment Amount and the Maintenance and Capital Expenditures Amount for the Closing are referred to collectively as the "Adjustment Amount." The Inventory Adjustment Amount will be based on a fuel inventory survey conducted within five days prior to the Closing Date consistent with current inventory procedures of the Sellers (the "Inventory Survey"). The Sellers will permit an employee, or representative, of the Buyer to observe the Inventory Survey. The Adjustment Statement shall be prepared using the same generally accepted accounting principles, policies and methods as the Sellers have historically used in connection with the calculation of the items reflected on such Adjustment Statement. The Buyer agrees to cooperate with the Sellers in connection with the preparation of the Adjustment Statement and related information, and shall provide to the Sellers such books, records and information as may be reasonably requested from time to time. (b) Within ten (10) Business Days after the Buyer's receipt of the Adjustment Statement, the Buyer shall pay to MPS on behalf of the Sellers an amount equal to the Adjustment Amount. (c) The Purchase Price reflects Buyer's intent to use the diesel generating facilities that are included within the Caribou Station on a regular basis. Nevertheless, the permit that governs the discharge of cooling water from those diesel generating facilities includes limits that inhibit such use during periods of low water flow and warm weather. MPS agrees that, unless MPS is able, prior to the Closing Date, to obtain modifications to such permit that would allow Buyer to use such facilities without such an inhibition, such modifications to be reasonably satisfactory to Buyer, then the Purchase Price shall be reduced by One Hundred Thousand Dollars ($100,000). 3.3 Allocation of Purchase Price and Assumed Obligations. The Buyer and the Sellers shall use their good faith best efforts to agree upon an allocation among the Purchased Assets of the sum of the Purchase Price and the Assumed Obligations consistent with Section 1060 of the Code and the Treasury Regulations thereunder within 180 days after the date of this Agreement but in no event less than 30 days prior to the Closing. The Buyer and the Sellers may jointly agree to obtain the services of an independent engineer or appraiser (the "Independent -18- -158- Appraiser") to assist the parties in determining the fair value of the Purchased Assets for purposes of such allocation. If such an appraisal is made, both the Buyer and the Sellers agree to accept the Independent Appraiser's determination of the fair value of the Purchased Assets. The parties shall jointly select the Independent Appraiser. The cost of the appraisal shall be borne equally by the Buyer and the Sellers. Each of the Buyer and the Sellers agrees to file Internal Revenue Service Form 8594, and all federal, state, local and foreign Tax Returns, in accordance with such agreed allocation. Each of the Buyer and the Sellers shall report the transactions contemplated by the Agreement for federal and provincial Income Tax and all other tax purposes in a manner consistent with the allocation determined pursuant to this Section 3.3. Each of the Buyer and the Sellers agrees to provide the other promptly with any other information required to complete Form 8594. Each of the Buyer and the Sellers shall notify and provide the other with reasonable assistance in the event of an examination, audit or other proceeding regarding the agreed upon allocation of the Purchase Price and the Assumed Obligations hereunder. 3.4 HST Election. The Buyer and the Sellers agree to execute jointly in the statutorily prescribed form, and the Buyer will file within the time required by subsection 167(1.1) of the Excise Tax Act (Canada), an election under subsection 167(1) of the Excise Tax Act (Canada) that no HST be payable with respect to the purchase and sale of the Canadian Assets hereunder. 3.5 Proration. (a) The Buyer and the Sellers agree that all of the items normally prorated, including those listed below, relating to the business and operation of the Purchased Assets will be prorated as of the Closing Date, with the Sellers liable to the extent such items relate to any time period prior to and on the Closing Date, and the Buyer liable to the extent such items relate to periods subsequent to the Closing Date: (1) personal property, real estate, occupancy, sewerage and water Taxes, assessments and other charges, if any, on or with respect to the business and operation of the Purchased Assets; (2) rent, Taxes and all other items payable under any of the Sellers' Agreements assigned to and assumed by the Buyer hereunder which are associated with the Purchased Assets; (3) any permit, license, registration, compliance, or assurance fees or other fees with respect to any Transferable Permit associated with the Purchased Assets; (4) sewer rents and charges for water, telephone, electricity and other utilities; and (5) rent under any leases of real or personal property included in the Purchased Assets, including the leases described in Schedule 5.9. -19- -159- (b) In connection with the prorations referred to in clause (a) above, in the event that actual figures are not available at the Closing Date, the proration shall be based upon the actual Taxes or fees for the preceding year (or appropriate period) for which actual Taxes or fees are available and such Taxes or fees shall be reprorated upon request of either the Sellers, on one hand, or the Buyer, on the other hand, made within sixty (60) days after the date that the actual amounts become available. The Sellers and the Buyer agree to furnish each other with such documents and other records as may be reasonably requested in order to confirm all adjustment and proration calculations made pursuant to this Section 3.5. ARTICLE IV THE CLOSING 4.1 Time and Place of Closing. Upon the terms and subject to the satisfaction of the conditions contained in Article VIII of this Agreement (the "Conditions"), the closing of the sale of the Purchased Assets contemplated by this Agreement (the "Closing") will take place at the offices of Verrill & Dana, LLP, One Portland Square, Portland, Maine 04112 at 10:00 A.M. (local time) on such Business Day as the parties may agree, which date is as soon as practicable, but no later than fifteen (15) Business Days following the date on which all of the Conditions have been satisfied or waived; or at such other place or time as the parties may agree. The date and time at which the Closing actually occurs is hereinafter referred to as the "Closing Date." 4.2 Payment of Purchase Price. (a) Upon the terms and subject to the satisfaction of the conditions contained in this Agreement, in consideration of the aforesaid sale, assignment, conveyance, transfer and delivery of the Purchased Assets, the Buyer will pay or cause to be paid to the Sellers, as MPS may direct, at the Closing an amount in United States dollars equal to $37,425,000, by wire transfer of immediately available funds or by such other means as are agreed upon by the Sellers and the Buyer. (b) The Buyer shall pay the Adjustment Amount in accordance with Section 3.2. 4.3 Deliveries by the Sellers. At the Closing, the Sellers will deliver the following to the Buyer: (a) One or more Bills of Sale, duly executed by the appropriate Seller for the personal property included in the Purchased Assets; (b) All consents, waivers or approvals obtained by the Seller with respect to the Purchased Assets, the transfer of any Transferable Permit related to the Purchased Assets, or the consummation of the transactions connected to the sale of the Purchased Assets, contemplated by this Agreement, to the extent specifically required hereunder; (c) Opinions of counsel and certificates (as contemplated by Section 8.2) with respect to the Purchased Assets; -20- -160- (d) For the conveyance of the U.S. Real Property, one or more quit-claim with covenant deeds to the Buyer or its designee, reserving the applicable Easements, or, with respect to the Flo's Inn Station, an Easement in favor of Buyer or its designee, in each case duly executed and acknowledged by the appropriate Seller and in recordable form, together with a certificate of Maine residency of MPS sufficient to relieve Buyer, its designee and their representatives of any Maine withholding obligation relating to the sale of the U.S. Real Property; (e) For the conveyance of the Canadian Real Property, one or more deeds to the Buyer or its designee utilizing Form A13 as prescribed by the Standard Forms of Conveyances Act (New Brunswick, Canada) duly executed and acknowledged by the appropriate Seller; (f) The Continuing Site Agreement, the Buy-Back Agreement, and the Interconnection Agreements, each duly executed by MPS; (g) All Permits and Environmental Permits transferable to the Buyer or its designee pursuant to this Agreement; (h) All releases necessary to terminate and discharge any Encumbrances (other than Permitted Encumbrances) on the Purchased Assets; (i) Appropriate assignments necessary to transfer to the Buyer or its designee all contracts and other intangible assets included in the Purchased Assets; (j) Originals of all books and records included in the Purchased Assets; (k) All such other instruments of assignment or conveyance as shall, in the reasonable opinion of the Buyer and its counsel, be necessary to transfer to the Buyer or its designee the Purchased Assets, in accordance with this Agreement and, where necessary or desirable, in recordable form; (l) A copy of the resolutions of the Board of Directors of each of the Sellers authorizing and approving this Agreement and each of the Closing Documents to which it is a party and the consummation of the transactions contemplated hereby and thereby, in each case certified by the secretary of the respective Seller; (m) A copy of the articles of incorporation and by-laws (or equivalent charter documents) of each of the Sellers, in each case certified by the secretary of the respective Seller, and a copy of the articles of incorporation (or equivalent charter document(s)) of each Seller certified by the Secretary of State of Maine, with respect to MPS, and the director of Corporate and Trust Affairs of New Brunswick, Canada, with respect to MNB; (n) Certificates by the secretary of each Seller as to the incumbency of each person executing any Closing Document on behalf of such Seller; (o) Such affidavits and, to the extent consistent with and not in addition to the terms hereof, indemnities reasonably requested by Buyer's title insurance company; and -21- -161- (p) Such other agreements, documents, instruments and writings as are required to be delivered by the Sellers at or prior to the Closing Date pursuant to this Agreement or otherwise required in connection herewith. In addition to the foregoing, MPS shall, on the Closing Date or on such other date after the Closing Date as the parties may specify in writing, dismantle, crate and deliver, at Buyer's sole cost and expense, the Purchased Assets constituting personal property at the Houlton Station, to a location designated by Buyer in writing not less than thirty (30) days prior to the Closing Date. 4.4 Deliveries by the Buyer. At the Closing, the Buyer will deliver the following to the Sellers: (a) The portion of the Purchase Price referred to in Section 4.2(a), by wire transfer of immediately available U.S. funds, or by such other means as are agreed upon by the Sellers and the Buyer; (b) Opinions of counsel and certificates (as contemplated by Section 8.3) with respect to the Purchased Assets; (c) The Instruments of Assumption with respect to the Assumed Obligations, duly executed by the Buyer or its designee; (d) All such other instruments of assumption as shall, in the reasonable opinion of the Sellers and its counsel, be necessary for the Buyer or its designee to assume the Assumed Obligations related to the Purchased Assets in accordance with this Agreement; (e) A copy of the resolutions of the Board of Directors (or similar governing board) of each of the Buyer and its designees authorizing and approving this Agreement and each of the Closing Documents to which it is a party and the consummation of the transactions contemplated hereby and thereby, certified by the secretary (or similar officer) of the Buyer or its designee, as the case may be; (f) A copy of the articles of incorporation and by-laws (or equivalent charter documents) of each of the Buyer and its designees, certified by its secretary (or similar officer), and a copy of the articles of incorporation (or equivalent charter documents) of each of the Buyer and its designees, certified by the Wisconsin Department of Financial Institutions, or by the similar authority in any jurisdiction of organization other than Wisconsin; (g) A certificate by the secretary (or similar officer), of each of the Buyer, and its designees, as to the incumbency of each person executing any Closing Document on behalf of Buyer or its designee, as the case may be; and (h) Such other agreements, documents, instruments and writings as are required to be delivered by the Buyer, or its designee, at or prior to the Closing Date pursuant to this Agreement or otherwise required in connection herewith. -22- -162- ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE SELLERS Each of the Sellers, for itself, represents and warrants to the Buyer as follows, as of the date hereof and on and as of the Closing Date: 5.1 Organization; Qualification. MPS is a corporation duly organized, validly existing and in good standing under the laws of the State of Maine and has all requisite corporate power and authority to own, lease, and operate its properties and to carry on its business as is now being conducted. MNB is a corporation duly organized, validly existing and in good standing under the laws of the Province of New Brunswick, Canada and has all requisite corporate power and authority to own, lease, and operate its properties and to carry on its business as is now being conducted. MPS owns directly 100% of the issued and outstanding capital stock of MNB. The Sellers are duly qualified or licensed to do business as foreign corporations and are in good standing in each jurisdiction in which the property owned, leased or operated by them or the nature of the business conducted by them makes such qualification necessary, except in each case in those jurisdictions where the failure to be so duly qualified or licensed and in good standing would not create a Material Adverse Effect. The states, provinces, and other jurisdictions in which the Sellers are qualified or licensed to do business are listed in Schedule 5.1. 5.2 Authority Relative to this Agreement. Each of the Sellers has full corporate power and authority to execute and deliver this Agreement and each of the other Closing Documents to which it is a party and to consummate the transactions contemplated hereby and thereby. The execution and delivery by each Seller of this Agreement and each of the other Closing Documents to which it is a party and the consummation of the transactions contemplated hereby and thereby have been duly and validly authorized by the Board of Directors of MPS and by the Board of Directors of MNB and its sole shareholder, and no other corporate proceedings on the part of either Seller are necessary to authorize this Agreement or any of the other Closing Documents to which it is a party or to consummate the transactions contemplated hereby or thereby. No notice to, meeting of, action by, or approval of the shareholders of MPS is necessary to authorize the execution and delivery of this Agreement or any of the other Closing Documents to which MPS is a party, or to consummate the transactions contemplated hereby or thereby. No preferred stock of MPS is issued and outstanding. Each of this Agreement and the other Closing Documents to which either Seller is a party has been duly and validly executed and delivered by such Seller, and assuming that each of this Agreement and such other Closing Documents constitutes a valid and binding agreement of the Buyer, subject to the receipt of the Sellers Required Regulatory Approvals and the Buyer Required Regulatory Approvals, constitutes a valid and binding agreement of such Seller enforceable against such Seller in accordance with its terms, except that such enforceability may be limited by applicable bankruptcy, insolvency, moratorium or other similar laws affecting or relating to enforcement of creditors' rights generally and by general principles of equity. -23- -163- 5.3 Consents and Approvals; No Violation. (a) Except as set forth in Schedule 5.3, and other than obtaining the Sellers Required Regulatory Approvals and the Buyer Required Regulatory Approvals, neither the execution and delivery of this Agreement and the other Closing Documents by the Sellers nor the consummation of the transactions contemplated hereby or thereby (including, without limitation, the sale by the Sellers of the Purchased Assets pursuant to this Agreement and the other Closing Documents) will (i) conflict with or result in any breach of any provision of the respective organizational documents or bylaws of the Sellers, (ii) require any consent, approval, authorization or permit of, or filing with or notification to, any governmental or regulatory authority, except (x) where the failure to obtain such consent, approval, authorization or permit, or to make such filing or notification, would not, individually or in the aggregate, create a Material Adverse Effect or (y) for those requirements which become applicable to the Sellers as a result of the specific regulatory status of the Buyer (or any of its Affiliates) or as a result of any other facts that specifically relate to the business or activities in which the Buyer (or any of its Affiliates) is or proposes to be engaged; (iii) result in or constitute a default (or an event which, with notice or lapse of time, or both, would constitute a default), or give rise to any right of termination, cancellation or acceleration, or result in the creation of any Encumbrance upon any of the assets of the Sellers, under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, license, agreement or other instrument or obligation to which either of the Sellers is a party or by which either of the Sellers, or any of the Purchased Assets may be bound, except for such defaults (or events which, with notice or lapse of time, or both, would constitute a default), or rights of termination, cancellation or acceleration as to which requisite waivers or consents have been obtained or which, in the aggregate, would not, individually or in the aggregate, create a Material Adverse Effect; or (iv) violate any order, writ, injunction, decree, statute, rule or regulation applicable to either of the Sellers, or any of their assets, which violation, individually or in the aggregate, would create a Material Adverse Effect. (b) Except as set forth in Schedule 5.3 and except for (i) any required approvals under the Federal Power Act, (ii) (A) notice by MPS to, and an order by, the PUC approving the transactions contemplated by this Agreement, (B) the approval by the Lieutenant-Governor in Council of New Brunswick of the transactions involving MNB and its assets contemplated by this Agreement, (iii) the approval, if required, of the SEC pursuant to the Holding Company Act, (iv) the approval, if required, of the National Energy Board of Canada and the Board of Commissioners of Public Utilities of the Province of New Brunswick, Canada and (v) the approval, if required, of the State of Maine with respect to the inclusion within the Purchased Assets of any rights, franchises, privileges or similar assets of the Sellers deriving from any private and special laws or other legislative grant or charter (the filings and approvals referred to in clauses (i) through (v) are collectively referred to as the "Sellers Required Regulatory Approvals"), no declaration, filing or registration with, or notice to, or authorization, consent or approval of any governmental or regulatory body or authority is necessary for the consummation by the Sellers of the transactions contemplated under this Agreement and the other Closing Documents, other than such declarations, filings, registrations, notices, authorizations, consents or approvals which, if not obtained or made, will not, individually or in the aggregate, create a Material Adverse Effect. -24- -164- 5.4 Reports. Since January 1, 1994, the Sellers have filed or caused to be filed with the SEC, the applicable state, provincial or local utility commissions or regulatory bodies, or the FERC, as the case may be, all material forms, statements, reports and documents (including all exhibits, amendments and supplements thereto) required to be filed by the Sellers with respect to the business and operations of the Sellers as it relates to the Purchased Assets under each of the Securities Act, the Exchange Act, the applicable State and provincial public utility laws, the Federal Power Act (United States), the Holding Company Act (United States), the Business Corporations Act (New Brunswick, Canada) and the National Energy Board Act (Canada), and the respective rules and regulations thereunder, all of which complied in all material respects with all applicable requirements of the appropriate act and the rules and regulations thereunder in effect on the date each such report was filed, and there were no material misstatements or omissions contained in such reports as of the respective dates thereof, in each case with respect to the Purchased Assets. 5.5 Financial Statements. The Sellers have made available to the Buyer their balance sheets, as of March 31, 1997 and March 31, 1998, and the related statements of income and cash flows for the years then ended (including the notes related thereto). Such balance sheets (including the related statements of income and cash flows and the related notes thereto) are referred to herein as the "Sellers Balance Sheets". Each of the Sellers Balance Sheets is complete and accurate, has been prepared in accordance with generally accepted accounting principles applied on a consistent basis, except as otherwise noted therein, and presents fairly, as of the date thereof, the financial position of such Seller in conformity with generally accepted accounting principles applied on a consistent basis, except as otherwise noted therein. 5.6 Undisclosed Liabilities. Except as set forth in Schedule 5.6, the Sellers have no liabilities or obligations relating to the Purchased Assets, the operation or maintenance of the Purchased Assets, or the business of the Sellers in connection therewith, secured or unsecured (whether absolute, accrued, contingent or otherwise, and whether due or to become due), which are not accrued or reserved against in the Sellers Balance Sheets as of March 31, 1998 (the "Sellers Recent Balance Sheets") or disclosed in the notes thereto in accordance with generally accepted accounting principles, except commercial liabilities and obligations incurred since the date of the Sellers Recent Balance Sheets in the ordinary course of business and consistent with past practice and none of which has or will have a Material Adverse Effect. Except as set forth in Schedule 5.6, the Sellers have no knowledge of any basis for the assertion against the Sellers or any successor in interest thereto of any liability or obligation relating to the Purchased Assets, the operation of the Purchased Assets, or the business of the Sellers in connection therewith, and to the knowledge of the Sellers there are no circumstances, conditions, happenings, events or arrangements, contractual or otherwise, which may give rise to any such liabilities or obligations, except commercial liabilities and obligations incurred in the ordinary course of business consistent with past practice. 5.7 Absence of Certain Changes or Events. Except (i) as set forth in Schedule 5.7, or in the reports, schedules, registration statements and definitive proxy statements filed by MPS with the SEC and (ii) as otherwise contemplated by this Agreement, since the date of the Sellers Recent Balance Sheets there has not been (a) any Material Adverse Effect; (b) any damage, destruction or casualty loss, whether covered by insurance or not, which, individually or in the -25- -165- aggregate, create a Material Adverse Effect; (c) any entry into any agreement, commitment or transaction (including, without limitation, any borrowing, capital expenditure or capital financing, any amendment or termination of any contract or agreement, or any waiver of material rights) by the Sellers with respect to the Purchased Assets, except agreements, commitments or transactions in the ordinary course of business consistent with past practice that individually or in the aggregate are not material to the Purchased Assets, the operation or maintenance of the Purchased Assets, or the business of the Sellers in connection therewith, and except agreements, commitments or transactions that do not extend beyond the Closing Date with respect to the Purchased Assets; (d) any change by the Sellers, with respect to the Purchased Assets, in accounting methods, principles or practices except as required or permitted by generally accepted accounting principles; (e) any increase in the compensation, salaries or wages payable to or to become payable to any Employee (including, without limitation, any increase or change pursuant to any bonus, pension, profit sharing, retirement or other plan or commitment), or any bonus or other employee benefit granted, made or accrued to or for the benefit of any Employee, other than in the ordinary course of business consistent with past practice; (f) any loan or advance (other than advances to Employees in the ordinary course of business for travel and entertainment in accordance with past practice) to any Person including, but not limited to, any Employee; or (g) any sale, lease, or other transfer or disposition of any properties or assets of the Sellers related to the Purchased Assets, the operation or maintenance of the Purchased Assets, or the business of the Sellers in connection with the Purchased Assets, other than transfers or dispositions in the ordinary course of business consistent with past practice, and other than dispositions of obsolete or unusable property, that individually or in the aggregate are not material to the Purchased Assets, the operation or maintenance of the Purchased Assets or the business of the Sellers in connection therewith. 5.8 Title to and Condition of Properties. (a) Marketable Title. Except as set forth in Schedule 5.8(a) and except for other Permitted Encumbrances, the Sellers have and at Closing Buyer or its designee will receive (i) good and marketable title to all of the Real Estate, free and clear of all Encumbrances and (ii) good and valid title to all of the personal property included within the Purchased Assets, free and clear of all Encumbrances. The foregoing representation with respect to title to the Real Estate shall expire upon consummation of the Closing and thereafter Buyer shall, with respect to such matters, rely upon the covenants set forth in the deeds for the Real Estate and upon title insurance with respect to the U.S. Real Property, and similar third-party assurances with respect to the Canadian Real Property. Except for the Sellers Required Regulatory Approvals and the Buyer Required Regulatory Approvals, none of the Purchased Assets are subject to any restrictions with respect to the transferability thereof. (b) Condition. Except as set forth in Schedule 5.8(b), the tangible assets at each station, taken as a whole (real and personal), constituting Purchased Assets (i) are in good operating and usable condition and repair, free from any defects (except ordinary wear and tear, in light of their respective ages and historical usages, and except such minor defects as do not interfere with the use thereof in the conduct of the normal operation and maintenance of the Purchased Assets); and (ii) have been maintained consistent with the standards generally followed in the industry. The Buyer acknowledges that an item is not defective merely because it breaks or -26- -166- otherwise fails after a reasonable amount of time has passed or after it has provided a reasonable amount of usage. (c) Real Estate. Schedule 5.8(c) sets forth all real property owned, leased, used or occupied by Sellers and included in the Purchased Assets (the "Real Estate"), including a description of all land, exhibits indicating the location thereof, and all Encumbrances, easements or rights of way of record (or, if not of record, of which Sellers have notice or knowledge) granted on or appurtenant to or otherwise affecting such Real Estate, the zoning classification thereof, and all plants, buildings or other structures located thereon. Except with respect to the Millinocket Facility, which has no deeded access rights but depends upon custom and usage as described in Schedule 5.8(c), no fact or condition exists which would prohibit or adversely affect the ordinary rights of access to and from the Real Estate from and to the existing highways and roads and there is no pending or threatened restriction or denial, governmental or otherwise, upon such ingress or egress. Except as set forth on Schedule 5.8(c), Sellers' occupation and use of the Real Estate is in material compliance with all applicable laws and regulations. Except as set forth on Schedule 5.8(c), there is not (i) any claim of adverse possession or prescriptive rights involving any of the Real Estate, (ii) any structure located on any Real Estate which encroaches on or over the boundaries of neighboring or adjacent properties or (iii) any structure of any other party which encroaches on or over the boundaries of any of such Real Estate. Except as indicated in Schedule 5.8(c), none of the Real Estate is located in a flood plain, flood hazard area, wetland or lakeshore erosion area within the meaning of any applicable order, decree, statute, rule, or regulation. No public improvements have been commenced and to the knowledge of the Sellers none are planned which in either case may result in special assessments against any of the Real Estate or otherwise create a Material Adverse Effect. No portion of any of the Real Estate has been used as a landfill or for storage or landfill of hazardous or toxic materials. Except as set forth on Schedule 5.8(c), the Sellers have no knowledge of any (i) planned or proposed increase in assessed valuations of any Real Estate, (ii) order, writ, injunction, or decree requiring repair, alteration, or correction of any existing condition affecting any Real Estate or the systems or improvements thereat, (iii) condition or defect which could give rise to an order of the sort referred to in "(ii)" above, or (iv) underground storage tanks, or any structural, mechanical, or other defects of material significance affecting any Real Estate or the systems or improvements thereat (including, but not limited to, inadequacy for normal use of mechanical systems or disposal or water systems at or serving the Real Estate). (d) No Certified Survey Map Required. No certified survey map or other state, municipal, or other governmental approval regarding the division, platting, or mapping of real estate is required as a prerequisite to the conveyance by the Sellers to Buyer (or as a prerequisite to the recording of any conveyance document) of any Real Estate pursuant to the terms hereof. 5.9 Leases. Schedule 5.9 lists, as of the date of this Agreement, all real property leases under which the Sellers are a lessee or lessor and which (x) relate to the Purchased Assets, the operation or maintenance of the Purchased Assets, or the business of the Sellers in connection therewith and (y) (i) provide for annual payments of more than $1,000 or (ii) are material to the operation or condition (financial or otherwise) of the Purchased Assets or the business of the Sellers in connection therewith. Except as set forth in Schedule 5.9, all such leases are valid, binding and enforceable in accordance with their terms, and are in full force and effect; there are -27- -167- no existing material defaults by the Sellers or, to the Sellers' knowledge, any other party thereunder; and no event has occurred which (whether with or without notice, lapse of time or both) would constitute a material default by the Sellers or, to the Sellers' knowledge, any other party thereunder, or would cause the acceleration of any of the Sellers' obligations thereunder or result in the creation of any Encumbrance on any of the Purchased Assets, or would give rise to an automatic termination, or the right of discretionary termination, thereof. 5.10 Insurance. Except as set forth in Schedule 5.10, all material policies of fire, liability, worker's compensation and other forms of insurance owned or held by the Sellers (including self insurance) with respect to the Purchased Assets, the operation or maintenance of the Purchased Assets, or the business of the Sellers in connection therewith, are in full force and effect, all premiums with respect thereto covering all periods up to and including the date as of which this representation is being made have been paid (other than retroactive premiums which may be payable with respect to comprehensive general liability and worker's compensation insurance policies), and no notice of cancellation or termination has been received with respect to any such policy which was not replaced on substantially similar terms prior to the date of such cancellation. Except as set forth on Schedule 5.10, there is no claim by the Sellers pending under any such policies as to which coverage has been questioned, denied or disputed by the underwriters of such policies, and the Sellers know of no basis for denial of any claim under any such policy. Except as set forth on Schedule 5.10, neither of the Sellers has received any written notice from or on behalf of any insurance carrier issuing any such policy that insurance rates therefor will hereafter be substantially increased (except to the extent that insurance rates may be increased for all similarly situated risks) or that there will hereafter be a cancellation or an increase in a deductible (or an increase in premiums in order to maintain an existing deductible) or nonrenewal of any such policy. Except as described in Schedule 5.10, the Sellers have not been refused any insurance with respect to the Purchased Assets, the operation or maintenance of the Purchased Assets, or the business of the Sellers in connection therewith, nor has their coverage been limited by any insurance carrier to which they have applied for any such insurance or with which they have carried insurance during the last twelve months. 5.11 Environmental Matters. Except as disclosed in Schedule 5.11 or in any public filing by MPS pursuant to the Securities Act or the Exchange Act: (a) The Sellers hold, and are in compliance with, all of the permits, licenses and governmental authorizations identified in Schedule 5.11, which are all of the permits, licenses and governmental authorizations required for the Sellers to own, operate, maintain, and engage in business related to the Purchased Assets under applicable Environmental Laws (collectively, the "Environmental Permits"), and the Sellers are otherwise in compliance with all applicable Environmental Laws with respect to the Purchased Assets, the operation or maintenance of the Purchased Assets, or the business of the Sellers in connection with the Purchased Assets, except for such failures to hold or comply with required Environmental Permits, or such failures to be in compliance with applicable Environmental Laws which, individually or in the aggregate, are not reasonably likely to create a Material Adverse Effect. (b) The Sellers have not received any written request for information or been notified that they are a potentially responsible party under CERCLA or any other Environmental Law, or -28- -168- are potentially subject to any judgment, rule, order, writ, injunction, or decree of any court, governmental or regulatory authority under the Clean Environment Act (New Brunswick, Canada) or the Clean Water Act (New Brunswick, Canada), and there are no claims, actions, proceedings or investigations pending or, to the knowledge of Sellers, threatened against Sellers before any court, governmental or regulatory authority or body acting in an adjudicative capacity relating in any way to any Environmental Laws. (c) The Sellers have not entered into or agreed to any consent decree or order, and are not subject to any outstanding judgment, decree, or judicial order relating to compliance with any Environmental Law or to investigation or cleanup of Hazardous Substances under any Environmental Law. The representations and warranties made in this Section 5.11 are the Sellers' exclusive representations and warranties relating to environmental matters. 5.12 Labor Matters. All collective bargaining agreements to which the Sellers are a party or are subject and which relate to the operation or maintenance of the Purchased Assets or the business of the Sellers in connection therewith are identified in Schedule 7.10(b). Solely (in each of the following clauses (a) through (f)) with respect to the operation or maintenance of the Purchased Assets or the business of the Sellers in connection therewith, except to the extent set forth in Schedule 5.12 and except for such matters as will not, individually or in the aggregate, create a Material Adverse Effect (a) the Sellers are in compliance with all applicable laws respecting employment and employment practices, terms and conditions of employment and wages and hours, and are not engaged in any unfair labor practice; (b) there is no unfair labor practice charge or complaint pending or, to the knowledge of the Sellers, threatened against the Sellers; (c) there is no labor strike, dispute, slowdown or stoppage actually pending or, to the Sellers' knowledge threatened against or affecting the Sellers; (d) no question concerning representation has been raised or, to the knowledge of Sellers, is threatened respecting the employees of the Sellers; (e) no arbitration proceeding arising out of or under collective bargaining agreements is pending against the Sellers; and (f) there are no administrative charges or court complaints against the Sellers concerning alleged employment discrimination or other employment related matters pending or, to the knowledge of Sellers, threatened before the U.S. Equal Employment Opportunity Commission, any administrative tribunals in New Brunswick governing human rights matters, or any governmental or regulatory body or authority. 5.13 ERISA; Benefit Plans. (a) Schedule 5.13(a) lists (i) all "employee pension benefit plans", as defined in Section 3(2) of ERISA, and all "pension plans", as defined in Section 1(1) of the Pension Benefits Act, including multiemployer plans (of which none exist), established, maintained or contributed to (or previously maintained or contributed to within the last six fiscal years) by the Sellers or any of their ERISA Affiliates for the benefit of current or former employees employed at the Purchased Assets, for the operation or maintenance of the Purchased Assets, or in connection with the business of Sellers relating to the Purchased Assets ("Pension Plans"); (ii) all "employee welfare benefit plans", as defined in Section 3(1) of ERISA, established, maintained or contributed to (or previously maintained or contributed to within the last six fiscal years) by the Sellers or any of their ERISA Affiliates for the benefit of current or former employees employed at the Purchased Assets, for the operation or maintenance of the Purchased Assets, or in connection with the -29- -169- business of Sellers relating to the Purchased Assets ("Welfare Plans"); and (iii) all bonus, compensation or other fringe benefit plans, programs, and arrangements established, maintained or contributed to (or previously maintained or contributed to within the last six fiscal years) by the Sellers or any of their ERISA Affiliates for the benefit of current or former employees employed at the Purchased Assets, for the operation or maintenance of the Purchased Assets, or in connection with the business of Sellers relating to the Purchased Assets, without regard to the coverage of any such plan, program or arrangement by ERISA or any provision of the Code. The plans, programs and arrangements listed on Schedule 5.13(a) are collectively referred to herein as the "Benefit Plans". Accurate and complete copies of all Benefit Plans and all material employee communications of general application related to such Benefit Plans have been made available to the Buyer. (b) Except as set forth in Schedule 5.13(b): (1) No Pension Plan and no ERISA Affiliate Plan has ever incurred an "accumulated funding deficiency", as defined in Section 302 of ERISA and Section 412 of the Code, whether or not waived, nor incurred a "solvency deficiency", as defined in Section 2 of the General Regulation - Pension Benefits Act, NB Reg. 91-195, as amended; (2) None of the Sellers nor any ERISA Affiliate has incurred any liability to the Pension Benefit Guaranty Corporation under Sections 4062, 4063, 4064 or 4069 of ERISA in connection with any Pension Plan that is subject to Title IV of ERISA, and none of the Purchased Assets is subject or potentially subject to a lien under Section 4068 of ERISA; (3) No Pension Plan and no ERISA Affiliate Plan, and no trust created under any such plan, has been terminated or has commenced voluntary or involuntary termination proceedings under Sections 4041 or 4042 of ERISA or has experienced a "reportable event" as defined in Section 4043 of ERISA or has been wound up or commenced voluntary or involuntary wind up proceedings under Sections 60 or 61 of the Pension Benefits Act; and (4) The Internal Revenue Service has issued a letter for each Pension Plan that is intended to be qualified determining that such plan is exempt from United States Federal Income Tax under Sections 401(a) and 501(a) of the Code. To the Sellers' knowledge, there has been no occurrence since the date of any such determination letter that has adversely affected (or might reasonably be expected to adversely affect) such qualification and each Pension Plan in form and in operation is in compliance in all respects with all applicable provisions of ERISA and the Code. The Minister of National Revenue has registered each Pension Plan provided for employees of the Sellers employed in New Brunswick, Canada, pursuant to the provisions of the Income Tax Act (Canada). Each Pension Plan in form and operation is in material compliance with applicable provisions of the Pension Benefits Act and the Income Tax Act (Canada). -30- -170- (5) All contributions or payments required to be made as of or before the Closing Date by the Sellers to, for, or in respect of the Benefit Plans, the IBEW Agreements, and the Pension Benefits Act have been made. (c) None of the Sellers nor any ERISA Affiliate has engaged in any transaction to avoid or evade liability within the meaning of Section 4069(b) of ERISA. No Benefit Plan and no ERISA Affiliate Plan is a "multiemployer plan", as defined in Section 4001(a)(3) of ERISA or Section 1(1) of the Pension Benefits Act, or a single-employer plan under multiple controlled groups, within the meaning of Sections 4063-64 of ERISA. (d) Each Welfare Plan has been maintained in accordance with the requirements of ERISA and other applicable law. In addition, each of the Sellers that maintains a "group health plan" within the meaning of Section 5000(b)(1) of the Code has materially complied in good faith with the applicable requirements of COBRA and HIPAA. (e) Except as set forth in Schedule 5.13(b), none of the Sellers, any ERISA Affiliate, any Benefit Plan that is subject to ERISA, Section 4975 of the Code, or the Pension Benefits Act, or any fiduciary, party in interest, disqualified person, affiliate or related person, with respect to any Benefit Plan has engaged or caused any such Benefit Plan to engage in any transaction prohibited by Section 406 or Section 407(a) of ERISA or Section 4975 of the Code, unless an appropriate exemption or exemptions have been obtained therefor under Section 408 of ERISA and Section 4975 of the Code, or prohibited by Section 44 of the General Regulation - Pension Benefits Act, NB Reg. 91-195, as amended. (f) With the exception of routine claims for benefits, including associated appeals and disputes of denied claims, arising in the ordinary course of administration of the Benefit Plans, no material claims, assessments, investigations, or proceedings in arbitration or litigation, or by or before the Superintendent of Pensions of the Province of New Brunswick or the Labour and Employment Board (New Brunswick), relating to or arising under any Benefit Plan are pending or, to the knowledge of Sellers, threatened against any Seller, any ERISA Affiliate, any Benefit Plan, or any trust or other funding arrangement created under or established as part of any Benefit Plan, or against any trustee, fiduciary, custodian, administrator, or any other Person, and the Sellers have no basis to anticipate that any such claim or claims exist. (g) Except as set forth on Schedule 5.13(a), Seller does not maintain, provide or contribute to a post-retirement welfare benefit plan (including, without limitation, post-retirement medical benefits for or on behalf of current or former employees employed at the Purchased Assets, for the operation and maintenance of the Purchased Assets, or in connection with the business of Sellers relating to the Purchased Assets). 