ML021090137

Nuclear Management Co., LLC, Kewaunee Nuclear Power Plant, 2001 Annual Financial Report for Wps Resource Corp, a Powerful Equation

ML021090137
Person / Time
Site:	Kewaunee
Issue date:	04/11/2002
From:	Coutu T Nuclear Management Co
To:	Document Control Desk, Office of Nuclear Reactor Regulation
References
Download: ML021090137 (72)

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A P0WER.FUL EQUAT10N CONTENTS FROM LARRY WEYERS DEAR FELLOW SHAREHOLDERS A powerful equation! That's what's needed to take a 2 HIGHLIGHTS company beyond the ordinary to the ranks of outstanding.

3 WPS RESOURCES CORPORATION AT A GLANCE It's the bits and pieces of a working model that must be put together with the utmost precision. It's the learning, planning, 6 LETTER TO SHAREHOLDERS implementation, and fine-tuning necessary to ensure that a company is on the right track.

10 APOWERFUL EQUATION WPS Resources has spent a great deal of time developing the equation to yield the results we need and you want. We know 16 FORWARD-LOOKING STATEMENTS our equation is powerful. It has delivered one of our best years ever, despite the events of 2001 that greatly impacted our industry 17 MANAGEMENT'S DISCUSSION AND ANALYSIS and created substantial hurdles for our management team.

36 CONSOLIDATED STATEMENTS OF INCOME Let me tell you how.

37 CONSOLIDATED BALANCE SHEETS A QUICK REVIEW OF 2001 In January, we transferred our transmission assets to the American 38 CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY Transmission Company and the Nuclear Management Company took over operations of the Kewaunee Nuclear Power Plant.

39 CONSOLIDATED STATEMENTS OF CASH FLOWS In April, we completed the merger of Wisconsin Fuel and 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Light Company into our electric and gas utility.

In August, we received approval to proceed with construction 67 REPORT OF MANAGEMENT of a 220-mile transmission line stretching from Wausau, Wisconsin, our being selected to serve the electric load in the City of to Duluth, Minnesota. Cleveland for five years and the electric load for six communities 67 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS In September, we completed construction of a gas storage around Toledo, Ohio, for four years.

facility in Michigan. We are successfully developing our electric business at 68 FINANCIAL STATISTICS We increased our ownership in the Kewaunee Nuclear our nonregulated energy services subsidiary. We have over Power Plant to 59 percent and successfully replaced the plant's 600 megawatts of electric retail sales contracts annually, and we're 69 LEADERSHIP STAFF steam generators. protecting our margins by supplying our commitments from our 70 BOARD OF DIRECTORS In November, we sold down our interest in our synthetic fuel own generation or through credit-worthy suppliers who own facility in Kentucky to a level that maximizes our investment and generation.

71 OFFICERS transferred operations to our new partner, We are also developing our nonregulated gas wholesale In December, we offered an additional 2,300,000 shares of segment and have nearly completed construction of a 3 billion 72 SHAREHOLDER INFORMATION common stock and were pleased when investors snapped them up cubic-foot gas storage facility in Michigan. The rapid-withdrawal, at $34.36 per share. state-of-the-art facility will improve the region's energy delivery We changed our ownership in Wisconsin River Power infrastructure, lower energy costs, and enhance the reliability of Company, the owner and operator of two hydro facilities on the energy supplies in the region.

Front Cover Top: Scott Phinney uses his Wisconsin River, to 50 percent. Serving our customers is important to us, and they recognize knowledge of working in a bucket near energized electric lines to assist local governments in We wrapped up the year by closing one of the biggest land us as a leader in responsiveness to their needs. WPS Energy installing American flags around Lambeau Field sales in Wisconsin's history by reaching agreement to transfer Services, Inc. received the number one ranking in the country from prior to a Monday Night Football Game.

ownership of a portion of our Peshtigo River hydro lands to the Mastio & Company for customer service provided inthe natural gas Front Cover Right: Healthy downtowns are Wisconsin Department of Natural Resources. marketing and services industry. This isthe third year in a row that relaxing places to spend time as isthe case in So, things are adding up for us, but what isthe result WPS Energy Services' customers rated it among the top handful Sheboygan Falls, Wisconsin, which has benefited of the equation?

from our donations to its Main Street Program. of marketers inthe nation. We believe that energy information is critical in a competitive environment, and we have worked hard Front Cover Bottom: Line Electricians Tee Jay A CLOSER LOOK AT THE EQUATION to develop the technology that gives us the capability to help our Lansin from Rhinelander and John Lund from PROFITABILITY AT OUR NONREGULATED SEGMENT customers effectively manage their energy needs.

Tomahawk know what it's like to work aloft in any type of weather and in any environment-it's all Our nonregulated subsidiaries continue to be profitable. The Our nonregulated power development subsidiary, in a day's work. revenue component of our equation began adding up with the WPS Power Development, is also focused on increasing profitability.

selection of WPS Energy Services, our nonregulated energy Our successful synthetic fuel operation in Kentucky has the proven At Right: The Victoria pipeline in Upper Peninsula Power's territory provides a shady spot services subsidiary, as the standard offer provider for electric service ability to generate more tax credits than we can use, so we for crews to enjoy a break during installation, in northern Maine for three years. This was soon followed with negotiated the sale of a portion of our interest and transferred

FA POWEAPUL EQUATI0H IAPOWERFULEQUATION brought a operations of the facilty to a new partner This transaction gain in 200 1 of 6 cents per share and is expected to brng additional gains of about 59 cents per share in 2002 and about 13 cents per OUR FINANCIAL PERFORMANCE CONTINUES TO IMPROVE.

share in 2003. We expect our remaining ownership share in the synthetic fuel facility to provide earnings conthbutions of between 40 and 55 cents per share annually for each year through 2007 R.h a

We completed construction of a 50 megawatt simple cycle 3.=

combustion turbine facility in Combined Locks, Wisconsin, in $.0 November and will complete construction ofthe cogeneration 1'02 phase by May This is our entrance into cogeneration development, a market which we plan to pursue.

In December, we reached agreement to purchase CH Resources, which owns three upstate New York power plants and related assets, The plants have a combined capacriy of 2M 20A 7M0 20 257 megawatts The facilities include a 09-megawatt combined cycle facility in Syracuse. a 95 megawatt combined cycle facility in U L OE T N Beaver Falls, and a 53 megawatt fluidized bed facility in Niagara W o P Falls. We expect the facilities to sell power into the New York bulk power market and the wholesale and retail open market Nimii*) Nt' QiO Mn ,,i*i l/

I Ml "ls' using assistance from our energy services subsidiary. We expect the approximate $62,000,000 transaction, which issubject to u1.9449 regulatory approval, to close by May The addition ofthese plants brings our nonregulated electric generating capacity to about 930 megawatts.

GROWING OUR REGULATED UTILITIES An important part of our powerul equation isa strong utility 0 0 2 2001 base, so we are growing our regulated utilities, We successfully completed the merger ofWisconsin Fuel *N, LT SUBSIDAI and Light, which served neady 50.000 natural gas customers in Wisconsin--areas in which we already served electrc customers into our Wisconsin utility. This transaction enables us to take R-o I*,o) ltMIkre) M 40,*fl advantage of overlapping service territories by eliminating nasI, redundancies, providing savings for our customers, and adding u,4 long-term value for our shareholders. 0 We set an electricity record for the sixth consecutive year when the electricity demand on our system surged to 2,173 megawatts on July 31 more than 125 megawatts greater than last year's peak and our system operators were able to meet that peak without relying on load reduction programs. 20M 201 20m02001 2" 2001 August brought the Public Service Commission of Wisconsin's approval for the construction of a 220-mile electric transmission line. This joint project ofWisconsin Public Service and Minnesota 4o-mi") Ncthicomn. ) A't *i*'l

$141.5 Power had been announced in 1999. It's a key first step in 3 improving the reliability of Wisconsin's transmission system. is Is" Currently. we are not always either able to import necessary power into the state or able to move bulk amounts of power within the state to where it is needed A defcient electrical system hurts Wisconsin, Minnesota, and the Midwest. The benefits ofthis Ps project to everyone in the region necessitate its construction.

On September 23, we increased our ownership in the 20 200 2000 2001 2000 201 Kewaunee Nudear Power Plant to 59 percent by purchasing (-03

Madison Gas and Electric Company's 17.8 percent share inthe STRATEGY FOR ADDING VALUE plant. This transaction added to our low-cost, base load capacity at a very reasonable cost. We believe that Kewaunee will continue Our strategy for the future includes building on our core to produce competitively priced, reliable and clean electricity at competencies of energy conversion and energy delivery in both least through the end of its current license in20 13, and that's good our regulated and nonregulated markets.

for our customers, emoloyees, and shareholders. We plan to continue our development and growth in the To ensure Kewaunee remains reliable and is able to operate northeast quadrant of the United States through nonregulated at its capacity, we completed a S 121.000.000 project to replace wholesale and retail energy sales.

the plant's two steam generators that had degraded and were We will continue to make generation investments in not operating efficiently. Our share of the project amounted selected markets in the United States through acquisition and/or to $71,000,000. development and will specifically look to areas that can support In September. we completed a $5,000,000 project that our nonregulated energy services focus.

replaced the 42-year-old, 0-foot diameter wooden penstock We have developed an electric generation plan for Wisconsin at Victoria Hydro in Michigan with a 9.5-foot diameter steel pipeline that includes the addition of more than 1,300 megawatts of electric stretching just over a mile. Hydro power is inexpensive power, and capacity by 2007 in both regulated and nonregulated arenas.

it is important that we maintain our facilities inthe Upper Peninsula We have developed an asset management strategy that of Michigan where hydro power resulting from Lake Superior-effect will evaluate the use of all our lands, including our hydro lands snows and rains is plentiful. and other facilities, to determine ifthey will play a part in our We ended the year with initiation of our asset management future or if sale or other utilization of the assets would be more strategy through an agreement to transfer more than 9.200 acres appropriate. Our shareholders will reap the added return that our of pristine forest and waterfront land. as well as islands and asset management strategy delivers.

water acreage, to the Smate of Wisconsin. The first step of the We are patenting our formula for predicting energy needs.

transaction closed in2001 when we sold the State 5,740 acres for The formula, developed by our employees, is accurately predicting

$13,500,000. Ifthe State exercises certain purchase options, the when our power needs are the greatest and when we can plan to total sale price for all the lands will be $25,000,000. We chose to sell excess capacity. This ability is saving our customers money sell the land to the State so it could be preserved and continue to while increasing returns to our shareholders.

be available for public recreational use. The transaction price was BALANCING OPPORTUNITIES AND RISKS one the State could afford, while at the same time ensuring a fair value for our shareholders, Balancing opportunities and risks is an important part of any business equation.

A STRONGER HOLDING COMPANY Though we've increased our electric and natural gas rates Our high-quality debt ratings provide flexibility and access in Wisconsin during 2001 and 2002, we are still one of the to capital markets at reasonable rates to help grow the business. lowest-cost energy providers in Wisconsin and the Midwest.

This was apparent when we successfully issued $150,000,000 Our regulated Wisconsin utility is seeking approval in 2002 of bonds for our electric and gas utility and secured the issuance for an increased authorized return that is reflective of the risk of a of $27,000,000 of tax-exempt municipal bonds for our power changing industry. Currently, we are authorized a 12.1 percent return development subsidiary at very attractive rates. on 54 percent equity at our regulated electric and natural gas utility.

Our successful common stock sale of 2,300,000 shares We've rewarded our shareholders with 43 consecutive years in December was substantially oversubscribed and confirms of increasing dividends. We feel it is extremely important for us the value of our company to the investing public. to continue to pay a healthy dividend to our shareholders, and On February 8, 2002, after market close, WPS Resources we'll continue to strive to do so.

was added to Standard & Poor's MidCap 400 Index. I am We've increased our common stock equity through proud that WPS Resources' common stock was added to this the $54,800,000 acquisition of Wisconsin Fuel and Light, our market-value weighted index. This is having a positive effect on $79,000,000 common stock sale, and increased investor our stock price and its liquidity. participation in our Stock Investment Plan. During 2001, FinancialGoals for 2002

"*Continue our earnings growth at 8 to 10 percent on an annualized basis.

"*Achieve 15 to 20 percent of our earnings from WPS Energy Services and WPS Power Development.

"*Continue our moderate growth in the annual dividend paid and achieve a payout ratio of 70 percent in 2003 by increasing earnings.

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IA PWE RFUL EQUATION shareholders invested over S I0.000.000 to add additional shares competencies we developed in our regulated operations.

to their accounts under the plan and reinvested about $9.000,000 We expect 15 to 20 percent of our future net income to come of dividends. The additional common stock shares outstanding had from our nonregulated segments.

an 18 cents pei- share dilutive effect, and yet reported earnings We expect our regulated businesses to deliver 2 to 4 percent per share of $2.75 are at a record level. of our earnings growth and our- nonregulated businesses together We are maintaining strong capital ratios to maintain a to provide the rest of the earnings growth necessary to meet our high-quality credit rating. This is important to us because it allows 8 to 10 percent earnings per share growth target, us to access the debt markets at reasonable rates. We have had 43 years of consecutive dividend increases Our investors are recognizing the value of their WPS an outstanding record without any plans to change.

investment as our stock holds its value. In spite of the economic A payout ratio of 70 percent or less should be attainable in downturn in 2001, our- stock yielded 5.7 percent at year-end 2003 with our expected earnings growth.

compared with 1.2 percent for the S&P 500.

THE RESULTS TOTAL THE LEADERSHIP COMPONENT We have a powerful strategy that blends our strong utility To ensure that the components of our equation are delivering base with an opportunity for higher growth through disciplined value to our customers and shareholders alike, we must have a nonregulated expansion.

strong, dedicated workforce with insightful leadership. Though About 70 percent of our shareholders are individual investors leadership comes in many forms, it begins with our Board of who rely on our quarterly dividend and stock price appreciation, Directors, whom you have elected as stewards of your investment, Our highly motivated, loyal workforce believes in and it continues through our officers and staff, and supports the company. Our employee turnover rate is The membership on our Board of Directors changed this year just 4 percent. Over 90 percent of our employees own with the retirement of Clarence Fisher on February I, 2001 and the WPS Resources' stock, which raesults in current and retired addition of Bill Protz on April I, 2001, Bill was a former Director of employees owning 9 percent of our outstanding common stock.

Wisconsin Fuel and Light. We are delivering shareholder value with our solid regulated The year also brought new faces to our leadership team with utility foundation, out- focused energy and energy services strategy, the retirement of Dan Bittner, our Senior Vice President and Chief projected earnings pet- share annualized growth of 8 to 10 percent, Financial Officer, after 35 years o dedicated service and the addition and an outstanding dividend record.

of Joe O'Leary to fill that role. Joe comes to us with experience in We believe that flexibility in the face of industry changes is both regulated and nonregulated industries. He has a record of important to our future. We also believe that financial strength, increasing the profitability of the organizations he has served, and quality service, diversity of generation resources, and a we are expecting more of the same from him. knowledgeable staff with strong leadership are key to our future In November we lost Wayne Peterson. one of our bright. competitiveness. These elements are a pant of our powerful young vice presidents. to cancer. At 42, Wayne had already made equation that is bringing value to you, our loyal shareholders.

a significant contribution to Wisconsin Public Service's success in Thank you for the support you have given us in the past, his position as Vice President - Distribution and Customer Service, We promise to do eveytlhing possible to protect your investment Many of us admired his leadership abilities during his 19-year career in our company and ensure that it continues to grow for you.

with the company. He will be missed.

Additional changes in our senior management team will occur Sincerely, when Ralph Baeten, our Senior Vice President - Finance and Treasurer, retires on February 28 after 31 years of service. Ralph will be followed into retirement by Pat Schrickel, our Executive Vice President (also President and Chief Operating Officer for Wisconsin Larry L.Weyers Public Service and Chairman. President, and Chief Executive Officer Chairman, President, and for Upper Peninsula Power) on March 31 after 35 years of service. Chief Executive Officer Iwant to thank them for their leadership and countless contributions through the years. February 22, 2002 ADDING IT ALL UP We are setting the stace for future growth and doing so through our core competencies. Our nonregulated businesses are in energy and energy-related services-the same core REO 0P RE CORPOATIO 9

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A P0W RFUL EQUATION Energy follows the laws of physics. We generate and Compounding the synergies between marketing and deliver energy using fundamental engineering principles. supply is an important part of our strategy, and we're doing So it's not surprising that WPS Resources Corporation-an it well. We succeeded first in Maine where WPS Power energy company-has developed a powerful equation for Development acquired generating assets and WPS Energy shareholder value, Services was waiting in the wings to market the energy from The factors in our equation aren't numbers but ways those assets. As we enter new markets, these subsidiaries of conducting business. They set us apart in the energy field. focus on what they do best-developing, owning, and The components of our equation, examined here, operating nonregulated generation facilities or supplying combine the factors to bring financial rewards. energy and services in the nonregulated marketplace. As we consider and pursue business expansion in nonregulated (n + r = B) markets, we look to these subsidiaries to continue capitalizing nonregulated + regulated businesses = Balance on the synergies they create by working together.

Success in today's energy industry demands a carefully In Wisconsin and Michigan, our regulated utilities remain crafted balance between the steady growth offered by strong. In 2001, Wisconsin Fuel and Light Company merged regulated utilities and the opportunities presented by new, into Wisconsin Public Service, expanding our service area and competitive markets. adding 50,000 customers. For the sixth consecutive year, WPS Power Development, Inc. and WPS Energy customers of Wisconsin Public Service set a new peak for Services, Inc. are our players in nonregulated energy electricity demand, which surged to 2,173 megawatts on markets. Together-with WPS Power Development July 31. As our customers grow, and as Wisconsin Public investing in power generation and WPS Energy Services Service grows, we continue doing a good job of keeping costs marketing the energy produced-these companies have down. Wisconsin Public Service has maintained some of the become an energy force, lowest energy rates in the Midwest and the United States.

Also in 2001, Upper Peninsula Power Company "The bdaance is hard to ea't." completed replacement of a 42-year-old wooden pipeline at its Victoria Hydro facility near Rockland, Michigan, In its place The State of Ohio opened its retail electric market to stands more than 6,000 feet of 9.5-foot diameter steel competitive suppliers in 2001, and WPS Energy Services pipeline. This major undertaking confirms our commitment emerged as a leading supplier. The City of Cleveland chose to renewable hydro power.

WPS Energy Services as the supplier for its aggregated The balance between WPS Resources' accomplishments buying program. During the second half of 2001, more than in both nonregulated and regulated businesses is hard to beat.

Cýýwf 1ACJý 75,000 residential and small commercial customers were served under this program. Typical customers are saving (f + c = R) 10 to 20 percent on the nonregulated portion of their electric foresight + change = Results bill. In early 2002, they will be joined by 50,000 additional Anticipating the end-result and pursuing what you believe customers in communities across northern Ohio that have to be true is the only way to effect change. WPS Resources' selected WPS Energy Services as their supplier. resolve has paid off with the completion of several projects The outstanding growth we've experienced in Ohio is that will serve us-and our customers-well.

in addition to existing business in the State of Maine, where In 2001, Wisconsin Public Service increased its ownership WPS Energy Services and WPS Power Development have of the Kewaunee Nuclear Power Plant to 59 percent. We also supplied more than 50,000 residential and business installed new steam generators at the plant-the largest project customers since 2000. in its history. The condition of the generators had threatened 0P SOC S CORPORATIO

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A POWERFUL EQUATION the life of this low-cost generation resource. We're pleased to The results of our subsidiaries' combined achievements in have the Kewaunee plant back at full capacity and to see the 2001 will bolster WPS Resources' business success. Wisconsin resurgence of a national interest in nuclear power for the future. Public Service is helping to shape the energy environment in The year also marked the culmination of a two-year push Wisconsin, which is integral to how we'll operate and serve for a stronger transmission system in Wisconsin. With the sole our customers in that state. Our nonregulated businesses are transmission interface to the west labeled "one of the most contributing an increasing portion of the value WPS Resources congested transmission lines in the Midwest," Wisconsin Public provides to shareholders, which fulfills a promise we made to you.

Service, along with Minnesota Power, Inc., took charge of informing the public about the need for a new line and gaining [s(e + e) = HPC]

regulatory approval to build one. service to customers In October, based on evidence of need, the Public x (community service + environmental concern)

Service Commission of Wisconsin approved a new = Healthy Productive Communities high-voltage line running from Wausau, Wisconsin, to Duluth, We can form the energy environment around us Minnesota-along a route that minimizes environmental and manage our risk-but without customers well served, impact and maximizes use of existing rights-of-way. The line we can't succeed.

should begin operating in 2005. It will be built by Wisconsin WPS Energy Services has been selected as the energy Public Service, which will then transfer its interest in the line supplier of choice in Ohio and Maine because of its reputation to the American Transmission Company, an independent for satisfying customers and keeping costs down, Even though company in Wisconsin that owns and operates the state's WPS Energy Services has grown significantly, with more than transmission system, ensuring fair use of this critical system. 225,000 customers, the company continually improves its Over the last few years, energy companies in retail ratings for customer service. In 200 1, WPS Energy Services markets have been notorious for speculating on price-and was rated number one for customer satisfaction in the losing in the final analysis. At WPS Energy Services, we don't country, according to a survey by Mastio & Company.

speculate. We back each power sale with generation we On the regulated side of the equation, either own or another credit-worthy supplier owns. We focus Wisconsin Public Service has been preparing on creating the energy solutions our customers require, at a for an array of new products and services price that's good for them and makes good business sense for our customers have told us are important to us. We've upgraded our management systems, modified our them. In 2001, customers gained the ability gas inventory handling software, enhanced our credit function, to complete many routine transactions, improved our margins and operating performance, and such as applying for new service, online at implemented a next-generation risk management system. www.wisconsinpublicservice.com. We also introduced E-Bill, an option for customers "Companies that waver who wish to receive and pay their energy bill online, and Energy-Saving Tools, including lose their equilibrium."

a free, convenient online analysis of customers' energy use and WPS Energy Services is long on practical solutions comparisons of their use with that by similar customers. Our next and short on second-guessing the market because solutions new product introduction will be NatureWise in 2002, giving boost performance, customers the choice to receive energy from renewable sources.

Similarly, risk management comes into play at WPS Power In 2001, J.D. Power and Associates ranked Wisconsin Development, where every project we pursue must have the Public Service number three in the country for customer ability to stand on its own and be profitable over its life cycle. service provided by a utility.