5.14 Condemnation. Except as set forth in Schedule 5.14, neither the whole nor any part of the Real Estate or any other real property or rights leased, used or occupied by the Sellers in connection with the ownership or operation of the Purchased Assets is subject to any outstanding order by any public authority to be sold, or any pending suit for condemnation or other taking by any public authority, and to the knowledge of Sellers, no such condemnation or other taking has been threatened. -31- -171- 5.15 Certain Contracts and Arrangements. (a) Except (i) as listed in Schedule 5.15(a) or 7.10(b), (ii) for contracts, agreements, personal property leases, commitments, understandings or instruments under which all rights, benefits, duties and obligations, contingent or otherwise, of any party or beneficiary will expire on or prior to the Closing Date, and (iii) for agreements with suppliers entered into in the ordinary course of business that in each case (x) do not provide for annual payments of more than $1,000 and (y) are not material to the operation or condition (financial or otherwise) of the Purchased Assets or the business of the Sellers in connection therewith, the Sellers are not a party to any written contract (including, without limitation, any employment contract), agreement, personal property lease, commitment, understanding or instrument relating to the business or operations of the Purchased Assets. Accurate and complete copies of all Sellers' Agreements have been made available to Buyer. (b) Except as disclosed in Schedule 5.15(b), each Sellers' Agreement (i) constitutes a valid and binding obligation of MPS or MNB, and to the knowledge of the Sellers constitutes a valid and binding obligation of the other parties thereto, (ii) is in full force and effect, and no notice of termination has been delivered by any party thereunder, and (iii) may be transferred to the Buyer pursuant to this Agreement and will continue in full force and effect thereafter, in each case without breaching the terms thereof or resulting in the forfeiture or impairment of any rights thereunder. Without limitation of the foregoing, (i) no consent of The Perth-Andover Electric Light Commission is required for the valid transfer and assignment to the Buyer of the Agreement between MNB and The Perth-Andover Electric Light Commission dated December 7, 1993 (which became effective on January 2, 1995), and (ii) no consent of any other Owner of the Wyman Station is required for the valid transfer and assignment to the Buyer of MPS's right, title and interest in and to the Wyman Agreements and such transfer and assignment will not give rise to any right of first refusal in favor of any other such Owner under any of the Wyman Agreements. (c) Except as set forth in Schedule 5.15(c), there is not, under any of the Sellers' Agreements, any default or event which, with notice or lapse of time or both, would (i) constitute a default on the part of any of the parties thereto, except such events of default and other events as to which requisite waivers or consents have been obtained or which would not, individually or in the aggregate, create a Material Adverse Effect, (ii) would give rise to an automatic termination, or the right of discretionary termination, thereof, or (iii) would cause the acceleration of any of the Sellers' obligations or result in the creation of any Encumbrance on any of the Purchased Assets. 5.16 Legal Proceedings, etc. Except as set forth in Schedule 5.16 or in any public filing made by MPS pursuant to the Securities Act or the Exchange Act, there are no claims, actions, proceedings or investigations pending or, to the knowledge of Sellers, threatened against or relating to the Sellers before any court, governmental or regulatory authority or body acting in an adjudicative capacity, which, if adversely determined, individually or in the aggregate, would create a Material Adverse Effect. Except as set forth in Schedule 5.16 or in any public filing made by MPS pursuant to the Securities Act or the Exchange Act, the Sellers are not subject to any outstanding judgment, rule, order, writ, injunction or decree of any court, governmental or -32- -172- regulatory authority which, individually or in the aggregate, would create a Material Adverse Effect. 5.17 Permits. All permits, licenses, franchises and other governmental authorizations, consents and approvals, other than the Environmental Permits, necessary to own or otherwise utilize, operate or maintain, or engage in the business of the Sellers in connection with, the Purchased Assets as presently conducted, are identified in Schedule 5.17 (collectively, the "Required Permits"). Except as set forth in Schedule 5.17, the Sellers have not received any written notification that they are, or in the future may be considered to be, in violation of any of the Required Permits, or any law, statute, order, rule, regulation, ordinance or judgment of any governmental or regulatory body or authority applicable to any Required Permits, except for notifications of violations which would not, individually or in the aggregate, create a Material Adverse Effect. The Sellers are in compliance with all Required Permits, laws, statutes, orders, rules, regulations, ordinances, or judgments of any governmental or regulatory body or authority applicable to it, except for violations which, individually or in the aggregate, do not create a Material Adverse Effect. 5.18 Regulation as a Utility. MPS is an exempt public utility holding company within the meaning of the Holding Company Act. MPS is subject to regulation in the United States as a public utility or public service company (or similar designation other than as an Exempt Wholesale Generator within the meaning of the Holding Company Act) only by FERC and the PUC; MPS is not subject to regulation in Canada. MNB is subject to regulation in Canada as a public utility only by the New Brunswick Board of Commissioners of Public Utilities, and is subject to regulation by the National Energy Board with respect to the international export of electricity and the construction and operation of international power transmission lines and infrastructure; MNB is not subject to regulation in the United States. 5.19 Taxes. With respect to the Purchased Assets and the business of the Sellers associated with the Purchased Assets, (i) all Tax Returns required to be filed other than those Tax Returns the failure of which to file would not create a Material Adverse Effect have been filed and, in each case when filed, were true, complete and correct in all material respects, and (ii) all material Taxes shown to be due on such Tax Returns have been paid in full. Except as set forth in Schedule 5.19, no notice of deficiency or assessment has been received from any taxing authority with respect to liabilities for Taxes of the Sellers in respect of the Purchased Assets (nor to the knowledge of Sellers has any such taxing authority threatened to issue such notice or assessment), which have not been fully paid or finally settled, and any such deficiency shown in such Schedule 5.19 is being contested in good faith through appropriate proceedings. Except as set forth in Schedule 5.19, there are no outstanding agreements or waivers extending the applicable statutory periods of limitation for Taxes associated with the Purchased Assets for any period. Schedule 5.19 sets forth the taxing jurisdictions in which the Sellers own assets or conduct business that require a notification to a taxing authority of the transactions contemplated by this Agreement, if the failure to make such notification, or obtain Tax clearances in connection therewith, would either require the Buyer to withhold any portion of the Purchase Price or would subject Buyer to any liability for any Taxes of the Sellers. -33- -173- 5.20 Sufficiency of Purchased Assets. The Purchased Assets constitute all of Sellers' generation assets, other than MPS's Power Purchase Agreement with Wheelabrator-Sherman Energy Company (successor to Signal-Sherman Energy Company, assignee of Sherman Power Company), and the real property that is included within the Houlton Station, and, together with the Continuing Site Agreement and the Interconnection Agreements, are sufficient to allow Buyer, after the Closing, if it has obtained all necessary governmental approvals, to deliver the output of such generation assets to MPS's transmission system at the respective interconnection points specified in the Interconnection Agreements. Without limiting the foregoing, the Purchased Assets shall include all of MPS's right, title and interest under any private and special laws of Maine that relate to the Purchased Assets. As of the Closing Date, the Purchased Assets will meet the standards with respect thereto contained in the Interconnection Agreements and the Continuing Site Agreement. Sellers have reviewed, and are reviewing, their business operations and assets with respect to Year 2000 compliance and, to the best of the Sellers' knowledge, the Purchased Assets do not include any material assets that are not Year 2000 compliant. 5.21 Buyer's Knowledge. The Sellers shall be deemed to have disclosed hereunder, as if they had set it forth on a schedule hereto, any facts and circumstances known to Buyer as of the date of this Agreement, whether known to Buyer through independent means or through review of Sellers' facilities and records, even if such matter is not listed on any Schedule attached hereto. EXCEPT FOR THE REPRESENTATIONS AND WARRANTIES EXPRESSLY SET FORTH IN THIS ARTICLE V, THE PURCHASED ASSETS ARE BEING SOLD AND TRANSFERRED "AS IS, WHERE IS," AND THE SELLERS ARE NOT MAKING ANY OTHER REPRESENTATIONS OR WARRANTIES, WRITTEN OR ORAL, STATUTORY, EXPRESS OR IMPLIED, CONCERNING SUCH PURCHASED ASSETS, INCLUDING, IN PARTICULAR, ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, ALL OF WHICH ARE HEREBY EXPRESSLY EXCLUDED AND DISCLAIMED. ARTICLE VI REPRESENTATIONS AND WARRANTIES OF THE BUYER The Buyer represents and warrants to the Sellers as follows as of the date hereof and on and as of the Closing Date: 6.1 Organization. The Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Wisconsin and has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as is now being conducted. 6.2 Authority Relative to this Agreement. The Buyer has full corporate power and authority to execute and deliver this Agreement and each of the other Closing Documents to which it is a party and to consummate the transactions contemplated hereby and thereby. The execution and delivery by Buyer of this Agreement and each of the other Closing Documents to which it is a party and the consummation of the transactions contemplated hereby and thereby -34- -174- have been duly and validly authorized by the Board of Directors of the Buyer and no other corporate proceedings on the part of the Buyer are necessary to authorize this Agreement or to consummate the transactions contemplated hereby. Each of this Agreement and the other Closing Documents to which Buyer is a party has been duly and validly executed and delivered by the Buyer, and assuming that each of this Agreement and such other Closing Documents constitutes a valid and binding agreement of the Sellers, subject to the receipt of the Buyer Required Regulatory Approvals and the Sellers Required Regulatory Approvals, constitutes a valid and binding agreement of the Buyer, enforceable against the Buyer in accordance with its terms, except that such enforceability may be limited by applicable bankruptcy, insolvency, moratorium or other similar laws affecting or relating to enforcement of creditors' rights generally or general principles of equity. 6.3 Consents and Approvals; No Violation. (a) Except as set forth in Schedule 6.3, and other than obtaining the Buyer Required Regulatory Approvals and the Sellers Required Regulatory Approvals, neither the execution and delivery of this Agreement and the other Closing Documents by the Buyer nor the consummation of the transactions contemplated hereby or thereby (including, without limitation, the purchase by the Buyer or its designee of the Purchased Assets and the assumption by the Buyer or its designee of the Assumed Obligations pursuant to this Agreement and the other Closing Documents) will (i) conflict with or result in any breach of any provision of the Certificate of Incorporation or Bylaws (or other similar governing documents) of the Buyer, (ii) require any consent, approval, authorization or permit of, or filing with or notification to, any governmental or regulatory authority, or (iii) result in a default (or give rise to any right of termination, cancellation or acceleration) under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, agreement, lease or other instrument or obligation to which the Buyer or any of its subsidiaries is a party or by which any of their respective assets may be bound, except for such defaults (or rights of termination, cancellation or acceleration) as to which requisite waivers or consents have been obtained. (b) Except as set forth in Schedule 6.3 and except for (i) qualification of the Buyer and/or each of its designees as an exempt wholesale generator under the Energy Policy Act of 1992, without restriction, including no restriction on sales to Affiliates, (ii) authorization to sell power under Section 205 of the Federal Power Act, (iii) approval by FERC, under Part I of the Federal Power Act, of the transfer of FERC project licenses related to, and necessary to operate, the Purchased Assets as currently operated, and approval by FERC of market-based rates for Buyer or its designees (or, alternatively, a disclaimer by FERC of jurisdiction under the Federal Power Act as to wholesale sales and either the approval by the State of Maine of market-based rates or a disclaimer by the State of Maine of jurisdiction over wholesale sales by Buyer or its designees), (iv) approval by the SEC pursuant to Section 9(a)(1) of the Holding Company Act if WPS Resources Corporation is required to register as a public utility holding company under the Holding Company Act prior to the Closing Date, (v) approval of the Department of Energy, Economic Regulatory Administration to export electricity to Canada from the United States, (vi) approval of the Superintendent of Pensions of the Province of New Brunswick of the establishment of any pension plan by Buyer or its designee in respect of its Canadian employees, (vii) any PUC approval or approval by the Lieutenant-Governor in Council of New Brunswick or -35- -175- the approval of the Board of Commissioners of Public Utilities of the Province of New Brunswick necessary for the Sellers to transfer any Purchased Assets in Maine or New Brunswick and for the Buyer or its designee to purchase the Purchased Assets or assume the Assumed Obligations in Maine or New Brunswick, and (viii) any necessary approval of the National Energy Board to export electricity from Canada to the United States and to operate international power transmission infrastructure as currently carried on in the conduct of the business of MNB in connection with the Purchased Assets (the filings and approvals referred to in clauses (i) through (viii) are collectively referred to as the "Buyer Required Regulatory Approvals"), no declaration, filing or registration with, or notice to, or authorization, consent or approval of any governmental or regulatory body or authority is necessary for the consummation by the Buyer of the transactions contemplated hereby. 6.4 Regulation as a Utility. The Buyer is not subject to regulation as a public utility or public service company (or similar designation other than as an Exempt Wholesale Generator within the meaning of the Holding Company Act) by the United States, any State of the United States, any foreign country or any municipality or any political subdivision of the foregoing. 6.5 Disclosure. Buyer has reviewed all materials identified on Schedule 6.5 in the form provided by Sellers to Buyer, and has had the opportunity to ask questions of Sellers' officers and employees and to undertake such review as it has deemed necessary or advisable with respect to the Purchased Assets, the Assumed Obligations and Sellers' operations. ARTICLE VII COVENANTS OF THE PARTIES 7.1 Conduct of Business Relating to the Purchased Assets. (a) Except as described in Schedule 7.1, during the period from the date of this Agreement to the Closing Date, the Sellers will operate the Purchased Assets and related businesses in the usual, regular and ordinary course consistent with good industry practice and shall use all commercially reasonable efforts to preserve intact the Purchased Assets and the businesses related thereto, and endeavor to preserve the goodwill and relationships with customers, suppliers and others having business dealings with them. Without limiting the generality of the foregoing, and, except as contemplated in this Agreement or as described in Schedule 7.1, prior to the Closing Date, without the prior written consent of the Buyer, the Sellers will not with respect to the Purchased Assets and related businesses, except in each case in the ordinary course of the Sellers' businesses: (1) except for (1) Permitted Encumbrances and (2) indebtedness constituting Excluded Liabilities that does not create an Encumbrance on the Purchased Assets that will continue beyond the Closing Date, create, incur, assume or suffer to exist any indebtedness for borrowed money (including obligations in respect of capital leases); -36- -176- (2) make any material change in the levels of fuel inventory and stores inventory customarily maintained by the Sellers with respect to the Purchased Assets, other than consistent with good industry practice; (3) sell, lease (as lessor), transfer or otherwise dispose of, any of the Purchased Assets, other than assets used, consumed or replaced in the ordinary course of business consistent with good industry practice; (4) terminate, extend or otherwise materially amend any of the Sellers' Agreements, any other contracts, agreements, personal property leases, commitments, understandings, instruments, or real property leases to the extent any such extension or amendment would require such item to be disclosed on Schedule 5.9 or 5.15(a), or waive any material default by, or release, settle or compromise any material claim against, any other party thereto; (5) enter into, terminate, extend or otherwise amend any real or personal property Tax agreement, treaty or settlement; (6) execute, enter into, terminate or otherwise amend any of the Required Permits or the Environmental Permits, other than routine renewals or non-material modifications or amendments; and (7) with respect to the Purchased Assets and related businesses, (x) amend in a material, adverse way, or cancel any liability or casualty insurance policies related thereto, (y) compromise, settle, withdraw, release or abate any material claims made or accruing thereunder or (z) fail to maintain by self insurance or with financially responsible insurance companies insurance in such amounts and against such risks and losses as are customary for such assets and businesses. (b) Notwithstanding anything in Section 7.1(a) to the contrary, the Sellers may, in their sole discretion, make (i) Maintenance Expenditures and Capital Expenditures (provided that the Buyer shall not be liable for any such expenditures in excess of the Maintenance and Capital Expenditures Amount), and (ii) at the Sellers' expense, such other maintenance and capital expenditures as the Sellers deem necessary. (c) A committee comprised of one Person designated by the Sellers and one Person designated by the Buyer, and such additional Persons as may be appointed by the Persons originally appointed to such committee (the "Transition Committee") will be established as soon after execution of this Agreement as is practicable to examine the business issues affecting the Purchased Assets and related businesses of the Sellers after the date hereof, giving emphasis to cooperation between the Buyer and the Sellers after the execution of this Agreement. From time to time, the Transition Committee shall report its findings to the senior management of each of MPS and the Buyer. (d) Between the date of this Agreement and the Closing Date, in the interest of cooperation between the Sellers and the Buyer and to permit informed action by the Buyer -37- -177- regarding its rights pursuant to Section 7.1(a) to grant, consent or to waive prohibitions or limitations under Section 7.1(a), the parties agree as follows. At the sole responsibility and expense of the Buyer, the Sellers will permit designated employees ("Observers") of the Buyer to observe all operations of the Sellers that relate to the Purchased Assets and related businesses, and to observe discussions with third parties relating solely to the Purchased Assets (not including discussions with legal counsel or accountants), and such observation will be permitted on a cooperative basis in the presence of personnel of the Sellers but not restricted to the normal business hours of the Sellers; provided, however, that such Observers and their actions shall not unreasonably interfere with the operation of the Sellers' business. The Buyer's Observers may recommend or suggest actions be taken or not be taken by the Sellers; provided, however, that the Sellers will be under no obligation to follow any such recommendations or suggestions and the Sellers shall be entitled, subject to this Agreement, to conduct their business in accordance with their own judgment and discretion. The Buyer's Observers shall have no authority to bind or make agreements on behalf of the Sellers; to conduct discussions with or make representations to third parties on behalf of the Sellers; or to issue instructions to or direct or exercise authority over the Sellers or any of the Sellers' officers, employees, advisors or agents. 7.2 Access to Information. (a) Between the date of this Agreement and the Closing Date, the Sellers will, during ordinary business hours and upon reasonable notice (i) give the Buyer and the Buyer Representatives reasonable access to all books, records, plants, offices and other facilities and properties constituting the Purchased Assets or relating to the Assumed Obligations to which the Buyer is not denied access by law; (ii) permit the Buyer to make such reasonable inspections thereof as the Buyer may reasonably request; (iii) furnish the Buyer with such financial and operating data and other information with respect to the Purchased Assets or the Assumed Obligations as the Buyer may from time to time reasonably request; (iv) furnish the Buyer a copy of each material report, schedule or other document filed or received by them with respect to the Purchased Assets or the Assumed Obligations with the SEC, PUC, DEP, FERC, the National Energy Board, the Board of Commissioners of Public Utilities of the Province of New Brunswick, or the Superintendent of Pensions of the Province of New Brunswick; provided, however, that (A) any such investigation shall be conducted in such a manner as not to interfere unreasonably with the operation of the Purchased Assets, (B) the Sellers shall not be required to take any action which would constitute a waiver of the attorney-client privilege and (C) the Sellers need not supply the Buyer with any information which the Sellers are under a legal obligation not to supply. Notwithstanding anything in this Section 7.2 to the contrary, (i) the Sellers will only furnish or provide such access to Transferring Employee Records and personnel and medical records as is permitted or required by law, legal process or subpoena and (ii) the Buyer shall not have the right to perform or conduct any environmental sampling or testing at, in, on, or underneath the Purchased Assets, except as set forth on Schedule 7.2 hereof. (b) All information furnished to or obtained by the Buyer and the Buyer's Representatives pursuant to this Section 7.2 shall be subject to the provisions of the Confidentiality Agreement and shall be treated as "Proprietary Information" (as defined in the Confidentiality Agreement). -38- -178- (c) For a period of six years after the Closing Date, each party and their representatives shall have reasonable access to all of the books and records of the Purchased Assets, including all Transferring Employee Records or other personnel and medical records permitted or required by law, legal process or subpoena, in the possession of the other party or parties to the extent that such access may reasonably be required by such party in connection with the Assumed Obligations or the Excluded Liabilities, or other matters relating to or affected by the operation of the Purchased Assets. Such access shall be afforded by the party or parties in possession of such books and records upon receipt of reasonable advance notice and during normal business hours. The party or parties exercising this right of access shall be solely responsible for any costs or expenses incurred by it or them pursuant to this Section 7.2(c). If the party or parties in possession of such books and records shall desire to dispose of any such books and records upon or prior to the expiration of such six-year period, such party or parties shall, prior to such disposition, give the other party or parties a reasonable opportunity at such other party's or parties' expense, to segregate and remove such books and records as such other party or parties may select. (d) Notwithstanding the terms of the Confidentiality Agreement and Section 7.2(b) above, the parties agree that prior to the Closing the Buyer may reveal or disclose Proprietary Information to any other Persons in connection with financing, and risk management if reasonably necessary, of or with respect to the Purchased Assets, and to such Persons with whom the Buyer expects it may have business dealings regarding the Purchased Assets from and after the Closing Date, and, to the extent that the Sellers consent (which consent shall not be unreasonably withheld) to existing and potential customers and suppliers, in each case only so long as such other parties enter into confidentiality agreements in favor of MPS on terms satisfactory to MPS. (e) Except as required by law, unless otherwise agreed to in writing by the Buyer, for a period commencing on the Closing Date and terminating three years after such date the Sellers shall keep (i) all Proprietary Information confidential and not disclose or reveal any Proprietary Information to any Person other than Sellers' Representatives who are actively and directly participating in the transactions contemplated hereby or who otherwise need to know the Proprietary Information for such purpose and to cause those Persons to observe the terms of this Section 7.2(e) and (ii) not to use Proprietary Information for any purpose other than consistent with the terms of this Agreement and the other Closing Documents. The Sellers shall continue to hold all Proprietary Information according to the same internal security procedures and with the same degree of care regarding its secrecy and confidentiality as currently applicable thereto. The Sellers shall notify the Buyer of any unauthorized disclosure to third parties that it discovers, and shall endeavor to prevent any further such disclosures. The Sellers shall be responsible for any breach of the terms of this Section 7.2(e) by the Sellers or the Sellers' Representatives. After the Closing Date, in the event that the Sellers are requested pursuant to, or required by, applicable law or regulation or by legal process to disclose any Proprietary Information, or any other information concerning the Purchased Assets, or the transactions contemplated hereby, the Sellers shall provide the Buyer with prompt notice of such request or requirement in order to enable the Buyer to seek an appropriate protective order or other remedy, to consult with the Sellers with respect to taking steps to resist or narrow the scope of such request or legal process, or to waive compliance, in whole or in -39- -179- part, with the terms of this Section 7.2(e). The Sellers agree not to oppose any action by the Buyer to obtain a protective order or other appropriate remedy after the Closing Date. In the event that no such protective order or other remedy is obtained, or that the Buyer waives compliance with the terms of this Section 7.2(e), the Sellers shall furnish only that portion of the Proprietary Information which the Sellers are advised by counsel is legally required. In any such event the Sellers shall use their reasonable best efforts to ensure that all Proprietary Information and other information that is so disclosed will be accorded confidential treatment. (f) The parties agree that the Confidentiality Agreement will terminate, without further act or evidence by the parties, upon consummation of the Closing. 7.3 Expenses. Except to the extent specifically provided herein, whether or not the transactions contemplated hereby are consummated, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be borne by the party incurring such costs and expenses. 7.4 Further Assurances. (a) Subject to the terms and conditions of this Agreement, each of the parties hereto will use its best efforts to take, or cause to be taken, all action, and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the sale of the Purchased Assets pursuant to this Agreement, including without limitation using its best efforts to ensure satisfaction of the conditions precedent to each party's obligations hereunder. Notwithstanding anything in the previous sentence to the contrary, the Sellers and the Buyer shall use their commercially reasonable efforts to obtain all Permits and Environmental Permits necessary for the Buyer to own, operate and maintain the Purchased Assets and to deliver the output thereof to MPS's transmission system at the respective interconnection points specified in the Interconnection Agreements. Neither of the parties hereto will, without prior written consent of the other party, take or fail to take any action, which would reasonably be expected to prevent or materially impede, interfere with or delay the transactions contemplated by this Agreement. From time to time after the date hereof, without further consideration, the Sellers will, at their own expense, execute and deliver such documents to the Buyer or its designee as the Buyer may reasonably request in order to more effectively vest in the Buyer the Sellers' title to the Purchased Assets subject only to Permitted Encumbrances. Without limiting the foregoing, the Sellers shall cooperate with the Buyer in the Buyer's efforts to cure or remove any defects or Encumbrances existing with respect to the Real Estate that the Buyer reasonably deems objectionable; provided, however, that in connection therewith the Sellers shall not be under any obligation to initiate legal action or to incur expense other than reasonable administrative and out-of-pocket expenses. From time to time after the date hereof, the Buyer will, at its own expense, execute and deliver such documents to the Sellers as the Sellers may reasonably request in order to more effectively consummate the sale of the Purchased Assets pursuant to this Agreement. (b) To the extent that the Sellers' rights under any Sellers' Agreement may not be assigned without the consent of another Person which consent has not been obtained, this Agreement shall not constitute an agreement to assign the same if an attempted assignment would -40- -180- constitute a breach thereof or be unlawful, and the Sellers, at their expense, shall use their commercially reasonable efforts to obtain any such required consents as promptly as possible. The Sellers and the Buyer agree that if any consent to an assignment of any Sellers' Agreement shall not be obtained or if any attempted assignment would be ineffective or would impair the Buyer's or its designee's rights and obligations under the Sellers' Agreement in question so that the Buyer or its designee would not in effect acquire the benefit of all such rights and obligations, the Sellers, to the maximum extent permitted by law and such Sellers' Agreement, shall after the Closing (assuming that the Buyer, in its sole and absolute discretion, waives in writing the condition precedent to Closing set forth in Section 8.2(k)), appoint the Buyer or its designee to be the Sellers' representative and agent with respect to such Sellers' Agreement, and the Sellers shall, to the maximum extent permitted by law and such Sellers' Agreement, enter into such reasonable arrangements with the Buyer or its designee as are necessary to provide the Buyer or its designee with the benefits and obligations of such Sellers' Agreement. The Sellers and the Buyer shall cooperate and shall each use their commercially reasonable efforts after the Closing to obtain an assignment of such Sellers' Agreement to the Buyer or its designee. 7.5 Public Statements. The parties shall consult with each other prior to issuing any public announcement, statement or other disclosure with respect to this Agreement or the transactions contemplated hereby and shall not issue any such public announcement, statement or other disclosure prior to such consultation, except as may be required by law and except that the parties may make public announcements, statements or other disclosures with respect to this Agreement and the transactions contemplated hereby to the extent and under the circumstances in which the parties are expressly permitted by the Confidentiality Agreement to make disclosures of "Proprietary Information" (as defined in the Confidentiality Agreement). 7.6 Consents and Approvals; Financing. (a) The Sellers and the Buyer agree that there is no need to file with the Federal Trade Commission or the United States Department of Justice any notifications under the HSR Act and the rules and regulations promulgated thereunder with respect to the transactions contemplated hereby. (b) The Sellers and the Buyer shall cooperate with each other and (i) promptly prepare and file all necessary documentation, (ii) effect all necessary applications, notices, petitions and filings and execute all agreements and documents, (iii) use all commercially reasonable efforts to obtain the transfer or reissuance to the Buyer of all necessary Transferable Permits, consents, approvals and authorizations of all governmental bodies and (iv) use all commercially reasonable efforts to obtain all necessary consents, approvals and authorizations of all other parties, in the case of each of the foregoing clauses (i), (ii), (iii) and (iv), necessary or advisable to consummate the transactions contemplated by this Agreement (including, without limitation, the Sellers Required Regulatory Approvals and the Buyer Required Regulatory Approvals) or required by the terms of any note, bond, mortgage, indenture, deed of trust, license, franchise, permit, concession, contract, lease or other instrument to which the Sellers or the Buyer is a party or by which any of them is bound. Each of the Sellers and the Buyer shall have the right to review in advance all characterizations of the information relating to the transactions contemplated by this -41- -181- Agreement which appear in any filing made in connection with the transactions contemplated hereby. (c) The Sellers and the Buyer shall cooperate with each other and promptly prepare and file notifications with, and request Tax clearances from, state, provincial and local taxing authorities in jurisdictions in which a portion of the Purchase Price may be required to be withheld or in which the Buyer would otherwise be liable for any Tax liabilities of the Sellers pursuant to such state and local Tax law. (d) Notwithstanding anything herein to the contrary, the Sellers shall use all commercially reasonable efforts to assist Buyer in obtaining all third party consents (including, without limitation, consents to the collateral assignment in favor of the Buyer's lenders of contracts or agreements included in the Purchased Assets), agreements, certificates, opinions, and other documents or instruments reasonably requested by the Buyer's lenders in connection with the financing, on a non- or limited recourse basis or otherwise, of Buyer's acquisition of the Purchased Assets hereunder, all of which shall be at Buyer's sole cost and expense to the extent that any such items are not otherwise required of Sellers hereunder or under any of the Closing Documents. From time to time after the date hereof, without further consideration, the Sellers will, at their own expense, execute and/or deliver such consents (including, without limitation, consents to the collateral assignment in favor of the Buyer's lenders of the Closing Documents), agreements, certificates, opinions, and other documents or instruments to the Buyer's lenders as the Buyer's lenders may reasonably request in connection with the financing, on a non- or limited recourse basis or otherwise, of Buyer's acquisition of the Purchased Assets hereunder. Sellers acknowledge that Buyer intends to obtain financing, on a non- or limited recourse basis or otherwise and on terms and conditions acceptable to Buyer, of Buyer's acquisition of the Purchased Assets hereunder and Buyer confirms that obtaining such financing is not a condition precedent to its obligations hereunder. 7.7 Fees and Commissions. The Sellers and the Buyer each represent and warrant to the other that no broker, finder or other Person is entitled to any brokerage fees, commissions or finder's fees in connection with the transaction contemplated hereby by reason of any action taken by the party making such representation. The Sellers and the Buyer will pay to the other or otherwise discharge, and will indemnify and hold the other harmless from and against, any and all claims or liabilities for all brokerage fees, commissions and finder's fees incurred by reason of any action taken by such party. 7.8 Tax Matters. (a) All transfer and sales taxes incurred in connection with this Agreement and the transactions contemplated hereby shall be borne by the Sellers, other than Maine real estate transfer taxes which shall be paid equally by Buyer and MPS, and MPS, at its own expense, will file, to the extent required by applicable law, all necessary Tax Returns and other documentation with respect to all such transfer or sales taxes, and, if required by applicable law, the Buyer will join in the execution of any such Tax Returns or other documentation. Prior to the Closing Date, MPS will provide to the Buyer, to the extent possible, an appropriate certificate of no Tax -42- -182- incurred in connection with this Agreement and the transactions contemplated hereby, from each applicable taxing authority. (b) With respect to Taxes to be prorated in accordance with Section 3.5 of this Agreement only, the Buyer shall prepare and timely file all Tax Returns required to be filed after the Closing with respect to the Purchased Assets, if any, for the period in which such Taxes must be reported, and shall duly and timely pay all such Taxes shown to be due on such Tax Returns. The Buyer's preparation of any such Tax Returns shall be subject to the Sellers' approval, which approval shall not be unreasonably withheld. The Buyer shall make such Tax Returns available for the Sellers' review and approval no later than fifteen (15) Business Days prior to the due date for filing such Tax Return. Within ten (10) Business Days after receipt of such Tax Return, the Sellers shall pay to the Buyer their proportionate share of the amount shown as due on such Tax Return determined in accordance with Section 3.5 of this Agreement. (c) Each of the Buyer and the Sellers shall provide the other with such assistance as may reasonably be requested by the other party in connection with the preparation of any Tax Return, any audit or other examination by any taxing authority, or any judicial or administrative proceedings relating to liability for Taxes, and each will retain and provide the requesting party with any records or information which may be relevant to such return, audit or examination, proceedings or determination. Any information obtained pursuant to this Section 7.8(c) or pursuant to any other Section hereof providing for the sharing of information or review of any Tax Return or other schedule relating to Taxes shall be kept confidential by the parties hereto. 7.9 Supplements to Schedules. Prior to the Closing Date, the Sellers and the Buyer shall supplement or amend the Schedules referenced in this Agreement with respect to any matter relating to the subject matter thereof hereafter arising which, if existing or occurring at the date of this Agreement, would have been required to be set forth or described in such Schedules. No supplement or amendment of any Schedule made pursuant to this Section shall be deemed to cure any breach of, or expand or limit the scope of, or otherwise modify or affect any representation or warranty made in this Agreement unless the parties agree thereto in writing. 7.10 Employees. (a) During the period beginning on the date of this Agreement and ending on the Closing Date (the "Buyer's Window"), the Buyer or its designee may offer employment, effective as of the Closing Date, to employees of the Sellers who are presently employed principally in connection with the ownership, operation, or maintenance of the Purchased Assets, and who are assigned to the departments listed in Schedule 7.10(a) and listed individually in such Schedule 7.10(a) (all such employees hereinafter referred to individually as an "Employee" and collectively as "Employees"); provided, however, that if any such individual ceases to be employed by either of the Sellers after the date hereof, Buyer or its designee may offer employment during the Buyer's Window, effective as of the Closing Date, to any individual or individuals who, in general, performs the functions and duties of such departed individual (and any such replacement individual or individuals, as the case may be, shall be deemed an "Employee" for the purposes of this Section 7.10). -43- -183- All such offers of employment shall be made (i) in accordance with all applicable laws and regulations, and (ii) for Employees represented by the International Brotherhood of Electrical Workers ("IBEW"), in accordance with the applicable IBEW Agreements (or any replacement or extension thereof as in effect at such time). (Each person who becomes employed by the Buyer or its designee as of the Closing Date pursuant to this Section 7.10 shall be referred to herein as a "Transferred Employee.") During the Buyer's Window, the Sellers will refrain from offering post-Closing employment to any of the Employees without the prior consent of the Buyer, other than those Employees who the Buyer indicates in writing it does not intend to hire. Buyer shall in good faith notify Seller as soon as possible regarding those employees who the Buyer does not intend to offer employment. The Buyer shall not solicit, directly or indirectly, for employment any employees of the Sellers at any time beginning on the date hereof and up to and including the second anniversary of the Closing Date, other than offers to Employees made during the Buyer's Window. Subject to the provisions set forth below, the Sellers shall not, at any time beginning at the end of the Buyer's Window and ending on the second anniversary of the Closing Date, solicit, directly or indirectly, for employment any Employee who accepted a position with the Buyer or its designee within the Buyer's Window. In the event the Buyer or its designee decides to terminate the employment of one or more of the Transferred Employees on or before 12 months following the Closing Date, Buyer or its designee shall provide Sellers with at least seventy-five (75) days advance written notice, following which Sellers shall have the right to offer employment to any such affected Transferred Employee, such employment to commence no sooner than the effective date of the Transferred Employee's employment termination with Buyer or its designee, as the case may be. With respect to any Employee who does not receive an offer of employment from the Buyer or its designee, the Sellers shall be responsible for providing such Employees with any benefits under the Sellers' Employee Transition Plan, which such Employees may be entitled to receive under the terms of said Plan. If, for any reason, any Employee has received severance benefits under the Sellers' Employee Transition Plan and is subsequently employed by Buyer at any time on or before the one (1) year anniversary of the Closing Date, Buyer shall reimburse the Sellers for the cost of any such severance benefits, whether such severance benefits are provided in cash or in kind. (b) Schedule 7.10(b) sets forth all of the collective bargaining agreements, and amendments thereto, to which the Sellers are a party with the IBEW in connection with the Purchased Assets (the "IBEW Agreements"). With respect to Transferred Employees who are included in the collective bargaining units covered by the IBEW Agreements (the "Transferred IBEW Employees"), as of the Closing Date the Buyer or its designee will assume the IBEW Agreements as they relate to Transferred IBEW Employees. The Buyer or its designee shall comply with all applicable obligations under the IBEW Agreements and will accept and fulfill all obligations under the IBEW Agreements, together with any revisions and/or extensions thereto, including, but not limited to, the obligation of Buyer or its designee to recognize the IBEW as the collective bargaining agent for the Transferred IBEW Employees. Transferred IBEW Employees -44- -184- shall be given credit for prior service with the Sellers for all purposes under the IBEW Agreements. (c) For the period commencing on the Closing Date and ending December 31, 2001, the Buyer or its designee shall provide all Transferred Employees who remain in its employ and who are not IBEW Employees ("Transferred Non-Union Employees") with total salary, benefits and opportunities for bonuses which is, in the aggregate, comparable to the total salary, benefits and opportunities for bonuses provided to such Employees by the Sellers immediately prior to the Closing Date. Nothing herein shall be deemed to guarantee a Transferred Employee continued employment with the Buyer or its designee for any definite period of time. (d) As of the Closing Date, all Transferred Employees shall, except as otherwise provided in this Section 7.10 or required by applicable law, cease to participate in the Welfare Plans and shall commence to participate in the employee welfare benefit plans, programs, and arrangements of the Buyer and its Affiliates, without regard to the coverage of any such plan, program, or arrangement by ERISA or any provision of the Code (the "Replacement Welfare Plans") on at least the same terms and conditions as similarly situated employees of the Buyer. The Buyer shall (i) waive or cause to be waived, except to the extent that such waiver is precluded by applicable law, any waiting period, probationary period, pre-existing condition exclusion, evidence of insurability requirement, or similar condition with respect to Transferred Employees under the Replacement Welfare Plans, other than, but only to the extent of, any waiting period, probationary period, pre-existing condition exclusion, evidence of insurability requirement, or similar condition that was in effect with respect to any such Transferred Employee under a Welfare Plan of the Seller and that had not been satisfied by such individual as of the Closing Date, and (ii) provide each such Transferred Employee with credit for satisfaction of any deductible, co-payment, or similar out-of-pocket payment requirement under the Replacement Welfare Plans to the extent of the deductible, co-payments, and similar out-of- pocket payments paid prior to the Closing Date under the Sellers' Welfare Plans (on a pro-rata basis in the event of a difference in plan years). (e) The Buyer shall credit the service of each Transferred Non-Union Employee with the Sellers and their Affiliates, including, without limitation, accrued vacation and sick time, for purposes of eligibility, participation, vesting, and accrual of or entitlement to benefits under all employee benefit plans, programs, and arrangements of the Buyer and its Affiliates, without regard to the coverage of any such plan, program, or arrangement by ERISA or any provision of the Code ("Buyer Benefit Plans") in which they become participants to the same extent as if such service had been performed for the Buyer or its designee; provided that the benefits provided under the Buyer Benefit Plans may be offset by the nonforfeitable benefits previously provided by the Sellers or the Sellers' Benefit Plans with respect to the same period of service. (f) Each Transferred Non-Union Employee who is eligible to participate in the Maine Public Service Company Non-Union Retirement Savings Plan ("Sellers' Non-Union 401(k) Plan") immediately before the Closing Date shall be eligible to participate in Wisconsin Public Service Corporation Administrative Employees' Savings Plan, a tax-qualified defined contribution plan including a cash-or-deferred arrangement of the Buyer or one of its Affiliates ("Buyer's 401(k) Plan") as of the Closing Date. The Buyer shall take any and all necessary action to cause the -45- -185- trustee of a tax-qualified defined contribution plan of the Buyer or one of its Affiliates, if requested to do so by a Transferred Non-Union Employee, to accept a direct "rollover" of all or a portion of said employee's distribution from the Sellers' Non-Union 401(k) Plan. (g) The Buyer shall make (or cause to be made) any and all amendments to its employee benefit plans, programs, and arrangements necessary to give effect to its obligations under this Agreement, which amendments shall be effective as of the Closing Date and delivered to the Sellers within a reasonable time after the Closing Date. (h) Provided Buyer has given Sellers at least seventy-five (75) days advance written notice and Sellers have not extended an offer of comparable employment, the Buyer shall pay to each Transferred Employee whose employment is involuntarily terminated by the Buyer or its designee within 12 months after the Closing Date, (except where such employment is terminated for cause, unless such cause is beyond the control of the Transferred Employee as in the case of a layoff for lack of work), the severance benefits that would have been provided to such individual upon such termination by the Sellers under the Sellers' Employee Transition Plan to the extent identified as to nature and amount in the Sellers' Employee Transition Plan, had such individual remained continuously employed by the Sellers and had been eligible under, and covered by, such plan on the date of such termination; the Seller will reimburse Buyer for the cost of such severance benefits. With respect to each Transferred Employee whose employment is involuntarily terminated by the Buyer or its designee on or after 12 months following the Closing Date but on or before December 31, 2001 (except where such employment is terminated for cause, unless such cause is beyond the control of the Transferred Employee as in the case of a layoff for lack of work), Buyer or its designees shall pay the severance benefits that would have been provided to such individual upon such termination by the Sellers under the Sellers' Employee Transition Plan to the extent identified as to nature and amount in the Sellers' Employee Transition Plan, had such individual remained continuously employed by the Sellers and had been eligible under, and covered by, such plan on the date of such termination. (i) Subject to the other provisions of this Section 7.10, and except as specifically provided to the contrary in this Agreement: (1) The Sellers, and not the Buyer or its designee, shall be responsible and shall assume any and all liability for (A) all compensation, benefits, and perquisites of any kind due any Transferred Employee on account of employment by the Sellers before the Closing Date, or the termination of employment by the Sellers, including, but not limited to, continuation of health care coverage pursuant to COBRA and compliance with HIPAA; and (B) all notices, payments, fines, taxes or assessments due to any governmental authority pursuant to any applicable foreign, federal, state, provincial or local law, common law, statute, rule or regulation with respect to the employment, discharge or layoff of employees employed at the Purchased Assets, including, but not limited to, the WARN Act, the Employment Standards Act (New Brunswick), and any rules or regulations that have been issued in connection with any of the foregoing. (2) The Buyer, and not the Sellers, shall be responsible and shall assume any and all liability for (A) all compensation, benefits, and perquisites of any kind due any Transferred Employee on account of employment by the Buyer or its designee on and after the Closing Date, -46- -186- or the termination of employment by the Buyer or its designee, including, but not limited to, continuation of health care coverage pursuant to COBRA and compliance with HIPAA; and (B) all notices, payments, fines, taxes or assessments due to any governmental authority pursuant to any applicable foreign, federal, state, provincial or local law, common law, statute, rule or regulation with respect to the employment, discharge or layoff of Transferred Employees by the Buyer or its designee, including, but not limited to, the WARN Act, the Employment Standards Act (New Brunswick), and any rules or regulations that have been issued in connection with any of the foregoing. (j) The Sellers acknowledge that the benefits identified in the Sellers' Employee Transition Plan are intended to cover all benefits that the Transferred Employees are entitled to by law and the IBEW Agreements. In the event that any Transferred Employee successfully claims in a court of competent jurisdiction that, under applicable law or the IBEW Agreements, severance benefits are due to such Transferred Employee in addition to those benefits identified as to nature and amount in the Sellers' Employee Transition Plan, then the Sellers shall pay directly or reimburse the Buyer for costs and expenses related to any additional benefits actually paid to such Transferred Employee (as well as costs and expenses associated with defending such action brought by such Transferred Employee) by the Buyer or its Affiliates; provided however, that the Sellers shall only be required to make any such payment or reimbursement if such benefits (A) arise out of such Transferred Employee's employment with the Sellers, and (B) are not due to some act or omission by the Buyer or any of its Affiliates. The Buyer and the Sellers agree that the terms of Section 9.2 hereof shall apply to this Section 7.10(j) as if set forth herein. 7.11 Risk of Loss. (a) From the date hereof through the Closing Date, all risk of loss or damage to the property included in the Purchased Assets shall be borne by the Sellers. (b) If, before the Closing Date all or any portion of the Purchased Assets are taken by eminent domain or expropriation or become the subject of a pending or (to the knowledge of the Sellers) contemplated taking which has not been consummated, the Sellers shall notify the Buyer promptly in writing of such fact. If such taking would create a Material Adverse Effect, the Buyer and the Sellers shall negotiate in good faith to settle the loss resulting from such taking (including, without limitation, by making a fair and equitable adjustment to the Purchase Price) and, upon such settlement, consummate the transaction contemplated by this Agreement pursuant to the terms of this Agreement. If no such settlement is reached within sixty (60) days after the Sellers have notified the Buyer of such taking, then the Buyer or the Sellers may terminate this Agreement pursuant to Section 10.1(f). (c) If, before the Closing Date all or any material portion of the Purchased Assets are damaged or destroyed by fire or other casualty, the Sellers shall notify the Buyer promptly in writing of such fact. If such damage or destruction would create a Material Adverse Effect and the Sellers have not notified Buyer of their intention to cure such damage or destruction within fifteen (15) days after its occurrence, the Buyer and the Sellers shall negotiate in good faith to settle the loss resulting from such casualty (including, without limitation, by making a fair and equitable adjustment to the Purchase Price) and, upon such settlement, consummate the -47- -187- transactions contemplated by this Agreement pursuant to the terms of this Agreement. If (i) no such settlement is reached within sixty (60) days after the Sellers have notified the Buyer of such casualty, or (ii) Sellers have notified Buyer of their intention to cure in accordance with the preceding sentence, but (x) Sellers have not proceeded diligently and in good faith to promptly cure such damage or destruction, or (y) such cure is not completed to Buyer's reasonable satisfaction not less than 60 days prior to the Termination Date, then the Buyer or the Sellers may terminate this Agreement pursuant to Section 10.1(f). 7.12 Real Estate Title; Title Insurance; Surveys. (a) Buyer is currently in the process of obtaining title insurance commitments, and Sellers are currently in the process of obtaining surveys, for the Real Estate. Both parties shall diligently pursue the completion of such matters and each agrees to cooperate with the other toward the goal of providing a complete set of surveys and title insurance commitments for the Real Estate meeting the requirements of this Section 7.12 as soon as is practicable but in any event within sixty (60) days after the date hereof. The date on which such materials are completed shall be referred to as the "Initial Title Review Date". (b) Within sixty (60) days after the Initial Title Review Date, the Buyer shall notify the Sellers in writing of any defects in title that would make the Sellers unable to convey good and marketable title to the Real Estate free of Encumbrances other than Permitted Encumbrances, whether such defects are disclosed herein or in the surveys and title commitments referred to above (any of which is called herein a "Defect of Title"). The Buyer shall be deemed to have waived any objection to any Defect of Title that existed as of the effective date of the title insurance commitments that are provided on the Initial Title Review Date if the Buyer fails to notify the Sellers of such Defect of Title within such sixty-day period. If Sellers notify Buyer that they are, despite reasonable efforts, unable to cure a Defect of Title (including obtaining affirmative coverage through Buyer's title insurance company) then Buyer shall elect, within thirty (30) days after receipt of Seller's notice, either (i) to accept title to the Real Estate subject to the uncured Defects of Title, or (ii) if such uncured Defect of Title constitutes a Material Adverse Effect, to terminate this Agreement in accordance with Section 10.1(e); Buyer's failure to so elect within such time period shall constitute an election to accept title subject to such uncured Defect of Title. With respect to any Defect of Title that does not exist on the effective date of the title insurance commitments that are provided on the Initial Title Review Date, but which arises prior to Closing, the Buyer shall notify the Sellers in writing of any such Defect of Title on or prior to the Closing. The Sellers shall have, at their option, a period of not more than 90 days after receipt of any such notice within which to remedy or cure any such Defect of Title to the reasonable satisfaction of the Buyer. If the Sellers elect to remedy or cure such Defect of Title, then the Closing shall be extended, if necessary, to a date that is not more than five (5) business days after the expiration of such 90-day period. If such Defect of Title is not corrected or remedied to the reasonable satisfaction of the Buyer within such 90-day period, the Buyer shall elect, by written notice to the Sellers within ten (10) days after the expiration of such 90-day period, either (i) to accept title to the Real Estate subject to the uncured Defects of Title, or (ii) if such uncured Defect of Title constitutes a Material Adverse Effect, to terminate this Agreement in accordance with Section 10.1(e); Buyer's failure to so elect within such time period shall constitute an election to accept title subject to such uncured Defect of Title. Sellers shall have the option to -48- -188- provide affirmative title insurance coverage over (which Buyer, at Sellers' expense, shall assist in attempting to obtain and provided that Sellers are responsible for any increase in cost attributable to such coverage), or to indemnify Buyer pursuant to Section 9.1 against, one or more uncured Defects of Title. Any such indemnification shall be subject to the limitations of Section 9.1(g)(2) and (3), but shall not be subject to the time limitations of Section 9.1 (g)(1). Notwithstanding the prior two sentences, Buyer shall not be required to accept an indemnity from Sellers with respect to any Defects of Title. (c) The title insurance commitments referred to herein shall be issued by a title insurance company or companies reasonably satisfactory to Buyer, agreeing to issue to Buyer or its designee standard form owner's policies of title insurance with respect to all Real Estate, together with a copy of each document to which reference is made in such commitments. To the extent that title insurance is not available for the Canadian Real Estate, then Buyer shall obtain the equivalent thereof commonly used for commercial transactions in New Brunswick, Canada. Such policies shall be standard ALTA form 1992 owner's policies (or the Canadian equivalent in respect of the Canadian Real Estate) in the full amount of the fair value of the Real Estate allocated respectively to each subject parcel of Real Estate under Section 3.3 hereof, insuring good and marketable title thereto (expressly including all easements and other appurtenances). All policies shall insure title in full accordance with the representations and warranties set forth herein and shall be subject only to such conditions and exceptions as shall be reasonably acceptable to Buyer and shall contain such endorsements as Buyer shall reasonably request. (d) The surveys of the Real Estate shall be prepared in accordance with ALTA/ACSM 1997 standards, or the Canadian equivalent in respect of the Canadian Real Estate, each detailing the legal description, the perimeter boundaries, all improvements located thereon, all easements and encroachments affecting each such parcel of Real Estate and such other matters as may be reasonably requested by Buyer or the title insurance companies, each containing a surveyor certificate reasonably acceptable to Buyer and the title insurance companies, and each prepared by a registered land surveyor in the jurisdiction where the Real Estate is located reasonably satisfactory to Buyer. (e) Sellers and Buyer agree to use the descriptions set forth in the surveys referred to above, once they have been accepted by Buyer, as the deed descriptions for the Real Estate. (f) Sellers and Buyer agree that the aggregate out-of-pocket cost of obtaining the title insurance commitments and final policy coverage (and the Canadian equivalent), and the surveys referred to in this Section 7.12 shall be paid half by the Sellers and half by the Buyer and that Sellers and Buyer intend to rely upon such surveys for all matters relating to real property descriptions and the status of title, except as otherwise provided in Section 7.12(b), and that such surveys shall run to the benefit of Sellers and Buyer. Furthermore, Buyer agrees that it shall not pursue the Sellers under their deeds to the Real Estate until it has first obtained whatever it may be owed under its owner's title insurance policies with respect to such claims. 7.13 Wyman Agreements. MPS agrees that it shall deliver any notices to the Owners (as defined in the Wyman Agreements) required under the Wyman Agreements as a result of the proposed transfer to Buyer or its designee of MPS's interest thereunder. -49- -189- ARTICLE VIII CONDITIONS PRECEDENT 8.1 Conditions to Each Party's Obligations. The respective obligations of each party to consummate the transactions contemplated hereunder shall be subject to the fulfillment at or prior to the Closing Date of the following conditions: (a) No preliminary or permanent injunction or other order or decree by any national, federal, provincial or state court which prevents the consummation of the sale of the Purchased Assets or the assumption of the Assumed Obligations contemplated hereby shall have been issued and remain in effect (each party agreeing to use its reasonable best efforts to have any such injunction, order or decree lifted) and no statute, rule or regulation shall have been enacted by any national, federal, provincial or state government or governmental agency in the United States or Canada which prohibits the consummation of the sale of the Purchased Assets or the assumption of the Assumed Obligations; (b) All national, federal, provincial, state, and local government consents and approvals required for the consummation of the sale of the Purchased Assets and the assumption of the Assumed Obligations contemplated hereby, the Sellers Required Regulatory Approvals and the Buyer Required Regulatory Approvals shall have been obtained or become Final Orders (a "Final Order" for all purposes of this Agreement means a final order after all opportunities for rehearing are exhausted (whether or not any appeal thereof is pending) that has not been revised, stayed, enjoined, set aside, annulled or suspended, with respect to which any required waiting period has expired; and as to which all conditions to effectiveness prescribed therein or otherwise by law, regulation or order have been satisfied) and such Final Orders shall not impose materially adverse terms or conditions; and (c) All consents and approvals for the consummation of the sale of the Purchased Assets and the assumption of the Assumed Obligations contemplated hereby required under the terms of any note, bond, mortgage, indenture, contract or other agreement (except the Sellers' Agreements) to which the Sellers or any of their subsidiaries, are a party shall have been obtained, other than those which if not obtained, would not, in the aggregate, create a Material Adverse Effect. 8.2 Conditions to Obligations of the Buyer. The obligation of the Buyer to consummate the transactions contemplated hereunder shall be subject to the fulfillment at or prior to the Closing Date of the following additional conditions: (a) There shall not have occurred and be continuing a Material Adverse Effect; (b) The Sellers shall have performed and complied with in all material respects all covenants and agreements contained in this Agreement and the other Closing Documents which are required to be performed and complied with by the Sellers on or prior to the Closing Date, and the representations and warranties of the Sellers set forth in this Agreement and in the other Closing Documents shall be true and correct in all material respects as of the date hereof or -50- -190- thereof, as the case may be, and as of the Closing Date as though made at and as of the Closing Date; provided, however, a failure of this condition shall not constitute a failure for purposes of consummating the Closing unless such failure materially and adversely affects the Purchased Assets, or Buyer's ability to finance the acquisition of the Purchased Assets or to operate the Purchased Assets; (c) There shall be no Encumbrances on the Purchased Assets, other than Permitted Encumbrances; (d) The Buyer shall have received certificates from authorized officers of the Sellers, dated the Closing Date, to the effect that, to such officers' knowledge, the conditions set forth in Sections 8.2(a), (b) and (c) have been satisfied; (e) MPS shall have assigned to the Buyer or its designee all of its rights and obligations in the IBEW Agreements as they relate to the Transferred IBEW Employees, to be employed at or in conjunction with the U.S. Assets after the Closing Date; (f) MNB shall have assigned to the Buyer or its designee all of its rights and obligations in the IBEW Agreements as they relate to the Transferred IBEW Employees to be employed at or in conjunction with the Canadian Assets after the Closing Date; (g) The Buyer shall have received an opinion from Verrill & Dana, LLP, or other counsel reasonably acceptable to Buyer, dated the Closing Date and substantially in the form of Exhibit G-1. As to any matter contained in such opinion which involves the laws of any jurisdiction other than the Federal laws of the United States or the laws of the State of Maine, such counsel may rely upon opinions of counsel admitted in such other jurisdictions. Any opinions relied upon by such counsel as aforesaid shall be delivered together with the opinion of such counsel. Such opinion may expressly rely as to matters of fact upon certificates furnished by MPS and appropriate officers and directors of MPS and by public officials; (h) The Buyer shall have received an opinion from Clark, Drummie & Company, dated the Closing Date and substantially in the form of Exhibit G-2. As to any matter contained in such opinion which involves the laws of any jurisdiction other than the national laws of Canada or the laws of the Province of New Brunswick, such counsel may rely upon opinions of counsel admitted in such other jurisdictions. Any opinions relied upon by such counsel as aforesaid shall be delivered together with the opinion of such counsel. Such opinion may expressly rely as to matters of fact upon certificates furnished by the Sellers and appropriate officers and directors of the Sellers and by public officials; (i) The Buyer or its designee shall have obtained an interconnection agreement, in form and substance reasonably satisfactory to the Buyer, with New Brunswick Power Company, on or before September 30, 1998, for the benefit of the Tinker Generating Facility and the transmission lines associated therewith, and such agreement shall be in full force and effect; (j) The Buyer shall have obtained all Permits and Environmental Permits necessary for the Buyer or its designee to own, operate and maintain the Purchased Assets and to deliver the -51- -191- output thereof to MPS's transmission system at the respective interconnection points specified in the Interconnection Agreements, and to perform its covenants and agreements hereunder and under the other Closing Documents; (k) All consents and approvals for the consummation of the sale of the Purchased Assets (including, without limitation, the assignment of the Sellers' rights, benefits, and interests under the Sellers' Agreements to the Buyer or its designee) and the assumption of the Assumed Obligations contemplated hereby required under the terms of any of the Sellers' Agreements shall have been obtained by the Sellers; (l) The Buyer shall have received, for delivery to Buyer's lenders, all consents (including, without limitation, consents to the collateral assignment in favor of the Buyer's lenders of the Closing Documents and/or of contracts or agreements included in the Purchased Assets), agreements, certificates, opinions, and other documents or instruments by or on behalf of the Sellers as may have been reasonably requested by the Buyer's lenders in connection with the financing, on a non- or limited recourse basis or otherwise, of Buyer's acquisition of the Purchased Assets hereunder; and (m) The Buyer shall have received the certificate or certificates from each applicable taxing authority required pursuant to Section 7.8(a). 8.3 Conditions to Obligations of the Sellers. The obligation of the Sellers to consummate the transactions contemplated by this Agreement shall be subject to the fulfillment at or prior to the Closing Date of the following additional conditions: (a) The Buyer shall have performed in all material respects its covenants and agreements contained in this Agreement and the other Closing Documents which are required to be performed on or prior to the Closing Date; (b) The representations and warranties of the Buyer which are set forth in this Agreement and the other Closing Documents shall be true and correct in all material respects as of the date hereof or thereof, as the case may be, and as of the Closing Date as though made at and as of the Closing Date; (c) The Sellers shall have received a certificate from an authorized officer of the Buyer, dated the Closing Date, to the effect that, to such officer's knowledge, the conditions set forth in Sections 8.3(a) and (b) have been satisfied; (d) The Buyer or its designee shall have assumed, as set forth in Section 7.10, all of the applicable obligations under the IBEW Agreements as they relate to Transferred IBEW Employees to be employed at or in conjunction with the Purchased Assets after the Closing Date; (e) The Sellers shall have received an opinion from Foley & Lardner, counsel for the Buyer, dated the Closing Date and substantially in the form of Exhibit H. As to any matter contained in such opinion which involves the laws of any jurisdiction other than the federal laws of the United States and the State of Wisconsin, such counsel may rely upon opinions of counsel -52- -192- admitted in such other jurisdictions. Any opinions relied upon by such counsel as aforesaid shall be delivered together with the opinion of such counsel. Such opinion may expressly rely as to matters of facts upon certificates furnished by appropriate officers and directors of the Buyer and its subsidiaries and by public officials. ARTICLE IX INDEMNIFICATION 9.1 Indemnification. (a) The Sellers will jointly and severally indemnify, defend and hold harmless the Buyer from and against any and all claims, demands or suits (by any Person), losses, liabilities, damages (including consequential or special damages), obligations, payments, costs and expenses (including, without limitation, the costs and expenses of any and all actions, suits, proceedings, assessments, judgments, settlements and compromises relating thereto and reasonable attorneys' fees and reasonable disbursements in connection therewith) (each, an "Indemnifiable Loss"), asserted against or suffered by the Buyer relating to, resulting from or arising out of (i) any breach by the Sellers of any covenant or agreement of the Sellers contained in this Agreement or in any of the Closing Documents or the inaccuracy or breach as of the date hereof or thereof, as the case may be, or on the Closing Date of any representation or warranty of the Sellers in this Agreement or in any of the Closing Documents, or (ii) the Excluded Liabilities. Notwithstanding the foregoing, the Sellers shall have no liability hereunder after the Closing Date with respect to the condition of title of the Real Estate, except as set forth in the deeds to the Real Estate delivered to the Buyer at the Closing. Furthermore, Buyer agrees that it shall pursue Sellers under their deeds for the Real Estate only after it has obtained whatever it may be owed under its owner's title insurance policies with respect to such claims. (b) The Buyer will indemnify, defend and hold harmless the Sellers from and against any and all Indemnifiable Losses asserted against or suffered by the Sellers relating to, resulting from or arising out of (i) any breach by the Buyer or its designee of any covenant or agreement of the Buyer or its designee contained in this Agreement or in any of the Closing Documents or the inaccuracy or breach as of the date hereof or thereof, as the case may be, or on the Closing Date of any representation or warranty of the Buyer in this Agreement or in any of the Closing Documents, (ii) the Assumed Obligations (including those that are assumed by Buyer's designee), or (iii) any actions of the Observers. (c) Any Person entitled to receive indemnification under this Agreement (an "Indemnitee") having a claim under these indemnification provisions shall make a good faith effort to recover all losses, damages, costs and expenses from insurers of such Indemnitee under applicable insurance policies so as to reduce the amount of any Indemnifiable Loss hereunder. The amount of any Indemnifiable Loss shall be reduced by any amounts actually and irrevocably recovered by the Indemnitee with respect to such claim or the underlying facts under insurance policies, (i) net of any increase that will occur, or is reasonably likely to occur, in insurance premiums payable by the Indemnitee, whether by retrospective premium adjustments or any other premium increase under the policy or policies under which the claim is made or any other policy, -53- -193- where the increase results directly from filing the insurance claim and (ii) less, dollar for dollar, the amount by which the insurance claim when filed or at any time during the applicable policy period, either singly or in the aggregate with all other claims made under the applicable policy or policies, exceeds the policy coverage limit; provided, however, that this subsection shall apply only if this provision does not constitute an improper waiver of the insurer's rights of subrogation against the Indemnifying Party. Nothing contained in this Section 9.1(c) shall be deemed to create an obligation of any party hereto to maintain any form or level of insurance after the Closing, to name any other party as an additional insured or to obtain approval for any waiver of rights of subrogation. (d) The expiration, termination or extinguishment of any representation, warranty, covenant or agreement, or the time within which to make a claim hereunder with respect thereto, shall not affect the parties' obligations under this Section 9.1 if the Indemnitee provided the Person required to provide indemnification under this Agreement (the "Indemnifying Party") with proper notice of the claim or event for which indemnification is sought prior to such expiration, termination or extinguishment. (e) The rights and remedies of the Sellers and the Buyer under this Article IX are exclusive and in lieu of any and all other rights and remedies which the Sellers and the Buyer may have under this Agreement or otherwise for monetary relief with respect to (i) any breach or failure to perform any covenant or agreement or representation or warranty set forth in this Agreement or (ii) the Assumed Obligations or the Excluded Liabilities, as the case may be, provided, however, that the foregoing limitation shall not apply to the parties' respective obligations after the Closing Date under the Buy-Back Agreement, the Continuing Site Agreement, the Interconnection Agreements or the Instruments of Assumption. (f) Buyer and Sellers each agree that notwithstanding any provisions in this Agreement to the contrary, all parties to this Agreement retain their remedies at law or in equity with respect to willful, knowing or intentional breaches of this Agreement, including a failure to consummate the Closing hereunder when and if required to do so. (g) Except for any willful, knowing or intentional breach or misrepresentation, as to which claims may be brought without limitation as to time or amount: (1) Any claim or action shall be brought under this Article IX for breach of a representation or warranty within two (2) years after the Closing Date. Regardless of the foregoing, however, or any other provision of this Agreement: (A) there shall be no time limitation hereunder on claims or actions brought for breach of any representation or warranty made in or pursuant to Sections 5.1, 5.2, 5.3, 6.1, 6.2 or 6.3; (B) a claim or action brought for breach of any representation or warranty made in or pursuant to Section 5.11 hereof must be brought within five (5) years after the Closing Date; (C) any claim or action brought for breach of any representation or warranty made in or pursuant to Section 5.19 may be brought at any time until the underlying tax obligation is barred by the applicable period of limitation under federal, state and foreign laws relating thereto (as such period may be extended by waiver) and (D) there shall be no time limitation -54- -194- hereunder for claims against Sellers under the deeds to the Real Estate or with respect to any indemnity given by the Sellers to cure a Title Defect pursuant to Section 7.12; (2) An Indemnitee shall not be entitled to indemnification under this Article IX for breach of a representation or warranty unless the aggregate of the Indemnifying Party's indemnification obligations to the Indemnitee pursuant to this Article IX (but for this Section 9.1(g)(2)) exceeds $100,000; but in such event, the Indemnified Party shall be entitled to indemnification for amounts in excess thereof; and (3) An Indemnifying Party's aggregate indemnification obligations under this Article IX for breach of a representation or warranty shall not exceed $3,000,000. 9.2 Defense of Claims. (a) If any Indemnitee receives notice of the assertion of any claim or of the commencement of any claim, action, or proceeding made or brought by any Person who is not a party to this Agreement or any Affiliate of a party to this Agreement (a "Third Party Claim") with respect to which indemnification is to be sought from an Indemnifying Party, the Indemnitee will give such Indemnifying Party reasonably prompt written notice thereof, but in any event not later than sixty (60) days after receipt of notice thereof. Such notice shall specify this Section of this Agreement, describe the nature of the Third Party Claim in reasonable detail and will indicate the estimated amount, if practicable, of the Indemnifiable Loss that has been or may be sustained by the Indemnitee. The Indemnifying Party will have the right to participate in or, by giving written notice to the Indemnitee, to elect to assume the defense of any Third Party Claim at such Indemnifying Party's own expense and by such Indemnifying Party's own counsel, and the Indemnitee will cooperate in good faith in such defense. (b) If within thirty (30) days after an Indemnitee provides written notice to the Indemnifying Party of any Third Party Claim the Indemnitee receives written notice from the Indemnifying Party that such Indemnifying Party has elected to assume the defense of such Third Party Claim as provided in the last sentence of Section 9.2(a), the Indemnifying Party will not be liable for any legal expenses subsequently incurred by the Indemnitee in connection with the defense thereof. If the Indemnifying Party fails to defend a Third Party Claim actively and in good faith within a reasonable period of time after receipt of written notice from the Indemnitee to such effect, specifying that the Indemnitee intends to invoke its rights under this Section, the Indemnitee may assume the defense of such claim, or compromise or settle such claim, for the account and risk of the Indemnifying Party, and the Indemnifying Party will be bound by all such actions of the Indemnitee and liable for all reasonable expenses thereof. Without the prior written consent of the Indemnitee, the Indemnifying Party will not enter into any settlement of any Third Party Claim which would lead to liability or create any financial or other obligation on the part of the Indemnitee for which the Indemnitee is not entitled to indemnification hereunder. If a firm offer is made to settle a Third Party Claim without leading to liability or the creation of a financial or other obligation on the part of the Indemnitee for which the Indemnitee is not entitled to indemnification hereunder and the Indemnifying Party desires to accept and agree to such offer, the Indemnifying Party will give written notice to the Indemnitee to that effect. If the Indemnitee fails to consent to such firm offer within ten (10) days after its receipt of such notice, -55- -195- the Indemnitee may continue to contest or defend such Third Party Claim and, in such event, the maximum liability of the Indemnifying Party as to such Third Party Claim will be the amount of such settlement offer, plus reasonable costs and expenses paid or incurred by the Indemnitee up to the date of such notice. (c) Any claim by an Indemnitee on account of an Indemnifiable Loss which does not result from a Third Party Claim (a "Direct Claim") will be asserted by giving the Indemnifying Party reasonably prompt written notice thereof, but in any event not later than sixty (60) days after the Indemnitee becomes aware of such claim, stating the nature of such claim in reasonable detail, specifying this Section of this Agreement and indicating the estimated amount, if practicable, and the Indemnifying Party will have a period of thirty (30) days within which to respond to such Direct Claim. If the Indemnifying Party does not respond within such thirty (30) day period, the Indemnifying Party will be deemed to have accepted such claim. If the Indemnifying Party rejects such claim, the Indemnitee will be free to seek enforcement of its rights to indemnification under this Agreement. (d) If the amount of any Indemnifiable Loss, at any time subsequent to the making of an indemnity payment in respect thereof, is reduced by recovery, settlement or otherwise under or pursuant to any insurance coverage, or pursuant to any claim, recovery, settlement or payment by or against any other entity, the amount of such reduction, less any costs, expenses or premiums incurred in connection therewith, will promptly be repaid by the Indemnitee to the Indemnifying Party. Upon making any indemnity payment, the Indemnifying Party will, to the extent of such indemnity payment, be subrogated to all rights of the Indemnitee against any third party in respect of the Indemnifiable Loss to which the indemnity payment relates; provided, however, that (i) the Indemnifying Party will then be in compliance with its obligations under this Agreement in respect of such Indemnifiable Loss and (ii) until the Indemnitee recovers full payment of its Indemnifiable Loss, any and all claims of the Indemnifying Party against any such third party on account of said indemnity payment is hereby made expressly subordinated and subjected in right of payment to the Indemnitee's rights against such third party. Without limiting the generality or effect of any other provision hereof, each such Indemnitee and Indemnifying Party will duly execute upon request all instruments reasonably necessary to evidence and perfect the above-described subrogation and subordination rights, and otherwise cooperate in the prosecution of such claims at the direction of the Indemnifying Party. Nothing in this Section 9.2(d) shall be construed to require any party hereto to obtain or maintain any insurance coverage. (e) A failure to give timely notice as provided in this Section 9.2 will not affect the rights or obligations of any party hereunder except if, and only to the extent that, as a result of such failure, the party which was entitled to receive such notice was actually prejudiced as a result of such failure. -56- -196- ARTICLE X TERMINATION AND ABANDONMENT 10.1 Termination. (a) This Agreement may be terminated at any time prior to the Closing Date by mutual written consent of the Sellers and the Buyer. (b) This Agreement may be terminated by the Sellers or the Buyer if the Closing contemplated hereby shall have not occurred on or before the first anniversary of the date of this Agreement (the "Termination Date"); provided that the right to terminate this Agreement under this Section 10.1(b) shall not be available to any party whose failure to fulfill any obligation under this Agreement has been the cause of, or resulted in, the failure of the Closing to occur on or before such date; and provided, further, that if on the first anniversary of the date of this Agreement the conditions to the Closing set forth in Section 8.1(c) shall not have been fulfilled but all other conditions to the Closing shall be fulfilled or shall be capable of being fulfilled, then the Termination Date shall be the day which is eighteen months from the date of this Agreement. (c) This Agreement may be terminated by either the Sellers or the Buyer if (i) any governmental or regulatory body, the consent of which is a condition to the obligations of the Sellers and the Buyer to consummate the Closing, shall have determined not to grant its or their consent and all appeals of such determination shall have been taken and have been unsuccessful, (ii) one or more courts of competent jurisdiction in the United States or Canada or any state or province shall have issued an order, judgment or decree permanently restraining, enjoining or otherwise prohibiting the Closing, and such order, judgment or decree shall have become final and nonappealable or (iii) any statute, rule or regulation shall have been enacted by any state or province or federal government or governmental agency in the United States or Canada which prohibits the consummation of the Closing. (d) This Agreement may be terminated by the Sellers if there has been a material violation or breach by the Buyer of any agreement, representation or warranty contained in this Agreement which has rendered the satisfaction of any condition to the obligations of the Sellers to effect the Closing impossible and such violation or breach has not been waived by the Sellers. (e) This Agreement may be terminated by the Buyer if there has been a material violation or breach by either Seller of any agreement, representation or warranty contained in this Agreement or in any of the other Closing Documents which has rendered the satisfaction of any condition to the obligations of the Buyer to effect the Closing impossible and such violation or breach has not been waived by the Buyer in writing. (f) This Agreement may be terminated by either of the Sellers or the Buyer in accordance with the provisions of Section 7.11(b) or (c). 10.2 Procedure and Effect of Termination. In the event of termination of this Agreement and abandonment of the transactions contemplated hereby by either or both of the -57- -197- parties pursuant to Section 10.1, written notice thereof shall forthwith be given by the terminating party to the other party and this Agreement shall terminate and the transactions contemplated hereby shall be abandoned, without further action by any of the parties hereto. If this Agreement is terminated as provided herein: (a) Said termination shall be the sole remedy of the parties hereto with respect to breaches of any agreement, representation or warranty contained in this Agreement and none of the parties hereto nor any of their respective trustees, directors, officers or Affiliates, as the case may be, shall have any liability or further obligation to the other party or any of their respective trustees, directors, officers or Affiliates, as the case may be, pursuant to this Agreement, except in each case as stated in this Section 10.2 and in Sections 7.2(b), 7.3 and 7.7; and (b) All filings, applications and other submissions made pursuant to this Agreement, to the extent practicable, shall be withdrawn from the agency or other Person to which they were made. ARTICLE XI MISCELLANEOUS PROVISIONS 11.1 Amendment and Modification. Subject to applicable law, this Agreement may be amended, modified or supplemented only by written agreement of the Sellers and the Buyer. 