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IA POWERE UL EQUATION Our employees rise above the call of duty during Under the agreement, the Wisconsin Department of catastrophic events, such as a June II storm that knocked out Natural Resources is purchasing some of the land, and we're power to 38,000 customers-99 percent of our customers donating significant portions to the Department. Wisconsin in the Oshkosh, Wisconsin, area. The damage was close to Public Service is retaining small parcels for hydro operations and the worst the company has endured. Line crews, in addition 383 acres for development in an environmentally responsible to repairing downed lines, contended with nearly a quarter of manner, We were able to sell the land to a caring steward, the city's trees broken and uprooted. Employees worked while at the same time ensuring we received a fair value for back-to-back shifts, without going home. Others distributed dry our shareholders.

ice for refrigeration of perishable foods and kept customers Multiplying our service by support like this for the informed about the progress of restoration efforts. places where we live and work helps build healthy.

WPS Resources' employees live in the communities we productive communities, serve, so our involvement in these communities goes beyond business as usual. [s(e + f) = SV]

In Cleveland, Ohio, WPS Energy Services helps bridge service to customers x (efficiency + flexibility) the digital divide with substantial contributions to the = Shareholder Value Cleveland Foundation. These contributions will create WPS Resources can say objectively that our customer technology centers throughout the city, where residents can service is outstanding. Surveys by Mastio & Company and access the latest computer technology. This means greater J.D. Power-and feedback from our customers confirm this.

hope and opportunity for the community. Our history as a low-cost energy provider is proof Wisconsin Public Service and Upper Peninsula Power positive of our efficient operations. We're saving customers Company support Main Street Programs, helping to revitalize money. And though we've requested rate increases in the hearts of our Wisconsin and Michigan communities. Wisconsin to cover the costs of improved customer service, A healthy, vibrant downtown is a symbol for the community our rates remain comparable to, if not lower than, those surrounding it, a social and cultural attraction, and an of other electric and gas utilities in the Midwest and the employment center. Our economic development and United States, community relations professionals combine forces with local The balance we maintain between nonregulated and government to assist in developing these areas. regulated business yields flexibility to adapt to the changing HO CO H ' lI v cu 5I'm nn s energy environment. We're positioned to take advantage of

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',rjcl OHIH II*OuC' profitable opportunities that fall within our risk parameters, yet we can flourish in regulated surroundings by growing through our traditional utility business.

Other areas are best left undeveloped. Wisconsin Public High-quality debt ratings and a strong capital structure give Service and the State of Wisconsin have a plan that will preserve us flexibility in accessing capital to help grow our businesses.

more than 9,200 acres of pristine forest and waterfront land, as Simply put, all of this makes up our equation for well as islands and water acreage, for future generations.

shareholder value. By operating wisely and efficiently, and For 75 years, Wisconsin Public Service owned these serving our customers well, WPS Resources is able to produce lands along the Peshtigo River, surrounding the company's financial success that enhances shareholder value.

hydro operations in the area. We preserved the lands in their As events in the energy industry unfold, some companies natural state as much as possible, and invited the public to are reaching great heights. Others are falling to all-time lows.

enjoy outdoor recreation on the lands. With changes in the Knowing who we are as a company and what constitutes energy industry, however, we began reconsidering the success is the key to WPS Resources' stability and growth.

ownership of property not directly needed for our operations.

We've found an equation that works.

We searched for new, caring hands to own these lands and preserve them for public enjoyment.

11~~ WP RESUR E S.OPRAIN

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FORWARD-LOOKING STATEMENTS This report contains forward-looking statements within I BASIC* EAR' G PR S IS the meaning of Section 21 E of the Securities Exchange Act of 1934. You can identify these statements by the fact that they do not relate strictly to historical or current facts and often include words such as "anticipate," "believe," "estimate,"

"expect," "intend," "plan," "project," and other similar words.

Although we believe we have been prudent in our plans and assumptions, there can be no assurance that indicated results will be realized. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could vary materially from those anticipated.

Forward-looking statements speak only as of the date on which they are made, and we undertake no obligation to update any forward-looking statements, whether as a result of "I I II " "e I " II new information, future events, or otherwise. We recommend that you consult any further disclosures we make on related subjects in our 10 -Q, 8-K, and 10-K reports to the Securities and Exchange Commission.

The following is a cautionary list of risks and uncertainties that may affect the assumptions which form the basis of forward-looking statements relevant to our business.

These factors, and other factors not listed here, could cause actual results to differ materially from those contained in forward-looking statements.

"* General economic, business, and regulatory conditions

"* Legislative and regulatory initiatives regarding deregulation and restructuring of the utility industry

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which could affect costs and investment recovery

"* State and federal rate regulation

"* Growth and competition and the extent and timing 0*

• 36* ** OS of new business development in the markets of subsidiary companies 238.46

"* The performance of projects undertaken by subsidiary companies

"* Business combinations among our competitors and customers ii'.I'l

"* Energy supply and demand

"* Financial market conditions, including availability, terms, and use of capital

"* Nuclear and environmental issues

"* Weather and other natural phenomena 0

0 t I I I I "* Commodity price and interest rate risk

"* Acts of terrorism

• Assumes $100 investment in common stock at year-end 1991and all dividends reinvested quarterly- Cumulative total return for the ten-year period is equilavent to an average annual return of 9.08%.

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A P 8\V E R FU L E Q -. A [ N MANAGEMENT'S DISCUSSION AND ANALYSIS Development's investment in its synthetic fue operation RESULTS OF OPERATIONS contributed to higher earnrings. Partially offsetting tese 'actors were increased operating expenses at all segments and a WPS Resources Corpo-ator is a nocding company.

lower margin at WPS Power Development.

Our wholly- owned subsidiaries include two reguJated atilities, Wisconsin Public Service Corporation and Upper Peninsula Power Company. Another wholly-owned subsidiary, Overview of Utility Operations WPS Resources Capital Corporation, is a holding company Utility operations include tne e ecric ati ity operations e

"or our nonregulated businesses including WPS renegy at Wisconsin Public Service and Upper P ninsula Power and Services, Inc. and W/PS Power Development, Inc. the natural gas utility operations at Wisconsin Public Service, Income from electric utilty operations was $58.8 mil ion n 2001 compared wvith $60,7 million in 2000. Incoime from gas 200 CONPARED WITH 2000 ut ty operations was $8,9 imi Ion in 200 and S I 1.6 million WPS Resources Corporation Overview in 2000.

WPS Resources' 2001 and 2000 results of oper ions a-e shown in the followvng chart: Electric Utility Operations The conso'idated electric utility margin represerts electric WPS Resources' Results revenue less cost of sales exclusive of intercompany transactions, (Mil/ions, except share amounts) 2001 2000 Change Our consolidated electric uti ity margin inrcreased $1 .,4 million, Consolidated operating revenues $2,675.5 $1,949.0 37%

or 3%, primarily cue to a .4% Wisconsin retail electric ate Income available for increase at Wisconsin PuRnic Service which becarre effective common shareholders $77.6 $67.0 16%

on januaOy I, 2001.

Basic earnings per share $2.75 $2.53 9%

Diluted earnings per share $2.74 $2.53 8%

Electric Utility Results (Millions) 2001 2000 1999 Consolidated operating revenrues increased cue to sales Revenues $654.4 $623.8 $582.5 volume grovwth for al business segments and nigner natara Fuel and purchased power 218.2 199.0 187.4 gas nrices in The first nart o-' 200 . Ir addition, rate irrreases Margin $436.2 $424.8 $395.1 at Wisconsin Public Service contribated to increased revenues Sales in kilowatt-hours 12,741,024 12,565,011 12,503,487 in 2001. The Pablic Service Commission of Wisconsin authorized a 5.4% ncrease in Wisconsin r e-il electric rates The consolidated electric ut iity marg'n ncreased dae and a 1.5/o increase in iVsconsin retair natural gas rates to the electric rate increase at Wisconsin Public Seorce and effectve January I, 2001.

hirgher sales volumes to most customer classes at UDner increased proftabi ity at oar non-egalated segments offset Peninsula Power and Wisconsin Public Service. Summer a decrease in earnings at our electric and natural gas utility weather was 66% warmer in 2001 than 'n 2000, and 17%

segments resulting in improved eanirgs in 200 1.A gain on warmer than normal. Partially offsetning these mactors was the sale of hydro lands as pa-t of our asset management a 2% decrease in sales aolarge commercial and industrial strategy, ncreased natura gas and electric animity margins, customers at \/iscons n Public Service due to declining ncreased electic and natural gas margins at WPS Energy economic conditions.

Services, additiona tax credi-s a& WPS Power Development Affecting the electric utility margin was a change in the and a gain on tne sale of a portion of V/PS Power customer mix at Wisconsin Public Service. Sales nolower ugi srda u~tohn@Th~'r l air idsiT Lnrf Ler I _PamtifrJM4eKý

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MANAGEMENT'S DISCUSSION AND ANALYSIS margin, nortirm customýers increased more than sales to minus 2% from forecasted costs on an annualized basis.

higher margin ccstomers. The lack of new reteail electric rates In the third cua-ter of 2001, Wisconsir Public Se-vice at Upper Peninsula Power also affected the margin negatively, submitted a fuel filing witn the Public Service Commission Upper Peninsula Power's appl cation for a $5.7 million rate of Wisconsin requesting a $ 1.9 millios retail electric rate increase which had been penring before the Nichigar Public reduction. The rate reduction was approved and Service Commission since October 2000 was d smissed imulemented on September 3, 2001. Wisconsin Public in August 2001 at Upper Peninsula Powe 's request. Service submitted an additional fuel ftring in November 2001, Upper Peninsula Powe* requested a dismissal because the and a rate reduction of $0.3 million was approved and nformaton fled in the case was outdated, Upper Peninsula implemented on December 8. 200 Power intends to submit a application for rate ,ncreases vew in 2002, Gas Utility Operations Our consolicatec fCel expense for produoion plants The consolidated gas utilty margin represents natural decreased $5.2 milion, or 4% , largely due to decreased ,as revenues less purchases exclusive of rntercompany o oduction at Wiscorsir Public Service's combustion turbine transactions. Effective April 2001, the gas utility margin at generation plants. Our consolidated purchased power WVsconsin Public Service includes the merged Wisconsin Fuel expense. howbever increased $24.4 milion due to an increase and Light Company operationsr in power purchases and a 9% ircrease in the cost per kilowats-hour of powaer purchases made by Wisconsin Public Wisconsin Public Service Service in 2001 compar-ed witn 2000, Power purchases were Corporation's 006 hgher in 200 I duie to warmer summer weather and the Gas Utility Results (Millions) 2001 2000 1999 avairability of ecoiomically p ced energy. Also contributing to Revenues $321.6 $264.5 $191.5 increased powe- purhases were a schediuled outage at Purchase costs 230.2 185.1 117.6 Wisconsin P3blic Ser, cice's ruc ear plant and an unscheduled Margin $ 91.4 $ 79.4 $ 73.9 outage aT ore of ts fossil fueled generation plants, Throughput in therms 742,722 701,094 662,615 Wisconsin Puolic Seicie's Kewaunee Nuclear Power Plant was off lise0or a scKeduled refueling and replacement of The gas utility margin at Wiscons n Pubic Service its sseamr 0eneraiors nch began in late Septembe- of 2001. ncreased $ 12.0 miilion, o - 15%, in 2001, h s rnc-ase was Tne Kewaunee plart -eturned to service In early December due to a 1.5% nciease in Wscons n -etai natu-al gas rates as scheduled. Wisconsin Public Service is curresty a 59% effective January I, 2001. and higher overal natural gas owvner of the Kevvaunee plant, Wisconsin Puulirr Service's throuohput volumes of 6%. increased gas hrioughput Pul'lam Unit 7 was of line fo- unscheduled repasrs in -he vo umes vwere largeiy the result of Wiscons n Pubirc Sernice's fourtn cua' er of 200 1 and returned to serrice or Februry 3. acquistion of Wisconsin Fuel and Light ir the second quarter 2002. Wisconsin Public Service c0ose to take acvantage ol of 200 1. Gas throughPut volumes to large commercial and purchased power' cu-ng these outages because o' industrial customers, however decreased 9% as a result of economica./y favorable pricing. customers swtching to the gas transport customer class and The Public Service Commission of Wisconsin allows decl ning economic conditions. Gas throughput volures to Wisconsin Public Sex ice the onportunity to adjust prospectively gas transport customerss inc-eased 15%. I1 addition, gas the amount billed to Wisconsin reail customers for fuel throughput volumes to interruptible customers decreased and purchased powev- i' costs fall outside a suecified range. 6%. Gas throughput volumes were regatively affected by Wiscons n Pubic Senv ce is required to file an application to jwinter weather wnich was 9% milder n 2001 than n 2000, ad ust rates either higher or lowe .,hen costs are plus or and 8% mlder than normal.

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IA P 0 W E ;F F U L E Q J A T O N MANAGEMENT'S DISCUSSION AND ANALYSIS Wisconsin Public Service's natural gas revenues increased WPS Energy Sevices oet income increased to 56.4 million 557. I million, or 22%/ as the result of an increase in the in 2001 compared wth S .7 million n 2000, WPS Power average unit cost of natural gas in the first half of 2001, Development's net income increased to $2.3 milion in 2001 increased throughput, and the 1.5/ increase in Wisconsin compared with $0.9 million in 2000.

etai gas rates, Wisconsin Public Service's natural gas purchase costs Overview of WPS Energy Services increased 545. I mion, or 2 4/o, largely due to a higher WPS Energy Se-vices' principal ausiness iivolves average unit cost of natural gas in the first half of 2001. nonregu'ated gas sales. In additior, nonregulated lecatric The higher natural gas prices experienced earlier in 200l sales have become an important factor in the growth of were passed on to customers and are reflected in both WPS Energy Services. Revenues at WPS Energ Services grew revenues ann gas purchases, this naving little impact on margin. to $ .575.1 millon in 2001 compared \vth $955.6 mi lion Under current regulatory practice the Public Service in 2000, an increase of 65%. This increase was th-e result of Commission of W isconsin and the Michigan Public Service additional natural gas and electric sales volumes coupled with Commission allow Wisconsin Public Service to pass changes in a higher unit cost of natural gas in the first half of 2001.

the cost of natural gas on to customers through a purchased The higher unit cost oa natural gas is also reflected in cost gas adjustment ciause. of sales, thus having little impact c-) margin. income increased $4.7 million in 2001 lie to increasec sales and Other Utility Expenses/Income improved ope-atiois.

Utility operatiio exoenses increased $36.3 million largely due to increased transmission expenses associated WPS Energy Services' Margins with the traisfer of assets to American Transmission Company, increased pa.yments to the Wisconsin Department WPS Energy Services Gas Results of Admin st-ataon for demand-side management (energy (Millions) 2001 2000 1999 conservation) activities, increased maintenance costs at the Nonregulated natural gas revenues $1,406.3 $919.5 $288.0 Kewaunee plant during its refueling outage, and higher Nonregulated natural gas cost of sales 1,390.4 908.2 283.4 write-offs of uncollectile accounts. Margin $ 15.9 S 11.3 $ 4.6 The Public Service Commission of Wisconsin has allowed a poation of the higher transmission costs to be deferred. Nonregulated gas revenues at WPS Energy Services The deferred transmission costs. $4.4 nillion for 200 1, are increased $486.8 million, or 5358, primariy as the result expected to be recovered in future regulatoryn proceedings. ol sales volume growth and higher natural gas prices in the Lower earnings on the nuclear decommissioning lund first half oa 200 The nonregulatea gas margin increased contributed to a decrease in other ncome fi-om utiity $4.6 million, or 41 %, due to increased saaes volumes and operations, Due to regulatory practice, lower earnings on exiting from unprofitabie market segments, the nuclear decommissioning find were offset by decreased depreciation expense. Also contributing to decreased WPS Energy Services Electric Results deprecia-ion expense were an extension in the Kewaunee (Millions) 2001 2000 1999 plant's assumed deGreciable life and a reduction in the nuclear Nonregulated electric revenues $165.0 $33.8 $3.4 decommissioning fund contribhiaon. Nonregulated electric cost of sales 150.3 29.4 3.2 Interest expense increased die to the issuance of additional Margin $ 14.7 $ 4.4 $ .2 long-term deat by Wisconsin Public Service in August of 200 I.

Nonrnegulated electric revenues at WPS Energy Services 3

Overview of Nonregulated Operations increased $ 131.2 nr!ion, or 88%/. The nonregulated electric Nonregulated operations consist of the natural gas, margin increased S 0.3 million, or 2340o. Higher electric sales electric, and other sales at WPS Energy Services, a diversified volumes in existing and newly-entered retail e!ecnaic markets, energy supply and serv:ces company, and the operations of increased electric wholesale activities, as wel as impacts from WPS Power Development, an electruc generation asset marketing energy from WPS Power Development's Sunbury development company. plant, contributed to these increases.

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MANAGEMENT'S DISCUSSION AND ANALYSIS WPS Energy Services' Other Expenses WPS Power Development experenced a decrease of Other operating expenses at WPS Energy Services increased $2.0 mri lon in its marg n in 2001 from 2000, The primary

$8.5 milion laigely due to costs associated with business factors n this decrease were a $2.8 nclhion margin decrease expansion acd higher write offseo uncollectible accounts. at Sanbury due to higher fuel costs as a result of purchasing coal at current market prices and higher costs of ren acement Impact of Enron power during outages. WPS Power Development is Although VKP Energy Services is an energy marketer, :t attempting to recover a portion of the fuel cost increase nas exnericed little ripact on day to day operations as a through a lawsuit wnich it filed against a coal supplier for

-esult of the bannr.rptcc Enron Corporation, and is in a net failure to deliver under the terms of a coal supp y agreement.

Dayable position with Kr on affil.ates. WPS Energy Services has The Sunbury margin decrease was partially offset by nigher iqudated all open posiions with the Enron affiliates and margins at the VVestwood generation plant. which was replaced them with othe' suppliers. The forward contracts with acquired in September of 2000.

-he Eron affiliates priovided -o- payments representing the net liquidation value of the con-racts at the time of liquidation, and WPS Power Development's Other Expenses/Income

-h~s net liquidaton amount is reflected on the balance sheet as Other operating expenses at WPS Power Development a current accounts payvbae, contingent upon tne oaccome of ncreased by $4,5 million in 2001 compared with 2000, Enron's cankruptcy proceedirgs. Macagerment believes these pnimarly due to costs associated wth operations at the liabilities are properly 'ecorded. The Enroc bankruptcy is t WA estwood plant, higher payroll expenses, and ncreased expected to cave ar efect on other companies throughoat deve opment costs for potentia new projects.

the industry As a resua.V WPS Energy Services s more closely Other income increased $ 1.8 milion, primarly from monitoring its credit exposure viih other trading partners, a port on of the gan that was recognized n the sale of a partal interest in WPS Power Developments synthetic t

Overview of WPS Power Development uel facility.

Revenues at /!PS Power Development increased

$13.4 million, or 10% primarily cue to higher revenues Tax Credits at its Sunbur, generation plant of 57,0 million and higher WPS Power Deveropment recorded synthetic fuel tax revenues from ýts steam operations of 57.1 million. credits of $2 .5 million in 2001, an increase of approx ma-ely WPS Power Develoarcent s income was $2.3 million $4 mi Ion over 2000. \eA/ used these credits to the extent the in 200l compared w tn $0.9 million in 2000, Additional tax aw permits to reduce our current feceral tax iahbiity, and

-ax credits of approximately S4 million from its synthetic the remainder increased our alternatve micimum tax credt fuel operation was tne primary factor in WPS Power available for future years. Approximately S 10 million of tax Development's increased income in 20z, credits where carried over from 2001, which brings the cumulative c-edts being carned forward to approxnmately WPS Power Development's Margin S2! mi iion. Alternative minimum tax cred ts can be used in I ture years to reduce our regular tax iability, subJec to WPS Power Development's various limitations. Based on a reveew of all known facts Production Results (Millions) 2001 2000 1999 and circumstances, management has concluded that it is Nonregulated other revenues $141.5 $128.1 $35.4 Nonregulated other cost of sales 110.2 94.8 18.6 more ikely than not that we will be able to use these Margin $ 31.3 $ 33.3 $16.8 credits in the fature to reduce ou< federal tax liabi ity

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A P E R F U L E Q U AT S 0 N MANAGEMENT'S DISCUSSION AND ANALYSIS Overview of Holding Company and Other Operations margins. Additionally a higher margin along vwih adcitonal tax Holding company and other operations include the credits at WPS Power Development coctributed to higcec operations of WPS Resources and WPS Resources Capital income. Partially offseoring Ihese 'actors were increases 1i as holding comnpanies and the nonutilitv activities at Wisconsin operating and rncerest expenses, coupled vith costs associated Pubeic Service and Upper Peninsula Power Holding company with an eectric energy contracr enterec in-o by WPS Resources and otner operations experienced income of $1.3 mllion in as a hedge against potentiia sumncmer energy price spikes, 2001 compared with a loss of $7.9 million in 2000.

Other nonutility income at Wisconsin Public Service Overview of Utility Operations included a pre tax gain of $13. I million on the sale of hydro Income from electric utility operations was $60.7 million lands in December of 200 1,. The sale of these hydro lands in 2000 compared with $56. l millon in 1999. income from was the first significant transaction in our five to seven-year natural gas utility operatons was S 1.6 million in 2000 and asset management strategy to increase shareholder return $ 11.2 million in 1999, Tie primary reasons for higher utility f-om the sale, development, or use of certain real estate net income were a Wisconsin retail electric rate increase and assets deemed to be no longer essential to operations. increased natural gas sales volumes as the result of winter In addition, earnings on equity investmenrs were higher in weather that wvas 8% clcer ii 2000 Thac n 999.

2001 compared with 2000 primarily due to our investment in American Transmission Comuany. Electric Utility Operations Interest expense increased due to additional short-term Our consolidated electric utility marg n increased borrowng at WPS Resources for working capital needs in $29.7 million, or 8%, primarily due to a 4.c% Wisconsin the fnrst hafl of 200 I. retail electric rate increase atsWsconsin Public Serv'ice which became effective on ]anu.r7 I, 2000. Tcis -ate increase was 2000 COMPARED WITH 1999 primarily intended to recover additiocal :uel and purchased WPS Resources Corporation Overview power costs for the year, The 2000 electric rate increase WPS Resources' 2000 and 1999 resuits of operations also took into account the expected cain on the sale of utility are snown in the follow Ing chant: assets which is discussed under "Other Electric and Gas Utility Expenses/Incorne."