11.2 Waiver of Compliance; Consents. Except as otherwise provided in this Agreement, any failure of any of the parties to comply with any obligation, covenant, agreement or condition herein may be waived by the party entitled to the benefits thereof only by a written instrument signed by the party granting such waiver, but such waiver or failure to insist upon strict compliance with such obligation, covenant, agreement or condition shall not operate as a waiver of, or estoppel with respect to, any subsequent or other failure. 11.3 Notices. All notices and other communications hereunder shall be in writing and shall be deemed given and received if delivered personally or by facsimile transmission or mailed by overnight courier or by registered or certified U.S. mail (return receipt requested), postage prepaid, to the parties at the following addresses (or at such other address for a party as shall be specified by like notice; provided that notices of a change of address shall be effective only upon receipt thereof): (a) If to the Sellers, to: Maine Public Service Company 209 State Street P.O. Box 1209 Presque Isle, Maine 04769 Facsimile: (207) 764-6586 Attention: Frederick C. Bustard -58- -198- with a copy to: Verrill & Dana, LLP One Portland Square Portland, ME 04112 Facsimile: (207) 744-7499 Attention: Mark K. Googins, Esq. (b) if to the Buyer, to: WPS Power Development, Inc. 677 Baeten Road Green Bay, Wisconsin 54304 Facsimile: (920) 490-5999 Attention: Gerald L. Mroczkowski with a copy to: Foley & Lardner 777 East Wisconsin Avenue Milwaukee, Wisconsin 53202 Facsimile: (414) 297-4900 Attention: Edward J. Hammond, Esq. 11.4 Assignment. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, but neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any party hereto, including by operation of law without the prior written consent of the other party, nor is this Agreement intended to confer upon any other Person except the parties hereto any rights or remedies hereunder; except, however, notwithstanding the foregoing, and in addition to (but without limitation of) Sellers' agreements and covenants set forth in Section 7.6(d) hereof, the Sellers agree that this Agreement, and each of the other Closing Documents, may be collaterally assigned at any time without the Sellers' consent in favor of the Buyer's lenders as security in connection with the financing, on a non- or limited recourse basis or otherwise, of Buyer's acquisition of the Purchased Assets hereunder. Notwithstanding the foregoing, no provision of this Agreement shall create any third party beneficiary rights in any employee or former employee of the Sellers (including any beneficiary or dependent thereof) in respect of continued employment or resumed employment, and no provision of this Agreement shall create any rights in any such Persons in respect of any benefits that may be provided, directly or indirectly, under any employee benefit plan, program or arrangement except as expressly provided for thereunder. To the extent that a Buyer's designee is the party that is involved with any of the Purchased Assets after the Closing Date, then any obligations of Buyer hereunder for the period after the Closing Date shall also be an obligation of such designee. 11.5 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Maine (regardless of the laws that might otherwise -59- -199- govern under applicable Maine principles of conflicts of law) as to all matters, including but not limited to matters of validity, construction, effect, performance and remedies. 11.6 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 11.7 Interpretation. The article and section headings contained in this Agreement are solely for the purpose of reference, are not part of the agreement of the parties and shall not in any way affect the meaning or interpretation of this Agreement. 11.8 Schedules and Exhibits. All Exhibits and Schedules referred to herein are intended to be and hereby are specifically made a part of this Agreement. 11.9 Entire Agreement. This Agreement, the Confidentiality Agreement, the Buy-Back Agreement, the Continuing Site Agreement, the Interconnection Agreements, the Instruments of Assumption, the other Closing Documents, and the Exhibits, Schedules, documents, certificates and instruments referred to herein or therein, embody the entire agreement and understanding of the parties hereto in respect of the transactions contemplated by this Agreement. There are no restrictions, promises, representations, warranties, covenants or undertakings, other than those expressly set forth or referred to herein or therein. It is expressly acknowledged and agreed that there are no restrictions, promises, representations, warranties, covenants or undertakings contained in any material made available to the Buyer pursuant to the terms of the Confidentiality Agreement (including the Offering Memorandum, dated September, 1997, and the Bidder's Questions and Updated Document Index letter dated December 29, 1997, previously made available to the Buyer by the Sellers). This Agreement supersedes all prior agreements and understandings between the parties with respect to such transactions other than the Confidentiality Agreement. [the remainder of this page is intentionally blank] -60- -200- IN WITNESS WHEREOF, the Sellers and the Buyer have caused this agreement to be signed by their respective duly authorized officers as of the date first above written. MAINE PUBLIC SERVICE COMPANY By: /s/ Paul R. Cariani Name: Paul R. Cariani Title: President MAINE AND NEW BRUNSWICK ELECTRICAL POWER COMPANY, LIMITED By: /s/ Paul R. Cariani Name: Paul R. Cariani Title: President WPS POWER DEVELOPMENT, INC. By: /s/ Gerald L. Mroczkowski Name: Gerald L. Mroczkowski Title: Vice President -61- -201- EX-3.B.1 3 EXHIBIT 3B-1 WPS RESOURCES CORPORATION BY-LAWS AS IN EFFECT SEPTEMBER 1, 1998 ARTICLE I. OFFICES 1. PRINCIPAL OFFICE The principal office of the Corporation in the State of Wisconsin shall be in the City of Green Bay. The Corporation may also have offices at such other places, within and outside of the State of Wisconsin, as the Board of Directors may designate or as the business of the Corporation may require. 2. REGISTERED OFFICE The Board of Directors shall designate the registered office of the Corporation and may change such registered office by resolution. ARTICLE II. SHAREHOLDERS 1. ANNUAL MEETING The annual meeting of the shareholders for the election of directors and for the transaction of such other business as may properly be brought before the meeting shall be held each year not later than the fourth Tuesday in May, on the date designated by the Board of Directors and specified in the notice of meeting. If the election of directors shall not be held on the day designated for any annual meeting of the shareholders, or at any adjournment thereof, the Board of Directors shall cause the election to be held at a special meeting of the shareholders as soon thereafter as convenient. 2. SPECIAL MEETINGS Special meetings of the shareholders may be called by the Chairman of the Board of Directors or the President or the Secretary, or by resolution of the Board of Directors. The Corporation shall call a special meeting of shareholders in the event that the holders of at least 10% of all the votes entitled to be cast on any issue proposed to be considered at the proposed special meeting sign, date, and deliver to the Corporation one or more written demands for the meeting describing one or more purposes for which it is to be held. The Corporation shall -202- give notice of such a special meeting within 30 days after the date that the demand is delivered to the Corporation. 3. PLACE OF MEETING Each meeting of shareholders, annual or special, shall be held at the principal office of the Corporation unless another place, either within or without the State of Wisconsin, has been designated by the Board of Directors and specified in the notice of such meeting, but any meeting of shareholders may be adjourned to reconvene at any place designated by a majority of the shares represented at such meeting. 4. NOTICE OF MEETINGS Written notice stating the date, time, and place of the meeting and, in case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than 10 nor more than 60 days before the date of the meeting (unless a different time is provided by the Wisconsin Business Corporation Law or the Articles of Incorporation) to each shareholder of record entitled to vote at such meeting and to such other persons as required by the Wisconsin Business Corporation Law. Such notice shall be given by or at the direction of the officer or persons calling the meeting and shall be deemed to be delivered when deposited in the United States mail, postage prepaid, addressed to the shareholder of record at his or her address as it appears in the records of the Corporation. If any meeting of the shareholders is adjourned to another time or place, no notice of such adjourned meeting need be given other than by announcement thereof at the meeting at which such adjournment is taken; provided, however, that if a new record date for an adjourned meeting is or must be fixed, the Corporation shall give notice of the adjourned meeting to persons who are shareholders as of the new record date. 5. WAIVER OF NOTICE A shareholder may waive any notice required by the Wisconsin Business Corporation Law, the Articles of Incorporation or these By-laws before or after the date and time stated in the notice. The waiver shall be in writing and signed by the shareholder entitled to the notice, contain the same information that would have been required in the notice under applicable provisions of the Wisconsin Business Corporation Law (except that the time and place of meeting need not 2 -203- be stated) and be delivered to the Corporation for inclusion in the corporate records. A shareholder's attendance at a meeting, in person or by proxy, waives objection to all of the following: a. Lack of notice or defective notice of the meeting, unless the shareholder at the beginning of the meeting or promptly upon arrival objects to holding the meeting or transacting business at the meeting; and b. Consideration of a particular matter at the meeting that is not within the purpose described in the meeting notice, unless the shareholder objects to considering the matter when it is presented. 6. FIXING OF RECORD DATE The Board of Directors may fix in advance a date as the record date for the purpose of determining shareholders entitled to notice of and to vote at any meeting of shareholders, shareholders entitled to demand a special meeting as contemplated by Section 2 of this Article II, shareholders entitled to take any other action, or shareholders for any other purpose. Such record date shall not be more than 70 days prior to the date on which the particular action, requiring such determination of shareholders, is to be taken. If no record date is fixed by the Board of Directors or by the Wisconsin Business Corporation Law for the determination of shareholders entitled to notice of and to vote at a meeting of shareholders, the record date shall be the close of business on the day before the first notice is given to shareholders. If no record date is fixed by the Board of Directors or by the Wisconsin Business Corporation Law for the determination of shareholders entitled to demand a special meeting as contemplated in Section 2 of this Article II, the record date shall be the date that the first shareholder signs the demand. Except as provided by the Wisconsin Business Corporation Law for a court-ordered adjournment, a determination of shareholders entitled to notice of and to vote at a meeting of shareholders is effective for any adjournment of such meeting unless the Board of Directors fixes a new record date, which it shall do if the meeting is adjourned to a date more than 120 days after the date fixed for the original meeting. The record date for determining shareholders entitled to a distribution (other than a distribution involving a purchase, redemption, or other acquisition of the Corporation's shares) or a share dividend is the date on which the Board of Directors authorized the distribution or share dividend, as the case may be, unless the Board of Directors fixes a different record date. 3 -204- 7. SHAREHOLDERS' LIST FOR MEETINGS After a record date for a special or annual meeting of shareholders has been fixed, the Corporation shall prepare a list of the names of all of the shareholders entitled to notice of the meeting. The list shall be arranged by class or series of shares, if any, and show the address of and number of shares held by each shareholder. Such list shall be available for inspection by any shareholder, beginning two business days after notice of the meeting is given for which the list was prepared and continuing to the date of the meeting, at the Corporation's principal office or at a place identified in the meeting notice in the city where the meeting will be held. A shareholder or his or her agent may, on written demand, inspect and, subject to the limitations imposed by the Wisconsin Business Corporation Law, copy the list, during regular business hours and at his or her expense, during the period that it is available for inspection pursuant to this Section. The Corporation shall make the shareholders' list available at the meeting and any shareholder or his or her agent or attorney may inspect the list at any time during the meeting or any adjournment thereof. Refusal or failure to prepare or make available the shareholders' list shall not affect the validity of any action taken at a meeting of shareholders. 8. QUORUM AND VOTING REQUIREMENTS Shares entitled to vote as a separate voting group may take action on a matter at a meeting only if a quorum of those shares exists with respect to that matter. The holders of a majority of the shares entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of shareholders. Once a share is represented for any purpose at a meeting, other than for the purpose of objecting to holding the meeting or transacting business at the meeting, it is considered present for purposes of determining whether a quorum exists for the remainder of the meeting and for any adjournment of that meeting unless a new record date is or must be set for the adjourned meeting. If a quorum exists, except in the case of the election of directors, action on a matter shall be approved if the votes cast within the voting group favoring the action exceed the votes cast opposing the action, unless the Articles of Incorporation or the Wisconsin Business Corporation Law requires a greater number of affirmative votes. Unless otherwise provided in the Articles of Incorporation, each director shall be elected by a plurality of the votes cast by the shares entitled to vote in the election of directors at a meeting at which a quorum is present. Though less than a quorum of the outstanding votes of a voting group are represented at a meeting, a majority of the votes so represented may adjourn the meeting from time to time without further notice. At such adjourned meeting at which a 4 -205- quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. 9. PROXIES At all meetings of shareholders, a shareholder may vote his or her shares in person or by proxy. A shareholder may appoint a proxy to vote or otherwise act for the shareholder by signing an appointment form, either personally or by his or her attorney-in-fact. An appointment of a proxy is effective when received by the Secretary or other officer or agent of the Corporation authorized to tabulate votes. An appointment is valid for 11 months from the date of its signing unless a different period is expressly provided in the appointment form. 10. ACCEPTANCE OF INSTRUMENTS SHOWING SHAREHOLDER ACTION If the name signed on a vote, consent, waiver, or proxy appointment corresponds to the name of a shareholder, the Corporation, if acting in good faith, may accept the vote, consent, waiver, or proxy appointment and give it effect as the act of a shareholder. If the name signed on a vote, consent, waiver, or proxy appointment does not correspond to the name of a shareholder, the Corporation, if acting in good faith, may accept the vote, consent, waiver, or proxy appointment and give it effect as the act of the shareholder if any of the following apply: a. The shareholder is an entity and the name signed purports to be that of an officer or agent of the entity. b. The name purports to be that of a personal representative, administrator, executor, guardian, or conservator representing the shareholder and, if the Corporation requests, evidence of fiduciary status acceptable to the Corporation is presented with respect to the vote, consent, waiver, or proxy appointment. c. The name signed purports to be that of a receiver or trustee in bankruptcy of the shareholder and, if the Corporation requests, evidence of this status acceptable to the Corporation is presented with respect to the vote, consent, waiver, or proxy appointment. d. The name signed purports to be that of a pledgee, beneficial owner, or attorney-in-fact of the shareholder and, if the Corporation requests, evidence acceptable to the Corporation of the signatory's authority to sign 5 -206- for the shareholder is presented with respect to the vote, consent, waiver, or proxy appointment. e. Two or more persons are the shareholders as co-tenants or fiduciaries and the name signed purports to be the name of at least one of the co-owners and the person signing appears to be acting on behalf of all co-owners. The Corporation may reject a vote, consent, waiver, or proxy appointment if the Secretary or other officer or agent of the Corporation who is authorized to tabulate votes, acting in good faith, has reasonable basis for doubt about the validity of the signature on it or about the signatory's authority to sign for the shareholder. ARTICLE III. BOARD OF DIRECTORS 1. GENERAL POWERS The business and affairs of the Corporation shall be managed by its Board of Directors. The Board shall determine the nature and character of the business to be conducted by the Corporation and the method of doing so; what employees, agents, and officers shall be employed and their compensation; and what purchases or contracts for purchase shall be made. The Board may delegate any of its aforesaid powers to committees or to officers, agents, or employees as it may from time to time determine. 2. NUMBER OF DIRECTORS The number of directors of the Corporation shall be ten, divided into three classes: Class A - 4 members, Class B - 3 members, and Class C - 3 members. 3. TERM At the 1994 annual meeting of shareholders, the directors of Class A shall be elected for a term to expire at the first annual meeting of shareholders after their election, and until their successors are elected and qualify, the directors of Class B shall be elected for a term to expire at the second annual meeting of shareholders after their election, and until their successors are elected and qualify, and the directors of Class C shall be elected for a term to expire at the third annual meeting of shareholders after their election and until their successors are elected and qualify. At each annual meeting of shareholders 6 -207- after the 1994 annual meeting of shareholders, the successors to the class of directors whose terms shall expire at the time of such annual meeting shall be elected to hold office until the third succeeding annual meeting of shareholders, and until their successors are elected and qualify. 4. QUALIFICATIONS No director shall be eligible for re-election after attaining the age of 70 years. Directors need not be shareholders of the Corporation or residents of the State of Wisconsin. 5. MEETINGS The Board of Directors shall hold its meetings at such place or places, within or without the State of Wisconsin, as the Board may from time to time determine. a. A meeting of the Board of Directors, to be known as the annual meeting, may be held, without notice, immediately after and at the same place as the annual meeting of the shareholders at which such Board is elected, for the purpose of electing the officers of the Corporation and to transact such other business as may come before the Board. Such annual meeting may be held at a different place than the annual meeting of shareholders and/or on a date subsequent to the annual meeting of shareholders, if notice of such different place and/or date has been given to or waived by all the directors. b. Regular meetings of the Board of Directors may be held without call and without notice, at such times and in such places as the Board may by resolution from time to time determine. c. Special meetings of the Board of Directors may be called at any time by the Chairman of the Board or the Chief Executive Officer and shall be called by the Secretary of the Corporation upon the written request of three or more directors. 6. NOTICE; WAIVER Notice of each special meeting of the Board of Directors shall be given by written notice delivered or communicated in person, by telegraph, teletype, facsimile or other form of wire or wireless communication, or by mail or private carrier, to each director at his or her business address or at such other address as such director shall have designated in writing filed with the Secretary, in each case not 7 -208- less than 48 hours prior to the meeting. The notice need not prescribe the purpose of the special meeting of the Board of Directors or the business to be transacted at such meeting. If mailed, such notice shall be deemed to be effective when deposited in the United States mail so addressed, with postage thereon prepaid. If notice is given by telegram, such notice shall be deemed to be effective when the telegram is delivered to the telegraph company. If notice is given by private carrier, such notice shall be deemed to be effective when delivered to the private carrier. Whenever any notice whatever is required to be given to any director of the Corporation under the Articles of Incorporation or these By-laws or any provision of the Wisconsin Business Corporation Law, a waiver thereof in writing, signed at any time, whether before or after the date and time of meeting, by the director entitled to such notice shall be deemed equivalent to the giving of such notice. The Corporation shall retain any such waiver as part of the permanent corporate records. A director's attendance at or participation in a meeting waives any required notice to him or her of the meeting unless the director at the beginning of the meeting or promptly upon his or her arrival objects to holding the meeting or transacting business at the meeting and does not thereafter vote for or assent to action taken at the meeting. 7. QUORUM Except as otherwise provided by the Wisconsin Business Corporation Law or by the Articles of Incorporation or these By-laws, a majority of the number of directors specified in Section 2 of Article III of these By-laws shall constitute a quorum for the transaction of business at any meeting of the Board of Directors. Except as otherwise provided by the Wisconsin Business Corporation Law, the Articles of Incorporation, or these By-laws, a quorum of any committee of the Board of Directors created pursuant to Section 13 hereof shall consist of a majority of the number of directors appointed to serve on the committee. A majority of the directors present (though less than such quorum) may adjourn any meeting of the Board of Directors or any committee thereof, as the case may be, from time to time without further notice. 8. MANNER OF ACTING The affirmative vote of a majority of the directors present at a meeting of the Board of Directors or a committee thereof at which a quorum is present shall be the act of the Board of Directors or such committee, as the case may be, unless the Wisconsin Business Corporation Law, the Articles of Incorporation, or these By-laws require the vote of a greater number of directors. 8 -209- 9. MINUTES OF MEETINGS Minutes of any regular or special meeting of the Board of Directors shall be prepared and distributed to each director. 10. VACANCIES Vacancies occurring in the Board of Directors shall be filled in the manner provided in Article 5 of the Articles of Incorporation. 11. COMPENSATION The Board of Directors, irrespective of any personal interest of any of its members, may establish reasonable compensation of all directors for services to the Corporation as directors, officers, or otherwise, or may delegate such authority to an appropriate committee. The Board of Directors also shall have authority to provide for or delegate authority to an appropriate committee to provide for reasonable pensions, disability or death benefits, and other benefits or payments, to directors, officers, and employees and to their estates, families, dependents, or beneficiaries on account of prior services rendered by such directors, officers, and employees to the Corporation. 12. PRESUMPTION OF ASSENT A director who is present and is announced as present at a meeting of the Board of Directors or any committee thereof created in accordance with Section 13 of this Article III, when corporate action is taken, assents to the action taken unless any of the following occurs: a. The director objects at the beginning of the meeting or promptly upon his or her arrival to holding the meeting or transacting business at the meeting; b. The director's dissent or abstention from the action taken is entered in the minutes of the meeting; or 9 -210- c. The director delivers written notice that complies with the Wisconsin Business Corporation Law of his or her dissent or abstention to the presiding officer of the meeting before its adjournment or to the Corporation immediately after adjournment of the meeting. Such right of dissent or abstention shall not apply to a director who votes in favor of the action taken. 13. COMMITTEES The Board of Directors by resolution adopted by the affirmative vote of a majority of all of the directors then in office may create one or more committees, appoint members of the Board of Directors to serve on the committees and designate other members of the Board of Directors to serve as alternates. Each committee shall have two or more members who shall, unless otherwise provided by the Board of Directors, serve at the pleasure of the Board of Directors. A committee may be authorized to exercise the authority of the Board of Directors, except that a committee may not do any of the following: a. Authorize distributions; b. Approve or propose to shareholders action that the Wisconsin Business Corporation Law requires to be approved by shareholders; c. Fill vacancies on the Board of Directors or, unless the Board of Directors provides by resolution that vacancies on a committee shall be filled by the affirmative vote of the remaining committee members, on any Board committee; d. Amend the Corporation's Articles of Incorporation; e. Adopt, amend, or repeal By-laws; f. Approve a plan of merger not requiring shareholder approval; g. Authorize or approve reacquisition of shares, except according to a formula or method prescribed by the Board of Directors; and h. Authorize or approve the issuance or sale or contract for sale of shares, or determine the designation and relative rights, preferences and limitations of a class or series of shares, except that the Board of Directors may authorize a committee to do so within limits prescribed by the Board of 10 -211- Directors. Unless otherwise provided by the Board of Directors in creating the committee, a committee may employ counsel, accountants, and other consultants to assist it in the exercise of its authority. 14. TELEPHONIC MEETINGS Except as herein provided and notwithstanding any place set forth in the notice of the meeting or these By-laws, members of the Board of Directors (and any committees thereof created pursuant to Section 13 of this Article III) may participate in regular or special meetings by, or through the use of, any means of communication by which all participants may simultaneously hear each other, such as by conference telephone. If a meeting is conducted by such means, then at the commencement of such meeting the presiding officer shall inform the participating directors that a meeting is taking place at which official business may be transacted. Any participant in a meeting by such means shall be deemed present in person at such meeting. Notwithstanding the foregoing, no action may be taken at any meeting held by such means on any particular matter which the presiding officer determines, in his or her sole discretion, to be inappropriate under the circumstances for action at a meeting held by such means. Such determination shall be made and announced in advance of such meeting. 15. ACTION WITHOUT MEETING Any action required or permitted by the Wisconsin Business Corporation Law to be taken at a meeting of the Board of Directors or a committee thereof created pursuant to Section 13 of this Article III may be taken without a meeting if the action is taken by all members of the Board or of the committee. The action shall be evidenced by one or more written consents describing the action taken, signed by each director or committee member, and retained by the Corporation. Such action shall be effective when the last director or committee member signs the consent, unless the consent specifies a different effective date. ARTICLE IV. OFFICERS 1. PRINCIPAL OFFICERS The principal officers of the Corporation required by statute shall be a President, such number of Vice Presidents as may be elected by the Board of Directors, a Secretary, and a Treasurer. The Board of Directors may elect from among the directors a Chairman of the Board of Directors and a Vice Chairman of the Board 11 -212- of Directors, may designate such Chairman, Vice Chairman, or any principal officer as the Chief Executive Officer, may elect such assistant secretaries and assistant treasurers and other officers as it shall deem necessary, and may prescribe by resolution their respective powers and duties. 2. PRESIDENT The President shall be elected by the directors. Unless the Board of Directors otherwise prescribes, he or she shall be the Chief Executive Officer of the Corporation. In the event that the President is not the Chief Executive Officer, he or she shall have such powers and duties as the Board of Directors may prescribe. 3. CHAIRMAN OF THE BOARD OF DIRECTORS If a Chairman of the Board of Directors shall be elected, he or she shall preside as Chairman of all meetings of the shareholders and of the Board of Directors. He or she shall have such other authority as the Board may from time to time prescribe. If there is no Chairman of the Board, or in the absence of the Chairman, the presiding officer at meetings of the shareholders, and of the Board of Directors shall be another officer in the following order of priority: Vice Chairman of the Board of Directors, President and Vice Presidents (subject, however, to Section 5 of this Article). 4. CHIEF EXECUTIVE OFFICER The Chief Executive Officer shall exercise active supervision over the business, property, and affairs of the Corporation. a. The Chief Executive Officer shall have authority, subject to such rules as may be prescribed from time to time by the Board or its committees, to appoint agents or employees other than those elected by the Board, to prescribe their powers and duties, and to delegate such authority as he or she may see fit. Any agent or employee not elected by the Board shall hold office at the discretion of the Chief Executive Officer or other officer employing him. b. The Chief Executive Officer is authorized to sign, execute, and acknowledge, on behalf of the Corporation, all deeds, mortgages, bonds, notes, debentures, contracts, leases, reports and other documents and instruments, except where the signing and execution thereof by some other officer or agent shall be expressly authorized and directed by law or 12 -213- by the Board or by these By-laws. Unless otherwise provided by law or by the Board, the Chief Executive Officer may authorize any officer, employee, or agent to sign, execute, and acknowledge, on behalf of the Corporation, and in his or her place and stead, all such documents and instruments. c. Unless otherwise ordered by the Board of Directors, the Chief Executive Officer, or a proxy appointed by him, shall have full power and authority, in the name of and on behalf of the Corporation, to attend, act, and vote at any meeting of the shareholders of any other corporation in which the Corporation may hold shares of stock. At any such meeting, he or she shall possess and may exercise any and all rights and powers incident to the ownership of shares of stock. d. The Chief Executive Officer shall have such other powers and perform such other duties as are incident to the office of Chief Executive Officer and as may be prescribed by the Board. 5. VICE PRESIDENTS In the absence of the President or during his or her inability or refusal to act, his or her powers and duties shall temporarily devolve upon such Vice Presidents or other officers as shall be designated by the Board of Directors or, if not designated by the Board, by the Chief Executive Officer or other officer to whom such power may be delegated by the Board; provided, that no Vice President or other officer shall -------- act as a member or chairman of any committee of the Board of Directors of which the President is a member or chairman, except at the direction of the Board. a. Each Vice President shall have such powers and perform such other duties as may be assigned to him by the Board or by the President, including the power to sign, execute, and acknowledge all documents and instruments referred to in Section 4 of this Article. b. The Board may assign to any Vice President, general supervision and charge over any branch of the business and affairs of the Corporation, subject to such limitations as it may elect to impose. c. The Board of Directors may, if it chooses, designate one or more of the Vice Presidents "Executive Vice President" with such powers and duties as the Board shall prescribe. 13 -214- 6. SECRETARY The Secretary shall attend, and keep the minutes of meetings of the shareholders, of the Board of Directors and, unless otherwise directed by any such committee, of all committees, in books provided for that purpose; shall have custody of the corporate records and seal; shall see that notices are given and records and reports properly kept and filed as required by law or by these By-laws; and, in general, shall have such other powers and perform such other duties as are incident to the office of Secretary and as may be assigned to him or her by the Board of Directors or the Chief Executive Officer. 7. ASSISTANT SECRETARIES In the absence of the Secretary, or during his or her inability or refusal to act, his or her powers and duties shall temporarily devolve upon such one of the Assistant Secretaries as the President or the Board of Directors may direct. The Assistant Secretaries shall have such other powers and perform such other duties as may be assigned to them by the Board, the Chief Executive Officer, or the Secretary. 8. TREASURER The Treasurer shall have charge and custody of the funds, securities, and other evidences of value of the Corporation, and shall keep and deposit them as required by the Board of Directors. He or she shall keep proper accounts of all receipts and disbursements and of the financial transactions of the Corporation. He or she shall render statements of such accounts and of money received and disbursed by him or her and of property and money belonging to the Corporation as required by the Board. The Treasurer shall have such other powers and perform such other duties as are incident to the office of Treasurer and as from time to time may be prescribed by the Board or the Chief Executive Officer. 9. ASSISTANT TREASURERS In the absence of the Treasurer, or during his or her inability or refusal to act, his or her powers and duties shall temporarily devolve upon such one of the Assistant Treasurers as the President or the Board of Directors may direct. The Assistant Treasurers shall have such other powers and perform such other duties as from time to time may be assigned to them, respectively, by the Board, the Chief Executive Officer, or the Treasurer. 14 -215- 10. OTHER ASSISTANTS AND ACTING OFFICERS The Board of Directors shall have the power to appoint any person to act as assistant to any officer, or as agent for the Corporation in his or her stead, or to perform the duties of such officer whenever for any reason it is impracticable for such officer to act personally, and such assistant or acting officer or other agent so appointed by the Board of Directors or an authorized officer shall have the power to perform all the duties of the office to which he or she is so appointed to be an assistant, or as to which he or she is so appointed to act, except as such power may be otherwise defined or restricted by the Board of Directors. 11. COMPENSATION The salaries or other compensation of all officers elected as provided under Section 1 of this Article (other than assistant officers) shall be fixed from time to time by the Board of Directors. The salaries or other compensation of all other agents and employees of the Corporation shall be fixed from time to time by the Chief Executive Officer, but only within such limits as to amount, and in accordance with such other conditions as may be prescribed by or under the authority of the Board of Directors. 12. TENURE Each officer shall hold office until his or her successor shall have been duly elected and qualified, or until his or her death, resignation, disqualification, or removal. Any officer, agent, or employee may be removed, with or without cause, at any time by the Board of Directors notwithstanding the contract rights, if any, of the officer removed. The appointment of an officer does not of itself create contract rights. 13. RESIGNATION An officer may resign at any time by delivering notice to the Corporation that complies with the Wisconsin Business Corporation Law. The resignation shall be effective when the notice is delivered, unless the notice specifies a later effective date and the Corporation accepts the later effective date. 14. VACANCIES Any vacancy in any office may be filled by the Board of Directors for the unexpired portion of the term. If a resignation of an officer is effective at a later date as contemplated by Section 13 of this Article IV, the Board of Directors may 15 -216- fill the pending vacancy before the effective date if the Board provides that the successor may not take office until the effective date. 15. REASSIGNMENT OF DUTIES In case of the absence or disability of any officer of the Corporation, or for any other reason deemed sufficient by the Board of Directors, the Board may reassign or delegate the powers and duties, or any of them, to any other officer, director, or person it may select. ARTICLE V. CERTIFICATES FOR AND TRANSFER OF SHARES 1. FORM Certificates representing shares of the Corporation shall be in such form as shall be determined by the Board of Directors. All certificates for shares shall be consecutively numbered or otherwise identified. The name and address of the person to whom the shares represented thereby are issued, with the number of shares and date of issue, shall be entered on the stock transfer books of the Corporation. All certificates surrendered for the transfer shall be cancelled and no new certificate shall be issued until the former certificate for a like number of shares shall have been surrendered and cancelled, except in case of a lost or destroyed certificate provided for in Section 4 of this Article V or a certificate for shares transferred in compliance with the escheat laws of any state. 2. SIGNATURES Certificates representing shares of the Corporation shall be signed by the President or a Vice President and by the Secretary or an Assistant Secretary; and may be sealed with the seal of the Corporation (which may be a facsimile) and countersigned and registered in such manner, if any, as the Board of Directors may prescribe. Whenever any certificate is manually signed on behalf of a transfer agent, or a registrar, other than the Corporation itself or an employee of the Corporation, the signatures of the President, Vice President, Secretary, or Assistant Secretary, upon such certificate may be facsimiles. In case any officer who has signed, or whose facsimile signature has been placed upon such certificate, ceases to be such officer before such certificate is issued, it may be issued with the same effect as if he or she were such officer at the date of its issue. 16 -217- 3. RESTRICTIONS ON TRANSFER The face or reverse side of each certificate representing shares shall bear a conspicuous notation of any restriction imposed by the Corporation upon the transfer of such shares. 4. LOST, DESTROYED, OR STOLEN CERTIFICATES Where the owner claims that his or her certificate for shares has been lost, destroyed, or wrongfully taken, a new certificate shall be issued in place thereof if the owner: a. So requests before the Corporation has notice that such shares have been acquired by a bona fide purchaser; b. Files with the Corporation a sufficient indemnity bond; and c. Satisfies such other reasonable requirements as may be prescribed by or under the authority of the Board of Directors. 5. TRANSFER OF SHARES Prior to due presentment of a certificate for shares for registration of transfer the Corporation may treat the registered owner of such shares as the person exclusively entitled to vote, to receive notifications, and otherwise to have and exercise all the rights and powers of an owner. Where a certificate for shares is presented to the Corporation with a request to register for transfer, the Corporation shall not be liable to the owner or any other person suffering loss as a result of such registration of transfer if: a. There were on or with the certificate the necessary endorsements; and b. The Corporation had no duty to inquire into adverse claims or has discharged any such duty. The Corporation may require reasonable assurance that said endorsements are genuine and effective and compliance with such other regulations as may be prescribed by or under the authority of the Board of Directors. 17 -218- 6. CONSIDERATION FOR SHARES The Board of Directors may authorize shares to be issued for consideration consisting of any tangible or intangible property or benefit to the Corporation, including cash, promissory notes, services performed, contracts for services to be performed or other securities of the Corporation. Before the Corporation issues shares, the Board of Directors shall determine that the consideration received or to be received for the shares to be issued is adequate. The determination of the Board of Directors is conclusive insofar as the adequacy of consideration for the issuance of shares relates to whether the shares are validly issued, fully paid, and nonassessable. The Corporation may place in escrow shares issued in whole or in part for a contract for future services or benefits, a promissory note, or otherwise for property to be issued in the future, or make other arrangements to restrict the transfer of the shares, and may credit distributions in respect of the shares against their purchase price, until the services are performed, the benefits or property are received, or the promissory note is paid. If the services are not performed, the benefits or property are not received, or the promissory note is not paid, the Corporation may cancel, in whole or in part, the shares escrowed or restricted and the distributions credited. 7. OTHER RULES The Board of Directors shall have the power and authority to make all such further rules and regulations not inconsistent with the statutes of the State of Wisconsin as it may deem expedient concerning the issue, transfer, and registration of certificates representing shares of the Corporation, including the appointment and designation of Transfer Agents and Registrars. ARTICLE VI. INDEMNIFICATION OF OFFICERS AND DIRECTORS 1. MANDATORY INDEMNIFICATION a. In all cases other than those set forth in Section 1b hereof, subject to the conditions and limitations set forth hereinafter in this Article VI, the Corporation shall indemnify and hold harmless any person who is or was a party, or is threatened to be made a party, to any Action (see Section 16 of this Article VI for definitions of capitalized terms used herein) by reason of his or her status as an Executive, and/or as to acts performed in the course of such Executive's duties to the Corporation and/or an Affiliate, against Liabilities and reasonable Expenses incurred by or on behalf of an Executive in connection with any Action, including, without limitation, in 18 -219- connection with the investigation, defense, settlement or appeal of any Action; provided, pursuant to Section 3 of this Article VI, that it is not determined by the Authority, or by a court, that the Executive engaged in misconduct which constitutes a Breach of Duty. b. To the extent an Executive has been successful on the merits or otherwise in connection with any Action, including, without limitation, the settlement, dismissal, abandonment, or withdrawal of any such Action where the Executive does not pay, incur, or assume any material Liabilities, or in connection with any claim, issue, or matter therein, he or she shall be indemnified by the Corporation against reasonable Expenses incurred by or on behalf of him or her in connection therewith. The Corporation shall pay such Expenses to the Executive (net of all Expenses, if any, previously advanced to the Executive pursuant to Section 2 of this Article VI), or to such other person or entity as the Executive may designate in writing to the Corporation, within ten days after the receipt of the Executive's written request therefor, without regard to the provisions of Section 3 of this Article VI. In the event the Corporation refuses to pay such requested Expenses, the Executive may petition a court to order the Corporation to make such payment pursuant to Section 4 of this Article VI. c. Notwithstanding any other provision contained in this Article VI to the contrary, the Corporation shall not: (1) Indemnify, contribute, or advance Expenses to an Executive with respect to any Action initiated or brought voluntarily by the Executive and not by way of defense, except with respect to Actions: (a) brought to establish or enforce a right to indemnification, contribution, and/or an advance of Expenses under Section 4 of this Article VI, under the Statute as it may then be in effect or under any other statute or law or otherwise as required; (b) initiated or brought voluntarily by an Executive to the extent such Executive is successful on the merits or otherwise in connection with such an Action in accordance with and pursuant to Section 1b of this Article VI; or (c) as to which the Board determines it to be appropriate. 