WPS Resources' Results Although our consolidated kilowatt hour sales wNere only (Millions, except share amounts) 2000 1999 Change slightly higher, partia'ly due to a 3 I% cooler surime- in 2000 Consolidated operating revenues $1,949.0 $1,098.5 77% tcac in 1999, consolidated revenues increased 7% cue to the Income available for Wisconsin etai electric rate increase at Wiscocsin Public Service, common shareholders 67.0 59.6 12% Our consolidated fuel expense increased $15.7 million, Basic and diluted earnings per share $2.53 $2.24 13% or 14%. due to increased production at Wisconsin Public Service's fossil-fue'ed and combustion turbine gene-ation The substantia' reve0 cue growth was largely due to plants. In addition, tie averiae cost of generation at the increased natural gas and electric sales at WPS Energy combustion -urbine plants increased 90% largely as a result Services and increased sales at WPS Power Development as of a higher unit cost of natiual gas. Generation costs at the we acquired additionai customers and expanded into cew Kewaunee plant decreased 14% in 2000 due to its scheduled markets. Part of the increase in revenues was a result of the outage for refueling and mainrce nance in the second quanten of record high unit cost of natural oas experienced in 2000. Gas 2000. A similar outage did not occur in 1999. Tne Kewaunee cost Der the m was 43% higher in 2000 than in ý999. The plant was off-cine beginning April 22 2000 and returned to high unit cost of natural gas was refiected in both revenues full power on June 2, 2000. During the scheduled outage, and cost of sales, thus having litle impact on margin. nuclear generation was replaced with additional fossil fuel The increase in income and earnings per share was the and combustion turbine generation and additional purchased 2

result of higher electric and natural gas utility margins and power. Wisconsin Public Service was the operator and 4 . %

increases in WPS Energy Services' eleccric and natural gas owner of the Kewaunee piant in 2000, Our consolidated purchased power excense decreased $4. I million, howvever,

MANAGEMENT'S DISCUSSION AND ANALYSIS largely due to a 50 decrease rnthe cost per k lowaft-nour of WPS Power Development's net income was $0.9 million power purchases mace by Wisconsin Public Service in 2000 in 2000 compared with a loss of $3.8 million n 1999.

compared with 1lo9.

Annual fuel costs at December 31, 2000 were within Overview of WPS Energy Services the 2% fuel vindew authorized by the Public Service Revenues at WPS Energy Services grew to Commission of \A sconsrn and, accocdinghy no adjustment $955.6 million in 2000 compared with $292.2 million in was made to electric 'ates for 2000 fuel costs. 1999 an increase of 227%. This increase was the result of additional natural gas and electric sales volumes coupled Gas Utility Operations cwitha higher unit cost of natural gas. The hioher unit cost of The gas ui ity m.argir at Wisconsin Public Service gas was also reflected in the cost of sales, thus having litle increased $3,4 rmilor or 7%, in 2000 die to an increase impact on margin. Income increased $5.2 million in 2000 in throughput volumes, die to a larger increase in alectc and gas margins than in Winter weat-e r ,as a factor for Wisconsin Public the related other operating expenses.

Service's natural gas operations in 2000. Weather was 8%

colder in 2000 thanr 1999. nowever. weather was 2% WPS Energy Services' Margins warmer tha n normal i- 2000, Wisconsin Public Service's The nonreguoated gas margin at WPS Energy Services natural gas -everues icreased $73.0 million, or 38%. as the inc"eased $6.7 million largeiy due to increased sales volumes.

result of a 430 increase in the average unio cost ol natural gas Natuoal gas revenues at WPS Energy Services more than coupled with a 6% increase in overall throughput volumes. tripled in 2000 compared with 1999. This increase was due Wisconsin Public Service's natural gas purchase costs to sales volumes that doubled as the result of additional sales increased $67.6 mrllo, or 57%. Ths increase resulted from in the wholesale market and general business growth. In a higher average ani cost of natural gas and higher gas addition, a large pontion of the increase was due to a higher volumes porchasec of i0%. The hngher unit cost of natural anit cost of natural gas in 2000.

gas was -efteced in beth revenues and gas purchases, thus \PS Energy Services' gas cost of sales tripled dae to having little impact on margin. additional natural gas purchases coupled with a higher unit cost of natural gas.

Other Electric and Gas Utility Expenses/Income Electric margins at WPS Energy Seovices increased Utility operatirng expenses increased $22.3 mirion. $4.2 million in 2000. Eelocrc revenues at \A\PS Energy Electric ctiityo operatirn expenses increased $18.4 million Services were $33.8 minlion in 2000 and $3,4 million in primarily due to costs associated with the schednled outage 1999. This increase in reveice resulted from additional aid other maintenarce activties asthe Kewaunee plant. electsic saOes in Pennsylvania and Maine assocated with Higher ea-nirgs of $6.2 million on the Kewaunee WPS Powe' Development's assets that were acquirec in plant's nuclear cecome issioning ftnd resu'ted in increased the second and fourth quarters of !999, Electric purchases other income at \Wisconsin Public Service in 2000. Due increased S26.2 million due to additional sales volumes.

to regaatorv practces arhis higher income was offset by inrceased depreciatio- and decommissionring expense. Other WPS Energy Services' Other Expenses income at Wisconsin Prblic Service also ircudec a gain of Other operating expenses at WPS Energy Services

$3.8 micion or the sale of a combustion turbine which increased $4.2 million, or 4 2 %, primarly due to greater Wiscoisin Public Service constructed for another Wisconsin payroll and other operational costs associated with atictyv The Public Secv ce Comnmssion of Wisconsin bhsiness expansion.

considered th s gain in'he Wisconsin retail electric rate adjustment whvch was effective January . 2000. Overview of WPS Power Development Income at WPS Power Development was $0.9 mcilion Nonregulated Operations in 2000 compared with a ýoss of $3.8 million in 1999. The WPS Eiergy Serv ces' neo income improved no increase in income was primarily due to a higher margin on

$1.7 million in 2000 ceipared with a loss of $3.5 million opera-1ng activities and add'tional tax credits. Partially offsetting in 1999, Income at WPS Power Development also improved. these factors were higher operating anc interest exoenses.

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L E Q U AT 1 0 N MANAGEMENT'S DISCUSSION AND ANALYSIS Tax c'edts at WPS Power Deve.opment increased increased in 2000. Higier nterest expense of 56.3 mrllion approximately S 6.7 million in 2000. We used tlese -ax in 2000 was largely due to ionrecou-se debt put in place credits to the extent the tax law permits to reduce our to finance the plart acquisitions.

cur'ent federal ncome tax Ilab:lty. Approximately S I ili on Additional costs at the Sunbury generation plant in of these tax credits were carried for\ Nard from 2000 to Pernnsylvania lowered result at WPS Power Developmenit.

-educe our tax liabil ty in subsequent years. particularly in the fourti quarter of 2000. This included higher A arge Orion of -he tax credits at WPS Power production costs, higier maintenance costs (both planned and Development re ate to the operations of its synthet cfeo accelerated) and increased costs of replacemert power while facilities. Producton at the synthetic fuel fac itty was higher the plant was undergoing maintenance. The dec Aion was tnan anticipated n 20CC. despite the physicai relocation of the made to move some maintenance scheduled in future project from Alabama to Kentucky diring 2000. The fac Ity years into 2000 -o coincide with other plait downtime.

was taken out of operation in April 2000 to prepare for The accelerated mainterance ai the Sunbury plant relocation, and WPS Pow/er Deve opment began operation was intended -o enhance availability in 200 and of the facilities in the nev/ ocation or September I, 2000. future yea's.

In addition, WPS Power Development reversed $0.9 million of Previously recorded 'osses in the first quarter of 2000 as Overview of Holding Company and Other Operations a resuet of an equity contriburtio to .ts synthetic fuel Project Holding company and other operations experienced by the minority ov/ner. Prior to this transaction, WPS Power a loss of $7, mrillion ir 2000 comnared with a loss of Development had been 'ecodong ' 00% of the operating $0.4 million in 1999. The increased loss was urimarily due osses of tnis proJect because the minority owner's equity had to additional irterest expense, increased operating expenses, been reduced to zero: however, iKhad been alocated only and a cost of $3.8 rirlot for ar elec rc eerey contract 66.7% of the tax credits. Through an agreement with the entered into by WPS Resources in 2000 as a hedoe against minorty owner, WPS Power Development received 00% potential summer energy nrice spikes of the tax c edts and operating results from the project until the minority owner was able to contribute furtner capital to BALANCE SHEET fund its share of the operating costs, 2001 COMPARED WITH 2000 Customer and other receivables decreased 569.8 nirllion WPS Power Development's Margin and accrued unbil ed revenues decreased 527.4 million as the WPS Power Deve opment experienced an increase of result of milder weather and a substantially lower unit cos' of

$16.5 million in its margin in 2000. This Increase vvas largely natural gas experienced it December of 2001 compared with due to the operation of the electric generation facilities December of 2000.

acqu red in Maine and Canada ri the second quarter of 1999 Regulatory assets increased S Ia.5 million as the result and in Pennsylvania :n the lourto cuarter of 1999.

of deferred costs remiated to compliance with certain Nuclear Regulatory Commission requirements aid additional WPS Power Development's Other Expenses regulatory assets acquired as a result of the Wisco sin Fuel Other operating expenses at \APS Power Deve opmenm and LUg& merger, largely related to future environmental increased $27.2 million n 2000 due to maintenance remecraTon costs. Other assets increased $ 04.7 million and higher product on costs a- its generation plants in argely as a result of toe investment in American Transmission Pennsylvania. Costs associated with tie investigation and Company, goodwill associated wvth -he Wisconsin Fuel and stamt-uc of new projects at WPS Power Development also Light merger, and an increase in pension assets, diraxt&

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MANAGEMENT'S DISCUSSION AND ANALYSIS Assets fi-om risk anagement activities decreased average common equity ratios. WPS Resources and WPS Power

$ 13.' million and I abilities from risk management activities Development made equity contributions of $ 15.5 million and decreased $21 9.6 r.imon largely due to charges in forward prices, $9.0 million, respectmvey, to Sunbury Generation, LLC for Short-term debt decreased $83.4 million as tIe result expenditures at tne Sunbury generation plant.

of replacing short-term debt wit-) addtional orng-term debt Cash requirements exceeded internally generated funds at Wisconsin Pubic Se ice and common stock equty at by $1 12.8 milion ;n 2001. Shnot-term borrowings througn WPS Resources. TIe current poatian of long-term deb commercial paper decreased $104.6 million as the result of includes S50.0 mlr ion of 7.30% first mortgaoe bonds at issuing additiona long- eam debt at Wisconsin Pubiic Service Wisconsin Public Serice which ma7jre or Otober I, 2002. and the sale of common stock at WPS Resources in 2001.

We currentny nave io Dlaris to refinance trese boncs with Our pre-tax interest coverage, including nonrecourse debt, long-term debt. Long-term debt increased $67.8 million as was 2.33 times for the 12 months ended December 31, 2001.

the result of addit onal senior notes issued at Wisconsin Public in October 1999, WPS Resources ciled a shelf registration Service in The thirid qu-arrer of 2001 and obtaining financing with the Secarities and Excha-ne Commission, which aliowed tnrougr tax-exempt bonds for WPS Power Deve opmenT Is the issuance of $400.0 million in the aggregate of public Westvood p ant in the second quarter of 200 1 long-term debt and common stock, Long-erm debt of Regulato, liabilties increased $2_7.8 mil ion primarily due $ 50.0 million was issued in 2000 and common stock of to -he deferral of S 1.8 milion in pension setlement gains $79.0 million was issued in 200] under the shelf registration.

resulting from enployees transferring from W'sconsin Public Effetive January 2001. we began issuing new shares Service to Nuclear Management Comrany, LLC. Other of common stock for our Stock investment Plan and for lorg-term iabilites increased $47.9 milion primaily due to certain of our stock-based employee benefit plans. Eqaity tre ceferred gain of $38.C million on the sale of a portion increased by $18.6 million in 2001 as a result of these alans, of WPS Power DeveloDment's oAnership interest in its WPS Resources also repurchased $ I. I mil ion of existing synthetic fue oaeratior. common stock for stock based compensation plans.

Wisconsin Public Service issued $150.0 million of FINANCIAL CONDITION 6. 125% senior notes in the third quarter of 200 1, with part of the proceeds used to retire $53. million of 8.8% first Investments and Financing montcage bonds. The rema nder of tre proceeds was Payments for etsr-n of capital of $35.0 mirlon we'e paid

-sec to reduce short-term debt and suppaot working capital by Wisconsin Pubinc Servce to WPS Resources in 2 00 1.

requirements. The senior notes are secured by a pledge of first WPS Resources ade equity cortribctions of 595.0 million mortgage bonds but aecome ansecired if Wisconsin Public

.o Wisconsin Public Sea,,ice n 200]. These payments and Service retires all of its outstanding first mortgage bonds.

equity coarr butiors alowec W sconsin Pubic Searace's WPS Resources sold $79.0 milaion of common stock average equity capita izaton and its capit a l zation ratio foa in the fourth quarter of 2001 resulting in a net increase in ratemaking to remain near target levels as estabcished by tne common equity of $76.0 irlion after issuance costs.

Pubnic Service Comir rrsson of W\risconsin n Its mosirecent n April 2001, the Schuylkill Coanty Industrial rate order, A!PS Resources also contributed $54.8 milion Deve opmenr Authority issued $27.0 million of refunding of equity to Wisconsin Pub]ic Se-mice for the Wisconsin Fuel tax-exempt bonds. WPS Westwood Generation is obligated and Ligrr acquisition.

WPS Resources also made equity contributions of to repay the aefunding bonds. WPS Resources agreed to gua-anty WPS Westwood Generation's obligation to provide SI 2.0 mirlion to Uppe- Peninsura Power Company in 2001.

Trese equiy conticuton> vere made aomaintain appronriate sufficent funds to Day the refanding bonds and the related obaigations and indemnities.

A POWE RFUL EQUATION MANAGEMENT'S DISCUSSION AND ANALYSIS Wisconsin Public Service makes large investments in On April 12. 200, VWisconsin Public Service filed an canital assets. Net constreLion expecditures, inclading nuclear application with the Public Service Commission of Wisconsin fuel, for Wisconsin Public Service are expected to be for additional rate relief in 2002. Wisconsin Public Service approximately $565 million n the aggregate for the 2002 requested an $86.8 millron, or 16. 1I%, increase in retail thIough 2004 period. Larger projects include $60 million for electric rates and a $13.5 million, o- 4.5%, iccrease in automated meter readino, $27 miclion for computer software retail natural gas rates for 2002. Wisconsin Public Service and systems, and S68 millior for 'he sta4t of construction of requested a 12.6% reiurn on equity, with equity constituting generat on facilities that wivI continue to be const.ruted 559o of the capital structcie. The Public Service through 2007. Commission of Wisconsin's order, o-iginally expected Other capital requirements for Vt/isconsin Public Service to be issued in january 2002. has now been deayed for the three year period include contributions of $7.8 million until April 2002.

to tce Kewaunee plant's decommissioning trust fund, Wisconsin Purblic Service received an interim rate order In 2004, -he second phase of Wisconsin Pubi;c Service's on December [9. 2001 and implemented interim rates on agreement to purchase electricity from the De Pere Energy January I 2002. The orde- authorized a $55.5 million, or Center, a gas fired cooeneration facilitv will be accounted for 10.3%, retail electric rate increase and an $11.2 million, or as a capital lease. The De Pere Energy Center lease will be 4.7%, retail natural gas -te increase. Interim rates are based capitalized at approximately $80 million. on a 12. 1% return on equity, witc equity constituting 550/

UpDper Peninsula Power is expected to incur net of -he capital structure, are subject to refund to the extent construction expedcitures of about $37 million in the aggregate interim revenues exceed revenue authorized in the final rate for the period 2002 tnrough 2004 primarily for electric order, and will be in effect until superseded by the final -ate disntibution improvements and repairs at hydro facilities. In order establishing new rates. Wisconsin Public Service add'Lion, Upper Peninsula Power is considering the potential anticipates that it will ro be required to -efund revenues need "or constraction of a combustion turbine at an estimated collected under the interim rates.

cost of $4 1 mllio during the 2002 through 2003 timeframe. Upper Peninsula Power intends to submit an application Identified capital expenditures for WPS Power Development with the Michigan PublIc Service Commission for -ate

'or 2002 through 2004 Include the acquisition of the increases sometime in 2002 and anticipates new rates CH Resources generating facilities for approximately $62 million will be effective In 2003.

in 2002, S13 million for handling NOx emissions at te Sunbury facilit. and $4.7 mi lion for generaton facilities at the Combined Merger with Wisconsin Fuel and Light Company Locks Energ Center. Other capital expenditures for WPS Power The merge- of Wisconsin Fuel and Light Company into Deve opmemn for 2002 through 2004 could be significant Wisconsin Public Service was completed on April 1, 200 1.

dependirg on its success in pursuing development and acquisition Wisconsin Fuel and Ligc- shareholders received l,73 shares opportunities. WAnen applicable, non-recourse financing will of WVPS Resources' common stock for each share of be sought 'or fundino significant portions of these acquisitions. Wisconsin Fuel and Light's comnmon stock. A totaI of WPS Resources expects to make capital contributions 1,763,943 shares were issued resulting in a purchase of up to $92 million to fund construction of our portion of the orice of $54.8 million based on an average price of Wvausau to Duluth trarsmission ýire which wilI be transferced to 531.0625, the prevailing pnice at the time of the merger American Transmission Company in exchange for an increase announcement, in our equity ownership in American T-ansmission Company, Wisconsin Public Service used -he purchase method of accounting and recorded $41.9 million of total premium Regulatory associated with the purchase. Of that total, $36.I million was On December 21, 2000, Wisconsin Public Service recorded as goodwill and $5.8 million after-tax was recorded received an order fironc the Public Service Commission of as an aceuisition adjustment included in plant. The acquisition Wisconsin authorizing a 5,4%o increase in retail electric rates adjustment is expected to be recovered in Wisconsin retail and a 1.0%increase in retail natural gas rates for 2001 and rates over the period 2003 through 2005 as approved by 2002. A 12. % reurn on equity was approved. The new the Public Service Commission of Wisconsin.

rates were imp emented on January I, 200 1.

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MANAGEMENT'S DISCUSSION AND ANALYSIS American Transmission Company, LLC recognized settlement gains of SI 2.8 million in 2001 as a result In the first anc second quarters of 200 1, Wsconsin Public of these employees and other former employees taking Service and Upper Peninsula Power transferred transmission wthdrawals from the pension plan during tne year. The majority assets at their net book value to American Transmission of the settlement gains were recorded as a regulatory liability.

Company in excharge r ot cash and an approximate 15% Wisconsin Public Service wil return the net of settlement gains ownership interest in Ameican T~ansmission Company. and curtailment :osses to ratepayers in future rates, The Public Service Commission of Wisconsin initiated a The Kewaunee plant's co owners received approval generic docket to address the potential recovery of deferred from -he Public Service Commission of Wisconsin to apply 2000 and 2001 start um costs and increased transmission deferred accounting treatment beginning March 27, 2001 to operating costs of American Transmission Company by the the incremental costs associated with compliance with certain memner Wisconsin ýti it es including Wisconsin Public Service. Nuclear Regulatory Commission requirements mandating Completior of rhe docket is anticipated in the spring of 2002 improvements to plant procedures. Wisconsin Pubnic Service and should identi5i the costs to be recovered and The method received an order to recover the deferred costs subject to for recovery, viscorsin Punlic Service began recovering some of review by the Pubic Service Commission of Wisconsin in a these costs, as a rsu t of Its interim rate case order whicn was future rate proceeding. Wisconsin Public Service has deferred implemented January I, z_002. The Interim recovery of these approximately $10 million as a regulatory asset through costs is subject to refund should the costs in the final generic December 31 200].

docket be less than the costs included in the marm rate On September 24, 200 1. Wisconsin Public Service American '-ansmissionCompany mplemented new acquired Madison Gas and Electric's 17.8% interest in the Federal Energy Regulatory Commission tariffs, subject to Kewaunee plant for S l7.5 million. This acquisicion increased refund on lanuay l. '00 . Settlements related to issues Wiscorsin Public Service's ovwnership interest in tne surrounding these ariffs were approved in late 2001. The Kewaunee plant to 59%.

settlement reduced transmission ra es fo Wisconsin Pubnic Service by approximately S8 million during the 200 1-2005 Security pnase in period. On December 19, 2001, the Public Service Commission On August 17, 200 z , th-e Public Service Commission of of Wisconsin authorized Wisconsin Pubnic Service to defer Wisconsin approved the construction of a 220-mile 345 kV additional costs incurred with regard to increased security transmission line from Wausau, Wisconsin -o Duluth, measures at Kewaunee and other facilities. The deferred Minnesota. T he jc nt project of Wisconsin Public Service and security costs will be addressed in Wisconsin Public Service's Minnesota Power had aeceived tne approva of the Minnesota rate proceeding to be filed in 2002 for 2003 rate relief, Public Service Comm snon in March of 200o. Construction of tne line is expected to begin in 2002 with comnpleion in 2005. Wisconsin River Power Company Our finding obligation of the construction costs is estimatec to be Wisconsin Public Service's ownership interest in between $ 4 0 muil on aod $92 million. Our interest in the line will Wisconsin River Power Company decreased To 50% effective eventually be contributed to American Transmission Company December 3 I, 2001 as the result of the sale of a portion of its for an increased equity nterest in American Transmiss.on ownership interest to Wisconsin Power and Lignt Company.

Company. We anucipate that our equity interest in American Transmission Compan, may increase to approximately 25% Acquisition of Generation Facilities after completion and contribution of the line, On September 10, 200., Mid-American Power, LLC.

a joint venture of WPS Power Developmen- and Burns &

Kewaunee Nuclear Plant McDonnell, announced a plan for cons-iruction of an On January , 200 1,Wisconsin Public Services additional 200 megawatts of electrical capacity at the existing administrative employees at the Kewaunee plant transferred 53 megawatt Stoneman power plant in Cassville, Wisconsin.

,o Nuclear Managemen- Company, LLC. As a resilt of these Construction is expected to begin in 2003 with completion employees leaving 7he VWiscorsin Public Service benefit plans, by the first quarter of 2006.

a curtailment loss o $88 million was experienced. Most o& We expect the Combined Locks Energy Center, a the curtailment loss %,,asdeferred as a regulator, asset. We cogeneration Project owned by WPS Power Development 0 COROA0

A POW-RFUL fQUATION MANAGEMENT'S DISCUSSION AND ANALYSIS and located at the App eton Coated paper mill in Combined performance of the plant, the project to date has no' me" Locks, Wisconsin, to begin ful operation by May I, 2002. management's proJected near term financial pernormance WPS Energy Services will market the electric energy produced levels, Due to ths lower level of performance, WPS Resources by the facility in the wholesale electric marketplace. Construction aid WPS Power Development contributed additional capital is underway to install a near recovery steam generator into the proJen to fund operating expenses and capital which will complete tie cogeneratior aspect of the project. expenditures and to ensure that tne project complies In December 200 1,WPS Power Development reached an with its project financing debt covenants, In 2001, capital agreement to purchase the stock of CH Resources. Inc., which contributions amounted to $24.5 million, Projections going owns three power plants and other assets. The approximate forward indicate that Sunbury will produce adequate cash

$62 million transactions subject to regulatory approvals flows for its operation, with capital contributions being required and is expected to close n the second quarter of 2002. for capital expenditures. In 2002. capital contributons will WPS Resources s expected 7o issue short-term debt in be required primarily to fund a project to reduce NOx order to provide equity funding to WPS Power Development emissions fiom the plant. Those expenditures are estimated for this acquisiton. to be approximately $13 million and vwere anticipated when the plant was acquired.