19 -220- (2) indemnify the Executive under this Article VI for any amounts paid in settlement of any Action effected without the Corporation's written consent. The Corporation shall not settle in any manner which would impose any Liabilities or other type of limitation on the Executive without the Executive's written consent. Neither the Corporation nor the Executive shall unreasonably withhold their consent to any proposed settlement. d. An Executive's conduct with respect to an employee benefit plan sponsored by or otherwise associated with the Corporation and/or an Affiliate for a purpose he or she reasonably believes to be in the interests of the participants in and beneficiaries of such plan is conduct that does not constitute a breach or failure to perform his or her duties to the Corporation or an Affiliate, as the case may be. 2. ADVANCE FOR EXPENSES a. The Corporation shall pay to an Executive, or to such other person or entity as the Executive may designate in writing to the Corporation, his or her reasonable Expenses incurred by or on behalf of such Executive in connection with any Action, or claim, issue, or matter associated with any such Action, in advance of the final disposition or conclusion of any such Action (or claim, issue, or matter associated with any such Action), within ten days after the receipt of the Executive's written request therefor; provided, the following conditions are satisfied: (1) The Executive has first requested an advance of such Expenses in writing (and delivered a copy of such request to the Corporation) from the insurance carrier(s), if any, to whom a claim has been reported under an applicable insurance policy purchased by the Corporation and each such insurance carrier, if any, has declined to make such an advance; (2) The Executive furnishes to the Corporation an executed written certificate affirming his or her good faith belief that he or she has not engaged in misconduct which constitutes a Breach of Duty; and (3) The Executive furnishes to the Corporation an executed written agreement to repay any advances made under this Section 2 if it is ultimately determined that he or she is not entitled to be 20 -221- indemnified by the Corporation for such Expenses pursuant to this Article VI. b. If the Corporation makes an advance of Expenses to an Executive pursuant to this Section 2, the Corporation shall be subrogated to every right of recovery the Executive may have against any insurance carrier from whom the Corporation has purchased insurance for such purpose. 3. DETERMINATION OF RIGHT TO INDEMNIFICATION a. Except as otherwise set forth in this Section 3 or in Section 1c of this Article VI, any indemnification to be provided to an Executive by the Corporation under Section 1a of this Article VI upon the final disposition or conclusion of any Action, or any claim, issue, or matter associated with any such Action, unless otherwise ordered by a court, shall be paid by the Corporation to the Executive (net of all Expenses, if any, previously advanced to the Executive pursuant to Section 2 of this Article VI), or to such other person or entity as the Executive may designate in writing to the Corporation, within 60 days after the receipt of the Executive's written request therefor. Such request shall include an accounting of all amounts for which indemnification is being sought. No further corporate authorization for such payment shall be required other than this Section 3. b. Notwithstanding the foregoing, the payment of such requested indemnifiable amounts pursuant to Section 1a of this Article VI may be denied by the Corporation if: (1) the Board by a majority vote thereof determines that the Executive has engaged in misconduct which constitutes a Breach of Duty; or (2) a majority of the directors of the Corporation are a party in interest to such Action. c. In either event of nonpayment pursuant to Section 3b of this Article VI, the Board shall immediately authorize and direct, by resolution, that an independent determination be made as to whether the Executive has engaged in misconduct which constitutes a Breach of Duty and, therefore, whether indemnification of the Executive is proper pursuant to this Article VI. 21 -222- d. Such independent determination shall be made, at the option of the Executive(s) seeking indemnification, by: (1) A panel of three arbitrators (selected as set forth below in Section 3f from the panels of arbitrators of the American Arbitration Association) in Milwaukee, Wisconsin, in accordance with the Commercial Arbitration Rules then prevailing of the American Arbitration Association; (2) An independent legal counsel mutually selected by the Executive(s) seeking indemnification and the Board by a majority vote of a quorum thereof consisting of directors who were not parties in interest to such Action (or, if such quorum is not obtainable, by the majority vote of the entire Board); or (3) A court in accordance with Section 4 of this Article VI. e. In any such determination there shall exist a rebuttable presumption that the Executive has not engaged in misconduct which constitutes a Breach of Duty and is, therefore, entitled to indemnification hereunder. The burden of rebutting such presumption by clear and convincing evidence shall be on the Corporation. f. If a panel of arbitrators is to be employed hereunder, one of such arbitrators shall be selected by the Board by a majority vote of a quorum thereof consisting of directors who were not parties in interest to such Action or, if such quorum is not obtainable, by an independent legal counsel chosen by the majority vote of the entire Board, the second by the Executive(s) seeking indemnification, and the third by the previous two arbitrators. g. The Authority shall make its independent determination hereunder within 60 days of being selected and shall simultaneously submit a written opinion of its conclusions to both the Corporation and the Executive. h. If the Authority determines that an Executive is entitled to be indemnified for any amounts pursuant to this Article VI, the Corporation shall pay such amounts to the Executive (net of all Expenses, if any, previously advanced to the Executive pursuant to Section 2 of this Article VI), including interest thereon as provided in Section 6c of this Article VI, or such other person or entity as the Executive may designate in writing to the Corporation, within ten days of receipt of such opinion. 22 -223- i. Except with respect to any judicial determination pursuant to Section 4 of this Article VI, the Expenses associated with the indemnification process set forth in this Section 3 of this Article VI, including, without limitation, the Expenses of the Authority selected hereunder, shall be paid by the Corporation. 4. COURT-ORDERED INDEMNIFICATION AND ADVANCE FOR EXPENSES a. An Executive may, either before or within two years after a determination, if any, has been made by the Authority, petition the court before which such Action was brought or any other court of competent jurisdiction to independently determine whether or not he or she has engaged in misconduct which constitutes a Breach of Duty and is, therefore, entitled to indemnification under the provisions of this Article VI. Such court shall thereupon have the exclusive authority to make such determination unless and until such court dismisses or otherwise terminates such proceeding without having made such determination. An Executive may petition a court under this Section 4 either to seek an initial determination by the court as authorized by Section 3d of this Article VI or to seek review by the court of a previous adverse determination by the Authority. b. The court shall make its independent determination irrespective of any prior determination made by the Authority; provided, however, that there shall exist a rebuttable presumption that the Executive has not engaged in misconduct which constitutes a Breach of Duty and is, therefore, entitled to indemnification hereunder. The burden of rebutting such presumption by clear and convincing evidence shall be on the Corporation. c. In the event the court determines that an Executive has engaged in misconduct which constitutes a Breach of Duty, it may nonetheless order indemnification to be paid by the Corporation if it determines that the Executive is fairly and reasonably entitled to indemnification in view of all of the circumstances of such Action. d. In the event the Corporation does not: (1) Advance Expenses to the Executive within ten days of such Executive's compliance with Section 2 of this Article VI; or (2) Indemnify an Executive with respect to requested Expenses under Section 1b of this Article VI within ten days of such Executive's written request therefor, the Executive may petition the court before 23 -224- which such Action was brought, if any, or any other court of competent jurisdiction to order the Corporation to pay such reasonable Expenses immediately. Such court, after giving any notice it considers necessary, shall order the Corporation to pay such Expenses if it determines that the Executive has complied with the applicable provisions of Section 2 of this Article VI or 1b of this Article VI, as the case may be. e. If the court determines pursuant to this Section 4 that the Executive is entitled to be indemnified for any Liabilities and/or Expenses, or to the advance of Expenses, unless otherwise ordered by such court, the Corporation shall pay such Liabilities and/or Expenses to the Executive (net of all Expenses, if any, previously advanced to the Executive pursuant to Section 2 of this Article VI), including interest thereon as provided in Section 6c of this Article VI, or to such other person or entity as the Executive may designate in writing to the Corporation, within ten days of the rendering of such determination. f. An Executive shall pay all Expenses incurred by such Executive in connection with the judicial determination provided in this Section 4, unless it shall ultimately be determined by the court that he or she is entitled, in whole or in part, to be indemnified by, or to receive an advance from, the Corporation as authorized by this Article VI. All Expenses incurred by an Executive in connection with any subsequent appeal of the judicial determination provided for in this Section 4 shall be paid by the Executive regardless of the disposition of such appeal. 5. TERMINATION OF AN ACTION IS NONCONCLUSIVE The adverse termination of any Action against an Executive by judgment, order settlement, conviction, or upon a plea of no contest or its equivalent, shall not, of itself, create a presumption that the Executive has engaged in misconduct which constitutes a Breach of Duty. 6. PARTIAL INDEMNIFICATION; REASONABLENESS; INTEREST a. If it is determined by the Authority, or by a court, that an Executive is entitled to indemnification as to some claims, issues, or matters, but not as to other claims, issues, or matters, involved in any Action, the Authority, or the court, shall authorize the proration and payment by the Corporation of such Liabilities and/or reasonable Expenses with respect to which indemnification is sought by the Executive, among such claims, 24 -225- issues, or matters as the Authority, or the court, shall deem appropriate in light of all of the circumstances of such Action. b. If it is determined by the Authority, or by a court, that certain Expenses incurred by or on behalf of an Executive are for whatever reason unreasonable in amount, the Authority, or the court, shall nonetheless authorize indemnification to be paid by the Corporation to the Executive for such Expenses as the Authority, or the court, shall deem reasonable in light of all of the circumstances of such Action. c. Interest shall be paid by the Corporation to an Executive, to the extent deemed appropriate by the Authority, or by a court, at a reasonable interest rate, for amounts for which the Corporation indemnifies or advances to the Executive. 7. INSURANCE; SUBROGATION a. The Corporation may purchase and maintain insurance on behalf of any person who is or was an Executive of the Corporation, and/or is or was serving as an Executive of an Affiliate, against Liabilities and/or Expenses asserted against him or her and/or incurred by or on behalf of him or her in any such capacity, or arising out of his or her status as such an Executive, whether or not the Corporation would have the power to indemnify him or her against such Liabilities and/or Expenses under this Article VI or under the Statute as it may then be in effect. Except as expressly provided herein, the purchase and maintenance of such insurance shall not in any way limit or affect the rights and obligations of the Corporation and/or any Executive under this Article VI. Such insurance may, but need not, be for the benefit of all Executives of the Corporation and those serving as an Executive of an Affiliate. b. If an Executive shall receive payment from any insurance carrier or from the plaintiff in any Action against such Executive in respect of indemnified amounts after payments on account of all or part of such indemnified amounts have been made by the Corporation pursuant to this Article VI, such Executive shall promptly reimburse the Corporation for the amount, if any, by which the sum of such payment by such insurance carrier or such plaintiff and payments by the Corporation to such Executive exceeds such indemnified amounts; provided, however, that such portions, if any, of such insurance proceeds that are required to be reimbursed to the insurance carrier under the terms of its insurance policy, such as 25 -226- deductible, retention, or co-insurance amounts, shall not be deemed to be payments to such Executive hereunder. c. Upon payment of indemnified amounts under this Article VI, the Corporation shall be subrogated to such Executive's rights against any insurance carrier in respect of such indemnified amounts and the Executive shall execute and deliver any and all instruments and/or documents and perform any and all other acts or deeds which the Corporation shall deem necessary or advisable to secure such rights. The Executive shall do nothing to prejudice such rights of recovery or subrogation. 8. WITNESS EXPENSES The Corporation shall advance or reimburse any and all reasonable Expenses incurred by or on behalf of an Executive in connection with his or her appearance as a witness in any Action at a time when he or she has not been formally named a defendant or respondent to such an Action, within ten days after the receipt of an Executive's written request therefor. 9. CONTRIBUTION a. Subject to the limitations of this Section 9, if the indemnity provided for in Section 1 of this Article VI is unavailable to an Executive for any reason whatsoever, the Corporation, in lieu of indemnifying the Executive, shall contribute to the amount incurred by or on behalf of the Executive, whether for Liabilities and/or for reasonable Expenses in connection with any Action in such proportion as deemed fair and reasonable by the Authority, or by a court, in light of all of the circumstances of any such Action, in order to reflect: (1) The relative benefits received by the Corporation and the Executive as a result of the event(s) and/or transaction(s) giving cause to such Action; and/or (2) The relative fault of the Corporation (and its other Executives, employees, and/or agents) and the Executive in connection with such event(s) and/or transaction(s). b. The relative fault of the Corporation (and its other Executives, employees, and/or agents), on the one hand, and of the Executive, on the other hand, shall be determined by reference to, among other things, the parties' 26 -227- relative intent, knowledge, access to information, and opportunity to correct or prevent the circumstances resulting in such Liabilities and/or Expenses. The Corporation agrees that it would not be just and equitable if contribution pursuant to this Section 9 were determined by pro rata allocation or any other method of allocation which does not take account of the foregoing equitable considerations. c. An Executive shall not be entitled to contribution from the Corporation under this Section 9 in the event it is determined by the Authority, or by a court, that the Executive has engaged in misconduct which constitutes a Breach of Duty. d. The Corporation's payment of, and an Executive's right to, contribution under this Section 9 shall be made and determined in accordance with and pursuant to the provisions in Sections 3 and/or 4 of this Article VI relating to the Corporation's payment of, and the Executive's right to, indemnification under this Article VI. 10. INDEMNIFICATION OF EMPLOYEES Unless otherwise specifically set forth in this Article VI, the Corporation shall indemnify and hold harmless any person who is or was a party, or is threatened to be made a party to any Action by reason of his or her status as, or the fact that he or she is or was an employee or authorized agent or representative of the Corporation and/or an Affiliate as to acts performed in the course and within the scope of such employee's, agent's, or representative's duties to the Corporation and/or an Affiliate, in accordance with and to the fullest extent permitted by the Statute as it may then be in effect. 11. SEVERABILITY If any provision of this Article VI shall be deemed invalid or inoperative, or if a court of competent jurisdiction determines that any of the provisions of this Article VI contravene public policy, this Article VI shall be construed so that the remaining provisions shall not be affected, but shall remain in full force and effect, and any such provisions which are invalid or inoperative or which contravene public policy shall be deemed, without further Action or deed by or on behalf of the Corporation, to be modified, amended, and/or limited, but only to the extent necessary to render the same valid and enforceable, and the Corporation shall indemnify an Executive as to Liabilities and reasonable Expenses with respect to any Action to the full extent permitted by any 27 -228- applicable provision of this Article VI that shall not have been invalidated and to the full extent otherwise permitted by the Statute as it may then be in effect. 12. NONEXCLUSIVITY OF ARTICLE VI The right to indemnification, contribution, and advancement of Expenses provided to an Executive by this Article VI shall not be deemed exclusive of any other rights to indemnification, contribution, and/or advancement of Expenses which any Executive or other employee or agent of the Corporation and/or of an Affiliate may be entitled under any charter provision, written agreement, resolution, vote of shareholders or disinterested directors of the Corporation or otherwise, including, without limitation, under the Statute as it may then be in effect, both as to acts in his or her official capacity as such Executive or other employee or agent of the Corporation and/or of an Affiliate or as to acts in any other capacity while holding such office or position, whether or not the Corporation would have the power to indemnify, contribute, and/or advance Expenses to the Executive under this Article VI or under the Statute; provided that it is not determined that the Executive or other employee or agent has engaged in misconduct which constitutes a Breach of Duty. 13. NOTICE TO THE CORPORATION; DEFENSE OF ACTIONS a. An Executive shall promptly notify the Corporation in writing upon being served with or having actual knowledge of any citation, summons, complaint, indictment, or any other similar document relating to any Action which may result in a claim of indemnification, contribution, or advancement of Expenses hereunder, but the omission so to notify the Corporation will not relieve the Corporation from any liability which it may have to the Executive otherwise than under this Article VI unless the Corporation shall have been irreparably prejudiced by such omission. b. With respect to any such Action as to which an Executive notifies the Corporation of the commencement thereof: (1) The Corporation shall be entitled to participate therein at its own expense; and (2) Except as otherwise provided below, to the extent that it may wish, the Corporation (or any other indemnifying party, including any insurance carrier, similarly notified by the Corporation or the Executive) shall be entitled to assume the defense thereof, with 28 -229- counsel selected by the Corporation (or such other indemnifying party) and reasonably satisfactory to the Executive. c. After notice from the Corporation (or such other indemnifying party) to the Executive of its election to assume the defense of an Action, the Corporation shall not be liable to the Executive under this Article VI for any Expenses subsequently incurred by the Executive in connection with the defense thereof other than reasonable costs of investigation or as otherwise provided below. The Executive shall have the right to employ his or her own counsel in such Action but the Expenses of such counsel incurred after notice from the Corporation (or such other indemnifying party) of its assumption of the defense thereof shall be at the expense of the Executive unless: (1) The employment of counsel by the Executive has been authorized by the Corporation; (2) The Executive shall have reasonably concluded that there may be a conflict of interest between the Corporation (or such other indemnifying party) and the Executive in the conduct of the defense of such Action; or (3) The Corporation (or such other indemnifying party) shall not in fact have employed counsel to assume the defense of such Action, in each of which cases the Expenses of counsel shall be at the expense of the Corporation. The Corporation shall not be entitled to assume the defense of any Derivative Action or any Action as to which the Executive shall have made the conclusion provided for in clause (2) above. 14. CONTINUITY OF RIGHTS AND OBLIGATIONS The terms and provisions of this Article VI shall continue as to an Executive subsequent to the Termination Date and such terms and provisions shall inure to the benefit of the heirs, estate, executors, and administrators of such Executive and the successors and assigns of the Corporation, including, without limitation, any successor to the Corporation by way of merger, consolidation, and/or sale or disposition of all or substantially all of the assets or capital stock of the Corporation. Except as provided herein, all rights and obligations of the Corporation and the Executive hereunder shall continue in full force and effect despite the subsequent amendment or modification of the Corporation's Articles of Incorporation, as such are in effect on the date hereof, and such rights and 29 -230- obligations shall not be affected by any such amendment or modification, any resolution of directors or shareholders of the Corporation, or by any other corporate action which conflicts with or purports to amend, modify, limit, or eliminate any of the rights or obligations of the Corporation and/or of the Executive hereunder. 15. AMENDMENT This Article VI may only be altered, amended, or repealed by the affirmative vote of a majority of the shareholders of the Corporation so entitled to vote; provided, however, that the Board may alter or amend this Article VI without such shareholder approval if any such alteration or amendment: a. Is made in order to conform to any amendment or revision of the Wisconsin Business Corporation Law, including, without limitation, the Statute, which (1) Expands or permits the expansion of an Executive's right to indemnification thereunder; (2) Limits or eliminates, or permits the limitation or elimination, of liability of the Executives; or (3) Is otherwise beneficial to the Executives; or b. In the sole judgment and discretion of the Board, does not materially adversely affect the rights and protections of the shareholders of the Corporation. Any repeal, modification, or amendment of this Article VI shall not adversely affect any rights or protections of an Executive existing under this Article VI immediately prior to the time of such repeal, modification, or amendment and any such repeal, modification, or amendment shall have a prospective effect only. 16. CERTAIN DEFINITIONS The following terms as used in this Article VI shall be defined as follows: a. "Action(s)" shall include, without limitation, any threatened, pending, or completed action, claim, litigation, suit, or proceeding, whether civil, criminal, administrative, arbitrative, or investigative, whether predicated on foreign, Federal, state, or local law, whether brought under and/or 30 -231- predicated upon the Securities Act of 1933, as amended, and/or the Securities Exchange Act of 1934, as amended, and/or their respective state counterparts and/or any rule or regulation promulgated thereunder, whether a Derivative Action and whether formal or informal. b. "Affiliate" shall include, without limitation, any corporation, partnership, joint venture, employee benefit plan, trust, or other similar enterprise that directly or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, the Corporation. c. "Authority" shall mean the panel of arbitrators or independent legal counsel selected under Section 3 of this Article VI. d. "Board" shall mean the Board of Directors of the Corporation. e. "Breach of Duty" shall mean the Executive breached or failed to perform his or her duties to the Corporation or an Affiliate, as the case may be, and the Executive's breach of or failure to perform those duties constituted: (1) A willful failure to deal fairly with the Corporation (or an Affiliate) or its shareholders in connection with a matter in which the Executive has a material conflict of interest; (2) A violation of the criminal law, unless the Executive: (a) Had reasonable cause to believe his or her conduct was lawful; or (b) Had no reasonable cause to believe his or her conduct was unlawful; (3) A transaction from which the Executive derived an improper personal profit (unless such profit is determined to be immaterial in light of all the circumstances of the Action); or (4) Willful misconduct. f. "Derivative Action" shall mean any Action brought by or in the right of the Corporation and/or an Affiliate. 31 -232- g. "Executive(s)" shall mean any individual who is, was, or has agreed to become a director and/or officer of the Corporation and/or an Affiliate. h. "Expenses" shall include, without limitation, all expenses, fees, costs, charges, attorneys' fees and disbursements, other out-of-pocket costs, reasonable compensation for time spent by the Executive in connection with the Action for which he or she is not otherwise compensated by the Corporation, any Affiliate, any third party or other entity, and any and all other direct and indirect costs of any type or nature whatsoever. i. "Liabilities" shall include, without limitation, judgments, amounts incurred in settlement, fines, penalties and, with respect to any employee benefit plan, any excise tax or penalty incurred in connection therewith, and any and all other liabilities of every type or nature whatsoever. j. "Statute" shall mean Wisconsin Business Corporation Law Sections 180.0850-180.0859 (or any successor provisions). k. "Termination Date" shall mean the date an Executive ceases, for whatever reason, to serve in an employment relationship with the Company and/or any Affiliate. ARTICLE VII. SEAL BOARD OF DIRECTORS The Board of Directors shall provide a corporate seal which shall be circular in form and shall have inscribed thereon the words "WPS RESOURCES CORPORATION, CORPORATE SEAL." The continued use for any purpose of any former corporate seal or facsimile thereof shall have the same effect as the use of the corporate seal or facsimile thereof in the form provided by the preceding sentence. ARTICLE VIII. AMENDMENTS 1. The Board of Directors shall have authority to adopt, amend, or repeal the By-laws of this Corporation upon affirmative vote of a majority of the total number of directors at a meeting of the Board, the notice of which shall have included notice of the proposed amendment; but the Board of Directors shall have no power to amend any By-law or to reinstate any By-law repealed by the 32 -233- shareholders unless the shareholders shall hereafter confer such authority upon the Board of Directors. 2. The shareholders shall have power to adopt, amend, or repeal any of the By-laws of the Corporation, at any regular or special meeting of the shareholders, in accordance with the provisions of Article II of these By-laws. There shall be included in the notice of such regular or special meeting a statement of the nature of any amendment that is proposed for the consideration of the shareholders by the holders of at least 5% of the voting stock of the Corporation in a writing delivered to the Secretary of the Corporation not less than 90 days prior to the date of such meeting or by the Board of Directors. 33 -234- EX-3.B.2 4 EXHIBIT 3B-2 WISCONSIN PUBLIC SERVICE CORPORATION BY-LAWS AS IN EFFECT SEPTEMBER 1, 1998 ARTICLE I. OFFICES 1. PRINCIPAL OFFICE The principal office of the Corporation in the State of Wisconsin shall be in the City of Green Bay. The Corporation may also have offices at such other places, within and outside of the State of Wisconsin, as the Board of Directors may designate or as the business of the Corporation may require. 2. REGISTERED OFFICE The Board of Directors shall designate the registered office of the Corporation and may change such registered office by resolution. ARTICLE II. SHAREHOLDERS 1. ANNUAL MEETING The annual meeting of the shareholders for the election of directors and for the transaction of such other business as may properly be brought before the meeting shall be held each year not later than the fourth Tuesday in May, on the date designated by the Board of Directors and specified in the notice of meeting. If the election of directors shall not be held on the day designated for any annual meeting of the shareholders, or at any adjournment thereof, the Board of Directors shall cause the election to be held at a special meeting of the shareholders as soon thereafter as convenient. 2. SPECIAL MEETINGS Special meetings of the shareholders may be called by the Chairman of the Board of Directors, the President, the Secretary, or by resolution of the Board of Directors. The Corporation shall call a special meeting of shareholders in the event that the holders of at least 10% of all the votes entitled to be cast on any issue proposed to be considered at the proposed special meeting sign, date, and deliver to the Corporation one or more written demands for the meeting describing one or more purposes for which it is to be held. The Corporation shall give notice of such a special meeting within 30 days after the date that the demand is -235- delivered to the Corporation. If the holders of the Preferred Stock shall become entitled, as provided by Article II of the Articles of Incorporation, to elect members of the Board of Directors, special meetings of the shareholders shall be held upon call as provided in said Article III. 3. PLACE OF MEETING Each meeting of shareholders, annual or special, shall be held at the principal office of the Corporation unless another place, either within or without the State of Wisconsin, has been designated by the Board of Directors and specified in the notice of such meeting, but any meeting of shareholders may be adjourned to reconvene at any place designated by a majority of the shares represented at such meeting. 4. NOTICE OF MEETINGS Written notice stating the date, time, and place of the meeting and, in case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than 10 nor more than 60 days before the date of the meeting (unless a different time is provided by the Wisconsin Business Corporation Law or the Articles of Incorporation) to each shareholder of record entitled to vote at such meeting and to such other persons as required by the Wisconsin Business Corporation Law. Such notice shall be given by or at the direction of the officer or persons calling the meeting and shall be deemed to be delivered when deposited in the United States mail, postage prepaid, addressed to the shareholder of record at his address as it appears in the records of the Corporation. a. If any meeting of the shareholders is adjourned to another time or place, no notice of such adjourned meeting need be given other than by announcement thereof at the meeting at which such adjournment is taken; provided, however, that if a new record date for an adjourned meeting is or must be fixed, the Corporation shall give notice of the adjourned meeting to persons who are shareholders as of the new record date. b. In connection with the election of members of the Board of Directors by the holders of the Preferred Stock pursuant to Article III of the Articles of Incorporation, the Corporation shall prepare and mail to the holders of record of Preferred Stock such proxy forms, communications, and documents as may be deemed appropriate and as may be required by any governmental authority having jurisdiction thereof. 2 -236- 5. WAIVER OF NOTICE A shareholder may waive any notice required by the Wisconsin Business Corporation Law, the Articles of Incorporation, or these By-laws before or after the date and time stated in the notice. The waiver shall be in writing and signed by the shareholder entitled to the notice, contain the same information that would have been required in the notice under applicable provisions of the Wisconsin Business Corporation Law (except that the time and place of meeting need not be stated), and be delivered to the Corporation for inclusion in the corporate records. A shareholder's attendance at a meeting, in person or by proxy, waives objection to all of the following: a. Lack of notice or defective notice of the meeting, unless the shareholder at the beginning of the meeting or promptly upon arrival objects to holding the meeting or transacting business at the meeting. b. Consideration of a particular matter at the meeting that is not within the purpose described in the meeting notice, unless the shareholder objects to considering the matter when it is presented. 6. FIXING OF RECORD DATE The Board of Directors may fix in advance a date as the record date for the purpose of determining shareholders entitled to notice of and to vote at any meeting of shareholders, shareholders entitled to demand a special meeting as contemplated by Section 2 of this Article II, shareholders entitled to take any other action, or shareholders for any other purpose. Such record date shall not be more than 70 days prior to the date on which the particular action, requiring such determination of shareholders, is to be taken. If no record date is fixed by the Board of Directors or by the Wisconsin Business Corporation Law for the determination of shareholders entitled to notice of and to vote at a meeting of shareholders, the record date shall be the close of business on the day before the first notice is given to shareholders. If no record date is fixed by the Board of Directors or by the Wisconsin Business Corporation Law for the determination of shareholders entitled to demand a special meeting as contemplated in Section 2 of this Article II, the record date shall be the date that the first shareholder signs the demand. Except as provided by the Wisconsin Business Corporation Law for a court-ordered adjournment, a determination of shareholders entitled to notice of and to vote at a meeting of shareholders is effective for any adjournment of such meeting unless the Board of Directors fixes a new record date, which it shall do if the meeting is adjourned to a date more than 120 days after the date fixed for the original meeting. The record date for determining shareholders entitled to a distribution (other than a distribution involving a purchase, redemption, or other acquisition of the Corporation's shares) or a share dividend is the date on which 3 -237- the Board of Directors authorized the distribution or share dividend, as the case may be, unless the Board of Directors fixes a different record date. 7. SHAREHOLDERS' LIST FOR MEETINGS After a record date for a special or annual meeting of shareholders has been fixed, the Corporation shall prepare a list of the names of all of the shareholders entitled to notice of the meeting. The list shall be arranged by class or series of shares, if any, and show the address of and number of shares held by each shareholder. Such list shall be available for inspection by any shareholder, beginning two business days after notice of the meeting is given for which the list was prepared and continuing to the date of the meeting, at the Corporation's principal office or at a place identified in the meeting notice in the city where the meeting will be held. A shareholder or his or her agent may, on written demand, inspect, and, subject to the limitations imposed by the Wisconsin Business Corporation Law, copy the list, during regular business hours and at his or her expense, during the period that it is available for inspection pursuant to this Section. The Corporation shall make the shareholders' list available at the meeting and any shareholder or his or her agent or attorney may inspect the list at any time during the meeting or any adjournment thereof. Refusal or failure to prepare or make available the shareholders' list shall not affect the validity of any action taken at a meeting of shareholders. 8. QUORUM AND VOTING REQUIREMENTS Shares entitled to vote as a separate voting group may take action on a matter at a meeting only if a quorum of those shares exists with respect to that matter. The holders of a majority of the shares entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of shareholders. Once a share is represented for any purpose at a meeting, other than for the purpose of objecting to holding the meeting or transacting business at the meeting, it is considered present for purposes of determining whether a quorum exists for the remainder of the meeting and for any adjournment of that meeting unless a new record date is or must be set for the adjourned meeting. If a quorum exists, except in the case of the election of directors, action on a matter shall be approved if the votes cast within the voting group favoring the action exceed the votes cast opposing the action, unless the Articles of Incorporation or the Wisconsin Business Corporation Law requires a greater number of affirmative votes. Unless otherwise provided in the Articles of Incorporation, each director shall be elected by a plurality of the votes cast by the shares entitled to vote in the election of directors at a meeting at which a quorum is present. Though less than a quorum of the outstanding votes of a voting group are represented at a meeting, a majority of the votes so represented may adjourn the meeting from time to time without further notice. At such adjourned meeting at which a quorum shall be present or represented, any 4 -238- business may be transacted which might have been transacted at the meeting as originally notified. 9. PROXIES At all meetings of shareholders, a shareholder may vote his or her shares in person or by proxy. A shareholder may appoint a proxy to vote or otherwise act for the shareholder by signing an appointment form, either personally or by his or her attorney-in-fact. An appointment of a proxy is effective when received by the Secretary, other officer, or agent of the Corporation authorized to tabulate votes. An appointment is valid for 11 months from the date of its signing unless a different period is expressly provided in the appointment form. 10. ACCEPTANCE OF INSTRUMENTS SHOWING SHAREHOLDER ACTION If the name signed on a vote, consent, waiver, or proxy appointment corresponds to the name of a shareholder, the Corporation, if acting in good faith, may accept the vote, consent, waiver, or proxy appointment and give it effect as the act of a shareholder. If the name signed on a vote, consent, waiver, or proxy appointment does not correspond to the name of a shareholder, the Corporation, if acting in good faith, may accept the vote, consent, waiver, or proxy appointment and give it effect as the act of the shareholder if any of the following apply: a. The shareholder is an entity and the name signed purports to be that of an officer or agent of the entity. b. The name purports to be that of a personal representative, administrator, executor, guardian, or conservator representing the shareholder and, if the Corporation requests, evidence of fiduciary status acceptable to the Corporation is presented with respect to the vote, consent, waiver, or proxy appointment. c. The name signed purports to be that of a receiver or trustee in bankruptcy of the shareholder and, if the Corporation requests, evidence of this status acceptable to the Corporation is presented with respect to the vote, consent, waiver, or proxy appointment. d. The name signed purports to be that of a pledgee, beneficial owner, or attorney-in-fact of the shareholder and, if the Corporation requests, evidence acceptable to the Corporation of the signatory's authority to sign for the shareholder is presented with respect to the vote, consent, waiver, or proxy appointment. 5 -239- e. Two or more persons are the shareholders as co-tenants or fiduciaries and the name signed purports to be the name of at least one of the co-owners and the person signing appears to be acting on behalf of all co-owners. The Corporation may reject a vote, consent, waiver, or proxy appointment if the Secretary, other officer, or agent of the Corporation who is authorized to tabulate votes, acting in good faith, has reasonable basis for doubt about the validity of the signature on it or about the signatory's authority to sign for the shareholder. ARTICLE III. BOARD OF DIRECTORS 1. GENERAL POWERS The business and affairs of the Corporation shall be managed by its Board of Directors. The Board shall determine the nature and character of the business to be conducted by the Corporation and the method of doing so; what employees, agents, and officers shall be employed and their compensation; and what purchases or contracts for purchase shall be made. The Board may delegate any of its aforesaid powers to committees or to officers, agents, or employees as it may from time to time determine. 2. NUMBER OF DIRECTORS The number of directors of the Corporation shall be ten, divided into three classes: Class A - 4 members, Class B - 3 members, and Class C - 3 members. 3. TERM At the 1988 annual meeting of shareholders, the directors of Class A shall be elected for a term to expire at the first annual meeting of shareholders after their election, and until their successors are elected and qualify, the directors of Class B shall be elected for a term to expire at the second annual meeting of shareholders after their election, and until their successors are elected and qualify, and the directors of Class C shall be elected for a term to expire at the third annual meeting of shareholders after their election and until their successors are elected and qualify. At each annual meeting of shareholders after the 1988 annual meeting of shareholders, the successors to the class of directors whose terms shall expire at the time of such annual meeting shall be elected to hold office until the third succeeding annual meeting of shareholders, and until their successors are elected and qualify. 6 -240- 4. QUALIFICATIONS No director elected to such office for the first time after January 1, 1972 shall be eligible for re-election after attaining the age of 70 years. Directors need not be shareholders of the Corporation or residents of the State of Wisconsin. 5. MEETINGS The Board of Directors shall hold its meetings at such place or places, within or without the State of Wisconsin, as the Board may from time to time determine. a. A meeting of the Board of Directors, to be known as the annual meeting, may be held, without notice, immediately after and at the same place as the annual meeting of the shareholders at which such Board is elected, for the purpose of electing the officers of the Corporation and to transact such other business as may come before the Board. Such annual meeting may be held at a different place than the annual meeting of shareholders and/or on a date subsequent to the annual meeting of shareholders, if notice of such different place and/or date has been given to or waived by all the directors. b. Regular meetings of the Board of Directors may be held without call and without notice, at such times and in such places as the Board may by resolution from time to time determine. c. Special meetings of the Board of Directors may be called at any time by the Chairman of the Board or the Chief Executive Officer and shall be called by the Secretary of the Corporation upon the written request of three or more directors. 6. NOTICE; WAIVER Notice of each special meeting of the Board of Directors shall be given by written notice delivered or communicated in person, by telegraph, teletype, facsimile, or other form of wire or wireless communication, or by mail or private carrier, to each director at his business address or at such other address as such director shall have designated in writing filed with the Secretary, in each case not less than 48 hours prior to the meeting. The notice need not prescribe the purpose of the special meeting of the Board of Directors or the business to be transacted at such meeting. If mailed, such notice shall be deemed to be effective when deposited in the United States mail so addressed, with postage thereon prepaid. If notice is given by telegram, such notice shall be deemed to be effective when the telegram is delivered to the telegraph company. If notice is given by private carrier, such notice shall be deemed to be effective when delivered to the private carrier. Whenever any notice whatever is required to be given to any director of the 7 -241- Corporation under the Articles of Incorporation, these By-laws, or any provision of the Wisconsin Business Corporation Law, a waiver thereof in writing, signed at any time, whether before or after the date and time of meeting, by the director entitled to such notice shall be deemed equivalent to the giving of such notice. The Corporation shall retain any such waiver as part of the permanent corporate records. A director's attendance at or participation in a meeting waives any required notice to him or her of the meeting unless the director at the beginning of the meeting or promptly upon his or her arrival objects to holding the meeting or transacting business at the meeting and does not thereafter vote for or assent to action taken at the meeting. 7. QUORUM Except as otherwise provided by the Wisconsin Business Corporation Law, by the Articles of Incorporation, or these By-laws, a majority of the number of directors specified in Section 2 of Article III of these By-laws shall constitute a quorum for the transaction of business at any meeting of the Board of Directors. Except as otherwise provided by the Wisconsin Business Corporation Law, by the Articles of Incorporation, or by these By-laws, a quorum of any committee of the Board of Directors created pursuant to Section 13 hereof shall consist of a majority of the number of directors appointed to serve on the committee. A majority of the directors present (though less than such quorum) may adjourn any meeting of the Board of Directors or any committee thereof, as the case may be, from time to time without further notice. 8. MANNER OF ACTING The affirmative vote of a majority of the directors present at a meeting of the Board of Directors or a committee thereof at which a quorum is present shall be the act of the Board of Directors or such committee, as the case may be, unless the Wisconsin Business Corporation Law, the Articles of Incorporation, or these By-laws require the vote of a greater number of directors. 9. MINUTES OF MEETINGS Minutes of any regular or special meeting of the Board of Directors shall be prepared and distributed to each director. 10. VACANCIES Vacancies occurring in the Board of Directors shall be filled in the manner provided in Article V of the Articles of Incorporation. 8 -242- 11. COMPENSATION The Board of Directors, irrespective of any personal interest of any of its members, may establish reasonable compensation of all directors for services to the Corporation as directors, officers, or otherwise, or may delegate such authority to an appropriate committee. The Board of Directors also shall have authority to provide for or delegate authority to an appropriate committee to provide for reasonable pensions, disability, or death benefits, and other benefits or payments, to directors, officers, and employees, and to their estates, families, dependents, or beneficiaries on account of prior services rendered by such directors, officers, and employees to the Corporation. 12. PRESUMPTION OF ASSENT A director who is present and is announced as present at a meeting of the Board of Directors or any committee thereof created in accordance with Section 13 of this Article III, when corporate action is taken, assents to the action taken unless any of the following occurs: a. The director objects at the beginning of the meeting or promptly upon his or her arrival to holding the meeting or transacting business at the meeting. b. The director's dissent or abstention from the action taken is entered in the minutes of the meeting. c. The director delivers written notice that complies with the Wisconsin Business Corporation Law of his or her dissent or abstention to the presiding officer of the meeting before its adjournment or to the Corporation immediately after adjournment of the meeting. Such right of dissent or abstention shall not apply to a director who votes in favor of the action taken. 13. COMMITTEES The Board of Directors by resolution adopted by the affirmative vote of a majority of all of the directors then in office may create one or more committees, appoint members of the Board of Directors to serve on the committees, and designate other members of the Board of Directors to serve as alternates. Each committee shall have two or more members who shall, unless otherwise provided by the Board of Directors, serve at the pleasure of the Board of Directors. A committee 9 -243- may be authorized to exercise the authority of the Board of Directors, except that a committee may not do any of the following: a. Authorize distributions. b. Approve or propose to shareholders action that the Wisconsin Business Corporation Law requires to be approved by shareholders. c. Fill vacancies on the Board of Directors or, unless the Board of Directors provides by resolution that vacancies on a committee shall be filled by the affirmative vote of the remaining committee members, on any Board committee. d. Amend the Corporation's Articles of Incorporation. e. Adopt, amend, or repeal By-laws. f. Approve a plan of merger not requiring shareholder approval. g. Authorize or approve reacquisition of shares, except according to a formula or method prescribed by the Board of Directors. h. Authorize or approve the issuance or sale or contract for sale of shares, or determine the designation and relative rights, preferences and limitations of a class or series of shares, except that the Board of Directors may authorize a committee to do so within limits prescribed by the Board of Directors. Unless otherwise provided by the Board of Directors in creating the committee, a committee may employ counsel, accountants, and other consultants to assist it in the exercise of its authority. 14. TELEPHONIC MEETINGS Except as herein provided and notwithstanding any place set forth in the notice of the meeting or these By-laws, members of the Board of Directors (and any committees thereof created pursuant to Section 13 of this Article III) may participate in regular or special meetings by, or through the use of, any means of communication by which all participants may simultaneously hear each other, such as by conference telephone. If a meeting is conducted by such means, then at the commencement of such meeting the presiding officer shall inform the participating directors that a meeting is taking place at which official business may be transacted. Any participant in a meeting by such means shall be deemed present in person at such meeting. Notwithstanding the foregoing, no action may be taken at any meeting held by such means on any particular matter which the presiding officer determines, in his or her sole discretion, to be inappropriate 10 -244- under the circumstances for action at a meeting held by such means. Such determination shall be made and announced in advance of such meeting. 15. ACTION WITHOUT MEETING Any action required or permitted by the Wisconsin Business Corporation Law to be taken at a meeting of the Board of Directors or a committee thereof created pursuant to Section 13 of this Article III may be taken without a meeting if the action is taken by all members of the Board or of the committee. The action shall be evidenced by one or more written consents describing the action taken, signed by each director or committee member and retained by the Corporation. Such action shall be effective when the last director or committee member signs the consent, unless the consent specifies a different effective date. ARTICLE IV. OFFICERS 1. PRINCIPAL OFFICERS The principal officers of the Corporation required by statute shall be a President, such number of Vice Presidents as may be elected by the Board of Directors, a Secretary, and a Treasurer. The Board of Directors may elect from among the directors a Chairman of the Board of Directors and a Vice Chairman of the Board of Directors, may designate such Chairman, Vice Chairman, or any principal officer as the Chief Executive Officer, may elect such Assistant Secretaries and Assistant Treasurers and other officers as it shall deem necessary, and may prescribe by resolution their respective powers and duties. 2. PRESIDENT The President shall be elected by the directors. Unless the Board of Directors otherwise prescribes, he or she shall be the Chief Executive Officer of the Corporation. In the event that the President is not the Chief Executive Officer, he or she shall have such powers and duties as the Board of Directors may prescribe. 3. CHAIRMAN OF THE BOARD OF DIRECTORS If a Chairman of the Board of Directors shall be elected, he or she shall preside as Chairman of all meetings of the shareholders and of the Board of Directors. He or she shall have such other authority as the Board may from time to time prescribe. If there is no Chairman of the Board, or in the absence of the Chairman, the presiding officer at meetings of the shareholders, and of the Board of Directors shall be another officer in the following order of priority: Vice Chairman of the 11 -245- Board of Directors, President, and Vice Presidents (subject, however, to Section 5 of this Article). 4. CHIEF EXECUTIVE OFFICER The Chief Executive Officer shall exercise active supervision over the business, property, and affairs of the Corporation. a. The Chief Executive Officer shall have authority, subject to such rules as may be prescribed from time to time by the Board or its committees, to appoint agents or employees other than those elected by the Board, to prescribe their powers and duties, and to delegate such authority as he or she may see fit. Any agent or employee not elected by the Board shall hold office at the discretion of the Chief Executive Officer or other officer employing him. b. The Chief Executive Officer is authorized to sign, execute, and acknowledge, on behalf of the Corporation, all deeds, mortgages, bonds, notes, debentures, contracts, leases, reports, and other documents and instruments, except where the signing and execution thereof by some other officer or agent shall be expressly authorized and directed by law or by the Board or by these By-laws. Unless otherwise provided by law or by the Board, the Chief Executive Officer may authorize any officer, employee, or agent to sign, execute, and acknowledge, on behalf of the Corporation, and in his place and stead, all such documents and instruments. c. Unless otherwise ordered by the Board of Directors, the Chief Executive Officer, or a proxy appointed by him, shall have full power and authority, in the name of and on behalf of the Corporation, to attend, act, and vote at any meeting of the shareholders of any other corporation in which the Corporation may hold shares of stock. At any such meeting, he or she shall possess and may exercise any and all rights and powers incident to the ownership of shares of stock. d. The Chief Executive Officer shall have such other powers and perform such other duties as are incident to the office of Chief Executive Officer and as may be prescribed by the Board. 5. VICE PRESIDENTS In the absence of the President or during his inability or refusal to act, his powers and duties shall temporarily devolve upon such Vice Presidents or other officers as shall be designated by the Board of Directors or, if not designated by the Board, by the Chief Executive Officer or other officer to whom such power may be 12 -246- delegated by the Board; provided, that no Vice President or other officer -------- shall act as a member or chairman of any committee of the Board of Directors of which the President is a member or chairman, except at the direction of the Board. a. Each Vice President shall have such powers and perform such other duties as may be assigned to him or her by the Board or by the President, including the power to sign, execute, and acknowledge all documents and instruments referred to in Section 4 of this Article. b. The Board may assign to any Vice President, general supervision and charge over any branch of the business and affairs of the Corporation, subject to such limitations as it may elect to impose. c. The Board of Directors may, if it chooses, designate one or more of the Vice Presidents "Executive Vice President" with such powers and duties as the Board shall prescribe. 6. SECRETARY The Secretary shall attend, and keep the minutes of, meetings of the shareholders, the Board of Directors and, unless otherwise directed by any such committee, all committees, in books provided for that purpose; shall have custody of the corporate records and seal; shall see that notices are given and records and reports properly kept and filed as required by law or by these By-laws; and, in general, shall have such other powers and perform such other duties as are incident to the office of Secretary and as may be assigned to him or her by the Board of Directors or the Chief Executive Officer. 7. ASSISTANT SECRETARIES In the absence of the Secretary, or during his or her inability or refusal to act, his powers and duties shall temporarily devolve upon such one of the Assistant Secretaries as the President or the Board of Directors may direct. The Assistant Secretaries shall have such other powers and perform such other duties as may be assigned to them by the Board, the Chief Executive Officer, or the Secretary. 8. TREASURER The Treasurer shall have charge and custody of the funds, securities, and other evidences of value of the Corporation, and shall keep and deposit them as required by the Board of Directors. He or she shall keep proper accounts of all receipts and disbursements and of the financial transactions of the Corporation. He or she shall render statements of such accounts and of money received and disbursed by him or her and of property and money belonging to the Corporation 13 -247- as required by the Board. The Treasurer shall have such other powers and perform such other duties as are incident to the office of Treasurer and as from time to time may be prescribed by the Board or the Chief Executive Officer. 9. ASSISTANT TREASURERS In the absence of the Treasurer, or during his or her inability or refusal to act, his or her powers and duties shall temporarily devolve upon such one of the Assistant Treasurers as the President or the Board of Directors may direct. The Assistant Treasurers shall have such other powers and perform such other duties as from time to time may be assigned to them, respectively, by the Board, the Chief Executive Officer, or the Treasurer. 10. OTHER ASSISTANTS AND ACTING OFFICERS The Board of Directors shall have the power to appoint any person to act as assistant to any officer, or as agent for the Corporation in his or her stead, or to perform the duties of such officer whenever for any reason it is impracticable for such officer to act personally, and such assistant or acting officer or other agent so appointed by the Board of Directors or an authorized officer shall have the power to perform all the duties of the office to which he or she is so appointed to be an assistant, or as to which he or she is so appointed to act, except as such power may be otherwise defined or restricted by the Board of Directors. 11. COMPENSATION The salaries or other compensation of all officers elected as provided under Section 1 of this Article (other than assistant officers) shall be fixed from time to time by the Board of Directors. The salaries or other compensation of all other agents and employees of the Corporation shall be fixed from time to time by the Chief Executive Officer, but only within such limits as to amount, and in accordance with such other conditions as may be prescribed by or under the authority of the Board of Directors. 12. TENURE Each officer shall hold office until his successor shall have been duly elected and qualified, or until his death, resignation, disqualification, or removal. Any officer, agent, or employee may be removed, with or without cause, at any time by the Board of Directors notwithstanding the contract rights, if any, of the officer removed. The appointment of an officer does not of itself create contract rights. 14 -248- 13. RESIGNATION An officer may resign at any time by delivering notice to the Corporation that complies with the Wisconsin Business Corporation Law. The resignation shall be effective when the notice is delivered, unless the notice specifies a later effective date, and the Corporation accepts the later effective date. 14. VACANCIES Any vacancy in any office may be filled by the Board of Directors for the unexpired portion of the term. If a resignation of an officer is effective at a later date as contemplated by Section 13 of this Article IV, the Board of Directors may fill the pending vacancy before the effective date if the Board provides that the successor may not take office until the effective date. 15. REASSIGNMENT OF DUTIES In case of the absence or disability of any officer of the Corporation, or for any other reason deemed sufficient by the Board of Directors, the Board may reassign or delegate the powers and duties, or any of them, to any other officer, director, or person it may select. ARTICLE V. CERTIFICATES FOR AND TRANSFER OF SHARES 1. FORM Certificates representing shares of the Corporation shall be in such form as shall be determined by the Board of Directors. All certificates for shares shall be consecutively numbered or otherwise identified. The name and address of the person to whom the shares represented thereby are issued, with the number of shares and date of issue, shall be entered on the stock transfer books of the Corporation. All certificates surrendered for the transfer shall be cancelled, and no new certificate shall be issued until the former certificate for a like number of shares shall have been surrendered and cancelled, except in case of a lost or destroyed certificate provided for in Section 4 of this Article V or a certificate for shares transferred in compliance with the escheat laws of any state. 2. SIGNATURES Certificates representing shares of the Corporation shall be signed by the President or a Vice President and by the Secretary or an Assistant Secretary; and may be sealed with the seal of the Corporation (which may be a facsimile) and countersigned and registered in such manner, if any, as the Board of Directors 15 -249- may prescribe. Whenever any certificate is manually signed on behalf of a transfer agent or a registrar, other than the Corporation itself or an employee of the Corporation, the signatures of the President, Vice President, Secretary, or Assistant Secretary, upon such certificate may be facsimiles. In case any officer who has signed, or whose facsimile signature has been placed upon such certificate, ceases to be such officer before such certificate is issued, it may be issued with the same effect as if he or she were such officer at the date of its issue. 3. RESTRICTIONS ON TRANSFER The face or reverse side of each certificate representing shares shall bear a conspicuous notation of any restriction imposed by the Corporation upon the transfer of such shares. 4. LOST, DESTROYED, OR STOLEN CERTIFICATES Where the owner claims that his certificate for shares has been lost, destroyed, or wrongfully taken, a new certificate shall be issued in place thereof if the owner: a. So requests before the Corporation has notice that such shares have been acquired by a bona fide purchaser. b. Files with the Corporation a sufficient indemnity bond. c. Satisfies such other reasonable requirements as may be prescribed by or under the authority of the Board of Directors. 5. TRANSFER OF SHARES Prior to due presentment of a certificate for shares for registration of transfer, the Corporation may treat the registered owner of such shares as the person exclusively entitled to vote, to receive notifications, and otherwise to have and exercise all the rights and powers of an owner. Where a certificate for shares is presented to the Corporation with a request to register for transfer, the Corporation shall not be liable to the owner or any other person suffering loss as a result of such registration of transfer if: a. There were on or with the certificate the necessary endorsements b. The Corporation had no duty to inquire into adverse claims or has discharged any such duty. 16 -250- The Corporation may require reasonable assurance that said endorsements are genuine and effective and compliance with such other regulations as may be prescribed by or under the authority of the Board of Directors. 6. CONSIDERATION FOR SHARES The Board of Directors may authorize shares to be issued for consideration consisting of any tangible or intangible property or benefit to the Corporation, including cash, promissory notes, services performed, contracts for services to be performed, or other securities of the Corporation. Before the Corporation issues shares, the Board of Directors shall determine that the consideration received or to be received for the shares to be issued is adequate. The determination of the Board of Directors is conclusive insofar as the adequacy of consideration for the issuance of shares relates to whether the shares are validly issued, fully paid, and nonassessable. The Corporation may place in escrow shares issued in whole or in part for a contract for future services or benefits, a promissory note, or otherwise for property to be issued in the future, or make other arrangements to restrict the transfer of the shares, and may credit distributions in respect of the shares against their purchase price, until the services are performed, the benefits or property are received, or the promissory note is paid. If the services are not performed, the benefits or property are not received or the promissory note is not paid, the Corporation may cancel, in whole or in part, the shares escrowed or restricted and the distributions credited. 7. OTHER RULES The Board of Directors shall have the power and authority to make all such further rules and regulations not inconsistent with the statutes of the State of Wisconsin as it may deem expedient concerning the issue, transfer, and registration of certificates representing shares of the Corporation, including the appointment and designation of Transfer Agents and Registrars. ARTICLE VI. INDEMNIFICATION OF OFFICERS AND DIRECTORS 1. MANDATORY INDEMNIFICATION a. In all cases other than those set forth in Section 1b hereof, subject to the conditions and limitations set forth hereinafter in this Article VI, the Corporation shall indemnify and hold harmless any person who is or was a party, or is threatened to be made a party, to any Action (see Section 16 of this Article VI for definitions of capitalized terms used herein) by reason of his or her status as an Executive, and/or as to acts performed in the course of such Executive's duties to the Corporation and/or an Affiliate, against 17 -251- Liabilities and reasonable Expenses incurred by or on behalf of an Executive in connection with any Action, including, without limitation, in connection with the investigation, defense, settlement, or appeal of any Action; provided, pursuant to Section 3 of this Article VI, that it is not determined by the Authority or by a court, that the Executive engaged in misconduct which constitutes a Breach of Duty. b. To the extent an Executive has been successful on the merits or otherwise in connection with any Action, including, without limitation, the settlement, dismissal, abandonment, or withdrawal of any such Action where the Executive does not pay, incur, or assume any material Liabilities, or in connection with any claim, issue or matter therein, he or she shall be indemnified by the Corporation against reasonable Expenses incurred by or on behalf of him or her in connection therewith. The Corporation shall pay such Expenses to the Executive (net of all Expenses, if any, previously advanced to the Executive pursuant to Section 2 of this Article VI), or to such other person or entity as the Executive may designate in writing to the Corporation, within ten days after the receipt of the Executive's written request therefor, without regard to the provisions of Section 3 of this Article VI. In the event the Corporation refuses to pay such requested Expenses, the Executive may petition a court to order the Corporation to make such payment pursuant to Section 4 of this Article VI. c. Notwithstanding any other provision contained in this Article VI to the contrary, the Corporation shall not: (1) Indemnify, contribute or advance Expenses to an Executive with respect to any Action initiated or brought voluntarily by the Executive and not by way of defense, except with respect to Actions: (a) Brought to establish or enforce a right to indemnification, contribution and/or an advance of Expenses under Section 4 of this Article VI, under the Statute as it may then be in effect or under any other statute or law or otherwise as required; (b) Initiated or brought voluntarily by an Executive to the extent such Executive is successful on the merits or otherwise in connection with such an Action in accordance with and pursuant to Section 1b of this Article VI; or (c) As to which the Board determines it to be appropriate. (2) Indemnify the Executive under this Article VI for any amounts paid in settlement of any Action effected without the Corporation's written consent. 18 -252- The Corporation shall not settle in any manner which would impose any Liabilities or other type of limitation on the Executive without the Executive's written consent. Neither the Corporation nor the Executive shall unreasonably withhold their consent to any proposed settlement. d. An Executive's conduct with respect to an employee benefit plan sponsored by or otherwise associated with the Corporation and/or an Affiliate for a purpose he or she reasonably believes to be in the interests of the participants in and beneficiaries of such plan is conduct that does not constitute a breach or failure to perform his or her duties to the Corporation or an Affiliate, as the case may be. 2. ADVANCE FOR EXPENSES a. The Corporation shall pay to an Executive, or to such other person or entity as the Executive may designate in writing to the Corporation, his or her reasonable Expenses incurred by or on behalf of such Executive in connection with any Action, claim, issue, or matter associated with any such Action, in advance of the final disposition or conclusion of any such Action (or claim, issue, or matter associated with any such Action), within ten days after the receipt of the Executive's written request therefor; provided, the following conditions are satisfied: (1) The Executive has first requested an advance of such Expenses in writing (and delivered a copy of such request to the Corporation) from the insurance carrier(s), if any, to whom a claim has been reported under an applicable insurance policy purchased by the Corporation and each such insurance carrier, if any, has declined to make such an advance; (2) The Executive furnishes to the Corporation an executed written certificate affirming his or her good faith belief that he or she has not engaged in misconduct which constitutes a Breach of Duty; and (3) The Executive furnishes to the Corporation an executed written agreement to repay any advances made under this Section 2 if it is ultimately determined that he or she is not entitled to be indemnified by the Corporation for such Expenses pursuant to this Article VI. b. If the Corporation makes an advance of Expenses to an Executive pursuant to this Section 2, the Corporation shall be subrogated to every right of recovery the Executive may have against any insurance carrier from whom the Corporation has purchased insurance for such purpose. 19 -253- 3. DETERMINATION OF RIGHT TO INDEMNIFICATION a. Except as otherwise set forth in this Section 3 or in Section 1c of this Article VI, any indemnification to be provided to an Executive by the Corporation under Section 1a of this Article VI upon the final disposition or conclusion of any Action, claim, issue, or matter associated with any such Action, unless otherwise ordered by a court, shall be paid by the Corporation to the Executive (net of all Expenses, if any, previously advanced to the Executive pursuant to Section 2 of this Article VI), or to such other person or entity as the Executive may designate in writing to the Corporation, within 60 days after the receipt of the Executive's written request therefor. Such request shall include an accounting of all amounts for which indemnification is being sought. No further corporate authorization for such payment shall be required other than this Section 3. b. Notwithstanding the foregoing, the payment of such requested indemnifiable amounts pursuant to Section 1a of this Article VI may be denied by the Corporation if: (1) The Board by a majority vote thereof determines that the Executive has engaged in misconduct which constitutes a Breach of Duty; or (2) A majority of the directors of the Corporation are a party in interest to such Action. c. In either event of nonpayment pursuant to Section 3b of this Article VI, the Board shall immediately authorize and direct, by resolution, that an independent determination be made as to whether the Executive has engaged in misconduct which constitutes a Breach of Duty and, therefore, whether indemnification of the Executive is proper pursuant to this Article VI. d. Such independent determination shall be made, at the option of the Executive(s) seeking indemnification, by: (1) A panel of three arbitrators (selected as set forth below in Section 3f of this Article VI from the panels of arbitrators of the American Arbitration Association) in Milwaukee, Wisconsin, in accordance with the Commercial Arbitration Rules then prevailing of the American Arbitration Association; (2) An independent legal counsel mutually selected by the Executive(s) seeking indemnification and the Board by a majority vote of a quorum thereof consisting of directors who were not parties in interest to such Action (or, if such quorum is not obtainable, by the majority vote of the entire Board); or 20 -254- (3) A court in accordance with Section 4 of this Article VI. e. In any such determination there shall exist a rebuttable presumption that the Executive has not engaged in misconduct which constitutes a Breach of Duty and is, therefore, entitled to indemnification hereunder. The burden of rebutting such presumption by clear and convincing evidence shall be on the Corporation. f. If a panel of arbitrators is to be employed hereunder, one of such arbitrators shall be selected by the Board by a majority vote of a quorum thereof consisting of directors who were not parties in interest to such Action or, if such quorum is not obtainable, by an independent legal counsel chosen by the majority vote of the entire Board, the second by the Executive(s) seeking indemnification, and the third by the previous two arbitrators. g. The Authority shall make its independent determination hereunder within 60 days of being selected and shall simultaneously submit a written opinion of its conclusions to both the Corporation and the Executive. h. If the Authority determines that an Executive is entitled to be indemnified for any amounts pursuant to this Article VI, the Corporation shall pay such amounts to the Executive (net of all Expenses, if any, previously advanced to the Executive pursuant to Section 2 of this Article VI), including interest thereon as provided in Section 6c of this Article VI, or such other person or entity as the Executive may designate in writing to the Corporation, within ten days of receipt of such opinion. i. Except with respect to any judicial determination pursuant to Section 4 of this Article VI, the Expenses associated with the indemnification process set forth in this Section 3 of this Article VI, including, without limitation, the Expenses of the Authority selected hereunder, shall be paid by the Corporation. 4. COURT-ORDERED INDEMNIFICATION AND ADVANCE FOR EXPENSES a. An Executive may, either before or within two years after a determination, if any, has been made by the Authority, petition the court before which such Action was brought or any other court of competent jurisdiction to independently determine whether or not he or she has engaged in misconduct which constitutes a Breach of Duty and is, therefore, entitled to indemnification under the provisions of this Article VI. Such court shall thereupon have the exclusive authority to make such determination unless and until such court dismisses or otherwise terminates such proceeding without having made such determination. An Executive may petition a court under this Section 4 either to seek an initial determination by the court as 21 -255- authorized by Section 3d of this Article VI or to seek review by the court of a previous adverse determination by the Authority. b. The court shall make its independent determination irrespective of any prior determination made by the Authority; provided, however, that there shall exist a rebuttable presumption that the Executive has not engaged in misconduct which constitutes a Breach of Duty and is, therefore, entitled to indemnification hereunder. The burden of rebutting such presumption by clear and convincing evidence shall be on the Corporation. c. In the event the court determines that an Executive has engaged in misconduct which constitutes a Breach of Duty, it may nonetheless order indemnification to be paid by the Corporation if it determines that the Executive is fairly and reasonably entitled to indemnification in view of all of the circumstances of such Action. d. In the event the Corporation does not: (1) Advance Expenses to the Executive within ten days of such Executive's compliance with Section 2 of this Article VI; or (2) Indemnify an Executive with respect to requested Expenses under Section 1b of this Article VI within ten days of such Executive's written request therefore, the Executive may petition the court before which such Action was brought, if any, or any other court of competent jurisdiction to order the Corporation to pay such reasonable Expenses immediately. Such court, after giving any notice it considers necessary, shall order the Corporation to pay such Expenses if it determines that the Executive has complied with the applicable provisions of Section 2 of this Article VI or Section 1b of this Article VI, as the case may be. e. If the court determines pursuant to this Section 4 of this Article VI that the Executive is entitled to be indemnified for any Liabilities and/or Expenses, or to the advance of Expenses, unless otherwise ordered by such court, the Corporation shall pay such Liabilities and/or Expenses to the Executive (net of all Expenses, if any, previously advanced to the Executive pursuant to Section 2 of this Article VI), including interest thereon as provided in Section 6c of this Article VI, or to such other person or entity as the Executive may designate in writing to the Corporation, within ten days of the rendering of such determination. f. An Executive shall pay all Expenses incurred by such Executive in connection with the judicial determination provided in this Section 4 of this 22 -256- Article VI, unless it shall ultimately be determined by the court that he or she is entitled, in whole or in part, to be indemnified by, or to receive an advance from, the Corporation as authorized by this Article VI. All Expenses incurred by an Executive in connection with any subsequent appeal of the judicial determination provided for in this Section 4 of this Article VI shall be paid by the Executive regardless of the disposition of such appeal. 5. TERMINATION OF AN ACTION IS NONCONCLUSIVE The adverse termination of any Action against an Executive by judgment, order settlement, conviction, or upon a plea of no contest or its equivalent, shall not, of itself, create a presumption that the Executive has engaged in misconduct which constitutes a Breach of Duty. 6. PARTIAL INDEMNIFICATION; REASONABLENESS; INTEREST a. If it is determined by the Authority, or by a court, that an Executive is entitled to indemnification as to some claims, issues, or matters, but not as to other claims, issues, or matters, involved in any Action, the Authority, or the court, shall authorize the proration and payment by the Corporation of such Liabilities and/or reasonable Expenses with respect to which indemnification is sought by the Executive, among such claims, issues, or matters as the Authority, or the court, shall deem appropriate in light of all of the circumstances of such Action. b. If it is determined by the Authority, or by a court, that certain Expenses incurred by or on behalf of an Executive are for whatever reason unreasonable in amount, the Authority, or the court, shall nonetheless authorize indemnification to be paid by the Corporation to the Executive for such Expenses as the Authority, or the court, shall deem reasonable in light of all of the circumstances of such Action. c. Interest shall be paid by the Corporation to an Executive, to the extent deemed appropriate by the Authority, or by a court, at a reasonable interest rate, for amounts for which the Corporation indemnifies or advances to the Executive. 7. INSURANCE; SUBROGATION a. The Corporation may purchase and maintain insurance on behalf of any person who is or was an Executive of the Corporation, and/or is or was serving as an Executive of an Affiliate, against Liabilities and/or Expenses asserted against him or her and/or incurred by or on behalf of him or her in any such capacity, or arising out of his or her status as such an Executive, 23 -257- whether or not the Corporation would have the power to indemnify him or her against such Liabilities and/or Expenses under this Article VI or under the Statute as it may then be in effect. Except as expressly provided herein, the purchase and maintenance of such insurance shall not in any way limit or affect the rights and obligations of the Corporation and/or any Executive under this Article VI. Such insurance may, but need not, be for the benefit of all Executives of the Corporation and those serving as an Executive of an Affiliate. b. If an Executive shall receive payment from any insurance carrier or from the plaintiff in any Action against such Executive in respect of indemnified amounts after payments on account of all or part of such indemnified amounts have been made by the Corporation pursuant to this Article VI, such Executive shall promptly reimburse the Corporation for the amount, if any, by which the sum of such payment by such insurance carrier or such plaintiff and payments by the Corporation to such Executive exceeds such indemnified amounts; provided, however, that such portions, if any, of such insurance proceeds that are required to be reimbursed to the insurance carrier under the terms of its insurance policy, such as deductible, retention, or co-insurance amounts, shall not be deemed to be payments to such Executive hereunder. c. Upon payment of indemnified amounts under this Article VI, the Corporation shall be subrogated to such Executive's rights against any insurance carrier in respect of such indemnified amounts; and the Executive shall execute and deliver any and all instruments and/or documents and perform any and all other acts or deeds which the Corporation shall deem necessary or advisable to secure such rights. The Executive shall do nothing to prejudice such rights of recovery or subrogation. 8. WITNESS EXPENSES The Corporation shall advance or reimburse any and all reasonable Expenses incurred by or on behalf of an Executive in connection with his or her appearance as a witness in any Action at a time when he or she has not been formally named a defendant or respondent to such an Action, within ten days after the receipt of an Executive's written request therefore. 9. CONTRIBUTION a. Subject to the limitations of this Section 9, if the indemnity provided for in Section 1 of this Article VI is unavailable to an Executive for any reason whatsoever, the Corporation, in lieu of indemnifying the Executive, shall contribute to the amount incurred by or on behalf of the Executive, whether 24 -258- for Liabilities and/or for reasonable Expenses in connection with any Action in such proportion as deemed fair and reasonable by the Authority, or by a court, in light of all of the circumstances of any such Action, in order to reflect: (1) The relative benefits received by the Corporation and the Executive as a result of the event(s) and/or transaction(s) giving cause to such Action; and/or (2) The relative fault of the Corporation (and its other Executives, employees, and/or agents) and the Executive in connection with such event(s) and/or transaction(s). b. The relative fault of the Corporation (and its other Executives, employees, and/or agents), on the one hand, and of the Executive, on the other hand, shall be determined by reference to, among other things, the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent the circumstances resulting in such Liabilities and/or Expenses. The Corporation agrees that it would not be just and equitable if contribution pursuant to this Section 9 were determined by pro rata allocation or any other method of allocation which does not take account of the foregoing equitable considerations. c. An Executive shall not be entitled to contribution from the Corporation under this Section 9 in the event it is determined by the Authority, or by a court, that the Executive has engaged in misconduct which constitutes a Breach of Duty. d. The Corporation's payment of, and an Executive's right to, contribution under this Section 9 shall be made and determined in accordance with and pursuant to the provisions in Sections 3 and/or 4 of this Article VI relating to the Corporation's payment of, and the Executive's right to, indemnification under this Article VI. 10. INDEMNIFICATION OF EMPLOYEES Unless otherwise specifically set forth in this Article VI, the Corporation shall indemnify and hold harmless any person who is or was a party, or is threatened to be made a party to any Action by reason of his or her status as, or the fact that he or she is or was an employee or authorized agent or representative of the Corporation and/or an Affiliate as to acts performed in the course and within the scope of such employee's, agent's, or representative's duties to the Corporation and/or an Affiliate, in accordance with and to the fullest extent permitted by the Statute as it may then be in effect. 25 -259- 11. SEVERABILITY If any provision of this Article VI shall be deemed invalid or inoperative, or if a court of competent jurisdiction determines that any of the provisions of this Article VI contravene public policy, this Article VI shall be construed so that the remaining provisions shall not be affected, but shall remain in full force and effect, and any such provisions which are invalid or inoperative or which contravene public policy shall be deemed, without further Action or deed by or on behalf of the Corporation, to be modified, amended, and/or limited, but only to the extent necessary to render the same valid and enforceable, and the Corporation shall indemnify an Executive as to Liabilities and reasonable Expenses with respect to any Action to the full extent permitted by any applicable provision of this Article VI that shall not have been invalidated and to the full extent otherwise permitted by the Statute as it may then be in effect. 12. NONEXCLUSIVITY OF ARTICLE VI The right to indemnification, contribution, and advancement of Expenses provided to an Executive by this Article VI shall not be deemed exclusive of any other rights to indemnification, contribution, and/or advancement of Expenses which any Executive or other employee or agent of the Corporation and/or of an Affiliate may be entitled under any charter provision, written agreement, resolution, vote of shareholders, or disinterested directors of the Corporation or otherwise, including, without limitation, under the Statute as it may then be in effect, both as to acts in his or her official capacity as such Executive or other employee or agent of the Corporation and/or of an Affiliate or as to acts in any other capacity while holding such office or position, whether or not the Corporation would have the power to indemnify, contribute, and/or advance Expenses to the Executive under this Article VI or under the Statute; provided that it is not determined that the Executive or other employee or agent has engaged in misconduct which constitutes a Breach of Duty. 13. NOTICE TO THE CORPORATION; DEFENSE OF ACTIONS a. An Executive shall promptly notify the Corporation in writing upon being served with or having actual knowledge of any citation, summons, complaint, indictment, or any other similar document relating to any Action which may result in a claim of indemnification, contribution, or advancement of Expenses hereunder, but the omission so to notify the Corporation will not relieve the Corporation from any liability which it may have to the Executive otherwise than under this Article VI unless the Corporation shall have been irreparably prejudiced by such omission. 