ECO Coal Pelletization # 12, LLC Operations In November 2001, WPS Power Develonment, through TRENDS ts subs diary ECO Coal Pelletzation # 12. LLC. entered into Critical Accounting Policies a transactor with a subsid ary of a public company resulting in We prepare our financial statements in conformity with ECO # 2 contributing ts synthetic fuel producing machinery accounting principles generally accepted in the United States.

to a newly-formed entty in excnange for cash and a one-third Judgments and uncertainties about the application of these ownership interest in the newly-formed entity.

accounting policies along with estimates and other assumptions The transaction generated a pre tax gain of 540. I ml ion may affect reported results. \Ve consolidate the financial of wh ch S38.0 million has been deferred as of December 31.

statements of all majority-owned subsidiaries. All significant 2001 as a resJt of certain inhts of rescission and written puts intercompany transactions are eliminated, being granted to tne buyer As these rights of rescission expire Wisconsin Public Service and Upper Peninsula Power and the amount of the nut options granted to the buyer follow Statement of Financial Accounting Standards No. 71, dim nishes, WPS Power Development will recognize the

'Accounting for the Effects of Certain Types of Regulation,"

deferred gain on the transaction.

and their financial s aterients reflect the effects of the different Co ncurrenm with the partia sale ol this project WPS Power ratemaking principles followed by the various jurisdictions Deve opment bought oat the interem of ts previous partner in regulating each uti'ity. For Wisconsin Public Service, these the ECO # 12 project. The actual payments to this former include the Public Service Commission of Wisconsin, 90% of partner are contingent upon the same provisions referred to revenues: the Michigan Public Service Commission, 2% of above. As a resut, on December 31, 2001, $2 .3 million was revenues, and the Federal Energy Regulator- Commission, held in escrow, which will be released proportonately as the 8% of revenues.

respective rescission rights and put options expire.

Although unlikely, should Wisconsin Public Service or Upper Peninsula Power no longer meet tne criteria for Sunbury Generation, LLC applying Statement No. 7 , we would discontinue its WPS Power Development acqu red the Sunbury application as defined under Statement No. 10 1, "Regulated generation plant in November of 1999. As a result of both Enterprises - Accounting for the Discontinuatior of App ication market conditions and ssues related to the physica

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MANAGEMENT'S DISCUSSION AND ANALYSIS of FASB Statemernt No 71 ." Assets and liabilitres recognized VVe believe that ary gains or losses resulting from the solely due -o the actiors of rate regulation would no onger settlement of these contracts will ne collected from, or be recognized on tre Dalance sheet anc would be classified as refunded to, retail customers. Denivative assets and liab:it es an ext aoid naru irem in ncome for the period in which the that are recorded as a result o' these derivative cont-acts a-e d'scontinuatioi occurs offset with corresponding regulatory assets and liabilities, At

/*!eaccrue estimated amounts for services rendered January I, 2001, Wisconsin Public Service recorded a t uerivative asset and ar offselttng regulatory liability of but not ye- billed. \ /e reseo-ve an estiiiate fo' potential uncollectible custoie'- accounts based on historica, approx mately $1 7 mil ion. The cumulative effect on income uncollectible exaer ence and specific customer identification was not significant.

where practical. WPS Energy Services uses derivative financial and

\/PS Energy Serv ces follows the requirements of commodity instruments to reduce market risk assocated with Emerging issues Task Force Issue No. 98- 10, 'Accountino for changing prices of natara gas and elecrcty sold to customers Contracts involved in Energy Trading and Rcsk Management at f rm prices. WPS Energy Services also uses derivatives to Activities." APS Fnergy Services uses derivative financial and manage market rsk associated with anticipated energy commodity instriments to recuce market rsk associated with purchases as well as trading activities. WPS Energy Sevices changng arices of natural gas and electricity sold a- firm prices concluded that its energy contracts were trading contracts and, to its customers. \,,VPS -*-eov Services also uses deyivatives therefore, applies Emerging ssues Task Force Issoe No. 98- 1I, to manage market isk associated with anticipated energy 'Accounting for Contracts Involved in Energy Trading and Risk purchases as well as trading activities, Derivatives may include Management Activities." Accordingly, /PS Energy Services futures and 'orard contracts, prce swap agreements, and -ecorded its energy contracts at fair value on the balance call and pus opticns, Accordinvy under issue No. 98- 10, sheet, with changes n fair value recognized in earnings.

WPS Energy Ser. ces mark s renergy trading contracts to Because WPS Energy Services marks its energy Tra ding fair ,alue on tre balance sheet. and recognizes changes in contracts to market n accordance with Issue 98- 10 and does ma rket varue in ear ings. not anticipate designatng any derivative contracts as hedges for accounting purposes, the adoption of StaTement No. 133 did Impact of New Accounting Standards not have a material impact a- \t/PS Energy Services.

We adopted Statemert of Finarcal Accourting Standards V/e adopted Statement of Financal Accounting Standaros No. 133. Accourtinu 'or Derivative instruments and Hedging No. 142, Goodwil and Other Itangible Assets," on Jaiuary ,

Activitres oon janu 0 ir 1, 2001, This statement equires 2002 The financial statement impact of adapting Standaro oerivative instrumenti to De recorded at their fair value as No. 142 was immaterial. In accordance with the requirements assets or liabilities oi trne balance sheet. Changes in the of this statement, we ceased amortizing the goodwill associated derivative's farsjr ae to be recognized currently in with the Wisconsin Fuel ano Light merger at January I, 2002, earnings un ess specific hedge accounting criteria are me-. and prepared a preliminary evaluation of the fair market value

\'/e concuded tha-. tne majority of contracts at our tilty of the gas utility business segment to assess the potential subsidiaries and at VPS Power Develoamener for the impairment of the goodwil balance. Based on the estimated purchase, sale, and storage of natural gas. electricity, coal, and fair value, an impairment charge was rot required.

nuclear fuel do not meet The cefinition of a derivative as definec u.nder Statement No. 133 and, therefore, are not Liquidity subject to tne accountng requiremenis of Statement No. 133. WPS Resources normally uses internally generated funds Wisconsin Public Service entered inTo a limted namber o" and commercial paner borrowing to satisfy most of its capital commoditv -ontirct- that meet tie definition of a derivative, requirements. We may periodically issue org-term debt and

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- Q U A T I 0 N MANAGEMENT'S DISCUSSION AND ANALYSIS common stock to reduce short term debt, maintain desired WPS Resources holdc credit liner to .ack I00% of its capitalization ratios, and cundfuture growth. We seek commercial paper borrowing and letters of credit. Includec in non-recourse financing for funding some nonregulated the credit lines of WPS ,Resources, and also of Wisconsin acquisitions. WPS Resources' commercial paper borrowing Public Service. are credit lines of S10 million and $ 5 tri lion, program Provides for working capital requirements of the respectively, that require both companies -o mainta n a nonreJulated businesses and Upper Peninsula Power. The commercial paper 'atng of A liP .A decrease in ratings scecific forms of financing, amounts, and timing depend on the below that level could adversely affect the company by availability of projects, market cotoditions, and other factors. increasing the interest rates at which -tcar borrow, restricting The current credit ranings for WPS Resources and its ability to obtain lines anc letters of credit, and potentially Wisconsin Public Service are listed in tne table below: limiting the availability of funds to the company in the commercial paper market. A restrictio in the company's Credit Ratings Standard& Poor's Moody's ability to use commercia. pacer or-owvlng 'or its working WPS Resources Corporation capital needs could require it to secure finds through bank Senior unsecured debt A+ Aa3 Commercial paper A-I P-I loans resulting in higher interest expense and celayed Trust preferred securities A- AI availability o' funds, Wisconsin Public Service Corporation WPS Eneroy Services maintains underlyin:g agreements to Bonds AA- Aal support its electric and oas trading ope'atons. n the event of Preferred stock A Al a deterioration of WPS Resources' crecit ratino. most of these Commercial paper A- I+ P-I agreements allow the counte r-party to demand additiona assurance of payment. This provision could certairi o existing These ratinos are among the best in the energy industry business, new business, or both with the counter-party. The and have allowed us to access commercial paper and long term additional assurance requi-'reents could be me- with letters of debt markets or favo-able terms. credit, surety bonds, or cash deposits and wvoulc likely uesilt Rating agencies use a tumber of both cuantitative and .n WPS Resources being required to maintain increased bark qualitative measures in determining a company's credit rating. lines of credit, incur additional expenses, anc coulc restrict These measures include business risk, liquidity risk, the amount of business \'VPS Energy Services car conduct.

competitive position, capital mix inancial condition, WPS Energy Serices uses the NYMEX and over-the predictability of cash flows, management strength. and future counter financral markets to hedge its exposure to physical direction. Some of the quantitative measures can be analyzed customer obligat ons. These hedges a'e closely correlated o through a few key financial ratios, winle the qualitative ores the customer contracts, but price movements orn tne hedge are more subjective, contracts may require financial backing. CeQ-a n movements The recapture of Its operating and capital costs through in price for contracts througoh the NYNEX exchange require ratemaking mechanisms sich as the electric fuel window, posting of cash deposits equal to the marke mnove. For the purchased gas adjustment clause, and frequent rate over the-coutOer market, the underlying contract may allow adJustments based on projected test years have a positive the counter-party to require additional collateral to cove- the impact on Wisconsin Public Service's liquidity increased obligation. Narke: price changes could cause WPS Resources and Wisconsin Public Service maintain signif cant near-term cash requirements to support tie separate commercial paper borrowing programs in comoliance business. Increased requirements relatec to market price wirt the Public Sec, ice Commission of Wisconsin's directives, charges should only result in a temporary liqu dity need that Factors affecting the commercial paper credit ratings at both will unwind as the saYes contracts are fulfilled, WPS Resources and Wisconsin Public Service include the WPS Power Development has some projects which are overall credit strength for the company, the ratings on its partially funded by non-recourse debt, These debt obligations long-term debt, the amount of its short-term debt, and have certain debt coverage covenants related to liqudi'ty that the amount and quality of the bank facilities backing up its must be me. Factors that can impact iquidity at these projects commercial paper borrowing. If the company's ong-term are overall electric market conditions, the physical availability debt rating were to fall below a rating of A÷/A 1, the potential of the croject to meet contractual requirements, tne cost and exists for a downgrade in its commercial paper rating. availability of requi-ed nputs to production, and the level of 0

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MANAGEMENT'S DISCUSSION AND ANALYSIS operating and maintenance costs. Ifany of these projects Contractual Obligations and Commercial Commitments snou d fall below tne required debt coverage levels, The following tables summarize the contractual WPS Resources can e0 tmer contribute additional equity o-, obligations and commercial commitmenes of WPS Resources, F market conditions are such thaI the projem is no longer including its subsidiaries.

considered vable, abancon the project.

Payments Due by Period Less than I to 3 4 to 5 After 5 Contractual Obligations (Milions) Total I year years years years Long-term debt principal and interest payments $1,173.2 $102.7 $230.3 $ 86.9 $753.3 Minimum capital lease obligations 124.7 5.2 16.9 12.3 90.3 Operating leases 4.9 2.7 1.9 0.2 0.1 Unconditional purchase obligations 1,228.2 694.9 444.3 28.2 60.8 Total contractual cash obligations $2,531.0 $805.5 $693.4 $127.6 $904.5 Long-term debt a-incipal and interest payments Unconditional purchase obligations represent energy represent boncs, roei, and loans held by WPS Resources supply contracts at WPS Energy Services and certain and its subs diaries, \We record ali principal obligations on commodity purchase contracts at Wisconsin Public Service the balance sheet. and WPS Power Develoument. The energy supply contracts Wisconsin Public Service records minimum capital lease at WPS Energy Services have offsetting energy sale contracts.

obligations on its balance sheet at net present value, The Wisconsin Public Service expecs to recover the costs of its above table represents the total future obligation. contracts in future customer rates, Amount of Commitment Expiration Per Period Total Amounts Less than I to 3 4 to 5 Over 5 Other Commercial Commitments (Millions) Committed I year years years years Lines of credit $1333 $60.0 $73.3 $ $

Standby letters of credit 18.4 18.3 0.1 Guaranties 4.5 4.5 Total commercial commitments $156.2 $82.8 $73.4 $ $-

The WPS Resources Board of D rectors has authorized business operations of WPS Power Development, WPS Resources management -o issue corporate guaranties in the agoreoate has issued approximately $'30 million ir guaranties which are amount o' up to S50C Million to support the business not reflected in the table above. WPS Resources issues the operations of \VPS Eaergy Services which are not reflected guaranties -or indemnificatior obligations related to business in the table aaove. \tVPS Resources arimarilv issues 7he purcnase agreements, borrowings, and counter parties in guaranties to counter-parties in the wvolesale electric the wholesale electric marketalace to meet tneir credit and natural cas marketplace to meet the counter- parties' requirements and permrir VPS Power Development requirements and pert-nit WPS Energy Services to operate to operate within these markets, The authorized amount within tnese mar ets, The authorized amount of -the of the guaranties is in excess of the amount of obligations buaranties is in excess of the amount of obligations actually actually backed by WPS Resources' guaranties. The amount backed by the WPS Resources guaranties. The amount supported is dependent on the amount of the outstanding supported is depencent on the amounr of outstanding obligation that WPS Power Development has with the parties busiress WPS En.e.y Services has wi h the counter-pate holding the guaranties at any point in time. The guaranties holding the guranties at any point in time. VVPS Resources are required to suppor WPS Power Development in its refects WPS Energy Services' ouigat'ons supported by these normal operations of energy production a nd the sale of parentaý guaran-ies or ins consolidated balance sheet either as electricity, WPS Resources reflects WPS Power Development's accounts payable or liabilites from risk management activities, obdigations supported by these parental guaranties on The \WVPS Resources Board of Directors has authorized [7s consolidated balance sheets or in -he footnotes to corporate guaranties as needed to support certain specific itq financial statements.

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SA P 0 V/ E P F U L E Q J A T O 0 N MANAGEMENT'S DISCUSSION AND ANALYSIS Since May 2000. WA/PS Resources has provided limited Ges intelligence, and inside F-ERC) and well documented finarcal support and energy supply services to a third party, broker quotes, WPS Energy Services bases electric prices on Quest Energy, LLC, a Michigan imited liability company, published indices and well-documented broker quotes.

Quest is a retail eletricity marketirg entity, doing business as a Because the majority of the contracts have a term of less than registered Alternative Electric Supplier 'n 'he State of Michigan. 36 months, the forward curves have a reasonable degree of Financial support is in the form of an interest- bearing note iquidity and WPS Energy Services does not determine any with ar initia: maturity date of Nay 2005, secured by the forwyard price curves internally. Low tolerance for price risk assets o' Quest. O0 December 31, 200', the loan amount causes WPS Energy Services to use firancial instruments to remaining was $1.0 msilior. The note contains certain hedge substantially all its positions and, therefore, chances in restrietions on Quest's ability to enter into additional debt tne primary variable, which is tne forard price curves, has instruments. WPS Resources also provides corporate litte impact on tne net fair value of the contracts as marked guaranties on behalf o- Quest tnat are not included in its to-market. An outside Comsany with an esahlish-ed practice consolidated 'inancal statements. Guaranties have been in energy risk evalation verified tme electric mark to-market made to Quest's transmission Droviders in the amount of position at Decermber 3 1, 2001 due to the large increase

$4.5 milHion. These guaranties assure Quest's ability to pay for in new business and the introduction of new electric risk the transmission services it purchases from these entities, These management soft'ware. The '-esuts of its independent guaranties a-e reflectes in the table on the previous page. calculation were consistent with those generatec by WPS Eneriy Services provides substantially a'l of the WPS Energy Services.

electric energy supply to Quest on a whoesale basis without requiring the credit assurances required of other wholesale WPS Energy Services, Inc.

customers. WPS Energy Services exercises its right to evaluate Mark-to-Market Natural Quest's sales portfolio to verfy the porfollo's ability to Roll Forward (Millions) Gas Electric Total generate the revenues necessary to ay for purchased Fair value of contracts wholesale supply. V\/PS Energy Services further provides January 1, 2001 $ 7,3 $0.3 $ 7.6 computational infastructu-e and support services related to Less contracts realized or the daily operational activities or Quest At year-end, Quest settled during period 2.2 0.3 2.5 was curirent in its payables to WPS Energy Services. On Plus fair value of new contracts occasion, however, payments fror Quest have been late and entered into during period and WPS Energy Services imposes payment penalties on these other changes in fair value 8.7 6.3 15.0 late payments, Fair value of contracts outstanding at December 3 1, 2001 $13.8 $6.3 $20.1 Trading Activities WPS Energy Services measures the fair value of The fair valie of contracts at January I, 2001 and contracts, includino NYMEX exchange and over-the counter December 3 l, 2001, reflect the values reported on the contrams, natural gas options. naturau gas and electric power balance sheet fr net mark-to-marlet assets as of those dates.

physical fixed price contracts, basis contracts, and related Contracts realized o- settled include the value of contracts in financial nstruments or a rark-to- market basis using risk existence at january I 0 that were no longer n the net management systems. T-he primary input for natural gas mark-to-market assets as of December 3 I. 2001. Mark-toe pricing is the settled forvyard price curve of the NYNEX market gains and losses related to contracs that are stil excnange which includes spreads. contracts. and options. Basis included in WPS Energy Services' portfolio at December 31, pricing is derived from published indices (Ges Dai!,, Noturrl 2001, are included in the fair value of new contracts entered ih4.eilt~'uariri]C' r~t. e'VL-Q*

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MANAGEMENT'S DISCUSSION AND ANALYSIS into during the period. These amounts represent the marn-to Although WPS Energy Services strives to maintain a balanced market gain or loss at tne inception of these contracts. There book of back-no-back transactions, due To systems limitations, were, in many cases, offsetting positions emered into and settled any ineffecnveness in hedging activity for 2001 has been during the period resaling in gains or 'osses being realized during included under "fair value of new contracts entered into the current year. The gais ora losses from these offsetting during period" in the table on the previous page.

positions are not reflected in tne table on the previous page.

WPS Energy Services, Inc, ContractAging at Fair Value Maturity Maturity Total less than Maturity Maturity in excess fair Source of Fair Value (Millions) I year I to 3 years 4 to 5 years of 5 years value Prices actively quoted $12.0 $(0.8) $ $ $11.2 Prices provided by external sources 0.2 (0.1) - 0.1 Prices based on models and other valuation methods 3.0 4.5 1.3 - 8.8 Total fair value $15.2 $ 3.6 $1.3 $ - $20.!

Prices actively quoted includes NYMEX and over-the Electric Utility Restructuring - Michigan counter contracts, Prices provided by external sources In June 2000, a law was enacted which provides Michigan includes basis swaps. Prices based on models and other retail electric customers the right to choose their generation valuation methods n ude -etail natural gas and electric supplier by January n, 2002. Wisconsin Pubic Service and contracts due to tne vo ume optionality that exists in taose Upper Peninsula Power. along wita other Michigan Electric contracts. We deave from active quotes. or external and Cas Association members, jointly developed and filed sources provide, picrg, the most significant vahabie in open access tariffs and busiaess practices with the blichigan the mark-to-market calculation, for all contracts in the Public Service Commission prior to January I, 2002.

above table.

Gas Utility Restructuring - Wisconsin Related Party Transactions In its 2001-2002 Wisconsin retail rate application, We do not have material related party traasactons nor Wisconsin Public Service proposed to facilitate customer other relationshius which would allow us to negotiate terms choice of natural gas suppliers through the use of its new of material transactions on less than an arm's-lengch basis, automated meter readiac system. -he proposa. was aproved by the Public Service Commission of Wisconsin Electric Utility Restructuring - Wisconsin and provided customer choice of gas suppliers for large Eectric reliability continues to be the primary issue commercial customers begnning oa November ., 2001.

for the Public Senvice Commisson of Wisconsin. Industry Customer choice will be offered to additioral commercial restructuring and etanlcgeneraaon open access remain customers beginnino on November I 2002. This program secondary issues in -he state, ,wilI be expanded to all customers as the automated meter The Public Serv ce Commission of Wisconsin is evaluating reading system is installed system-wide.

proposals regarding future construction and ownership of generation facil ties in the state. The Public Service Gas Utility Restructuring - Michigan Commission of Wisconsin authorized Wisconsin Electric Most of Michigan's largest gas customers are allowed to Power Company to proceed with its planning for generation choose their natural gas commodity supplier The smaler construction. On FePruarv I, 2002, Wisconsin Electric Power Michigan natural gas utilities. including Wisconsin Public Service.

applied for Certnficates of Public Convenience and Necessity are to propose a customer caoice program for all customer for its generation cons-ruction proposals. This application is classes when it is in the best interests of each utility and its being reviewed. owever, and further approval is required customers. Wisconsin Public Service intends to provide customer in order for Wisconsin Electric Power to proceed. choice to its Michigan customers following the implementation of its automated meter reading system in that state.