26 -260- b. With respect to any such Action as to which an Executive notifies the Corporation of the commencement thereof: (1) The Corporation shall be entitled to participate therein at its own expense; and (2) Except as otherwise provided below, to the extent that it may wish, the Corporation (or any other indemnifying party, including any insurance carrier, similarly notified by the Corporation or the Executive) shall be entitled to assume the defense thereof, with counsel selected by the Corporation (or such other indemnifying party) and reasonably satisfactory to the Executive. c. After notice from the Corporation (or such other indemnifying party) to the Executive of its election to assume the defense of an Action, the Corporation shall not be liable to the Executive under this Article VI for any Expenses subsequently incurred by the Executive in connection with the defense thereof other than reasonable costs of investigation or as otherwise provided below. The Executive shall have the right to employ his or her own counsel in such Action but the Expenses of such counsel incurred after notice from the Corporation (or such other indemnifying party) of its assumption of the defense thereof shall be at the expense of the Executive unless: (1) The employment of counsel by the Executive has been authorized by the Corporation; (2) The Executive shall have reasonably concluded that there may be a conflict of interest between the Corporation (or such other indemnifying party) and the Executive in the conduct of the defense of such Action; or (3) The Corporation (or such other indemnifying party) shall not in fact have employed counsel to assume the defense of such Action, in each of which cases the Expenses of counsel shall be at the expense of the Corporation. The Corporation shall not be entitled to assume the defense of any Derivative Action or any Action as to which the Executive shall have made the conclusion provided for in clause (2) above. 14. CONTINUITY OF RIGHTS AND OBLIGATIONS The terms and provisions of this Article VI shall continue as to an Executive subsequent to the Termination Date and such terms and provisions shall inure to 27 -261- the benefit of the heirs, estate, executors, and administrators of such Executive and the successors and assigns of the Corporation, including, without limitation, any successor to the Corporation by way of merger, consolidation, and/or sale or disposition of all or substantially all of the assets or capital stock of the Corporation. Except as provided herein, all rights and obligations of the Corporation and the Executive hereunder shall continue in full force and effect despite the subsequent amendment or modification of the Corporation's Articles of Incorporation, as such are in effect on the date hereof, and such rights and obligations shall not be affected by any such amendment or modification, any resolution of directors or shareholders of the Corporation, or by any other corporate action which conflicts with or purports to amend, modify, limit, or eliminate any of the rights or obligations of the Corporation and/or of the Executive hereunder. 15. AMENDMENT This Article VI may only be altered, amended, or repealed by the affirmative vote of a majority of the shareholders of the Corporation so entitled to vote; provided, however, that the Board may alter or amend this Article VI without such shareholder approval if any such alteration or amendment: a. Is made in order to conform to any amendment or revision of the Wisconsin Business Corporation Law, including, without limitation, the Statute, which: (1) Expands or permits the expansion of an Executive's right to indemnification thereunder; (2) Limits or eliminates, or permits the limitation or elimination, of liability of the Executives; or (3) Is otherwise beneficial to the Executives; or b. in the sole judgment and discretion of the Board, does not materially adversely affect the rights and protections of the shareholders of the Corporation. Any repeal, modification, or amendment of this Article VI shall not adversely affect any rights or protections of an Executive existing under this Article VI immediately prior to the time of such repeal, modification, or amendment and any such repeal, modification, or amendment shall have a prospective effect only. 28 -262- 16. CERTAIN DEFINITIONS The following terms as used in this Article VI shall be defined as follows: a. "Action(s)" shall include, without limitation, any threatened, pending, or completed action, claim, litigation, suit, or proceeding, whether civil, criminal, administrative, arbitrative, or investigative, whether predicated on foreign, federal, state, or local law, whether brought under and/or predicated upon the Securities Act of 1933, as amended, and/or the Securities Exchange Act of 1934, as amended, and/or their respective state counterparts, and/or any rule or regulation promulgated thereunder, whether a Derivative Action, and whether formal or informal. b. "Affiliate" shall include, without limitation, any corporation, partnership, joint venture, employee benefit plan, trust, or other similar enterprise that directly or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, the Corporation. c. "Authority" shall mean the panel of arbitrators or independent legal counsel selected under Section 3 of this Article VI. d. "Board" shall mean the Board of Directors of the Corporation. e. "Breach of Duty" shall mean the Executive breached or failed to perform his or her duties to the Corporation or an Affiliate, as the case may be, and the Executive's breach of or failure to perform those duties constituted: (1) A willful failure to deal fairly with the Corporation (or an Affiliate) or its shareholders in connection with a matter in which the Executive has a material conflict of interest; (2) A violation of the criminal law, unless the Executive: (a) Had reasonable cause to believe his or her conduct was lawful; or (b) Had no reasonable cause to believe his or her conduct was unlawful; (3) A transaction from which the Executive derived an improper personal profit (unless such profit is determined to be immaterial in light of all the circumstances of the Action); or (4) Willful misconduct. 29 -263- f. "Derivative Action" shall mean any Action brought by or in the right of the Corporation and/or an Affiliate. g. "Executive(s)" shall mean any individual who is, was, or has agreed to become a director and/or officer of the Corporation and/or an Affiliate. h. "Expenses" shall include, without limitation, all expenses, fees, costs, charges, attorneys' fees and disbursements, other out-of-pocket costs, reasonable compensation for time spent by the Executive in connection with the Action for which he or she is not otherwise compensated by the Corporation, any Affiliate, any third party or other entity, and any and all other direct and indirect costs of any type or nature whatsoever. i. "Liabilities" shall include, without limitation, judgments, amounts incurred in settlement, fines, penalties, and, with respect to any employee benefit plan, any excise tax or penalty incurred in connection therewith, and any and all other liabilities of every type or nature whatsoever. j. "Statute" shall mean Wisconsin Business Corporation Law Sections 180.0850-180.0859 (or any successor provisions). k. "Termination Date" shall mean the date an Executive ceases, for whatever reason, to serve in an employment relationship with the Company and/or any Affiliate. ARTICLE VII. SEAL BOARD OF DIRECTORS The Board of Directors shall provide a corporate seal which shall be circular in form and shall have inscribed thereon the words "WISCONSIN PUBLIC SERVICE CORPORATION, GREEN BAY, WIS., CORPORATE SEAL." The continued use for any purpose of any former corporate seal or facsimile thereof shall have the same effect as the use of the corporate seal or facsimile thereof in the form provided by the preceding sentence. ARTICLE VIII. AMENDMENTS 1. The Board of Directors shall have authority to adopt, amend, or repeal the By-laws of this Corporation upon affirmative vote of a majority of the total number of directors at a meeting of the Board, the notice of which shall have included notice of the proposed amendment; but the Board of Directors shall have no 30 -264- power to amend any By-law adopted or amended by the shareholders after May 23, 1972, or to reinstate any By-law repealed by the shareholders after May 23, 1972, unless the shareholders shall hereafter confer such authority upon the Board of Directors. 2. The shareholders shall have power to adopt, amend, or repeal any of the By-laws of the Corporation, at any regular or special meeting of the shareholders, in accordance with the provisions of Article II of these By-laws. There shall be included in the notice of such regular or special meeting a statement of the nature of any amendment that is proposed for the consideration of the shareholders by the holders of at least 5% of the voting stock of the Corporation in a writing delivered to the Secretary of the Corporation not less than 90 days prior to the date of such meeting or by the Board of Directors. 31 -265- EX-10.F.1 5 EXHIBIT 10F-1 WPS RESOURCES CORPORATION DEFERRED COMPENSATION PLAN As Amended and Restated Effective January 1, 1999 -266- WPS RESOURCES CORPORATION DEFERRED COMPENSATION PLAN WPS Resources Corporation Deferred Compensation Plan (the "Plan") has been established effective January 1, 1996 to promote the best interests of WPS Resources Corporation (the "Company") and the stockholders of the Company by (1) attracting and retaining well-qualified persons for service as non-employee directors of the Company and designated subsidiaries or affiliates; and (2) attracting and retaining key management employees possessing a strong interest in the successful operation of the Company and its subsidiaries or affiliates and encouraging their continued loyalty, service and counsel to the Company and its subsidiaries or affiliates. This Plan replaces Deferred Compensation Plans 008, 009, 010 and 011 previously maintained by the Wisconsin Public Service Corporation. -267- ARTICLE I. DEFINITIONS AND CONSTRUCTION Section 1.01. Definitions. The following terms have the meanings -------------------------- indicated below unless the context in which the term is used clearly indicates otherwise: (a) "Account" means the recordkeeping account or accounts maintained by a Participating Employer for each Participant, including to extent applicable to any such Participant, Reserve Account A, Reserve Account B and the Stock Account. (b) An "Affiliate" of, or a person "affiliated" with, a specified person is a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the person specified and the term "Associate" used to indicate a relationship with any person, means (i) any corporation or organization (other than the registrant or a majority-owned subsidiary of the registrant) of which such person is an officer or partner or is, directly or indirectly, the beneficial owner of 10 percent or more of any class of equity securities, (ii) any trust or other estate in which such person has a substantial beneficial interest or as to which such person serves as trustee or in a similar fiduciary capacity, and (iii) any relative or spouse of such person, or any relative of such spouse, who has the same home as such person or who is a director or officer of the registrant or any of its parents or subsidiaries. (c) A person shall be deemed to be the "Beneficial Owner" of any securities: (i) which such Person or any of such Person's Affiliates or Associates has the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement, arrangement or understanding, or upon the exercise of conversion rights, exchange rights, rights, warrants or options, or otherwise; provided, however, that a Person shall not be deemed the -------- ------- Beneficial Owner of, or to beneficially own, (A) securities tendered pursuant to a tender or exchange offer made by or on behalf of such Person or any of such Person's Affiliates or Associates until such tendered securities are accepted for purchase or (B) securities issuable upon exercise of Rights pursuant to the terms of the Company's Rights Agreement with Firstar Trust Company, dated as of December 12, 1996, as amended from time to time (or any successor to such Rights Agreement) at any time before the issuance of such securities; (ii) which such Person or any of such Person's Affiliates or Associates, directly or indirectly, has the right to vote or dispose of or has "beneficial ownership" of (as determined pursuant to Rule 13d-3 of the General Rules 2 -268- and Regulations under the Act), including pursuant to any agreement, arrangement or understanding; provided, -------- however, that a Person shall not be deemed the Beneficial ------- Owner of, or to beneficially own, any security under this subparagraph (ii) as a result of an agreement, arrangement or understanding to vote such security if the agreement, arrangement or understanding: (A) arises solely from a revocable proxy or consent given to such Person in response to a public proxy or consent solicitation made pursuant to, and in accordance with, the applicable rules and regulations under the Act and (B) is not also then reportable on a Schedule 13D under the Act (or any comparable or successor report); or (iii) which are beneficially owned, directly or indirectly, by any other Person with which such Person or any of such Person's Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting (except pursuant to a revocable proxy as described in Section 1.01(c)(ii) above) or disposing of any voting securities of the Company. (d) "Beneficiary" means the person or entity designated by the Participant to be his beneficiary for purposes of this Plan. If a valid designation of Beneficiary is not in effect at time of the death of a Participant, the estate of the Participant is deemed to be the sole Beneficiary. If a Beneficiary dies while entitled to receive distributions from the Plan, any remaining payments shall be paid to the estate of the Beneficiary. Beneficiary designations shall be in writing, filed with the Secretary, and in such form as the Secretary may prescribe for this purpose. (e) "Board" means the Board of Directors of the Company. (f) "Bonus Deferral" means amounts credited, in accordance with an Executive's election under Section 8.02(b) of the WPS Resources Corporation Short-Term Variable Pay Plan, to an Executive's Stock Account in lieu of the payment of an equal amount as a current cash bonus. (g) A "Change in Control of the Company" shall be deemed to have occurred if: (i) any Person (other than any employee benefit plan of the Company or of any subsidiary of the Company, any Person organized, appointed or established pursuant to the terms of any such benefit plan or any trustee, administrator or fiduciary of such a plan) is or becomes the Beneficial Owner of securities of the Company 3 -269- representing at least 30% of the combined voting power of the Company's then outstanding securities; (ii) one-half or more of the members of the Board are not Continuing Directors; (iii) there shall be consummated any merger, consolidation, or reorganization of the Company with any other corporation as a result of which less than 50% of the outstanding voting securities of the surviving or resulting entity are owned by the former shareholders of the Company other than a shareholder who is an Affiliate or Associate of any party to such consolidation or merger; (iv) there shall be consummated (x) any merger of the Company or share exchange involving the Company in which the Company is not the continuing or surviving corporation other than a merger of the Company in which each of the holders of the Company's Common Stock immediately prior to the merger have the same proportionate ownership of common stock of the surviving corporation immediately after the merger; (v) there shall be consummated any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company to a Person which is not a wholly owned subsidiary of the Company; or (vi) the shareholders of the Company approve any plan or proposal for the liquidation or dissolution of the Company. (h) "Code" means the Internal Revenue Code of 1986, as interpreted by regulations and rulings issued pursuant thereto, all as amended and in effect from time to time. (i) "Company" means WPS Resources Corporation, a Wisconsin corporation, or any successor corporation. (j) "Compensation" means (i) for a Director, the Retainer Fee and (ii) for an Executive the base salary or wage payable by a Participating Employer for services performed, including elective contributions to a Section 125, 129 or 401(k) arrangement or Voluntary Deferrals to this Plan, but excluding extraordinary payments such as overtime, bonuses, meal allowances, reimbursed expenses, termination pay, moving pay, commuting expenses, Mandatory Deferrals to this Plan or other non-elective deferred compensation payments or accruals, stock options, the value of employer-provided fringe benefits or coverage, and any 4 -270- contributions on behalf of the Executive paid by a Participating Employer to a survivor's income benefit plan or any other employee benefit plan within the meaning of ERISA, all determined in accordance with such uniform rules, regulations or standards as may be prescribed by the Compensation Committee. (k) "Compensation Committee" means the Compensation Committee of the Board, which functions as the joint Compensation Committee for the Company and for Wisconsin Public Service Corporation. (l) "Continuing Director" means (i) any member of the Board of Directors of the Company who was a member of such Board on May 1, 1997, (ii) any successor of a Continuing Director who is recommended to succeed a Continuing Director by a majority of the Continuing Directors then on such Board and (iii) additional directors elected by a majority of the Continuing Directors then on such Board. (m) "Director" means a non-employee director of a Participating Employer who has been designated by the Compensation Committee as covered under or being eligible to participate in the Plan. (n) "ERISA" means the Employee Retirement Income Security Act of 1974, as interpreted by regulations and rulings issued pursuant thereto, all as amended and in effect from time to time. (o) "Executive" means a common law employee of a Participating Employer who has been designated by the Compensation Committee as covered under or otherwise being eligible to participate in this Plan. (p) "Mandatory Deferral" means the amount which may from time to time be credited to the Stock Account of an Executive in accordance with Section 3.01 and for which the Executive does not receive the option between receiving such amount as current cash compensation and deferring such amount into the Plan. (q) "Participant" means either a Director or Executive who is participating in or eligible to participate in the Plan. (r) "Participating Employer" means Company and any direct or indirect subsidiary of the Company that, with the consent of the Compensation Committee, adopts the Plan for the benefit of one or more Executives or Directors. (s) "Person" means any individual, firm, partnership, corporation or other entity, including any successor (by merger or otherwise) of such entity, or a group of any of the foregoing acting in concert. (t) "Retainer Fee" means those fees paid by a Participating Employer to non-employee directors for services rendered on the Board or any committee of the Board, or for 5 -271- service on the board of directors of a subsidiary or affiliate, including attendance fees and fees for serving as committee chair. (u) "Secretary" means the Secretary of the Company (or his delegate). (v) "Trust" means the WPS Resources Corporation Deferred Compensation Trust or other funding vehicle which may from time to time be established, as amended and in effect from time to time. (w) "Voluntary Deferrals" means amounts (other than Bonus Deferrals) credited, in accordance with a Participant's election, to his Account in lieu of the payment of an equal amount of current Compensation. (x) "WPS Resources Stock" means the common stock, $1.00 par value, of the Company. (y) "WPS Resources Stock Units" means the hypothetical shares of common stock, $1.00 par value, of the Company, that may be credited (i) to the Stock Account of an Executive as a result of Mandatory Deferrals or Bonus Deferrals, or (ii) to the Stock Account of either a Director or Executive as a result of Voluntary Deferrals. Section 1.02. Construction and Applicable Law. (a) Wherever any words ---------------------------------------------- are used in the masculine, they shall be construed as though they were used in the feminine in all cases where they would so apply; and wherever any words are use in the singular or the plural, they shall be construed as though they were used in the plural or the singular, as the case may be, in all cases where they would so apply. Titles of articles and sections are for general information only, and the Plan is not to be construed by reference to such items. This Plan, as applied to Executives, is intended to be a plan of deferred compensation maintained for a select group of management or highly compensated employees as that term is used in ERISA, and shall be interpreted so as to comply with the applicable requirements thereof. In all other respects, the Plan is to be construed and its validity determined according to the laws of the State of Wisconsin to the extent such laws are not preempted by federal law. In case any provision of the Plan is held illegal or invalid for any reason, the illegality or invalidity will not affect the remaining parts of the Plan, but the Plan shall, to the extent possible, be construed and enforced as if the illegal or invalid provision had never been inserted. 6 -272- ARTICLE II. PLAN ACCOUNTS Section 2.01. Establishment of Accounts. One or more of the following ---------------------------------------- Accounts (as applicable) will be established in the name of each Participant who (i) is identified on Schedule A as being eligible to participate in either the Voluntary Deferral component of the Plan or the Mandatory Deferral component of the Plan or in both the Voluntary Deferral and Mandatory Deferral components of the Plan, or (ii) is eligible for and has elected to make Bonus Deferrals in accordance with the procedures specified in Section 8.02(b) of the WPS Resources Corporation Short-Term Variable Pay Plan: (a) Reserve Account A (b) Reserve Account B (c) Stock Account. Section 2.02. Reserve Account A. (a) This Account will be credited -------------------------------- with the reserve account balance accumulated by a Participant as of December 31, 1995 under the prior deferred compensation program of Wisconsin Public Service Corporation. Except for attributed earnings as described below, no further "contributions" or credits of any kind will be made to this Account on behalf of a Participant. (b) As of the end of each Plan Year, the Account will be credited with an interest equivalent on the balance in the Account from time to time during the year. The annual interest equivalent will be the sum (on a non-compounded basis) of the attributed earnings for each month during the year based on the Account balance as of the last day of the month. Unless modified by the Compensation Committee, the interest equivalent rate for any month will be the greater of: (i) one-half of one percent (0.5%); or (ii) one-twelfth (1/12) of the return on common shareholders' equity (ROE). For the months of April through September, ROE means the consolidated return on equity of the Company and all subsidiaries for the twelve (12) months ended on the preceding March 31 as calculated pursuant to the Company's standard accounting procedure for financial reporting to shareholders. For the months October through March, ROE means return on equity as described above for the twelve (12) months ended on the preceding September 30. (c) The Compensation Committee may revise the interest equivalent rate described in Section 2.02(b) above or the manner in which it is calculated, but in no event shall the rate 7 -273- be less than six percent (6%) per annum. Any such revised rate shall be effective with the calendar month following such action by the Compensation Committee. (d) Notwithstanding Sections 2.02(b) and (c), in the event of a Change in Control, the rate of interest equivalent for each month following the Change in Control for which attributed earnings are required to be calculated shall be the greater of (A) the rate of interest equivalent otherwise applicable under Section 2.02(b) and (c) above calculated based upon the consolidated return on common shareholders equity of the Company (including for this purpose any successor corporation that is the survivor of a merger with the Company or any successor to that corporation) and all subsidiaries, and (B) a rate equal to two (2) percentage points above the prime lending rate at Firstar Bank Milwaukee, Milwaukee, Wisconsin (or any successor thereto) as of the last business day of that month. The minimum rate of interest equivalent under clause (B) above shall not apply with respect to any Participant who terminates employment under circumstances entitling the Participant to benefits under a Key Executive Employment and Severance Agreement in effect between the Company and such Participant. Section 2.03. Reserve Account B. (a) This Account shall be credited -------------------------------- with Voluntary Deferrals made after December 31, 1995 which a Participant elects to allocate to this Account in accordance with Section 3.02(c)(ii). (b) As of the end of each Plan Year, the Account will be credited with an interest equivalent on the balance in the Account from time to time during the year. The annual interest equivalent will be the sum (on a non-compounded basis) of the attributed earnings for each month during the year based on the Account balance as of the last day of each month. Unless modified by the Compensation Committee, the interest equivalent rate for any month will be the greater of: (i) one-half of one percent (0.5%); or (ii) seventy percent (70%) of one-twelfth (1/12) of the return on common shareholders equity (ROE). For the months of April through September, ROE means the consolidated return on equity of the Company and all subsidiaries for the twelve (12) months ended on the preceding March 31 as calculated pursuant to the Company's standard accounting procedure for financial reporting to shareholders. For the months October through March, ROE means return on equity as described above for the twelve (12) months ended on the preceding September 30. (c) The Compensation Committee may revise the interest equivalent rate described in Section 2.03(b) above or the manner in which it is calculated, but in no event shall the rate be less than six percent (6%) per annum. Any such revised rate shall be effective with the calendar month following such action by the Compensation Committee. 8 -274- (d) Notwithstanding Sections 2.03(b) and (c), in the event of a Change in Control, the rate of interest equivalent for each month following the Change in Control for which attributed earnings are required to be calculated shall be the greater of (A) the rate of interest equivalent otherwise applicable under Section 2.03(b) and (c) above calculated based upon the consolidated return on common shareholders equity of the Company (including for this purpose any successor corporation that is the survivor of a merger with the Company or any successor to that corporation) and all subsidiaries, and (B) a rate equal to two (2) percentage points above the prime lending rate at Firstar Bank Milwaukee, Milwaukee, Wisconsin (or any successor thereto) as of the last business day of that month. The minimum rate of interest equivalent under clause (B) above shall not apply with respect to any Participant who terminates employment under circumstances entitling the Participant to benefits under a Key Executive Employment and Severance Agreement in effect between the Company and such Participant. Further, in the case of any other Participant, the minimum rate of interest equivalent under clause (B) shall cease to apply on the third anniversary of the Change in Control in the event that the Participant is actively employed by the Company (or any successor thereto or affiliate thereof) on such date. Section 2.04. Stock Account. (a) This Account shall be credited with ---------------------------- (i) all Mandatory Deferrals made after December 31, 1995, (ii) those Voluntary Deferrals made after December 31, 1995 which a Participant, in accordance with Section 3.02(c)(ii), elects to allocate to this Account, and (iii) all Bonus Deferrals. (b) As of the end of each month, all Voluntary Deferrals, Mandatory Deferrals, and Bonus Deferrals made by or on behalf of a Participant during that month and allocated to the Participant's Stock Account (the "Convertible Amount") shall be converted, for recordkeeping purposes, into whole and fractional WPS Resources Stock Units, with fractional units calculated to four decimal places. The conversion shall be accomplished by dividing each Participant's Convertible Amount by the average purchase price of all shares of WPS Resources Stock purchased during that month by or on behalf of the Trust and the WPS Resources Corporation Stock Investment Plan. Likewise, any dividends that would have been payable on the WPS Resources Stock Units credited to a Participant's Stock Account had such Units been actual shares of WPS Resources Stock shall be converted, for recordkeeping purposes, into whole and fractional WPS Resources Stock Units based on the average purchase price of all shares of WPS Resources Stock purchased by or on behalf of the Trust and the WPS Resources Corporation Stock Investment Plan during the month in which the dividend is paid. Section 2.05. Accounts are For Recordkeeping Purposes Only. The Plan ----------------------------------------------------------- Accounts described in this Article II above serve solely as a device for determining the amount of benefits accumulated by a Participant under the Plan, and shall not constitute or imply an obligation on the part of a Participating Employer to fund such benefits. In any event, the Company may, in its discretion, set aside assets equal to part or all of such account balances and invest such assets in Company stock, life insurance or any other investment deemed appropriate. Any such assets, including WPS Resources Stock and any other assets held under the Trust, shall be and remain the sole property of the Company and except to the extent that 9 -275- the Trust authorizes a Participant to direct the trustee with respect to the voting of WPS Resources Stock held in the Trust, a Participant shall have no proprietary rights of any nature whatsoever with respect to such assets. 10 -276- ARTICLE III. MANDATORY AND VOLUNTARY DEFERRALS Section 3.01. Mandatory Deferrals. The Compensation Committee may, ---------------------------------- from time to time, authorize a Mandatory Deferral to be made on behalf of covered Executives. The authorization of any such contribution, the Executives entitled to the contribution, and the amount to be credited to each eligible Executive, shall be determined by the Compensation Committee in its sole discretion; provided that the maximum Mandatory Deferral for any year shall not exceed thirty percent (30%) of an Executive's Compensation for the year. Any Mandatory Deferral will be credited to an eligible Executive's Stock Account and converted into WPS Resources Stock Units in accordance with Section 2.04. Section 3.02. Election to Make Voluntary Deferrals. (a) A Participant --------------------------------------------------- may elect to make Voluntary Deferrals by submitting a properly completed and signed election form to the Secretary on or before December 20, 1995. If the Participant so elects, Voluntary Deferrals will commence with respect to Compensation earned by a Participant on or after January 1, 1996. Notwithstanding the foregoing, if, as of January 1, 1996, the Participant has in effect an election under the prior deferred compensation program maintained by Wisconsin Public Service Corporation and does not file an election with the Secretary in accordance with this Section 3.02(a), the prior election shall be deemed the Participant's initial election under this Plan. (b) If a Director or Executive first becomes eligible to participate in the Plan following the election period described in Section 3.02(a) above (such as, for example, a Director who commences service or an Executive who is newly designated by the Compensation Committee as being eligible) the initial deferral election may be made within thirty (30) days of the date that such person first becomes eligible under the Plan, and shall be effective with respect to Compensation earned by the Participant in the first payroll commencing on or after the date on which the deferral election is made. (c) A Participant's election shall be in such form as the Secretary may prescribe, and shall specify: (i) The percentage or dollar amount of Compensation to be deferred as a Voluntary Deferral. A Director may elect to defer all or any part of his Compensation, in whole dollar amounts or in increments of one percent (1%). An Executive may, without the consent of the Compensation Committee, elect to defer a portion of his Compensation, in whole dollar amounts or in increments of one percent (1%), provided that the amount or percentage elected does not exceed thirty percent (30%) of the Executive's Compensation. An Executive may elect to defer more than thirty percent (30%) of Compensation only if the Compensation Committee has approved the Executive's specific deferral percentage or amount. 11 -277- (ii) Whether the Voluntary Deferrals are to be credited to the Participant's Reserve Account (Reserve Account B) or the Participant's Stock Account. If the Participant desires to allocate Voluntary Deferrals to both his Reserve and Stock Accounts, the election must further specify the portion of the Voluntary Deferrals, in whole dollar amounts or in increments of one percent (1%), to be allocated to each Account. (d) An election shall be deemed made only when it is received by the Secretary, and shall remain in effect until modified by the Participant in accordance with Section 3.03 below or otherwise revoked in accordance with Plan rules. Section 3.03. Revision or Modification of Voluntary Deferral Election. ---------------------------------------------------------------------- (a) A Participant's initial election under Section 3.02 (including an election not to make Voluntary Deferrals) shall remain in effect from year to year unless revised or modified by the Participant in accordance with this Section 3.03 or otherwise revoked in accordance with Plan rules. (b) A Participant may modify his then current election (including an election not to make Voluntary Deferrals) by filing a revised election form, properly completed and signed, with the Secretary. The revised election will be effective with respect to Compensation earned by the Participant in the first payroll period commencing on or after the date on which the revised election is received by the Secretary. (c) An election shall be deemed revised in accordance with this Section 3.03 only when the revised election is received by the Secretary, and once effective, the revised election shall remain in effect until further revised in accordance with this Section 3.03 or otherwise revoked in accordance with Plan rules. Revised elections are prospectively effective with respect to Compensation earned on or after the applicable effective date described in Section 3.03(b) and (c) above. A revised election does not operate to modify or otherwise reallocate the amounts deferred prior to the effective date of the revised election. Section 3.04. Involuntary Termination of Voluntary Deferral Elections. ---------------------------------------------------------------------- A deferral election shall be automatically revoked upon termination of service as a Director (in the case of a Director) or termination of employment (in the case of an Executive). In addition, an Executive's deferral election shall terminate on the first day of the Plan Year following the date that the Compensation Committee determines that the Executive is no longer eligible to participate in the Plan, including any such action that may be necessary in order for the Plan to qualify under ERISA, with respect to Executive employees, as a plan of deferred compensation for a select group of management or highly compensated employees. 12 -278- ARTICLE IV. DISTRIBUTION OF RESERVE ACCOUNT A, RESERVE ACCOUNT B AND STOCK ACCOUNTS Section 4.01. Distribution Election. (a) The distribution election (if ------------------------------------ any) made by a Participant under the prior deferred compensation program maintained by Wisconsin Public Service Corporation shall be his distribution election under this Plan unless and until modified in accordance with Section 4.02 below. (b) A new Participant shall, at the time he commences participation in the Plan, make a distribution election with respect to his Account. The election shall be in such form as the Secretary may prescribe, and shall specify the distribution commencement date, the distribution period, the method of distributing earnings credited to the Account, and the distribution method applicable following the Participant's death. Any such election shall be consistent with the following rules (or where the Participant fails to make a selection, in accordance with the default rules set forth below): (i) Distribution Commencement Date. Unless the Participant ------------------------------ has selected a later commencement date (which in no event shall be later than the first distribution period following the Participant's attainment of age 72), distribution of a Participant's Accounts will commence within 60 days following the end of the calendar year in which occurs the Participant's retirement or termination of employment or service. For purposes of this Plan, a participating Executive who is disabled shall be deemed to have retired or terminated at the conclusion of benefits under all disability income plans sponsored by a Participating Employer or to which a Participating Employer contributes. Further, a participating Executive who ceases employment with a Participating Employer in connection with an early retirement (reduction in force) program sponsored by the Participating Employer shall, if a participant in the Wisconsin Public Service Administrative Employees Retirement Plan, be deemed to have retired upon commencement of retirement benefits under such plan. (ii) Distribution Period. Distributions will be made in 1, 3, ------------------- 6, 9, 12 or 15 annual installments, as elected by the Participant. (iii) Method of Calculating Annual Distribution Amount. Unless ------------------------------------------------ the Participant elects the Alternate Distribution Method, the amount to be distributed to the Participant each year during the distribution period will be 13 -279- determined under the Regular Distribution Method. The Regular and Alternate Distribution Methods are described in more detail in Section 4.03. (iv) Distribution of Remaining Account Following Participant's --------------------------------------------------------- Death. In the event of the Participant's death, the ----- Participant's remaining undistributed interest will be distributed to the Beneficiary designated by the Participant in either a single sum payment or in installments, as elected by the Participant. If the Participant has elected that death benefits be paid in a single sum, the payment shall be made no later than March 1 following the calendar year in which occurs the Participant's death. If the Participant has elected that death benefits be paid in installments, (A) any installments previously commenced to the Participant shall continue to the Beneficiary and (B) if installment distributions had not commenced as of the date of the Participant's death, payments over the installment period elected by the Participant shall commence to the Beneficiary no later than March 1 following the calendar year in which occurs the Participant's death. (c) A distribution election shall be deemed made only when it is received by the Secretary, and shall remain in effect until modified by the Participant in accordance with Section 4.02 below or otherwise revoked in accordance with Plan rules. Section 4.02. Modified Distribution Election. A Participant may from --------------------------------------------- time to time modify his distribution election by filing a revised distribution election, properly completed and signed, with the Secretary. However, a revised distribution election will be given effect only if the Participant remains employed by (or in the case of a Director, continues service on the Board or the board of directors of a Participating Employer) for twenty-four (24) consecutive months following the date that the revised election is received by the Secretary. Section 4.03. Calculation of Annual Distribution Amount. (a) For any -------------------------------------------------------- Participant whose retirement date was prior to January 1, 1996, distribution will continue to be calculated under the distribution method applicable to such Participant at the time his distributions commenced under the terms of the prior deferred compensation program maintained by Wisconsin Public Service Corporation. (b) For any Participant whose retirement date is after December 31, 1995, unless the Participant has selected the Alternate Distribution Option, the annual distribution amount shall be separately calculated for the Participant's interest (if any) in Reserve Account A, Reserve Account B and the Stock Account. 14 -280- (i) The annual distribution amount for Reserve Account A and Reserve Account B shall be determined by dividing the balance in each Account as of January 1 of the year for which the distribution is being made by the number of installment payments remaining to be made under the distribution period selected by the Participant. Distributions from Reserve Account A and Reserve Account B shall be made in cash. The amount of any distribution under this Section 4.03(b)(i) will be charged pro-rata against the Participant's interest in Reserve Account A and B. (ii) The annual distribution amount for the Stock Account shall be determined on a share basis by dividing the number of WPS Resources Stock Units credited to the Participant's Stock Account as of January 1 of the year for which the distribution is being made by the number of installment payments remaining to be made under the distribution period selected by the Participant, and then rounding the quotient obtained for all but the final installment to the next lowest whole number of WPS Resources Stock Units. The Committee will then distribute to the Participant shares of WPS Resources Stock and/or cash equal to the annual distribution amount. For any portion of the distribution that the Committee elects to satisfy by making a cash payment to the Participant, the cash payment shall be determined by multiplying the annual distribution amount (or the portion of the annual distribution amount being satisfied in cash) by the closing price of WPS Resources Stock on January 21 of the year in which the distribution is being made, as such share price is reported in the Wall Street Journal's New York Stock Exchange Composite Transactions listing. If January 21 falls on a Saturday, Sunday or holiday, the calculation of the cash portion of the distributions will be made based upon the closing price as reported for the immediately preceding business day. (c) For any Participant whose retirement date is after December 31, 1995 and who has selected the Alternate Distribution Method, the annual distribution amount shall be separately calculated for the Participant's interest (if any) in Reserve Account A, Reserve Account B and the Stock Accounts of January 1 of the year in which distributions commence. The annual distribution amounts, once calculated, shall not thereafter be recalculated. 