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SA P 0 \Y/ E R ýU J L E C AT 1 0 N MANAGEMENT'S DISCUSSION AND ANALYSIS Environmental Wisconsin Public Sewice estimates that it could cost $105 million Wisconsin Public Service estimates future undiscounted Der year for it to achieve the 90% reduction.

investigation and cleanup costs of I0 former manufactured gas Early compliance with the Federal Clean Air Act has si-es to be In the range of $43 million to $50 million. We may generated surplus sulfur dioxide allowances at Wisconsin adjust these est mates in the utute contingent upon remedial Public Service. Wisconsin Public Se-vice has sold and w Il technology, regulatory requ irements, and the assessment of continue to consider toe sale of any allowances in excess of enviroormental damages. its own needs. The Public Service Commission o Wisconsin Wisconsin Pub ic Service currently has a S43,4 million has ordered that profits fiom the sale ol allowances be iab lity recorded for gas plant cleanup with an offsetting passed on to Wisconsin Publ'c Sewvice's customersi regu atory asset (deferred coarge). We expect to recover WPS Power Development acquired emission cleanup costs net of insurance recoveries in future customer allowaoces as a result of the purchase of the Sunbury rates. V\e will not recover carrying costs associated with the plant in 1999 and the Westwood plant in 2000. The costs cleanuo expenditures. W sconsin Public Service has received assioned to these allowances are charged to expense as

$12.7 million n nsurance iecoveries which have been the allowances are used. The Sunbury plan- also purchases recorded as a reductror in toe regulatory asset. incremental emission allowances or the open market to The State of Wisconsin developed a nitrogen oxide comply with air regulations. WPS Power Development is reduction plan 'or all utilities in the ozone non-attainment area installing additional technology in order -o comply with established by the Un'ted States Environmental Protection the 2003 nitrogen oxide standards. Expenditures for Agency io southern Wisconsin. The nitrogen oxide reductions this technology could be significantm begin io 2003, and the requirements are gradually increased through 2007. This redoction nlan affects Edgewater Unit 4. Asset Management Strategy W:.sconsin Public Servce owns 3 1,8% of ths unt. A compliance In December 2001, Wisconsin Pubic Service sod plan for Edgewater Uni. 4 was n:ntated in 2000. The plan 5,740 acres of lard on the Peshtigo River irnorilheasterr innudes a combi-oat on of combhostion optimization and Wisconsin to the Wisconsin Department of Natural Resources emission trading at a potential cost to Wisconsin Pub ic Service for $ 13.5 minion. This sale uAas toe first significan- transaction of approxirmatey S5 ml ion. The State of Wisconsn Is also in a five to seven-year asset manage ment strategy we seeking voluntary reduct ons from units outsrde the ozone adopted ir 2001. The agreement with the Depairtoent of noo attanmen- area which may ead to additionai expenditures Natural Resources includes two options, one exercisable in Tor ntrocen oxide reductions at other units. W sconsin Public 2003 and the other in 2004, whereby the Department may Service is particpating in voluntary efforts -oreduce nitrogen acquire, at less than fair va ue, approximately 5,000 additio0al oxide levels at the Co umbia Energy Centern Wisconsin Public acres for $] 1.5 million f both options are exercised. The Service owns 3 .8% of Columbia. The Publc Service value associated with the difference betveen the option Commission of Wiscoosin has approved recovery of the orice and the fair value toll be treatec as a chrithable costs associated wito ntrogen oxide compliance. contribution.

The Wisconsin Department of Natural Resources ioitiated a ru emaking effort aimed at toe control of mercury IMPACT OF INFLATION emss ons, Coal fired generation plants are the primary target Our financial statements are preparec in accordance with of ths effort. The proposed rue was open to comment n accounting principles generally accepted in the United States October 2001. A fina rule could be issued in the spring of and report operating results in terms of historic cost. The 2002. As proposed, the rule requires poased in memcury statements provide a reasonable, objective. and quantifiable emission reductions reacning 90% reduction in 15 years, statement of financial results: but the), do rot evaluate the

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MANAGEMENT'S DISCUSSION AND ANALYSIS impact of nflation, Uider rate treatmen- prescribed by utiltty hypothetical changes are based or cerrain simplifying regulatory comm>sso.0s, Wisconsin Public Service's and Upper assumptions, including a constant level of variable rate debt Peninsula Power's projected operating costs are recoverable during the period and an immediate increase in the level of in revenues. Because -ate forecasting assumes inflation, most interest rates with no other subsequent changes for the of the inflationary effects on normal operating costs are remainder of the period. In the event of a significant change recoverable ir rates. However, in these -or ecasts, Wisconsin in interest rates, management would take action to mitigate Public Service and Upper 0erinsula Power are ony allowed the company's exposure to ahechange.

to recove- tIe historc cost of plart via depreciaton.

Commodity Price Risk QUALITATIVE AND WPS Resources is exposed to commodity price risk QUANTITATIVE DISCLOSURES resulting from the impact of market fluctuations in the price ABOUT MARKET RISK of certain commodities, including bun not limited to electricity, natural gas, coal, fuel oil, and uranium, which are used Market Risks and/or sold by our subsidiaries in the normal course of their W/PS Resources has potential marl<e- risk exposure for business. We employ established policies and procedures to instruments entered into for tradinc purposes related to reduce the market risk associated with changing commodity commodiry price rsk ard for instruments entered into for prices, including using various types of commodity and purposes other than trading reatec to interest rame risk, ecuity derivative instruments.

return and prinrpa! preservation risk. and commodity price WPS Resources' exposure to commodity price risk in its risk. There cr rerty is no mater al exposure due to foreign utility business is significantly mitigated by the current currency exchange rate risk. WPS Resources has risk ratemaking process for the recovery of its electric fuel and managernent policies in place to montor and assist in purchased energy costs as well as its cost of natural gas controlling these market risks and may use derivative and purchased for resale. Therefore, the below value-a -risk otner nstrumerts -o rranage some of these exposures.

amounts do not include measures for WPS Resources' regulated utilities, To further manage commodity price risk, Interest Rate Risk our regulated utilities enter into contracts of various duration WPS Resources is exposed to in-erest rate risk resulting for the purchase and/or sale of iatural gas, fuel for electric from its variable re long-term debt ard shont-te-m generation, and eiectrcty.

commercial paper borrowivno. Exposure to interest rate risk is WPS Power Development also uses purchase and/or sale managed by imiting the amount of variable rate obligations contracts for electric fuel and electricity to help manage its and continually noirtor ng tIe effects of market changes in commodity price risk. For purposes of risk management irterest rates. W'7PS Resources enters into long-term fixed cisclosure, al of WPS Power Development's activities are rate debt when it is acvantageous to do so. The company classified as non-trading.

may also enter in-o derivative financial instruments, such as WPS Energy Services uses derivative financial and swaps. to mitgate interest rate exposure. At December 31.

commodity instruments to reduce marke- risk associated with 2001. WPS Resources utilized one interest rate swap to fix the changing prices of natural gas and electricity sold at firm ahe irteest r ate on a variable rate loan at oie of its arices to customers. WPS Energy Services also utilizes these nonregulated subsidiaries.

nstruments to manage market risk associatec with anticipated Based on \ArPS Resources variable rate debt outstanding energy purchases, as we as trading activities. For purposes at December 3 . 200 , a hypothetical increase ia market of risk management disclosure, al of WPS Energy Services' interest rates of 00 basis points n 2002 would increase activities, including all of its energy commodity purchase and annual interest expense by approximately $0.6 million.

sale contracts and its gas in storage inventory, are classified Comparatively. based on rWPS Resources variable rate debt as trading. WPS Energy Sercices, therefore, follows outstanding at December 3 I, 2000, an increase in interest rates of 100 bas>s points would have increased interest mark-to-market accounting as required by Emerging Issues Task Force Issue No. 98- 10.

expense in 2001 by approximately $1.8 million. These f 3'7O'-00

A P 0 W E R F U L F Q U AT I N MANAGEMENT'S DISCUSSION AND ANALYSIS Value-at-Risk For the year ended December 31 2001, tie average, To measure commodity price risk exposure, WPS Resources high, and low VaR amounts for trading activities were $0.4 million, performs a value at risk (VaR) analysis of its exposures. $0.6 million, ard 30.2 million. respetvely, The same amounts VaR is used to descie a urobablist c approach to for the year ended December 31, 2000 were 30.3 million, quantifying the exposure to market risk. The VaR amount $0.4 million, and 50.2 million. For the year ended December 31, oep eerts an estimate of tre potertial charge in fair value 2001 the average, high, and low VaR amounts "ornon-trading

-hat could occur from adverse changes in market factors, activities were $3,0 mi lion. 4.4 million, and 31.4 million, within a 6 iven conficence evel, if an nstr ment or poetfoi respectively. The same amounts for tme year ended is hed for a specified rime period. \/aR models are relatvely December 31, 2000 were $2,2 million, 34.4 million, and sophisticatec. However the quantitatve risk information is $1. 1 millior. The average, hih. acd low amounts Were limited by the parameters estabished in creating the model, computed usng the VaR amounts at the begoinirg o the The nstruments behng used ray rave features tMat may reporting perioc ard the four quarter-erd amounts, trigger a potential ioss in excess of the ca colated amount if the charges in the under ying commodity price exceed the Equity Return and Principal Preservation Risk confdence level of the model used. VaR is not necessarily WPS Resources currentIy funds its ablities related o indicatve of actual results whlcn may occur, employee benefits and nuclear decommissioning through At WIPS Resources, VaR is estimated using a delta-normal various external trust sueds. These funds are managed approxima ion based on a one-day holding period and a 95% by various nvestrnert managers and rold irvestments in confidence level. The deeta-normal approximation is based on debt and equity securities Changes in the market value tne assumption that changes in -he value of the nortfolio over of these investments can nave ac impact on the future short time ner ods, such as one day, are normally distributed. expenses re ated to theseoiabilities. The pension liability is It does not take into account nigeer order risk exposures, adequately funded ant lunder noirmal n.arket conditions so it may not provide a good approximation of the risk n future required contributions to the plac are ornliely, a po-foloo with substantial option posttions. We utilized Changes in the ma-ket value of nvestments :-elated to a deela-porma anproximat on because our portfol o has other employee benefits or nuclear decornmissionsno imited exnosure to ontionaity. Our VaR calculation includes could impact future contributions, WPS Resources derivatve financa and commodity instruments. surc as monitors the trust fund porteolios by benchmarkig the for*ards, futures, swaes, and optrons as well as commodtes pe-formance of ahe investments against certain secuity reld r inventory, such as natura gas heod in storage to the irdices. All decommissionirn costs acd most of the extent such positons are signfcant. emu oyee benlef- costs relate to \WVPS Resources Our VaR aerourt for erading activities was calcu ated regulated utilities. As suc.r, the majority of these costs Lo be $0.5 million a- Decemner I, 2001 compared with a-e recovered in customers' rates. nmrtgating tr e equity SO.- million at December 31, 2000. Our VaR amount for return and princioac preservation risk on these exposures.

non rad ng actrvities was ca culated -o be $3.2 m lion at December 3 i, 2001 compared wth S4,4 mllion at Foreign Currency Exchange Rate Risk Decembeo 31. 2000. A signif cant portion of the VaR amount VW/e are exposed to foreign currency excha-oe rate risk re ated to non trading activities is mitigatec by WPS Power primarily throuoh tee purchase and sale of gas in Canada Development's generating capabilities, which are excluded ny one of our nonregoulted subsediaries. This risk to from the VaR calculaton as required by the Securities and WPS Resources at December 3 l, 2001 is immaterial.

Excrange Commissnon rules.

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CONSOLIDATED STATEMENTS OF INCOME Year Ended December 31 (Millions, except per share data) 2001 2000 1999 Nonregulated revenue $1,700.6 $1,060.7 $ 324.5 Utility revenue 974.9 888.3 774.0 Total revenues 2,675.5 1,949.0 1,098.5 Nonregulated cost of fuel, gas, and purchased power 1,639.6 1,014.3 301.5 Utility cost of fuel, gas, and purchased power 444.6 379.3 306.3 Operating and maintenance expense 361.2 311.5 255.5 Depreciation and decommissioning expense 86.6 99.9 83.7 Taxes other than income 36.2 33.8 31.8 Operating income 107.3 110.2 119.7 Miscellaneous income 37.5 20.2 8.9 Interest expense (55.8) (50.8) (32.7)

Distributions - preferred securities of subsidiary trust (3.5) (3.5) (3.5)

Other income (expense) (21.8) (34.1) (27.3)

Income before taxes 85.5 76. I 92.4 Provision for income taxes 4.8 6.0 29.7 Net income before preferred dividends 80.7 70. I 62.7 Preferred stock dividends of subsidiary 3.1 3.1 3.1 Income available for common shareholders $ 77.6 $ 67.0 $ 59.6 Average shares of common stock 28.2 26.5 26.6 Earnings per common share Basic $2.75 $2.53 $2.24 Diluted $2.74 $2.53 $2.24 Dividends per common share $2.08 $2.04 $2.00 The accomnpanying notes to V/PS Resoujrces Corporation consolidated financoia statements are sonintegral part of these statements.

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A P 0 \X/ E R F J L z Q U A T 1 0 N CONSOLIDATED BALANCE SHEETS At December 31 (Millions) 2001 2000 Assets Cash and cash equivalents $ 43.9 $ 12.8 Restricted funds 21.3:3 Accounts receivable - net of reserves of $5.0 and $4.2, respectively 248.0 317.8 Accrued unbilled revenues 56.5 83.9 Inventories 102.5 84.1 Assets from risk management activities 487.4 642.5 Other current assets 61.5 60.1 Current assets 1,021.1 1,201.2 Property, plant, and equipment, net 1,463.6 1,350.8 Regulatory assets 91.0 74.5 Other 294.3 189.6 Total assets $2,870.0 $2,816.1 Liabilities and Shareholders' Equity Short-term debt $ 46.2 $ 129.6 Current portion of long-term debt 56.6 8.3 Accounts payable 334.6 334.3 Liabilities from risk management activities 439.9 659.5 Other current liabilities 69.4 50.9 Current liabilities 946.7 1,182.6 Long-term debt 727.8 660.0 Deferred income taxes 69.5 100.4 Deferred investment tax credits 21.0 24.0 Regulatory liabilities 78.4 50.6 Environmental remediation liabilities 45.0 38.9 Benefit obligations 53.6 47.3 Other 111.0 63.1 Long-term liabilities 1,106.3 984.3 Company-obligated mandatorily redeemable trust preferred securities of subsidiary trust holding solely WPS Resources 7.00% subordinated debentures 50.0 50.0 Preferred stock of subsidiary with no mandatory redemption 51.1 51 .

Common stock equity 715.9 548.1 Total liabilities and shareholders' equity $2,870.0 $2,816.1 The accompanying notes to WPS Resources Corporationconsolidated financial statements are an integral part of these statements, WSRSOURCE C0P5 F0N

CONSOLIDATED STATEMENTS OF COMMON SHAR[HOLDERS' EQUITY Employee Stock Plan Guarantees Accumulated and Deferred Capital in Other Comprehensive Compensation Common Excess of Retained Treasury Comprehensive (Miliuons) Income Total Trust Stock Par Value Earnings Stock Income (Loss)

Balance at December 31, 1998 - $519.8 $(8.0) $26.6 $166.0 $335.2 $0.0 $0.0 Net income before

$62.7 62.7 62.7 preferred dividends Dividends on preferred (3.1) (3.1) (3.I)

Income available for common shareholders 59.6 Other comprehensive income .

Comprehensive income $59.6 .....

Issuance of common stock - 9.0 0.3 8.7 Dividends on common stock - (53. I) - - - (53.1)

- 4.6 3.6 - 1.0 - -

Other Balance at December 31, 1999 - $539.9 $(4.4) $26.9 $175.7 $341.7 $0.0 $0.0 Net income before

$70.1 70.1 - - 70. I -

preferred dividends Dividends on preferred (3.I) (3.1) (3.1)

Income available for common shareholders 67.0 Other comprehensive income .

Comprehensive income $67.0 ...

Issuance of common stock - 0.4 0.4 Dividends on common stock - (53.9) - - (53.9)

Other - (5.3) 1.2 1.6 - (8.)

Balance at December 31, 2000 - $548.1 $(3.2) $26.9 $177.7 $354.8 $(8.1) $0.0 Net income before preferred dividends $80.7 80.7 - - 80.7 Dividends on preferred (3.1) (3.1) (3.1)

Income available for common shareholders 77.6 Other comprehensive income - cash flow hedge (2.7) (2.7) (2.7)

Comprehensive income $74.9 .....

Issuance of common stock - 152.3 4.6 147.7 Dividends on common stock - (58.8) - - (58.8)

Other - (0.6) (1.0) - - - 0.4 Balance at December 31, 2001 - $715.9 $(4.2) $31.5 $325.4 $373.6 $(7.7) $(2.7)

The accompanying notes to WPS Resources Corporation consolidated financial statements are an integral part of these statements.

A P W E R F _1 L f Q U AT I N CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31 (Millions) 2001 2000 1999 Operating Activities Net income before preferred dividends $ 80.7 $ 70.1 $ 62.7 Adjustments to reconcile net income cash provided by operating activities Depreciation, amortization and decommissioning 102.1 119.5 98.6 Gain on nuclear decommissioning trust (8.1) (10.8) (3.9)

Deferred income taxes and investment tax credit (34.4) (16.8) (14.0)

Unrealized gains and losses on nonregulated energy contracts 14.4 17.0 7.6 Gain on sale of property (17.1) (3.8)

Other (9.2) 4.3 17.0 Changes in working capital Receivables 83.6 (207.1) (19.5)

Inventories (46.0) (30.1) (20.1)

Other current assets 0.9 (39.0) (16.7)

Accounts payable (35.0) 230.9 (12.1)

Other current liabilities 11.0 9.7 18.3 Net cash provided by operating activities 142.9 143.9 1 17.9 Investing Activities Capital expenditures (248.7) (199.1) (273.2)

Return of capital from equity method investment 42.4 Sale of assets 58.8 31.3 Decommissioning funding (2.6) (8.8) (9.2)

Other 10.8 (15.5) 12.9 Net cash used for investing activities (139.3) (192.1) (269.5)

Financing Activities Short-term debt - net (104.6) 39.7 30.0 Issuance of long-term debt 180.8 87.4 174.4 Repayment of long-term debt and capital lease (64.7) (10.3) (I.5)

Payment of dividends Preferred stock (3.1) (3.1) (3.1)

Common stock (58.3) (53.9) (53.0)

Issuance common stock 96.4 9.0 Purchase of common stock (1.1) (10.5) (0.6)

Redemption of obligations acquired in purchase business combination (17.9)

Other - 1.2 (0.2)

Net cash provided by financing activities 27.5 50.5 155.0 Increase in cash and cash equivalents $ 31.1 $ 2.3 $ 3.4 Cash and cash equivalents at beginning of year 12.8 10.5 7.1 Cash and cash equivalents at end of year $ 43.9 $ 12.8 $ 10.5 The accompanying notes to WPS Resources Corporation consolidated fmnoncial statements are on integral part of these statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE I -

SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES (a) Nature of Operations-WPS Resources Approximately 50% of Wisconsin Public Service's retail Corporation is a holding company. Our wholly-owned jurisdictional construction work n-progress expenditures are subsidiary, Wisconsin P b'ic Service Corporaion, is an electric subject to allowance for funds used during construction. The and gas utility. Wisconsin Pub!ic Service supplies and distributes Public Service Commission of Wisconsin allowed accrual of electric pDower atc natural gas in its franchised service territory allowance for funds used during constriction on 100% of the in northeastern \ scors n and an adjacent portion of the Kewaunee plant's steam generator replacement project. For Upper Peninsua of Micnigan. Our other wholly-owned utility 200 1, Wisconsin Public Service's retail rate allowance for subsidiar7, Upper Pen nsula Power Company, is an electric funds used during construction was I0.I%.

utility. Upper Pentinsula Power supplies and distributes electric Wisconsin Public Service's corstructcon work-in-progress energ in the Upper Peninsula of Michicgan. Another wtolly debt and equity percentages for wholesale Jurisdictionaý owned subsidiaos, WPS Resources Capital Corporation. is a electric allowance for funds used during construction are holding company for cur nonregulated businesses, WPS Energy specified in the Federal Energy Regu atory Commission's Services. inc. and WPS Power Developmem. Inc, WPS Energy Uniform System of Accounts. For 2001, the allowance fo.

Services is a cive-sifed enetgy supply and services company. funds used during construction wholesale rate was 6.3%.

WPS Power Development deve ops, owns and operates, Upper Peninsula Power is subject to ore allowance for through its ow sibsd in aies, electric generation projects. funds used during construction rate. That rate is the Michigan The termn .. i ity"'efers to the regulated activities of Public Service Commission's allowed rate of eturn. For 2001, Wisconsin Public Service and Upper Peninsu a Power. while the allowance for funds used during construction rate was

-he term "nonutiliy" refers to the activities of Wisconsin Public 5.7%. Historically, there nave been few calculations of Serice and Upper Peninsula Power, wnich are not regilated. al!owance for funds used dunrig construction due to the small The term "nonretgulaed" refers to activities other than those dollar amounts or short constriction periods of Upper Peninsula of W'sconsin Pubic Service and Upper Peninsula Power. Power's construction projects. We expect larger projects to (b) Use of Estimates--We prepare our financial occur in the future that will be subject to the application of statements in con ormity with accounting principles generally the allowance for funds used during construction calcilation.

accepted in the United SRaes. We make estimates and Both WPS Energy Services and WPS Power assumptons th-a afect reported amounts. These estimates Development calculate capitalized interest on long-term and assumptions itrcl"ce assets, liabilities, the disclosure of construction projects for periods where inancing is provided contingent assets and liabilities at the date of the financial ny WPS Resources by intenim debt. The interest rate stateme-tts, and the reported amounts of revenues and capitalized is based upon the monthly short-term borrowing expenses during tie reportng period. Actual results may rate WPS Resources incurs for such finds.

ciffer from those estimates. (e) Leases-Wisconsin Public Service accounts for the (c) Income Taxes-AWe account for income taxes agreement to purchase power from De Pere Energy Center.

-ising the lIabnity method as prescribed by Statement of LLC as a capital lease. On june 14, l999, Wisconsin Public Financial Accounting Standards No. 109, 'Accounting for Service recorded a leased asset and a lease obligation equal to Income Taxes.' Un'le the liability methodc deferred income the present value of the minimum lease payments. The leased tax liabilities am estanlish ed for all temporany differences in the asset is depreciated over 25 years, the life of the contract.

book and tax basis of assets atd lianbities based upon enacted (f) Revenue and Customer Receivables-We tax laws and rates applicanle to the periods in wtich the taxes accrue estimated amounts for electric and natural gas service become payable, rendered but not billed. Approximately 9% of WPS Resources' (d) Capitalized Interest and Allowance for total revenue is from companies in the paper products industsy.

Funds Used During Construction-WPS Resources' Wisconsin Public Service and Upper Peninsula Power use nonriegiuated sibsidiaries capitalize interest for constriction automatic fuel adjustment clauses for the Federal Energy projects. our utilities are required to use an allowance nwhile Regulatory Commission wholesale-electric and the Michigan for funcs used diring consiruction calculation., which includes Public Service Commission retail-electric portions of the both an interest rnd an equity component. business. The Wisconsin retail-electric portion of Wisconsin iS C ***S'

A P eV/ E k FU L E Q UAT S 0 N NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Public Service's business uses a "cost variance range" approachn reserving for 100% of specific customer receivable balances based on a specific estimated fuel cost for the forecast year. If deemed to be uncollectible.

Wisconsin Public Service's actual :uel costs "all outside this range. (g) Natural Gas in Storage-Average cost is used to a hearing can be helc resulting in ar adjustment to future rates. value natural gas in storage used for nontrading activities.

The Public Service Commission of Wiscorsir has Natural gas in storage used for trading activities is recorded at approved a modified one-for-one gas cost recovery plan for fair market value. Approximately 56% and 67% of the total Wisconsin Pablic Service. Implementation of the modified natural gas in storage at December 31. 2001 and 2000, one-for-ore gas cost recovery plan began in January 1999. respectyvely, was recorded at fair market value.

This plan allows Wisconsin Pablic Se-vice to pass changes in (h) Regulatory Assets and Liabilities-Wisconsin the cost of natural gas purchased from its sappliers or to Public Service and Upper Peninsula Power are subject to the system natural gas customers, subject to regulatory reviewv. provisions of Financial Accounting Standards Statement No. 7, Billings to Upper Peninsula Power's customers under the 'Accounting for the Effects of Certain Types of Regulation."

Michigan Public Service Commission's ur'sdotior include base Regulatory assets represent probable future reventue rate charges and a power supply cost recovery factor Upper associated with certain incurred costs. Revenue will be Penirsula Power receives Michigan Public Service Commission recovered from customers through the raiemaking process.

approval each year to recover projected power supply costs Regulatory liabilities represent arnounts ttat are refundable in by establishment of power supply cost recovery factors. future customer rates. Based on a current evaluatiot of the Annually, the Michigan Public Service Commission reconciles various factors and conditions that are expected to impact mhese factors to actCal costs and permits 100% recovery of future cost recoveryy, we believe that Auture recoven- of our allowed pover supply costs. Upper Peninsula Power defers regulatory assets is probable.

ary over or under recovery on the balance sheet. The (i) Retirement of Debt-Amortization of 0 ains or deferrals are relieved with additional billings or refunds. losses resuating from the settlement of long-term utility debt Wisconsin Public Service and Upper Peninsula Power are obligations occurred concurrently with rate recovery as required to provide service and grant credit to customers required by regulators.

within their service territories. The two companies contirually (j) Stock Options-t tWe issue stock options under oar review their customers' credit-worthiness and obtain deposits stock option plans and accoJnt for trhem using the intrinsic o- refund deposits accordingly. Both utilities are precluded value-based method described in Accounting Principles Board from discontinuing service to residential customers during Opinion No. 25, 'Accounting for Stock Issued to Employees" winter moratorium months. (Opinion 25). The intrirsic value-based method orly records At WPS Power Development. electric power revenues compensation expense for the excess of the quoted market related to fixed price contracts are recognized at the lower of price of the stock at he issue date over the optiot exercise amounts billable untder the contract or an amount equal Io the price. The exercise price is the arnount an employee must volume of the capacity mace available or the energy delivered pay to acquire the stock.

dur ng the period multinlied by the estimated average revenue (k) Consolidation Basis of Presentation-All ner kilowatt-hour per the -erms of tne contract. Under significant intercompanv transactions anc accounts are loating- price contracts, electric power revenues are eliminated. If a minority ov.wner's eqaity is nedaced to zero, recognized when capacity is provided or energy is delivered. it is our policy to record 100% of the subsidiary's losses until WPS Energy Services accrues revenues in the month that the minority owner makes capital contributions or energy is delivered and/or services are rendered. WVPS Energy commitments to fund its sha'e of the operating costs.

Services calculates the reserve for potential uncollectible (I) Reclassifications--Ve -eclassified certain prior castomer receivable balances by applying an estimated bad yea- financial statement amounts to conform to current debt experience rate to each past due aging category and year presentation.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 CASH AND EQUIVALENTS We consider short term investments with an original 2. As a result of the merger of Wisconsin Fuel and maturiry of thnee nmonths or less to be cash equivalents. Light Company into Wisconsin Public Service, Cash paid fori taxes during 2001, 2000, and 1999 was Wisconsin Puhlic Service acquired -he assets and

$34.0 million, 525.3 million, and $35.3 million, respectively. assumed certain liabilities of Wiscons n Fuel and Light During 2001, cash paic for interest totaled $52.6 million. For in exchange for 1.8 million shares of WPS Resources' 2000 and 1999, S49.0 million and $34.. million were paid common stock.

for interest, respec-Jvely. There were no noncash investing and financing activities The fo lowing noncash investing and financing activities during 2000.

occurred in 2001: The following noncash investing and financing activities

1. An investment in American Tansmission Company, occurred in 1999:

LLC was made with the exchange of S93.1 millIon of I. A capital lease obligation of $74.I million was transmission assets net of accumulated depreciation incurred when Wisconsin Public Service entered into for an approximate 15% equity interest in American a long- erm lease agreement for utieity plant assets.

T-ansnmssion Company and a $42.4 million return of 2. Net cash surrender value of a key executive life capital as showtn on the Consolidated Statements of insurance policy of S I.8 million was transferred Cash Flows. fiom Wisconsin Public Service to WPS Resources.

3. Nonutility assets of $0.1 million were transferred from Wisconsin Public Service -o WPS Resources.

NOTE 3-FAIR VALUE OF FINANCIAL INSTRUMENTS The fo'lowing methods and assumptions were usec to 'Accounting for Contracts Involved in Energy Trading and Risk esrimate the fair value of each class of financial instruments Managemeit Activities." See Note 4 for additional information.

for wnici it is mracticab e to estimate such value: The estimated fair values of out financial instruments as Cash, Snort-Term Investments, Energy Conservation of December 31 were:

Loans, Notes Payable, anm Outstanding Commercial Paper:

The carrying aimount approxima es fair value due to the short (Mifions) 2001 2000 maturity of tnose iivestments and obligations. Carrying Fair Carrying Fair Amount Value Amount Value Nucleam Decomonissroninig Tirusts: The value of nuclear Cash and cash equivalents $ 43.9 $ 43.9 $ 12.8 $ 12.8 decommissioning trust investments included n utiliti plant is Restricted cash 21.3 21.3 recorided at maket va ue, net of taxes payable on unrealized Energy conservation loans 2.6 2.6 3.5 3.5 gains and losses. he announ- recorded in nuclear Nuclear decommissioning decommissioning -rcsts other assets represents income trusts - utility plant 311.3 311.3 207.2 207.2 taxes cayable on urreoized gains and losses. Nuclear decommissioning Long -Term Debt and Preferred Stock: The fair value of trusts- other assets 22.4 22.4 18.3 18.3 long term debt ard p-eferred stock are estimated based on Notes payable 31.3 31.3 10.0 10.0 the quoted market price for the same or similar issues or on Commercial paper 15.0 15.0 119.6 119.6 the current rates offered to WPS Resources for debt of the Trust preferred securities 50.0 49.9 50.0 49.0 same remairing maturity. Long-term debt (excluding capital lease obligation) 712.6 744.2 595.9 601.9 Risk Nanagement Activities: Most of the fair value of risk Preferred stock 51.1 43.9 51.1 41.9 management acrvibes is c Je to WPS Energy Services' mark-to Risk management activities 47.5 47.5 (17.0) (I 7.0) market activties uncer Emerging Issues Task Force Issue I8-10,

I A P0WERF L EQUAT I N NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4-RISK MANAGEMENT ACTIVITIES On January 1, 200i, WPS Resources adopted Statemen effective, we have reco ded the S2.' rail on mark-to-market of Financial Accounting Standards No. 133, 'Accounting fo loss, net of defer0ed taxes, for 2001 cirectly o other Derivative Instruments and Hedging Activities." as amended, comprehensive nncome, WPS Resources did not exc'ude Statement No. 133 estaulinses accounting and financial any components of the der vative instrument s loss from reporting standards for derivative instruments, such as font/,ard the assessment of hedge effectiveness.

contracts, futures, and op ions, and related hedging actnities. Both Wisconsin Public Servce and WDS Resources' Statement No. 133 requires, in pari, that we recognize al nonregulaied segments hold a limited number of other derivative instruments on the balance shee- as assets or liabilities derivative instruments. The curulative effect on the a- their fair value. The treatment of subsequent changes in fair balance sneet and income statement for these contracts value of the derivatives are recorded currently in earnings at Decembe- 31. 2001 vas not significant.

unless certain hedge accounting criteria are met or if the \A/PS Energy Services uses derivative financal and derivatives are subject to -he provisions of Statement No, 71. commodity instruments to reduce market risk associated WPS Resources has concluded that the majority of its with changing prices of natural 0as and 0e ec rici>y sold at firm contracts do not meet tne definition of a derivative as defined prices -o its customers. WPS Energy Services also utilizes by Statement No. 133. Therefore, at Decembe- 31, 2001, these instruments to inanage market isk assoc ated with such contracts are not subject to the accounting requirements tradincg activities. V\/PS Enoerg Services marks its energy of this statement, as amended, contracts and related financia' instruments. includin Wisconsin Public Service has entered into a limitec intercompany contracts, to fair value in accordance wvt-n number of commodity contracts to service i7s customers that Emerging issues Task Force Issue 98- 10 Accoenting for meet the definition of a derivative under Statement No. 133. Cortiacts Involved in Lnergy Trading and Risk Yanagerrent A majority of these contracts are ratural gas purchase Actvi-ies." As such, tre impac of Staterr'e No. 133 or agreements. Manaoemert believes any gains o- losses WPS Energy Services at December 31 2001 was not resulting from the eventual settlement of these gas purchase significant. The majority o MWPS Resou-ces' assets and agreements will be collected fi0orn or refunded to custoirers. lnab lites from risk managemert actrvities are tne result Therefore. the derivative amounts to be recorded as a of V\/PS Energy Services' mar<kto-market activities under result o these natural gas contracts will be offset wvith a Issue 98 10.

corresponding regulatory asset or liability pursuant to WPS Energ> Serv ces nneasures the fair value of Statement No. 71. As of December 31, 2001, we have contracts, ncluding NHYPEX exchanrge and over the-counter recorded an asset from risk management activities and cortracts, naturai gas oneions, na-ural cas and electric power a regulatory liability of $5.0 million related to these physical fixed prce contracts, basis contracts and 'elated Wisconsin Public Se-eice contracts. financial instruments on a mark to-market basis usng risk V/PS Resources nonregulated segments have also management systems. The primnar input foe natural gas entered into a limited number of contracts that meet the p cino is the for,,arc price curve of the NYNEX exchange definition of a derivative under Statement No. 133, One of settled spreads, contracts, and options. Basis pricing is derived these contracts was an electric energy contract that was used from published indices and documented broker cuotes.

to protect VAPS Resources aoainst potential summer energy WPS Ene'gy Sermices bases electric prices on NYNEX price spikes. Tnis contract expired during the third quartei. exchange sellement prices and documented broker cuotes.

The total pre-tax loss of $3.5 miilion for this contrac is Because the majoity of the contracts have a term of less than included in other income in tne Consolidated Statements of 36 months, the foeiat cminunves have a reasonable degree of Income. A similar contract was held in 2000 that resulted in liquidity and WA S Eneroy Services does not cetermine any a $3.8 million pretax loss. forward price cur es inteirally. Low tolerance for price risk We have also classified as a derivative an inteo.est rate causes WPS Energy Sev ices to use firancial instrunnmens to swap that is used to fix the entire interest rate for the full term hedge substantially all of its positions and. therefore, changes of an 8-year variable rate loan. In accordance with Statement in the priona- variable, whnicn is 7he fohecvard price cures, No. 133, management has designated -his contract as a cash have little impact on the neo fair value of the contracts as flow hedge. Because the swap was calculated to be 100% markedcto-market.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5-PROPERTY, PLANT, AND EQUIPMENT Property, plant. and equipment consists of the following Depreciatior for the Kewaunee plant !s being accrued utility, nonatiliv.y and ronregulated assets, based on a Public Service Commission of Wisconsin order that became effective on January 1,2001, The order incudec (Millions) 2001 2000 a change in the methodology for the Kewaunee plant after the Electric utility $1,906.3 $1,893.4 steam generators were replaced. The cost of the new steam Gas utility 392.6 302.9 gererators that went into service in December 2001 will be Property under capital lease 74.1 74.1 2,373.0 2,270.4 recovered over an 8-1/2 year period using -he sum-of years Total utility plant Less: Accumulated depreciation digits method of depreciation. Also under this order, the and decommissioning 1,496.6 1,365.3 unrecovered plant investment at January I, 200 1, and future Net 876.4 905.1 additions will be recovered over a period ending 8-I /2 years Nuclear decommissioning trusts 311.3 207.2 after the installation of the steam generators using a straight-line Construction in progress 60.3 70.0 remaining life depreciation methodology.

Nuclear fuel, less Depreciation rates for Upper Peninsula Power were accumulated amortization 24.9 16.0 Net utility plant 1,272.9 1,198.3 approved by the Michigan Public Service Commission on January 1, 1994 and were in effect through 2001. A new Nonutility plant 4.7 4.7 depreciation study was filed with the Michigan Puboic Service Less: Accumulated depreciation 0.5 0.4 Commission in 2001, and new approved rates are effective Net nonutility plant 4.2 4.3 January I, 2002 through December 3 I 2006.

167.4 134.7 Depreciation expense also inclades accruals for nuclear Electric nonregulated Gas nonregulated 12.3 1.1 decommissioning. These accruals are not included in the Other nonregulated 25.0 25.3 annual composite rates shown below. An explanation of this Total nonregulated property, item is included .n Note 8, plant, and equipment 204.7 161.1 Less: Accumulated depreciation 18.2 12.9 Annual Utility Composite Net nonregulated property, Depreciation Rates 2001 2000 1999 plant, and equipment 186.5 148.2 Electric 3.23% 3.52% 3.46%

Total property, plant, and equipment $1,463.6 $1,350.8 Gas 3.37% 3.26% 3.23%

Utility plan- is sta-ed at the original cost of constriction Nonuaility property interest capitalization takes place ic.udinio an al ovance for funds used during construction. duaing constriction, and gain and loss recognition occurs in The cost of renewa s and beterments of units of property (as connection with retirements. Nonregulated property, plant, distinguished Yom miror items of property) is capitalized as an and equipment are capitalized at original cost. Significant addition to the utility alan- accounts. Except for land, no gain additions or improvements that extend asset lives are or loss is recoonized n conrection with ordinary retirements capitalized, while repairs and maintenance are charged to of utility property urits. The atility cearges the cost of units expense as incurred.

of property retired sold, o- otherwise disposed of. plus Nonutility property is depreciated using straight-line remov.I, less salvaoe, to the accumulated provision for depreciation. Asset lives range from 3 to 20 years.

deprecatior. Mlainteance, repair. replacement, and renewal Nonregulated plant is stated at the original construction costs associated with items rot qualifying as units of property cost, which includes capitalized interest for those assets, are considerec operatirg expenses. or estimated fair value at the time of acquisition, based V/e record straight ne depreciatior expense over the upon Accounting Principles Bulletin No. 16, 'Accounting for estimatec useful Ife of utility p-oaerty and include amounts Business Combinations." The costs of renewals, betterments, for estimated rerroval and salvage. The Public Service and major overhauls are capitalized as an addition to plant Commission o- Viscons'n approved depreciation rates accounts. The gains or losses associated with ordinary for Wisconsin Pubnic Service effective January I, 1999. retirements are recorded in the period of retirement.

I P:E *(R ' CORPORATIO

FA 0 IV E ,FL U AT I0ON NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Maintenance, repairs, and minor replacements are expensed The Combined Locks Ere,,g Center, however, is using as incurred. the units of production depreciation method for selected Most of the nonregulated subsidiaries compute pieces of equipment having cefrned lives stated ir terms depreciation using the straight line method over the following of houes of pr oductionr estimated useful lives: WPS Resources capitalizes certa n costs related to Structures and improvements 15 to 40 years software developed or obtained for internal use and Office and plant equipmert 5 to 35 years amortizes those costs to operating expense over the Office furniture and fixtures 5 to 10 years estimated useful life of -he re'ated softwvare, which is Vehicles 5 years usually three to seven years.

Leasehold 'Improvements Shorter of:

life of the lease or life of the asset NOTE 6-ACQUISITIONS AND SALES OF ASSETS On April I, 200i, Wiscorsin Public Service completed its The remaining prern ium, $5.8 million after-tax, was merger with Wisconsin Fuel and Light Company. WVsconsin recorded as an acquisition adjustment in plan. vwhich we Fuel and Light sewed residental, commercial, and industrial expect to be recovered ir Wisconsin retail rates over tie customers in Manitowoc and Wausau, Wisconsin with natural three-year period of 2003 through 2005. The acquisition gas. Wisconsin Fuel ard Light's shareholders received premium will be amontized over the recovery period.

1.73 snares of WPS Resources' common stock for each The operations of Wisconsin Fuel and Light are included share of Wisconsin Fuel and Light common stock. A total of ir the financial statements presented for Wiscounsin Public

.763,943 shams were issued resulting in a purchase price Service and WPS Resources for the perion beginning of $54.8 million based on an average price of $31.0625, the AprI I, 2001 and erdirg December 3 I. 200 1. but do prevailing price at the time of the merger announcement. not have a material impact.

Wisconsin Public Service used 'he purchase method of On September 24, 2001, Wisconsin Pubnic Seirvce accounting and recorded $41.9 million of total premium acquired Madison Gas and Electric Company's 17.8% interest assocrated with the purchase. Of the total premium, in the Kewaunee plant including its decommissioning trust

$36. I million was recorded as goodwill and is included in assets. As a result of the $ 17.5 million purchase WVisconisin other assets on the Consolidated Balance Sheets. During Public Service novw' owns 59% of the plant with the remainrng 2001, Wisconsin Public Service amortized $0.7 million of portion held by Wisconsin Power and Light Company. The goodwill using the straight-line method over a period of additional share of the operations of the Kevaunee plant is 40 years. We adopted Statement of Financial Accounting included in the finarcial staeernents of Wisconsin Public Service Standard No. 142, "Goodwill and Other Intangible Assets," beginning September 24. 2001. Madison Gas ani Electric will on January I, 2002. In accordance with the recuirements of retain its obligations as they relate to the plant fo- the perion this statement, we ceased amorizing the goodwill on January I, of time it was ar owner, 2002 and prepared a preliminary evaluation of the fair market Madison Gas and Elecmric wll maintain one value of the gas utility business segment to assess the potential decommissionirg trust fund that will accumulate its reeraining impairment of the goodwll balance, Based on the estimated contributions in accordance with its ex sting funding plan,

'air value, an impairment charge was not required at the time which extends -o December 31, 2002. On aruary 0 2, 2003, of the adoption of the statement. Madison Gas and Elecri c wvl transfer that trust fund to

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Wiscons n Pub ic Service. Wisconsin Public Service also assumed 2001 as a result of certain rights of rescission and pua options Madison Gas and EleSric's share of the decomtnm ssioning t beng granted 7o the buyer. As these rights of rescission expire obl:gatiors in exchatge for -he Trat> fhnds traisferred on and the amount of the put options of the buyer diminishes, WPS Power Development will recognize through earnings Septermber 24, 2001 and to be transferred on January 2. 2003.

'LOCI: WPS Power Development reached the deferred gain on the transacion.

.n December Concurrent with the sale of a por-Jon of its interest in ar agreement to pu -cnase the stock of CH Resoarces, Inc.,

plants anr other assets. The plants this project, WPS Power Development boaoht out the wnich owns thr e p interest of its previous partner in the ECO # 12 project, The have a comtbied Capacity o- 257 megawatts and are located acta payments to this former partner are contingent upon the ii New York. The approximate 562 million transaction is same provisions referred to above. As a result, $2z.3 million subject to reguIato' arpprovats anc is expected to dose n is held in escrow th at wiil be released proportionately the second quarter c- 2_002. WPS Resource s expected to ins project with snncr term rebt. as the respective rescission rights and put options expire.

prov de *`nanc ng for Nevada, LLC a direct, w-olly owned in 2001. Wisconsin Public Service sold 5.740 acres of Mr/PS Nort'ern land associated with several hydroelectric projects on the subsidiary of WAS Power Development, entered into anr asset Peshtigo River in nor heastern Wisconsin to the Wisconsin purchase agreement on October 2_, 2000 -o acquire tne Department of Natural Resources for $13,5 million. The sale 545-megawatt TracyPinor Power Station and related assets resulted in a pre-tax gain of $13. I million. The agreement from Ser-a Pacifc Power Company. a Nevada electric utility of Sierra Pacific Resources.

cbsidiary with the Department of Natural Resources includes two and waholly-ownmed s WPS Northern Nevada expected to close trris acquisitron options, one exercisable in 2003 and the other in 2004, whereby the Department may acquire, at less than fair value.

during 2"C 1. On Apri 8, 2001, the Staae of Nevada passed a approximate y 5,000 additional acres for $11 5 million if law placing a moraetorim on the sae of gene-atron assets by t

r. 200 3 . As a result. he purchase has eiectric aiorities until JuLy both options are exercised. The value associated with the difference between the option price and the fair value will not yet been closed. vWPS Power Development is currently be treated as a charitable contributon. Tne sale wvas the workint witti Sierra Pacific to evaluate the engineering and first par7 of a five to seven yea, asset management strategy economic feasibr Fy of modifying the coal gasification unit at adopted by WPS Resources in 200 1.

tnc re !inorder -o aheve commercial operation. The Wisconsin Public Service irncreaser its ownership oniginal asset purct ase agreement does not contatn an in Whisconsin River Power Company to 1awo-thirds by automatic teminratior prey sion if closing does no- occur.

The agreement coes alow eitner oarty to terminate the purcnasing an additional onehtnird interest from Consolidated Water Power Company in 2000. In December 200.

agreement after specified dates in 2002.

Wisconsin Power and Liuht exerused its option to purchase In November 200r, \APS Power Development, tnrough one-half of Wisconsin Public Servce's additional onethird its subsidiaai ECO Coal Pelletization # 12 LLC, entered into a transaocnon witht stbsidiarb of a public company resulting in share of Wa/isconsin River Powver Both transactions were at ir-rssynthenic fuel roducing macrinery net book value o Wisconsin River Power at August 31. 2000.

ECO # 12 coreir a As a result Wisconsin Public Service and Wisconsin Power to a newly-orred enrtty in exchange for cash and a one-third and Light each own one-half of Wisconsin River Power ownershia interest r the tewly-for-ted entity.

with Wisconsin Public Service remaining the operator The transaction generated a pr-e-tax gain of S40.1 Imr ion of the facility.

of whicht38.0 -millie hoas een referred as of December 31,

SA P O \V E R F - L EQ U A Ti 0 N NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 7-JOINTLY-OWNED UTILITY FACILITIES Information regardinr Wisconisin Public Service's share of major jointly-owned electric-generatino facilities in service at December 3 1, 200 1 is set :ýaorh below:

West Marinette Columbia Edgewater Kewaunee (Millions, except for percentages) Unit No. 33 Energy Center Unit No. 4 Plant Ownership 68.0% 31.8% 31.8% 59.0%

Plant capacity (Megawatts) 77.0 322.6 105.8 315.0 Utility plant in service $17.5 $118.7 $24.8 $235.7 Accumulated depreciation $ 5.2 $ 75.6 $15.3 $151.7 In-service date 1993 1975 and 1978 1969 1974 The increase in ownership at the Kewaunee plant during Wisconsin Public Service's share of direct expenses for 200! is the result of the purchase of Madison Gas and these plant s included in the correspondirg operating Electric's 17.8% interest. See Note 6 for more information expenses in the Consolidated Statements of income.

on the transaction. Wisconsin Public Service has supplied ias own financing for all jointy-owned projects.