15 -281- (i) For the year in which distribution commences, the annual distribution amount for Reserve Account A and Reserve Account B shall be determined by dividing the balance in each Account as of January 1 of the year in which distribution commences by the number of installment payments selected by the Participant. For each succeeding distribution year, the Participant shall be entitled to a distribution equal to the annual distribution amount calculated in accordance with the preceding sentence, plus all interest equivalent credited to the Account during the preceding calendar year. Distributions from Reserve Account A and Reserve Account B shall be made in cash. The amount of any distribution under this Section 4.03(c)(i) will be charged pro-rata against the Participant's interest in Reserve Account A and B. (ii) For the year in which distribution commences, the annual distribution amount for the Stock Account shall be determined on a share basis by dividing the number of WPS Resources Stock Units credited to the Participant's Stock Account as of January 1 of the year in which distribution commences by the number of installment payments selected by the Participant, and then rounding the quotient obtained for all but the final installment to the next lowest whole number of WPS Resources Stock Units. For each succeeding distribution year, the Participant shall be entitled to distribution of the number of WPS Resources Stock Units determined in accordance with the preceding sentence, plus all additional WPS Resources Stock Units credited to the Stock Account during the preceding calendar year on account of the assumed reinvestment of dividends, disregarding for all but the final installment any fractional WPS Resources Stock Units. The Committee will then distribute to the Participant shares of WPS Resources Stock and/or cash equal to the number of WPS Resources Stock Units required to be distributed for that year. For any portion of the distribution that the Committee elects to satisfy by making a cash payment to the Participant, the cash payment shall be determined by multiplying the distribution amount (or the portion of the distribution amount being satisfied in cash) by the closing price of WPS Resources Stock on January 21 of the year in which the distribution is being made, as such share price is 16 -282- reported in the Wall Street Journal's New York Stock Exchange Composite Transactions listing. If January 21 falls on a Saturday, Sunday or holiday, the calculation of the cash portion of the distributions will be made based upon the closing price as reported for the immediately preceding business day. Section 4.04. Time of Distribution. WPS Resources Stock distributed to ----------------------------------- a Participant shall be distributed on January 22 (or if January 22 falls on a Saturday, Sunday or holiday, the immediately following business day). For distribution and tax reporting purposes, the value of WPS Resources Stock distributed shall equal the number of shares distributed multiplied by the closing price of WPS Resources Stock on January 21 (or if January 21 falls on a Saturday, Sunday or holiday, the immediately preceding business day) of the year in which the distribution is being made as reported in the Wall Street Journal's New York Stock Exchange Composite Transaction listing. The cash portion of any distribution will be made no later than March 1 of the year for which the distribution is being made. Section 4.05. Other Distribution Rules. (a) Subject to adjustment as --------------------------------------- provided in paragraph (c) of this Section 4.05, the total number of authorized but previously unissued shares of WPS Stock which may be distributed to Participants pursuant to the Plan shall be one hundred thousand (100,000), which number shall not be reduced by or as a result of (i) any cash distributions pursuant to the Plan or (ii) the distribution to Participants pursuant to the Plan of any outstanding shares of WPS Stock purchased by or on behalf of the Trust. (b) The amount actually distributed to the Participant will be reduced by applicable income tax withholding. Unless the Participant has made a contrary election, income tax on the entire annual distribution amount will be withheld from the cash portion of the distribution, and WPS Resources Stock will be used to satisfy withholding obligations only to the extent that the cash portion of the distribution is insufficient for this purpose. (c) In the event of any merger, reorganization, consolidation, recapitalization, separation, liquidation, stock dividend, split-up, share combination or other change in the corporate structure of the Company or a Participating Employer affecting WPS Stock, such adjustment shall be made in the number and class of shares which may be distributed pursuant to the Plan as may be determined to be appropriate and equitable by the Compensation Committee in its sole discretion. 17 -283- ARTICLE V. SPECIAL DEATH BENEFIT FOR PARTICIPANTS WHO DIE WHILE MAKING VOLUNTARY AND MANDATORY DEFERRALS Section 5.01. Eligibility. If an Executive who is identified in -------------------------- Schedule B (as from time to time amended by the Compensation Committee) dies prior to attainment of age sixty-five (65) and while employed by a Participating Employer, and if at the time of the Executive's death Voluntary or Mandatory Deferrals were being made by or on behalf of the Executive, then a special death benefit shall be paid to the Executive's Beneficiary. This special death benefit is in addition to any other death benefit payable under the Plan. Section 5.02. Calculation of Special Death Benefit Amount. The special ---------------------------------------------------------- death benefit shall be an amount equal to the lesser of one million dollars ($1,000,000) or the sum of (a), (b), (c) and (d) below. (a) The difference between (i) the Voluntary Deferrals (not in excess of twenty percent (20%) of Compensation) and Mandatory Deferrals that would have been made by or on behalf of the Executive during the month in which occurs the Executive's death, assuming, for this purpose that the Executive had lived, and (ii) the Voluntary Deferrals of the Mandatory Deferrals actually made during such month; (b) The product obtained by multiplying (i) the Voluntary Deferrals (not in excess of twenty percent (20%) of Compensation) and Mandatory Deferrals made by or on behalf of the Executive during the month prior to the month in which occurs the Executive's death, and (ii) the number of full calendar months, inclusive, from the month following the month in which occurs the Executive's death to the month preceding the month in which the Executive would have attained age sixty-two (62) had he lived; (c) In the event the Executive's birthday is other than the first day of a calendar month, for the month in which the Executive would have attained age sixty-two (62), the product obtained by multiplying (i) the Voluntary Deferrals (not in excess of twenty percent (20%) of Compensation) and the Mandatory Deferrals made by or on behalf of the Executive during the month prior to the month in which occurs the Executive's death, and (ii) a fraction, the numerator of which is the number of days in such month prior to the Executive's sixty-second (62nd) birthday and the denominator of which is the total number of days in the month; (d) A projected earnings factor equal to the amount of interest equivalent that would have accumulated on the amounts described in (a), (b) and (c) above. The projected earnings factor shall be calculated using the interest equivalent rate that was in effect under Reserve Account B for the month prior to the month in which occurs the Executive's death. The calculation shall assume that the Voluntary and Mandatory Deferrals described in (a), (b) and (c) above were credited to Reserve Account B on a monthly basis assuming that the Executive had lived and continued to make Voluntary and Mandatory Deferrals. The interest equivalent shall be compounded in the same manner as the Executive's actual Reserve Account balance, i.e., the annual interest equivalent calculated as of the end of each Plan Year will be the sum 18 -284- (on a non-compounded basis) of the attributed earnings for each month during the year based on the Account balance as of the last day of the month. Section 5.03. Payment of Special Death Benefit. (a) The special death ----------------------------------------------- benefit calculated in accordance with Section 5.02 above shall be paid to the Executive's Beneficiary in fifteen (15) annual installments, with the first installment commencing within sixty (60) days of the Executive's death. The benefit calculated under Section 5.02 is a fixed amount which does not accrue earnings or interest equivalent on the undistributed balance. 19 -285- ARTICLE VI. SUPPLEMENTAL RETIREMENT BENEFIT Section 6.01. Supplemental Retirement Benefit. (a) An Executive who ---------------------------------------------- at the time of his retirement or termination of employment is identified in Schedule C shall be entitled to a supplemental retirement benefit if the Executive: (i) retires from a Participating Employer on or after attainment of age fifty-eight (58); or (ii) terminates employment with a Participating Employer on or after the attainment of age fifty (50) provided that the Executive has completed ten (10) or more years of service with a Participating Employer; or (iii) terminates employment with a Participating Employer prior to satisfaction of the requirements specified in Section 6.01(a)(i) or (ii) above but with the advance written approval of the Compensation Committee. (b) An Executive who at the time of his termination of employment is identified in Schedule C shall be entitled to a reduced supplemental benefit if the Executive terminates employment from a Participating Employer after attainment of age fifty (50) but prior to satisfying the requirements of Section 6.01(a) above. Section 6.02. Amount of Supplemental Benefit. (a) An Executive who --------------------------------------------- qualifies for the supplemental retirement benefit under Section 6.01(a) above shall receive a monthly amount equal to twenty percent (20%) [in the case of an Executive identified in Part I of Schedule C] or ten percent (10%) [in the case of an Executive identified in Part II of Schedule C] of the Executive's "average monthly compensation". (b) An Executive who qualifies for the supplemental retirement benefit under Section 6.01(b) above shall receive a monthly amount equal to the product obtained by multiplying (i) the monthly benefit determined under Section 6.02(a) above, by (ii) a fraction, the numerator of which is the Executive's years of service with a Participating Employer (including fractional years) and the denominator of which is ten (10). (c) The Executive's "average monthly compensation" is the Executive's "compensation", expressed on a monthly basis, during whichever period of thirty-six (36) consecutive months of employment produces the highest average. For this purpose, "compensation" shall have the same meaning as under the Wisconsin Public Service Corporation Administrative Employees' Retirement Plan with the exception that (i) Voluntary Deferrals and Mandatory Deferrals made by or on behalf of the Executive during the relevant period will be included in the Executive's compensation and (ii) the compensation limitation specified in Section 401(a)(17) of the Internal Revenue Code shall not apply. 20 -286- Section 6.03. Commencement and Duration of Supplemental Retirement ------------------------------------------------------------------- Benefits. Monthly payments calculated in accordance with Section 6.02 above - -------- will commence to the Executive with a payment for the month following the later to occur of (i) the month in which the Executive retires or terminates employment, or (ii) the month in which the Executive attains age fifty-eight (58). Monthly payments to the Executive shall continue until the earlier to occur of (a) the month in which occurs the Executive's death, or (b) one hundred twenty (120) monthly payments have been made. Section 6.04. Death After Benefit Commencement But Prior to Receipt of ----------------------------------------------------------------------- 120 Monthly Payments. If the Executive dies after his supplemental retirement - -------------------- benefit has commenced but before receipt of 120 payments, and if the Executive leaves a surviving spouse to whom the Executive was lawfully married on the date of his death, the surviving spouse shall receive monthly payments equal to fifty percent (50%) of the amount of the benefit that was being paid to the Executive. This benefit will commence with a payment for the month following the month in which occurs the death of the Executive and shall continue until the earlier to occur of (a) the month in which occurs the death of the surviving spouse, or (b) a total of one hundred twenty (120) monthly payments have been made to either the Executive or the surviving spouse. Section 6.05. Death Prior to Benefit Commencement. If the Executive -------------------------------------------------- dies prior to commencement of his supplemental retirement benefit, and if the Executive leaves a surviving spouse to whom the Executive was lawfully married on the date of his death, the surviving spouse shall receive monthly payments equal to fifty percent (50%) of the amount that would have been paid to the Executive (disregarding, in the case of an Executive who dies while actively employed, the age and service conditions described in Section 6.01 above but with the benefit amount calculated without assuming any salary increases). This benefit will commence with a payment for the month following the month in which occurs the death of the Executive and shall continue until the earlier to occur of (a) the month in which occurs the death of the surviving spouse, or (b) one hundred twenty (120) monthly payments have been made. Section 6.06. Special Rules Applicable Upon a Change in Control. In ---------------------------------------------------------------- the event of a Change in Control and unless otherwise waived by the Executive, an Executive who is identified in Schedule C and who is actively employed on the Change in Control date shall be entitled to receive a supplemental retirement benefit whether or not the Executive has satisfied the eligibility conditions set forth in Section 6.01. The supplemental retirement benefit shall commence to the Executive with a payment for the month following the month in which the Executive retires or otherwise terminates employment following the Change in Control, and shall continue until the earlier to occur of (a) the Executive's death, or (b) one hundred twenty (120) monthly payments have been made; provided that the Executive, in accordance with rules prescribed by the Committee but in no event after the Executive's termination of employment, may waive the application of this sentence in which case the rules of Section 6.03 shall govern the distribution of the Executive's benefit. If the Executive dies after benefit commencement but prior to receiving one hundred twenty (120) monthly payments, or if the Executive dies prior to benefit commencement, the provisions of Sections 6.04 and 6.05 shall apply. 21 -287- ARTICLE VII. PROTECTION OF QUALIFIED RETIREMENT PLAN BENEFIT Section 7.01. Pension Equalization Benefit. (a) In the case of an ------------------------------------------- Executive who is identified on Schedule D ( as from time to time amended by the Compensation Committee) and who participates in the Wisconsin Public Service Corporation Administrative Employees' Retirement Plan ("Retirement Plan"), a monthly benefit shall be paid to the Executive during his lifetime, and if applicable, to his surviving spouse following the Executive's death, a monthly amount equal to the difference between: (i) The monthly benefit that would have been payable to or on behalf of the Participant under the Retirement Plan had the Participant's (A) compensation for Retirement Plan purposes been calculated prior to reduction for Voluntary and Mandatory Deferrals made to this Plan and without regard to the compensation limitation described in Section 401(a)(17) of the Code, and (B) benefit been calculated without regard to the maximum benefit limitation described in Section 415 of the Internal Revenue Code; and (ii) The monthly benefit actually payable to or on behalf of the Executive under the Retirement Plan. (b) Payments under this Section 7.01 shall cease when all benefits payable to or on behalf of the Executive under the Retirement Plan are discontinued. 22 -288- ARTICLE VIII. RULES WITH RESPECT TO WPS RESOURCES STOCK AND WPS RESOURCES STOCK UNITS Section 8.01. Transactions Affecting WPS Resources Stock. In the --------------------------------------------------------- event of any merger, share exchange, reorganization, consolidation, recapitalization, stock dividend, stock split or other change in corporate structure affecting WPS Resources Stock, appropriate adjustments shall be made to the WPS Resources Stock Units (if any) credited to the Stock Account of each Participant. Section 8.02. No Shareholder Rights With Respect to WPS Resources Stock ------------------------------------------------------------------------ Units. Participants shall have no rights as a stockholder pertaining to - ----- WPS Resources Stock Units credited to their Stock Account. No WPS Resources Stock Unit nor any right or interest of a Participant under the Plan in any WPS Resources Stock Unit may be assigned, encumbered, or transferred, except by will or the laws of descent and distribution. The rights of a Participant hereunder with respect to any WPS Resources Stock Unit are exercisable during the Participant's lifetime only by him or his guardian or legal representative. 23 -289- ARTICLE IX. PARTICIPATING EMPLOYERS Section 9.01. Responsibility for Benefits. Each Participating Employer ------------------------------------------ shall be responsible for providing all benefits under the Plan that became payable to a Participant who is or was employed by (or serves or served on the board of directors of) that Participating Employer. To the extent that a Participant is or was employed by two or more Participating Employers, each such Participating Employer shall be responsible for providing the portion of the Participant's benefits accrued while in the employ of that employer. 24 -290- ARTICLE X. PROVISIONS Section 10.01. Administration. The Compensation Committee shall ------------------------------ administer and interpret the Plan and supervise preparation of Participant elections, forms, and any amendments thereto. To the extent necessary to comply with applicable conditions of Rule 16b-3, the Compensation Committee shall consist of not less than two members of the Board, each of whom is also a director of Parent and qualifies as a "non-employee director" for purposes of Rule 16b-3. If at any time the Compensation Committee shall not be in existence or not be composed of members of the Board who qualify as "non-employee directors", then all determinations affecting Participants who are subject to Section 16 of the Securities Exchange Act of 1934 (the "Exchange Act") shall be made by the full Board. The Board may, in its discretion, delegate to the Secretary or another committee of the Board any or all of the authority and responsibility of the Compensation Committee with respect to participation by Participants other than Participants who are subject to Section 16 of the Exchange Act at the time any such delegated authority or responsibility is exercised. Interpretation of the Plan shall be within the sole discretion of the Compensation Committee and shall be final and binding upon each Participant and Beneficiary. The Compensation Committee, and the Secretary with respect to matters assigned to him under this Plan or delegated to him by the Compensation Committee, may adopt and modify rules and regulations relating to the Plan as it deems necessary or advisable for the administration of the Plan. If the Secretary shall also be a Participant or Beneficiary, any determinations affecting the Secretary's participation in the Plan shall be made by the Compensation Committee. Section 10.02. Compliance With Securities Exchange Act. Transactions ------------------------------------------------------- under the Plan are intended to comply with all applicable conditions of Rule 16b-3 or its successor under the Exchange Act. The Plan shall be administered by the Compensation Committee so that transactions under the Plan will be exempt from Section 16 of the Exchange Act pursuant to regulations and interpretations issued from time to time by the Securities and Exchange Commission. Section 10.03. Participant Rights Unsecured. (a) The right of a -------------------------------------------- Participant or his Beneficiary to receive a distribution hereunder shall be an unsecured claim, and neither the Participant nor any Beneficiary shall have any rights in or against any amount credited to his Account or any other specific assets of a Participating Employer. The right of a Participant or Beneficiary to the payment of benefits under this Plan shall not be assigned, encumbered, or transferred, except by will or the laws of descent and distribution. The rights of a Participant hereunder are exercisable during the Participant's lifetime only by him or his guardian or legal representative. (b) The Company may authorize the creation of a trust or other arrangements to assist in meeting the obligations created under the Plan. However, any liability to any person with respect to the Plan shall be based solely upon any contractual obligations that may be created pursuant to the Plan. No obligation of a Participating Employer shall be deemed to be secured by any pledge of, or other encumbrance on, any property of a Participating Employer. 25 -291- Nothing contained in this Plan and no action taken pursuant to its terms shall create or be construed to create a trust of any kind, or a fiduciary relationship between a Participating Employer and any Participant or Beneficiary, or any other person. (c) If, after a Change in Control, (i) a dispute arises with respect to the enforcement of the Participant's rights under the Plan, or (ii) any legal proceeding shall be brought to enforce or interpret any provision contained in the Plan or to recover damages for breach of the Plan, in either case so long as the Participant is not acting in bad faith or otherwise pursuing a course of action that a reasonable person would determine to be frivolous, the Participant shall recover from the Company any reasonable attorneys' fees and necessary costs and disbursements incurred as a result of such dispute or legal proceeding ("Expenses"), and prejudgment interest on any money judgment obtained by the Participant calculated at the rate of interest announced by Firstar Bank Milwaukee, Milwaukee, Wisconsin (or any successor thereto), from time to time as its prime or base lending rate from the date that payments to the Participant should have been made under this Plan. Within ten (10) days after the Participant's written request therefor, the Company shall pay to the Participant, or such other person or entity as the Participant may designate in writing to the Company, the Participant's Expenses in advance of the final disposition or conclusion of any such dispute or legal proceeding. In the case of a deceased Participant, this Section 10.03(c) shall apply with respect to the Participant's Beneficiary or estate. Section 10.04. Income Tax Withholding. Subject to Section 4.04(c), no -------------------------------------- later than the date as of which an amount first becomes includible in the gross income of the Participant for Federal income tax purposes, the Participant shall pay or make arrangements satisfactory to the Compensation Committee regarding the payment of, any Federal, state, local or foreign taxes of any kind required by law to be withheld with respect to such amount. Section 10.05. Establishment, Amendment or Termination of Plan. --------------------------------------------------------------- (a) There shall be no time limit on the duration of the Plan. Except as provided in Section 10.05(b) below, the Board (or where specified herein, the Compensation Committee) may at any time amend or terminate the Plan; provided, however, that no amendment or termination may reduce or eliminate any Account balance accrued or credited on behalf of a Participant based on Mandatory Deferrals, Voluntary Deferrals and Bonus Deferrals already made or reduce or eliminate benefits accrued or credited based upon service already rendered. (b) Upon and following the occurrence of a Change in Control: (i) The Board may at any time amend the Plan consistent with Section 10.05(a) to (A) modify the terms and conditions applicable to (or otherwise eliminate) Bonus Deferrals, Mandatory Deferrals and Voluntary Deferrals made (or that in the absence of the amendment would have been made) on or after the Amendment Date, or (B) modify the terms and conditions applicable to (or otherwise eliminate) the accrual of benefits, with respect 26 -292- to periods on or after the Amendment Date, under the supplemental benefits described in Articles VI and VII of the Plan. (ii) Any amendment to the Plan or action to terminate the Plan that is not described in Section 10.05(b)(i) above, including, without limitation, an amendment that would affect the crediting of interest equivalent with respect to Bonus Deferrals, Mandatory Deferrals and Voluntary Deferrals made prior to the Amendment Date and any amendment that would affect the supplemental benefits described in Articles VI and VII that have accrued through the Amendment Date, shall be effective only with the written consent of the Participant (or in the case of a deceased Participant, the Participant's Beneficiary). (c) The term "Amendment Date" means the date on which an amendment to the Plan is validly adopted or the date on which the amendment is or purports to be effective, whichever is later. Section 10.06. Administrative Expenses. Costs of establishing and --------------------------------------- administering the Plan will be paid by the Participating Employers. Section 10.07. Effect on Other Employee Benefit Plans. Voluntary ------------------------------------------------------ Deferrals, Mandatory Deferrals and Bonus Deferrals credited to a Participant's Account under this Plan shall not be considered "compensation" for the purpose of computing benefits under any qualified retirement plan maintained by a Participating Employer, but shall be considered compensation for welfare benefit plans, such as life and disability insurance programs sponsored by a Participating Employer. Section 10.08. Successor and Assigns. This Plan shall be binding upon ------------------------------------- and inure to the benefit of the Company and Participating Employers, their successors and assigns and the Participants and their heirs, executors, administrators, and legal representatives. Section 10.09. Maximum Payment Limitation. Notwithstanding any other ------------------------------------------ provision of this Plan, if any portion of the payments or benefits described in this Plan or under any other agreement with or plan of the Company (in the aggregate, "Total Payments"), would constitute an "excess parachute payment", then the Total Payments to be made to the Participant shall be reduced such that the value of the aggregate Total Payments that the Participant is entitled to receive shall be one dollar ($1) less than the maximum amount which the Participant may receive without becoming subject to the tax imposed by Section 4999 of the Code (or any successor provision) or which the Company may pay without loss of deduction under Section 280G(a) of the Code (or any successor provision); provided that this Section 10.09 shall not apply in the case of a Participant who has in effect a valid employment contract providing that the Total Payments to the Participant shall be determined without regard to the maximum amount allowable under Section 280G of the Code (or any successor provision). The terms 27 -293- "excess parachute payment" and "parachute payment" shall have the meanings assigned to them in Section 280G of the Code (or any successor provision), and such "parachute payments" shall be valued as provided therein. Present value shall be calculated in accordance with Section 280G(d)(4) of the Code (or any successor provision). Within forty days following delivery of notice by the Company to the Participant of its belief that there is a payment or benefit due the Participant which will result in an excess parachute payment as defined in Section 280G of the Code (or any successor provision), the Participant and the Company, at the Company's expense, shall obtain the opinion (which need not be unqualified) of nationally recognized tax counsel selected by the Company's independent auditors and acceptable to the Participant in his sole discretion (which may be regular outside counsel to the Company), which opinion sets forth (A) the amount of the Base Period Income, (B) the amount and present value of Total Payments and (C) the amount and present value of any excess parachute payments determined without regard to the limitations of this Section 10.09. As used in this Section 10.09, the term "Base Period Income" means an amount equal to the Participant's "annualized includible compensation for the base period" as defined in Section 280G(d)(1) of the Code (or any successor provision). For purposes of such opinion, the value of any noncash benefits or any deferred payment or benefit shall be determined by the Company's independent auditors in accordance with the principles of Sections 280G(d)(3) and (4) of the Code (or any successor provisions), which determination shall be evidenced in a certificate of such auditors addressed to the Company and the Participant. Such opinion shall be addressed to the Company and the Participant and shall be binding upon the Company and the Participant. If such opinion determines that there would be an excess parachute payment, the payments hereunder that are includible in Total Payments or any other payment or benefit determined by such counsel to be includible in Total Payments shall be reduced or eliminated as specified by the Participant in writing delivered to the Company within thirty days of his receipt of such opinion or, if the Participant fails to so notify the Company, then as the Company shall reasonably determine, so that under the bases of calculations set forth in such opinion there will be no excess parachute payment. If such legal counsel so requests in connection with the opinion required by this Section 10.09, the Participant and the Company shall obtain, at the Company's expense, and the legal counsel may rely on in providing the opinion, the advice of a firm of recognized executive compensation consultants as to the reasonableness of any item of compensation to be received by the Participant. If the provisions of Sections 280G and 4999 of the Code (or any successor provisions) are repealed without succession, then this Section 10.09 shall be of no further force or effect. 28 -294- EX-11 6 EXHIBIT 11 STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS WPS RESOURCES CORPORATION
============================================================================================================ INFORMATION WITH RESPECT TO THE COMPUTATION OF EARNINGS PER SHARE OF COMMON STOCK Three Months Ended Twelve Months Ended (Thousands) December 31 December 31 1998 1997 1998 1997 ============================================================================================================ Shares of common stock at beginning of period 26,506 26,522 26,518 26,538 Shares of common stock purchased for deferred compensation trust - Date of deferred Number compensation trust purchase of Shares - --------------------------- --------- January 20, 1998 1 1 February 23, 1998 1 1 March 23, 1998 2 2 April 20, 1998 1 1 May 20, 1998 1 1 June 23, 1998 2 2 July 20, 1998 1 1 August 21, 1998 1 1 September 21, 1998 2 2 October 20, 1998 1 1 1 November 20, 1998 1 1 1 December 22, 1998 2 2 2 January 20, 1997 2 2 February 20, 1997 1 1 March 20, 1997 2 2 April 21, 1997 2 2 May 20, 1997 2 2 June 20, 1997 2 2 July 21, 1997 2 2 August 20, 1997 1 1 September 23, 1997 2 2 October 21, 1997 1 1 1 November 20, 1997 1 1 1 December 22, 1997 1 1 1 - ------------------------------------------------------------------------------------------------------------ Shares of common stock at end of period 26,502 26,519 26,502 26,519 ============================================================================================================ Computation of daily weighted average shares: Shares of common stock at beginning of period - Number Number of of Days Shares ------ ------ December 31, 1997 20 26,522 530,440 December 31, 1997 19 26,538 504,222 December 31, 1998 19 26,506 503,614 December 31, 1998 19 26,518 503,842 Shares of common stock after purchase for deferred compensation trust - Number Number of of Days Shares ------ ------ December 31, 1997 31 26,536 822,616 December 31, 1997 28 26,534 742,952 December 31, 1997 32 26,532 849,024 December 31, 1997 29 26,531 769,399 December 31, 1997 31 26,529 822,399 December 31, 1997 31 26,527 822,337 December 31, 1997 30 26,525 795,750 December 31, 1997 34 26,524 901,816 December 31, 1997 28 26,522 742,616 December 31, 1997 30 26,521 795,630 795,630 December 31, 1997 32 26,520 848,640 848,640 December 31, 1997 10 26,519 265,190 265,190 December 31, 1998 34 26,517 901,578 December 31, 1998 28 26,516 742,448 December 31, 1998 28 26,514 742,392 December 31, 1998 30 26,513 795,390 December 31, 1998 34 26,512 901,408 December 31, 1998 27 26,510 715,770 December 31, 1998 32 26,509 848,288 December 31, 1998 31 26,508 821,748 December 31, 1998 29 26,506 768,674 December 31, 1998 31 26,505 821,655 821,655 December 31, 1998 32 26,504 848,128 848,128 December 31, 1998 10 26,502 265,020 265,020 - ------------------------------------------------------------------------------------------------------------ Total days - weighted 2,438,417 2,439,900 9,676,341 9,682,591 ============================================================================================================ Average number of shares of common stock based on daily weighted average computations 26,505 26,521 26,511 26,528 ============================================================================================================ Earnings on common stock, as set forth in statements of income $6,415 $12,657 $46,631 $55,809 ============================================================================================================ Earnings per share of common stock based on weighted average shares $0.24 $0.47 $1.76 $2.10 ============================================================================================================
-295- EX-21 7 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT Status as of Name Incorporation December 31, 1998(6) - -------------------------------------- ------------- -------------------- Wisconsin Public Service Corporation (1) Wisconsin Active WPS Leasing, Inc. (2) Wisconsin Active WPS Energy Services, Inc. (1) Wisconsin Active WPS Power Development, Inc. (1) Wisconsin Active WPS Visions, Inc. (1) Wisconsin Active PDI Operations, Inc. (3) Wisconsin Active PDI Stoneman, Inc. (3) Wisconsin Active Upper Peninsula Power Company (1) Michigan Active Upper Peninsula Building Development Company (1) Michigan Active Penvest, Inc. (1) Michigan Active Wisconsin Woodgas LLC (3) Wisconsin Active PDI New England, Inc. (3) Wisconsin Active PDI Canada, Inc. (3) Wisconsin Active Mid-American Power, LLC (4) Wisconsin Active ECO Coal Pelletization #12, LLC (5) Wisconsin Active WPSR Capital Trust I (1) Delaware Active - ---------------- (1) Wholly-owned subsidiary of WPS Resources Corporation. (2) Wholly-owned subsidiary of Wisconsin Public Service Corporation. (3) Wholly-owned subsidiary of WPS Power Development, Inc. (4) PDI Stoneman, Inc. owns 66-2/3% of this subsidiary. (5) WPS Power Development, Inc. owns 66-2/3% of this subsidiary. (6) WPS Resources Capital Corporation, a wholly-owned subsidiary of WPS Resources Corporation, was formed on January 12, 1999 and became the parent of WPS Energy Services, Inc. and WPS Power Development, Inc. Additionally, WPS Nuclear Corporation, a wholly-owned subsidiary of WPS Resources Corporation, was formed on February 23, 1999. -296- EX-23 8 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-K into WPS Resources Corporation's previously filed Registration Statement Files No. 33-47172, No. 33-61991, No. 33-65167, and No. 333-63101, and Wisconsin Public Service Corporation's previously filed Registration Statement Files No. 33-35050 and No. 333-67979. /s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP Milwaukee, Wisconsin March 24, 1999 -297- EX-24 9 EXHIBIT 24 POWER OF ATTORNEY WHEREAS, WPS RESOURCES CORPORATION, a Wisconsin corporation (hereinafter referred to as "WPSR") and WISCONSIN PUBLIC SERVICE CORPORATION, a Wisconsin corporation (hereinafter referred to as "WPSC"), will file on or before the due date of March 31, 1999 with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, a combined annual report on Form 10-K, and WHEREAS, the undersigned is a Director of WPSR and WPSC; NOW, THEREFORE, the undersigned hereby constitutes and appoints L. L. Weyers, P. D. Schrickel, and F. J. Kicsar or any one of them, as attorney, with full power to act for the undersigned and in the name, place and stead of the undersigned, to sign the name of the undersigned as Director to said annual report on Form 10-K and any and all amendments to said annual report, hereby ratifying and confirming all that said attorney may or shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this document this 24th day of March, 1999. (SEAL) /s/ A. Dean Arganbright ------------------------ Director -298- EXHIBIT 24 POWER OF ATTORNEY WHEREAS, WPS RESOURCES CORPORATION, a Wisconsin corporation (hereinafter referred to as "WPSR") and WISCONSIN PUBLIC SERVICE CORPORATION, a Wisconsin corporation (hereinafter referred to as "WPSC"), will file on or before the due date of March 31, 1999 with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, a combined annual report on Form 10-K, and WHEREAS, the undersigned is a Director of WPSR and WPSC; NOW, THEREFORE, the undersigned hereby constitutes and appoints L. L. Weyers, P. D. Schrickel, and F. J. Kicsar or any one of them, as attorney, with full power to act for the undersigned and in the name, place and stead of the undersigned, to sign the name of the undersigned as Director to said annual report on Form 10-K and any and all amendments to said annual report, hereby ratifying and confirming all that said attorney may or shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this document this 24th day of March, 1999. (SEAL) /s/ Michael S. Ariens ------------------------ Director -299- EXHIBIT 24 POWER OF ATTORNEY WHEREAS, WPS RESOURCES CORPORATION, a Wisconsin corporation (hereinafter referred to as "WPSR") and WISCONSIN PUBLIC SERVICE CORPORATION, a Wisconsin corporation (hereinafter referred to as "WPSC"), will file on or before the due date of March 31, 1999 with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, a combined annual report on Form 10-K, and WHEREAS, the undersigned is a Director of WPSR and WPSC; NOW, THEREFORE, the undersigned hereby constitutes and appoints L. L. Weyers, P. D. Schrickel, and F. J. Kicsar or any one of them, as attorney, with full power to act for the undersigned and in the name, place and stead of the undersigned, to sign the name of the undersigned as Director to said annual report on Form 10-K and any and all amendments to said annual report, hereby ratifying and confirming all that said attorney may or shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this document this 24th day of March, 1999. (SEAL) /s/ Richard A. Bemis ------------------------ Director -300- EXHIBIT 24 POWER OF ATTORNEY WHEREAS, WPS RESOURCES CORPORATION, a Wisconsin corporation (hereinafter referred to as "WPSR") and WISCONSIN PUBLIC SERVICE CORPORATION, a Wisconsin corporation (hereinafter referred to as "WPSC"), will file on or before the due date of March 31, 1999 with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, a combined annual report on Form 10-K, and WHEREAS, the undersigned is a Director of WPSR and WPSC; NOW, THEREFORE, the undersigned hereby constitutes and appoints L. L. Weyers, P. D. Schrickel, and F. J. Kicsar or any one of them, as attorney, with full power to act for the undersigned and in the name, place and stead of the undersigned, to sign the name of the undersigned as Director to said annual report on Form 10-K and any and all amendments to said annual report, hereby ratifying and confirming all that said attorney may or shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this document this 24th day of March, 1999. (SEAL) /s/ Daniel A. Bollom ------------------------ Director -301- EXHIBIT 24 POWER OF ATTORNEY WHEREAS, WPS RESOURCES CORPORATION, a Wisconsin corporation (hereinafter referred to as "WPSR") and WISCONSIN PUBLIC SERVICE CORPORATION, a Wisconsin corporation (hereinafter referred to as "WPSC"), will file on or before the due date of March 31, 1999 with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, a combined annual report on Form 10-K, and WHEREAS, the undersigned is a Director of WPSR and WPSC; NOW, THEREFORE, the undersigned hereby constitutes and appoints L. L. Weyers, P. D. Schrickel, and F. J. Kicsar or any one of them, as attorney, with full power to act for the undersigned and in the name, place and stead of the undersigned, to sign the name of the undersigned as Director to said annual report on Form 10-K and any and all amendments to said annual report, hereby ratifying and confirming all that said attorney may or shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this document this 24th day of March, 1999. (SEAL) /s/ M. Lois Bush ------------------------ Director -302- EXHIBIT 24 POWER OF ATTORNEY WHEREAS, WPS RESOURCES CORPORATION, a Wisconsin corporation (hereinafter referred to as "WPSR") and WISCONSIN PUBLIC SERVICE CORPORATION, a Wisconsin corporation (hereinafter referred to as "WPSC"), will file on or before the due date of March 31, 1999 with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, a combined annual report on Form 10-K, and WHEREAS, the undersigned is a Director of WPSR and WPSC; NOW, THEREFORE, the undersigned hereby constitutes and appoints L. L. Weyers, P. D. Schrickel, and F. J. Kicsar or any one of them, as attorney, with full power to act for the undersigned and in the name, place and stead of the undersigned, to sign the name of the undersigned as Director to said annual report on Form 10-K and any and all amendments to said annual report, hereby ratifying and confirming all that said attorney may or shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this document this 24th day of March, 1999. (SEAL) /s/ Clarence R. Fisher ------------------------ Director -303- EXHIBIT 24 POWER OF ATTORNEY WHEREAS, WPS RESOURCES CORPORATION, a Wisconsin corporation (hereinafter referred to as "WPSR") and WISCONSIN PUBLIC SERVICE CORPORATION, a Wisconsin corporation (hereinafter referred to as "WPSC"), will file on or before the due date of March 31, 1999 with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, a combined annual report on Form 10-K, and WHEREAS, the undersigned is a Director of WPSR and WPSC; NOW, THEREFORE, the undersigned hereby constitutes and appoints L. L. Weyers, P. D. Schrickel, and F. J. Kicsar or any one of them, as attorney, with full power to act for the undersigned and in the name, place and stead of the undersigned, to sign the name of the undersigned as Director to said annual report on Form 10-K and any and all amendments to said annual report, hereby ratifying and confirming all that said attorney may or shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this document this 24th day of March, 1999. (SEAL) /s/ Robert C. Gallagher ------------------------ Director -304- EXHIBIT 24 POWER OF ATTORNEY WHEREAS, WPS RESOURCES CORPORATION, a Wisconsin corporation (hereinafter referred to as "WPSR") and WISCONSIN PUBLIC SERVICE CORPORATION, a Wisconsin corporation (hereinafter referred to as "WPSC"), will file on or before the due date of March 31, 1999 with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, a combined annual report on Form 10-K, and WHEREAS, the undersigned is a Director of WPSR and WPSC; NOW, THEREFORE, the undersigned hereby constitutes and appoints L. L. Weyers, P. D. Schrickel, and F. J. Kicsar or any one of them, as attorney, with full power to act for the undersigned and in the name, place and stead of the undersigned, to sign the name of the undersigned as Director to said annual report on Form 10-K and any and all amendments to said annual report, hereby ratifying and confirming all that said attorney may or shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this document this 24th day of March, 1999. (SEAL) /s/ Kathryn Hasselblad-Pascale ----------------------------- Director -305- EXHIBIT 24 POWER OF ATTORNEY WHEREAS, WPS RESOURCES CORPORATION, a Wisconsin corporation (hereinafter referred to as "WPSR") and WISCONSIN PUBLIC SERVICE CORPORATION, a Wisconsin corporation (hereinafter referred to as "WPSC"), will file on or before the due date of March 31, 1999 with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, a combined annual report on Form 10-K, and WHEREAS, the undersigned is a Director of WPSR and WPSC; NOW, THEREFORE, the undersigned hereby constitutes and appoints L. L. Weyers, P. D. Schrickel, and F. J. Kicsar or any one of them, as attorney, with full power to act for the undersigned and in the name, place and stead of the undersigned, to sign the name of the undersigned as Director to said annual report on Form 10-K and any and all amendments to said annual report, hereby ratifying and confirming all that said attorney may or shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this document this 24th day of March, 1999. (SEAL) /s/ James L. Kemerling ------------------------ Director -306- EX-27 10
UT 0000107833 WISCONSIN PUBLIC SERVICE CORPORATION 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 PER-BOOK 908,624 2,888 162,785 68,335 124,950 1,267,582 95,588 107,842 278,278 481,708 0 51,200 304,033 10,000 0 25,000 0 0 0 0 395,641 1,267,582 652,451 29,191 549,657 578,848 73,603 6,607 80,210 23,024 57,186 3,111 54,075 66,838 20,905 130,557 0 0 All of Wisconsin Public Service Corporation ("WPSC") common stock is controlled by WPS Resources Corporation which operates as a holding company. WPSC, as a subsidiary, does not calculate earnings per share. The earnings per share of WPS Resources Corporation for 1998 were $1.76 for both basic and diluted earnings per share calculations.
-----END PRIVACY-ENHANCED MESSAGE-----