NOTE 8-NUCLEAR PLANT OPERATION On September 2-, 2001, Wisconsin Public Service Energy receives quarterly payments ",orthe storage of fuel acquired "Madison Gas and Electric Company's V7.8/ interest based on generation. Dui ng 200u and 2000, payments in the Kewaunee plant includitg its decommissioning trust "tothe Deparntment of Enerry tota ed S I .4 million for assets. In addition to the decommissioning trust assets each year.

Wisconsin Publlc Service received from Madison Gas and Or an interim basis. spent nuclear fuel storage space is Electic in September 2001, Wisconsin Public Service will provided at the Kewaunee plant. Expenses associated with receive one remaining decommissioning trust fund on January 2, interim spent fuel storage at tne Kewaunee plant are 2003. Wisconsin Public Service assumed Madison Gas recognized as current operating costs. With rninor plant and Electric's share of the decommissioning obligations in modifications that were completed n 2001, the Kewaunee exchange for the trust funds transferred on September 24, plant should have suffcbent fuel storage capacity u til the end 2001 and those to be transferred on January 2. 2003. of its useful life in 2013.

The additional share of the operations of the Kewaunee The accumulated Provision for nuclear fuel, which plant is included in the financial statements of'Wisconsin Public represents nuclear fuel purchases and amorization, totaled Service beginning September 24, 2001. The net book value of $247.6 million a- December 3 , 2001 and $167.7 million W isconsint Public Sen/ice's 59% total share of the Kewaunee at December 3', 2000.

plant at December 3 1. 2001 was $88.5 million, Including For information on the depreciation policy for the construction work in-progress. For more information on the Kewaunee plant, see Note S.

transaction with. Madison Gas and Electric, see Note 6. Wisconsin Pubic Service's scare oa nuclea' The quantity of heat produced for the generation of decommissioning costs to date has been accrued over the electric energy by the Kewaunee plant is the basis for the estimated service ifeof the Kewaunee plant, recovered amortization of the costs of nuclear fuel to electric production currently from customers in -ates. and deposited in external fuel expense, including an amount for ultimate disposal. These trusts. Such costs totaled $2.6 million in 2001, $8.9 million in costs are recovered currently from customers in rates, The 2000, and S9.2 milio i999. n The 1999 and 2000 funding ultimate storage of fuel is the responsibility of the United levels used a recovery period ending in 2002. Beginning in States Department of Energy pursuant to a contract required 2001, the Public Service Commission of Wisconsin authorized by the Nuclear Vkaste Act of 1982. The Depatment of use of a funding period ending in 2010. As a result of this RisUit0PI **R~e*' e

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS extension, the cortr butions for 200 1 decreased to Future decommissioning costs coilected in customer rates S2.6 mirlion. In ceveloping our decommissioning funding and a charge for realized earnings from external trusts are plan, we assumed a long term after-tax earnings rare of included in depreciation expense. As of December 31. 2001.

aooroximately 59/. the accumulated provision for depreciation and Wisconsin Pubic Serv ce's share of the Kewaunee plant decommissioning included accumu ated provisions for decommissionrrg. based on its 59% ownership interest, is decommissioning totaling S31 1.3 million. Realized trust estimated -o be $3 9 million in curre: dollars based on earrings totaled $8.1 million in 2001, $10.8 million in 2000, a site-specific s-tudy. The study, which was performed in and $4.6 million in 1999, Unrealized gains and losses, nei 1998, uses immediate dismantlement as the method of of taxes, in external trusts are reflected as increases and decommission ng and assumes snutdovwn in 2013, As of decreases to the decomm ssioning reserve, since December 31, 2001, the market value o- the external nutcear decommissioning expense is recognized as the gains and decommissioning trusts, which are recorded as a part of losses are realized. ii accordance with regulatory requirements.

property, plant and equpment on the Consolidated Balance Sheets, totaled S31:.3 million, includirg the trust currently Investments in the nuclear decomm ssioning ,rusts are held by Madison Gas and Electric that is to be transferred to recorded at market value, Investmerts at December 31, 2001, Wisconsin Public Se'ice on January 2, 2003. Therefore, the consisted of 59.2% equity securities and 40.8% fixed income current cost of Wiscoensin Public Service's snare of the securities. The investments are classified as .tility plant and are estimated costs -o cecommission the Kewaunee plant, presented net of related income tax effects on unrealized gains assrming early retirement, exceeds the trust assets at and represent the amount of assets avai able to accomnlish December 3i. 2001 by about $7.7 million, decommissioning. The ronqualified trust investments Based on the stdndard cost escalanion assumptions designated to oay income taxes when unrealzed gains become required by a July 0194Public Service Commission of realized are classified as other assets. An offsetting regulatory WVsconsin order, tle undiscounted amount of Wisconsin liability reflects the expected reduction in future rates as Public Se-vice's share of decommissioning costs forecasted unrealized gains in the nonquaied trust are realized.

to be expended Det,.,,een the years 2013 and 2043 is Information regardino tne cost and market value of the external

$967 million under tre cur-ent funding plan, nuclear decommissioning trusts, net of tax is set foelh below:

2001 Security Type (Millions) Market Cost Unrealized Gain (Loss)

Fixed income $127.0 $123.8 $ 3.2 Equity 184.3 129.0 55.3 Balance at December 31 $311.3 $252.8 $58.5 2000 Security Type (Millions) Market Cost Unrealized Gain (Loss)

Fixed income $100.7 $ 98.9 $ 1.8 Equity 106.5 62.0 44.5 Balance at December 31 $207.2 $160.9 $46.3 I.~ iC ro ~i l Ihrjyfrf T, o ~

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A P 0 \V ER F '; L z Q U AT I e N NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9-REGULATORY ASSETS AND LIABILITIES The following regulato-y assets and liabilities are reflected i6 our Consolidated Balance Sh)eets as of December 3 I:

WPS Resources Regulatory Assets/Liabilities (Mi/lions) 2001 2000 Regulatory assets Demand-side management expenditures $ 9.6 $20.7 Environmental remediation costs (net of insurance recoveries) 40.0 30.5 Funding for enrichment facilities 3.6 4.1 Pension curtailment loss 8.1 8.1 Deferred nuclear costs 9.9 Unamortized loss on debt 4.5 1.4 Deferred American Transmission Company costs 4.4 0.5 Other 10.9 9.2 Total $91.0 $74.5 Regulatory liabilities Income tax related items $26.1 $25.2 Unrealized gain on decommissioning trust 22.4 18.3 Pension settlement gain 11.8 Natural gas derivatives 5.0 Deferred gain on emission allowance sales 6.0 2.9 Interest from tax refunds 5.0 3.8 Other 2.1 0.4 Total $78.4 $50.6 Our utility subsidiaries are recovering their regulatory costs. we believe it is probable that Wisconsin Public Service assets and retrning their regulato-y liabilities through rates and Upper Peninsula Power will continue to recover from charged to custoimers nased o-) specific ratemaking decisions customers the regulatory assets descriLed above.

or precedent for each te-n, Except for amounts expended for See Notes 13 and a for specific information on environmental costs. Wisconsin Public Service is recovering income tax and pens or related regulatoy liabilities, See carrying costs for aliregulatory assets. Upper Peninsula Power Note I4 for informator or envi-onmental remediation may recover carrying costs on environmental regulatory deferred costs.

assets. Based on prior and current rate trearment for such NOTE 10-INVESTMENTS IN AFFILIATES, AT EQUITY METHOD Investments iHcorporate joint ventures and other Investments in affiliates under the equity method are part companies accounted for under the equity method at of the other assets or tne Consolidated Balance Sheets and December 31, 2001, 2000, and 1999 follow: the equity income is recorded in miscellaneous income on the Consolidated Statements of Income, (Millions) 2001 2000 1999 WPS Investments, LLC, a consolidated subscdiary of American Transmission Wisconsin Public Service. has an approximate 159 ownership Company, LLC $56.2 $ - $ interest in American ]Tansissiorns Company, LLC, American Other 13.6 15.0 9.7 Transimission Colpany is a for-proflt, transmiss ononly Investments in affiliates, company. [t owns. plans. maintains, monitors, and operates at equity method $69.8 $15.0 $9.7 electric transmission assets in portions of Wisconsin, Michigan, and Illinois, Ame-ican Tansmission Company becan RE'URtL 0R Ce****. S"6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS areviously were assets on january 1, 200 and Upper Peninsula Power operations on 0 r.jai-y I, 2001. Its assets contributed its transmission assets on June 28, 2001.

own)ed and ope atec by multip e elect'ric utlities servng the 0 Our total ownershp inoterest in American Transmission uppe Midwest all of .h'c transferred tteir transmissior Company fluctuated throughout 2001 die to other utiiities assets to Amnerica Tratsmission Company in exchange for ain contributing assets and cash to become owners of American ownership inte-est. A visconsin lawxetcouraged utilities in Transmitsson Comnany, the stare to iansfe- osvrership and contolo of ter Condensed financial data of American Transmission transm stion assets to a state-wide transmission compar.y, Company for 2001 ollows:

Wisconsin Pubic Se'vice contributed its transmission 2001 (Mi/lhons)

Income statement data

$174.7 Revenues (I 10.1)

Operating expenses (11.4)

Other income (expense)

$ 53.2 Net income

$ 7.1 WPS Investment's equity in net income Balance sheet data

$ 56.7 Current assets 666.6 Non-current assets

$723.3 Total assets

$ 36.1 Current liabilities 297.9 Long-term debt 3.6 Other non-current liabi ities 385.7 Shareholder's equity I 1UIIcU.;L:I:

. A kU AlC ..... it $723.3 NOTE II-SHORT-TERN DEBT AND LINES OF CREDIT To arovide short-termn orrowing flexibility and security The information in the table below relates to short term for commerci D.pae- outstandingJ, \JPS Resources and its debt and lines of crecit for the years indicated:

subsidiar es mairta n Dark mines of credit. These lines of crecit recuire a fee.

2001 2000 1999 (Millions, except fcr percenteges)

As of end of year

$ 15.0 $119.6 $ 79.9 Commercial paper outstanding 1.95% 6.63% 6.55%

Average discount rate on outstanding commercial paper Short-term notes payabie outstanding $ 31.2 $ 10.0 $ 10.4 Average interest rate on short-term notes payable 1.61% 6.73% 8.10%

$130.0 $132.0 $127.0 Available (unused) lines of credit For the year

$177.6 $139.5 $218.5 Maximum amount of short-term debt

$110.6 $ 65.6 $ 68.6 Average amount of short-term debt 4.32% 6.39% 5.34%

Average interest rate on short-term debt W0R C

• 0. S

AL P 0 \V E R F U " E Q U A T I N NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 12-LONG-TERM DEBT At December 31 (Mi/rions) 2001 2000 Capital lease obligation - Wisconsin Public Service $ 73.0 713.6 Less: Current portion (0.9) (0.6)

Long-term capital lease obligation 72.1 First mortgage bonds - Wisconsin Public Service 72.1 73.0 Series Year Due 7.30% 2002 50.0 50.0 6.80% 2003 50.0 50.0 6.125% 2005 9.1 9.1 6.90% 2013 22.0 22.0 8.80% 2021 53.1 7.125% 2023 50.0 50.0 Senior notes - Wisconsin Public Service Series Year Due 6.08% 2028 50.0 50.0 6.125% 2011 150.0 First mortgage bonds - Upper Peninsula Power Series Year Due 7.94% 2003 15.0 15.0 10.0% 2008 2.1 3.0 9.32% 2021 18.0 18.0 Unsecured senior notes - WPS Resources Series Year Due 7.00% 2009 150.0 150.0 Term loans - nonrecourse, secured by nonregulated assets 95.8 102.8 Tax exempt bonds 27.0 Notes payable to bank, secured by nonregulated plant 20.3 19.3 Senior secured note 3.3 3.5 Other long-term debt 0.1 Total 712.6 595.9 Unamortized discount and premium on bonds and debt (1.2) (i.2)

Total long-term debt 711.4 594,7 Less current portion (55.7) (7.7)

Net long-term debt 655.7 587.0 Total long-term debt and capital lease obligation $727.8 $660.0 In November 1995. VVisconsin Public Service signed a 25-yea: agforement to par cise cevver f-om De Pero Enersy Cenoer, LLC, an independent povver producer arhic supplies the power feorr a cogeneration ' 0 cilty t owns,

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In June 1099, Phase I of the pro ect went nto operation. 2006 and 20 12. However, if certain debt covenants are We have accounted -or the contract as a capital lease. In not met, the ender is not recuired to renew the loanss Phase I, an isitial asset and corcespoandhn obligation were In April 2001, -he Scruyk!i County idustrial aecorded at $7/4. aiior. The asset and ob0igation represent Deveaopment Authority issued $27.0 million of refunding the aresent value of m nirsum lease payrnents. Excluded f-om ax-exempt aonds. A, tse time of issuance of the refunding the payme-s are executorv costs such as insurance. aonds, WPS Westwood Generation, LLC, a subsidiary of maintenance, ani taxes. When the contrat expires in 2,024, WPS Power Developmens. owned the original bonds, the Wisconsin PubLic Serv ce may renew tMe contract for No 5 proceeds of chich were used in substantial part to provide additional five year periods wvith proper notice. We are facilities. Upon issuance of the refundinc bonds, the original amotazinr the eased asset on a straight ne basis over the bonds were paid off. WPS Westwood Generation was paid original 25-3ear ter-ý o the contract. Following is a schedule S27.0 milion from the proceeds of the refunding bonds for of fCutre miri-nim ease paymen s, excluding executory costs, the retirement of the original bonds alus accrued interest.

under ire De Pere Fnergv CenGer capital lease: WPS VVestwood Generation s now obligated to pay she refunding bonds witn monthly payments thar have a floating Year ending December 31 (Millions) siterest rate that is reset weekly. At Decembeh 3 1. 2001, 2002 $ 5.2 ,he interest rate vas 1,51833%. The bonds rature in April 2003 5.4 2021. WPS Resources agreed to guarantee WPS \,Vest\vaood 2004 5,6 5.9 Generation's obligation to provide sufficient funds to pay -he 2005 2006 6.0 refunding bonds and the aelated obligations and indemnities.

Later years 96.6 As of December 3 2001, WPS Power Deve opment Net minimum lease payments 124.7 had aggregate outstarding indebtedness totaaing $20.3 million Less: Amount representing interest (51.7) under notes payabhe -o banks including $1[c,9 msllion of Present value of net minimum lease payments $ 73.0 indebtedness under its revolving credit nose af $12.5 million.

Ths note is secured by the assets of the Stoneman alant and is in Auoust 2001. Wisconsin Public Ser.ce retired g.u.aranteed bh V/PS Resources. It is due in 2005 and requires S53. I n Ilion of 8a80% first mortgage Donds that would cuarterly payments. In addition, the note has a variable interest naae matured in 202 , Aiso in Augjst 2001 Wiscorsir Public rate that ,vas at 3.85% aT December 3 , 2001. The remarning Service issued ! QI.0millio oa 6. 125% senior notes, The portion of the S20.3 million of notes payable is secured by serior no-es are sec-red by a pledge oftirst morLgage bonds nonregulated Plant, and also matures in 200W.

and become usecuread if Wisconsin Public Serice retires all The senior sec ired note of S3.3 million requires a- its outstandirg ,frs- mortgage bonds. At oar utility semiannual payments at ar interest rate oa 9.25%. and subsiciaries, plart assets secure first ar-togage bonds.

it matures in 2011.

Upper Penins.la Poker is requirec to make Dons sinkirg A- Decemuer 3 , 2001 WPS Resources and its find payments for some of its outstanding fr-st mortgage bonrs.

subsidiaries were in compliance with al! covensants relating Borrowirg0 y "PS Power Development unclae term to outstanding debh. A schedule of all principal debt payment loans and secared by nonreguiated assets totals $95.8 million.

amounIs, including bond maturities and exciud ng cap tal lease Tse assets of WPS New Esoland Generation, Inc. and payments, for WPS Resources is as follows:

0/PS Canada Gsner on, Inc.. subsidiaries oa WPS Power Developmert. secure $6.6 mill on aod $11x msilion, Year ending December 31 (Millions) respectively, of rae ao-al outstardiag amount. Both rave 2002 $ 55.7 7 71.1 semiasnuai instalime-i paymrents. an interest rate of 8. 30/o 2003 2004 6.7 and mature rnMay 20 10. Sunbuhy Generation, LLC, an 2005 36.3 Indirect suhbsidiar of WPS Power Development, s the 2006 7.7 borrov,,er of ts)e remaniprg $73.0 millon that is secured Later years 535.0 by its plant. QuarLerly payments are made in relation to Total payments $712.5 this financing that carnes an irterest rate of 7.8725% and matures in >arcc 2 8. This loan also has renewais in

A P 0 W E R F J L ý Q U A T I e N NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 13-INCOME TAXES Deferred income taxes are recorded for temporary pursuant to Statement of Financial Accounting Standards differences in the recognitron of certain assets or liabilities No. 109, includicng: the number of Years that capital and for tax and financial reporting pur oses. The prircipal operating losses and tax credits can De carried for.vard, components of outr deferred tax assets and liabilities the ex~stence of taxable temporary differences, and recognized in the balance sheet as of December 3 ! WPS Resources' earnings history and near-term earnings are as followvs: expectations, Although rea zation is not assured, we believe it is more likely than not that the entire net deferred tax (Millions) 2001 2000 asset will be realized.

Deferred tax assets WPS Resources is an owner in a faciii that produces Plant related $ 89.4 $ 84.5 State capital and operating loss carry forwards syntnetic fuel frorn coal fines as defired in Section 29 of the 6.5 6.5 Deferred tax credit carry forwards 21.2 11.0 internal Reven-ue Coce. The protuction and 4an of the Employee benefits 35.5 35.0 syr[ntic fuel from this facility qjalifies for tax cred s under Regulatory assets 5.7 4.7 Section 29 if certain recuirements are satisfied. Credits that Other 11.0 0.4 are not ut IFzed to retuce current -ax expense in the current Total $169.3 $142.1 year are camed for,,vard as alternative rrinimurm tax c-edts o Deferred tax liabilities reduce curreni tax expense in future years. The production Plant related $184.1 $200.3 and sale of synthetic fuel resu'ted i a reduction in current Employee benefits 30.0 31.3 Regulatory deferrals Lax expense of $11,4 rmIion in 2_00 1 11.0 8.6 Other 13.7 2.3 The ollowing is a reconciliation of the difference Total $238.8 $24215 between the current and fut..re tax expense tha t would be Net deferred tax liabilities $ 69.5 $100.4 computed by applying the federal statuto7- rose to income before income taxes, and the a..ual current adr funure A variety of factors are considered in determining the income tax expense that was recodeod on -he income amount of the defer ed ncome tax assets to be recognized staternent for the year- en-ed December 31:

(Mrirlons, except for percentages) 2001 2000 1999 Rate Amount Rate Amount Rate Amount Statutory federal income tax 35.0% $29.9 35.0% $26.6 35.0% $32.3 State income taxes, net 5.3 4.5 5.5 4.2 5.0 4.6 Rate difference on reversal of income tax temporary differences (2.5) (2.2) (2.1) (1 (1.6) (1.5)

Plant related (1.2) (1.0)

Federal tax credits (28.!) (24.0) (26.4) (20.1) (3.5) (3.3)

Other differences, net (2.9) (2.4) (4.!) (3.1) (2.7) (2.4)

Effective income tax 5.6% $ 4.8 7.9% $ 6.0 32.2% $29.7 Current provision Federal $29.2 $17.0 $33.8 State 8.5 8.5 9.4 Total current provision 37.7 25.5 43.2 Deferred benefit (32.9) (19.5) (13.5)

Total income tax expense $ 4.8 $ 6.0 $29.7 tt:;.fl.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 14-COMMITMENTS AND CONTINGENCIES Fuel and Purchased Power Corporate Guaranties

\/\/PS Resources routinely enters into long-term Since May 2000 WPS Resources has provided limited commodity purc-,are and sale commitmerts that ha, vanous financial support and enerr, supply services to Ques- Energy, quantity requiremeuts ad duraecons LLC. a Michigan 1mired liability company. Financial sipport Wiscorsin Pubrc Se-,,ice nas obl gations -elated to coa. is n the aorm of an irnerest bearirn note with an initial pwrchasec powere and natural gas. Obligatons 0e'ated to coal rat rity dare of May 2005, securec by the assets of Quest.

supply extend rIroud 2016 and total S 31.9 million. Of that WPS Resources provices corporate guarantes to two amodnT, thereos one rong term contract totalrng S3.7 millon transmission providers on behalf of Quest. At December 3 1, that pi o',,ides app -oxi'ra-eiy 23% of thne total riemen 2001. the guaranties totaled $4.5 million. These guaranties o Wiscorsir Publ Secicee through 2016. Through 2000, assure Quest's ability to pay for the transmission serices Wiscorsir Public Se r,,ce o has obliganions totaling $ 115.0 million it purchases rom tiese entities.

fo, either capacity o- energy related to curchasedcperi Nuclear Liability Also tohe-e a-e natara gas supply anc teansoor-atior contracts The Price Andersor Act ensures that funds will be vit tota estimated denand payments of $97.0 million through October 20 0. ava oable to oay for public liarility claims arising out of a nucleaý WSscons n Puoic Serv ce expects o recover these costs incident. This Act may require Wisconsir Pubkc Sevice to in future custo0ner rates. Admdiionally. Wiscorsir Public Service pay up to a maximum of $52.0 mi lior per ircdoent. The ha cotrrcts To S2 electyicit7 and ratural gas to customers. payments will noý exceed $3,9 millior per-incident in a given Mary of these cort-ac-s have indefinrite Ives. calendar year These amounts -ep-esert Wisconsin Public Service's 59% ownership in tre Kewaunee plant.

V\PS Pova.,er Development also enters into ong term orrmod ty cotriacts, mairy -elatec to tre pdrchase of coal Nuclear Plant Operation for the Sunbur7 olarT recn onracts eotal $11,9 milion and See Note 8 fo- deoailed information on the operations extend througr 2004.

of the Kewauree plant.

W\S Energy Ser.vces has unconritional pdrcase obligarons re ateo to enerIy sipply contracis that total Clean Air Regulations

$8-2.9 mi! or arnd extend throigh 2007 All trie contracts Early compliance ny Wisconsin Public Servzice with the have offse-ing sale corracrs.

Federal Clean Air Act has generated surplus sulfur dioxide allowances. We will consideo tne sale of any al owances Capital Lease available in excess of Wisconsin Public Service's needs. The In Novemoer 1H9S, Wisconsir Public Service signed a Publ'c Service Commission of Wisconsin has ordered that 25-year agreemeut to purchase Dower erom De Pere Energy profits from tse aof alloeances be passed on to Center LLC an rde endent power rooCucer trat bult a customers. During 200l. Wiscons n Public Service recorded cogeroateon facility and is selling electrical rov.,er to Wisconsin Pubic Serv ce. $4.2 million of proceeds from the sale of allowances.

The United States Envirormental Protection Agency In June 1999, Poase I of tre project went irto operat on.

has designated southeastern Wiscorsir as an ozone W'\e have accounted ior-he corract as a capital lease. Phase II non-attainment area. Under the Clear Ar Act, the State of rre croject s currently Drojected to be oaeradonal n 2004.

of Wi sconsin developed a nit-ogen oxide reduction plan for When Pnase I :ecores operatioral, W\sconsin Public Service Wisconsin's ozone non-attai mren area. -he niroger oxide will record ar addiortnra utility plant asset under a capital lease reductions begin in 2003 and gradually increase to 2007.

of apcroximeo $8- million.

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A P a \XV f.eF U L F Q U AT I S N NOTES TO CONSOLIDATED FINANCIAL STATEMENTS This plan affects Edgewater Unit 4, of which Wisconsin Public Protecion Agency requested add~tionar information on Service owns 31.8%. A compliance plan for this unit was Febriary 26, 2001. The additional information was submitted initiated in 2000, The plan includes a combination of on March 28. 200z and Apri 27. 2001, combustion optimization and emission trading at a cost The Wisconsin Departmen. of Natural Resources has

,o Wisconsin Public Service of about $5 million, initiated a rulemaking effort aimed at the cortrol of ercuLry The State of Wisconsin is also seeking voluntary emissions. Coal-burning power plants are the orimary araget reductions from utility units outside the ozone non-attainment of this regulatory effort, The proposed rule was cccn to area, which may lead to additional expendtJres for nitrogen comment in October 2001. A final rule could be completed oxide recuctions at other units. Wsconsin Public Service is in the spring cf 2002. As proposed, tre rule requires phased participating in voiunTary efo-ts to reduce nitrogen oxide in mercur>y emission reduction r-eaching 90% reduction levels at the Columbia Energy Center. Wisconsin Punlic 15 years after completion of the ruie. Wiscons n Public Service Se oce owns 31.8% of Columbia. The Public Service estimates that it could cost $105 million per year for ir to Commission o' Wisconsin nas approved recoveny of the achieve the proposed 90% reduction.

costs associated with nitrogen oxide compliance. WPS Power Developirenr acquired 30 years of emission Recent air quality modeoing by the Wisconsin Department allowances as a result of the acquisition of Surbury Generation, of Natural Resources revealed that Wes'on Units I and 2 LLC in November 1999. The puorchase of \,'\'PS Westvvood contribute to a modeled deviation from the suflur dioxide GeCeration, LLC in September 2000 also ndudeu 30 years ambient air quality standard, Wisconsin Public Ser-Vice and the of emission allowarces. A consisten valuation acros vintage Wisconsin Department of Natural Resources developed a years is being rtilized to allocate the cost of these allowances.

plan to ejiminate the model deviation by extending the The cost assignec to these allowances is being c raged co existing stacks at Weston Units I and 2 by 55 feet and limiting expense as tre alovances are used. 0 Vhen necessaar,yhe the sulfur content of the fuel to 1.2 pounds Der million Btu. Sunbury plant also purchases incremertal emission allowances The cost of the stack extension is about $0.9 mnilion. The on the open market to con-ply with ar regulations. Additional current and projected fuel meets the sulfur content limit. The technology is being instal0ed at the Sunrury planr to comply Environmental Prote tion Agency was unwilling to agree with with nitrogen oxide standards thar become effecitve in 2003.

this approach unless further studies were done to justify the We expect total expenditures for tthis technology wi I be about stack heighn increase, Wisconsin Public Serv ce is cooperaring

$16 million. During 2001 approximately 33 mnlIon was spent with the Wisconsin Depar-ment of Natural Resources to to begin instal in rg tne tchrology.

develop an approacn to resolve this issue.

On November 3 1999, the Environmental Protection Partial Sale of ECO Coal Pelletization #12 Agency announced that it was pursuing an. enforcement In November 2001, WPS Power Developrent, tnrough initiative against seven utilities, or their subsidiaries, located in its subsidiary ECO Coal Pelletization # 12, LLC, entered into the Midwest and the South as well as the Tennessee Valley a transaction wvith a subsit r of a public company resulting in Authority. The enforcemnen initiarive aileges that tre utilities ECO # 12 contributing its synthetic fuel pioducina machinery undertook modifications at treir coal-fired power plants in to a newly-formed entiy in exclrange for cash and a one-third violation of the Clean Air Act. The Environmental Protection ownership interest in tre rewly-formec entty. The transaction Agency is seeking penalties and the installation of additional generated a pre-tax gain of S40. mi lion of which 538.0 milion pollution control equipment. has been deferred as of Decernmber 3, 2001 as a result of As a continuation of this initiative, the Environmental certain rights of rescission and cut options being granared c Protection Agency requested on December 14, 2000 that the buyer. All such options expire in 2003.

Wisconsin Public Service provide information pursuant to Concurrent witv the sale of a portion of tHs project, Section 114 of the Clean Air Act relating to projects WPS Power Developmenet hougnt out the interest of ins undertaken at the Pulriam and Weston plants. The information previous partner in the ECO # 12 project. The actual was submitted on January 16 2001 and no response nas payments to tris former partner are conringent upon the been received from the Environmental Protection Agency. same provisions referred o above. As a result, $-Z .3 rnilion Wisconsin Power and Lght Company, the operator of is held in escrow that willbe released proportionately as the the Columbia and Edgewater plants jointly-owned with respective rescission nghts and put option expire.

Wisconsin Public Service, also submitted information related For more inormat~on on tre transactton, see Note 6.

-o projects undertaken at those plants. The Env ronmental

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Manufactured Gas Plant Remediation Future Capital Expenditures Wisconsin Public Service continues -o investigate the We estimate utility plant const-uction expenditures environmental leanuip of ten manufactured gas plant sites, at Wisconsin Public Se'vice for 2002 to be approximately including tv'o sites formeriy owned by Wisconsin Fuel and $208 million and construction expenditures at Upper Light. Tie cleanup of Wisconsin Public Service's Stevens Point Peninsula Power for 2002 to be approximately $9 million.

manufactu-ed gas pant sire ls substantially complete vwi'th Wisconsin Public Service estimates demand-side management monitorinc of the site continuing. Costs of This cleanup were expenditures eobe $24 million in 2002. Recovery of within the ranie expe-ced for tnis site. Cleanup began at both previously deferred demand side management expenditures ire Sheboyoan sites ir November 2000, and cleanup of the of about $6 million from cusTomers will occur through

.and portion o the sites was substantially completed by 2002. In addi-on to the 2002 estimated expenditures, August 2001.lnSed mendt cleanup remains to be addressed Upper Peninsula Power is considering the potential need at one Sheboygan siter To-date, costs are at expected levels. for construction of a combustion turbine aý an estimated Wiscon Public Serv ce estimates future undiscounted cost of $41 million during the 2002-2003 timefirame.

investigation and clearup costs to be bnrveen $43 million There are no commitments for additional acquisition and $5C million. These est mates may be adjusted in the expenditures for the nonregulated subsidiaries at this time future coninigent upon remediation technology, regulatory other than commitments made under the stock purchase requiremenTs, and -he assessment of natural resources agreement to acquire CH Resources and the asset purchase damages, agreement to acquire the Tracy/Pinon Power Station. The

\Wisconsin Pubic Ser ice currently has a $43.4 million CH Resources transaction is expected to close in the liability recorded 'or cleanup wivth ar offsetting regulatory asset second quarter of 2002 for approximately $62 million.

(deferred charge. \A e expew to recover cleanup costs net of The Tracy/Pinon transaction is currently subjec to a insurance recoveries, i. future customer rates. Carrying costs legislative moratorium and may be -erminated before associamed Aith the cleaa-u expenditures wvill not be recoverable -he moratorium expires.

Wisconsin Pun!ic Servrice has receved S 2.7 million in Fot more information on both transactions, insurrnce recoveries ma- we recorded as a reduction to see Note 6.

the regulator" asset.

NOTE I 5--EMPLOYEE BENEFIT PLANS VWPS Resources has non-contributo-y retirement plans employees are subject to federal unrelated business income covering substantially all employees under which the company taxes at a 39.1c% tax rate.

may make annual corrhibutions to an irrevocable trust. We A'l pension costs and postretirement plan costs are established the plans to provide retired emnloyees, who meet accounted for under Statements of Fnancaal Accounting conditions relatirg to age and lengh of service, wvvtn a Standards Nose 87 and 106, "mployers' Accounting for monthly payment. Vsconsin Public Service administers and Pensions" and "Employers' Accounting for Postretirement maintalis the plans. These plans are fully funded. and no Benefits Other Than Pensions. respectiveoy. The standards cont-riutions were mace to them in 2001, 2000, o. 1999. require the company to accrue the cost of these benefits as WPS Resou ,ces also currently offers medical, dental, and expense over the period in which the employee renders life insur ance bnet ts to employees and their dependents. We service. The transition obligation for current and future expense these items tor arive employees as incurred. WAe retirees under Statement of Financial Accounting Standards fund bnerets for renrees ttrough r-evocable trusts as allowed No. 106 is recognized over 20 years beginning in 1993.

for income tax purposes, Wisconsin Public Service and Upper The following tables provide a reconciliation of the Peninsula Power expensed and recovered througn customer changes in the plan's benefit obligations and fair value of assets rates the net periodic benefit cost. Our neniregulated over the three one-year periods ending December 31, 2001, subsidiaries expensed allocated amounts. Ouw nor-administrative 2000, and 1999, and a statement of the funded status as of plan is a colleccivety barga ned plan and, nherefore, is tax December 31 for each year:

exempt. The nvestnerts in the trust covering administrative

IA POWERFUL EQUATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Millions) 2001 2000 1999 Reconciliation of benefit obligation - pension Obligation at January I $484.9 $396.7 $399.4 Service cost 11.0 10.2 10.9 Interest cost 32.7 31.5 27.5 Plan amendments 0.2 56.5 4.0 Actuarial (gain) loss 35.4 2.2 (31.5)

Acq uisitions 13.1 - 4.8 Benefit payments (21.2) (19.4) (18.4)

(Settlements)/curtailments (60.9) 7.2 Obligation at December 31 $495.2 $484.9 $396.7 Reconciliation of fair value of plan assets - pension Fair value of plan assets at January I $676.1 $654.3 $610.5 Actual return on plan assets (13.7) 41.2 58.0 Employer contributions _ _ _

Acquisitions 18.1 4.2 Benefit payments (88.6) (19.4) (18.4)

Fair value of plan assets at December 31 $591.9 $676.1 $654.3 Funded status at December 31 $ 96.7 $191.2 $257.6 Unrecognized transition (asset) obligation (2.2) (6.1) (9.9)

Unrecognized prior-service cost 59.1 64.4 21.2 Unrecognized (gain) loss (69.3) (186.5) (204.0)

Net prepaid benefit cost $ 84.3 $ 63.0 $ 64.9 (Millions) 2001 2000 1999 Reconciliation of benefit obligation - other Obligation at January I $102.6 $135.2 $138.8 Service cost 3.0 2.7 4.6 Interest cost 7.6 7.8 9.4 Plan amendments - (16.8)

Actuarial (gain) loss 65.5 (19.0) (13.8)

Acquisitions adjustments 3.7 (1.3) 2.2 Benefit payments (6.2) (6.0) (6.0)

Obligation at December 31 $176.2 $102.6 $135.2 Reconciliation of fair value of plan assets - other Fair value of plan assets at January I $152.3 $149.7 $139.8 Actual return on plan assets (4.4) 7.9 15.2 Employer contributions (7.0) 0.7 0.7 Benefit payments (6.2) (6.0) (6.0)

Fair value of plan assets at December 31 $134.7 $152.3 $149.7 Funded status at December 31 $(41.5) $ 49.7 $ 14.5 Unrecognized transition (asset) obligation (12.4) 15.7 36.6 Unrecognized prior-service cost (12.9) (14.1) 3.9 Unrecognized (gain) loss 14.4 (96.9) (105.0)

Net accrued benefit liability $ (52.4) $ (45.6) $ (50.0)

WSRSIOURCES RTO 0OP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The oiloviun- table provides the components of ne- period c benefit cost for the plans for tne ore-year periods ended DeceIhber 3!, 200 1. 2000, ard 1999:

Jtl[lll (Milions)

Net periodic benefit cost - pension

$11.0 $10.2 $10.9 Service cost 32.7 31.5 27.5 Interest cost (47.0) (46.3) (42.4)

Expected return on plan assets (3.5) (3.6) (3.6)

Amortization of transition asset 5.5 4.7 2.1 Amortization of prior-service cost (2.3) (2.7)

Amortization of net gain

$ (3.6) $(6.2) $(5.5)

Net periodic benefit cost before settlement gain/curtailment loss (12.7) 8.7 (Settlement gain)/curtailment loss Regulatory liabilityi(asset) offset 11.8 (8.!)

$(4.5) $(5.6) $(5.5)

Net periodic benefit cost Net periodic benefit cost - other

$ 3.0 $ 2.7 $ 4.6 Service cost 7.6 7.8 9.4 Interest cost (9.7) (9.3) (8.3)

Expected return or plan assets 1.3 1.8 2.8 Amortization of transition obligation (1.2) (0.7) 0.3 Amortization of p-ior-service cost (4.6) (4.6) (2.7)

Amortization of net gain

$ (3.6) $(2.3) $ 6.1 Net periodic benefit cost accounting for the year 2000 under Statement of Financial Dui no 2000, ",.,PS Resources mnade sbstantiai cnanges Accounting Standards No. 88, "Employers' Accounting for to the ad-tinlst,-atve emp oyees portion of the pension ard 2 Settlements ane Curtailments of Defined Benefit Pension Pans postretirement benefit placs. Effectrve jarua> 1, 001,-he and for Termination Benefits." Most of -he 2000 curtailment admirs-rsa-ive employees' persion plar was changed to a loss was deferred as a regulatory asset, per son eqaity plar v.th a ajmp sum distribution optior for alI For the reasons mentioned above, !arge numbers of fuLiure reaiees. Accdionally, all future administrative retirees lump sum oayments were paid out of the persion plar during I no orger be gC.er subsidized post-etirement medical and tre course of 2001. This required se-lemernt accounting cental coverage. Due -o emp oyees Who waired until 2001 to rew Clan benefits and variois under Statement No. 88. Most of the settlement gain was retire to take 0 o che deferred as a regulatory liarility, reorianizations inctlcing tte formation of Nuclear The assumptions used in measuring \'/PS Resources' Manage,-ient Company. a s cn ficant number of emnloyees ran M early 2_OC'. Th s requred cur-ailment benefit obligation are shown in the following table:

left our pensior 2001 2000 1999 Weighted average assumptions as of December 3] - pension 7.25% 7.50% 7.50%

Discount rate 8.75% 8.75% 8.75%

Expected return on plar assets 5.50% 5.50% 5.50%

Rate of compensation increase Weighted average assumptions as of December 31 - other 7.50% 7.50%

7.25%

Discount rate 8.75% 8.75% 8.75%

Expected return on plan assets

A P 0 \X, E rD U L E Q J A O IN NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Fo' the December 3 , 2001 disclosed pOStretiement VWisconsin Public Se.i/ice )as ar Employee Stck obligation, we assumed medical COST trend rates of I C!% fo Ownership Plan that - elc [.9 milion shares of \/PS Resources those under age 65 and re1 for those over age 65, common Stock (market value ofapproximately S69.2 million) decreasing to 5c ard 6,5%. oespectively, by the year 2008. at December 31, 20. Tie Employee Stock Ownership Plan

\/Ve assumed dental cost trend rates of 8% decreasing to 5/C also had a loan cuar anteed by \,s\/!sons n Public Seorice and by -he yea' 200A. These trend rates represent a charge from secured by common stock that was pad off rnJune of 2000.

our prior assumptions, At December 31. 1999, we assumed The company was paying principal and interest on tre loan medical cost trend rates of 8% and dental cost treic rates of usi-ig contributions fror Wisconsin Pubic Sevice anic 7.5%, both decreasing to 7% at December 31, 2000 and divdencs on our common stock held by tie Err:Doye) eventually reaching 5% by 2006. Assumed health care cost Stock Ownersnip Pan. The Employee Stock Ownershiu Plan tiend rates iave a sgnfican -effect or the amounts reoirted allocated shares to parlicipants as the loa-i ,va repaicd Tax for 1he health care plans. A I% change in assumed health berefits from certain dividerds aid to the Employee Stock care cost trend 'ates woulc have the following effects: Ownership Pla-i are recognized as a reduction ii Wiscorsi Public Service's cost of provicing service to c-stomers.

(Millions) I% Increase I% Decrease Effect on total of service and interest cost components of net periodic postretirement health care benefit cost $ 1.8 $ (IA)

Effect on the health care component of the accumulated postretirement benefit obligation $26.0 $(21.8)

NOTE 16-COMPANY-OBLIGATED MANDATORILY REDEEMABLE TRUST PREFERRED SECURITIES OF SUBSIDIARY TRUST On July 30, 1998, WPSR Capital Trust i, a Delaware deferral ol cis i butions on tl1e trust prefe-'ed securities as nusiness trust, issued S50.0 million of trust preferied securities well. If we would de'er nteresr paiments, interest aid 70 the public. WPS Resoueces owns all of the outstanding trus distributions would continue to accrue anic comouiding common securities of the -ust, and the only asset of the interest on -he ceferred amoiunts woulc aso accrue. Through Tirust ls $5 1,5 million of subordinated debentures that ve 200 i, we have not deferred interest payments. Aftei July, 30, issued. The debentures are due on June 30, 2038 and bear 2003, we may receem 0 or part of the cebertures, This nterest a' 7%a per year The terms and interest payments on would require the T-0 sý to redeem an equal amount of trust the debentures correspond 7o the terms and distributions on securiries at face value plus ani accrued rteresi aid unioaid the trust pre0erred seouri ies. 'vVe have consolidated the distributions. We entered into a mi-ned Cluarantee of payment preferred securit es of nhe Trust into our finiancial statements. of disti butions, recemptLion paymerts, aid Iquicatior WVe ref ect the nterest uayments on the debentures as payments with respect to the trust preierred securities.

"Distnibutions - preiered securities of subsidiary trust." This guarantee, onether wit i our obligations unde r the These payments are tax deductible by \A/PS Resources, debentures, and under otier relatec documents, :roeVldes We may defer interest payments on the debentures a fill and unconditioral guarantee by us of amounts cue for up to 20 consecutive quarters. This would require tie on the outstanding itust Preferred securities.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 17-COMMON EQUITY At December 31, 2001, we had $365,8 million of Shares outstanding at December 31 2001 2000 retained earnings avaiiabne or dividends.

Common stock, $1 par value, Earnings per share is computed by dividing net income 100,000,000 shares authorized 31,496,296 26,851,034 307,052 336,385 availabre for common shareholders for the period by the Treasury stock Average cost of treasury shares $25.17 $24.23 weighted average number of shares of common stock Shares in deferred compensation trust 135,995 105,179 outstanding during the period, Diluted earning per share Average cost of deferred is computed by dividing net income availabne for common compensation trust shares $30.67 $29.78 shareholders for tne period by the weignhed average number of stares of common stock outstanding during the period As part of the rerger of Wisconsin Fue' and Light into adjusted for the exercise and/or conversion of all potentially Wisconsin Public S'-v>ce, 1,763,943 shares of common smock ere issuec on Apr ii 200 to Wiscons n Fuel and Lioht dilutive securities. Such dilutive items incluce in-the-money stock options and deferred compensation plan stares. The shareholders. See Note 6 for more irformation on -he meriger.

calculation of diluted earrings per share for the years shown On December i1, 2001. 2,300.000 shares of excludes deferred compensat on plan shares and some WPS Resources common stock were issued at S34.36 per stock option plan shares that had an anti-dilutive effect.

share and resultec in net increase in equity of $76.0 million, ffective Jana- '0 01, we began issuing new stock The foilowing table reconciles the computation of basic and diluted earnings per share:

unde our Stock Irvestment Pan and under certain of our stock nased emp~oyee benefit plans. During 2C01, we issued Reconciliation of Earnings Per Share 544,5 15 shares udcer <hese plans, which increased equity (Millions, except per shore amounts) 2001 2000 1999 S 186 miillon. Net income available to common shareholders $77.6 $67.0 $59.6 In December 1996, we adopted a Sharetoider Rights Basic weighted average shares 28.2 26.5 26.6 Plan. The nan is ces gned to enhance the ability of the Board 0.1 Incremental issuable shares of Diredors to protect sharenolcers and the company if Diluted weighted average shares 28.3 26.5 26.6 efforts are mace to gai control of our company in a manner Basic earnings per common share $2.75 $2.53 $2.24

.hat is not in our best nterests or the best inte-ests of our Diluted earnings per common share $2.74 $2.53 $2.24 shareholders. The nat gives our existing shareholders, under ceotain circumstances, the right to purchase stock at a 2 0 discounted price. The nights expire on December I!, 0 6.

NOTE 8--STOCK OPTION PLANS In May of 2001, st-areholders approved the WPS Resources Compensation,' net income and earnings per share would have been reduced to the pro forma amounts indicated below:

Corporation 2001 Omrnius Incentive Compensation Plan for certain manacement personnel. In 1999, shareholders 2001 2000 1999 (Millions, except per share amounts) approved the WPS Resources Corporation 1999 Stock Net income Option Plan for cer.a n management personnel. In December As reported $77.6 $67.0 $59.6 1999, the Board of Directors approved the WPS Resources Pro forma 77.3 66.8 56.5 Corporation l999 Non Employee Directors Stock Option Plan. Opinion 25 and related interpretations are usec to Basic earnings per common share As reported $2.75 $2.53 $2.24 account for these plans. Accordingly, no compensation costs Pro forma 2.74 2.53 2.23 have been recognized for these plans in 2001, 2000. or 1999.

Had compensation cost been determined consistent with Diluted earnings per common share Financial Accounting Standards Board Statement of Financial As reported $2.74 $2.53 $2.24 Pro forma 2.73 2.52 2.23 Accounting Szandards No. 123, 'Accounting for Stock Based 0 C *E***'

A POWE R U L E OUATI1 N NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Under the provisions of the 2001 Omnibus Incentive wil be issued under the i999 Stock Ontion Plan, although Compensation Planr die rumber of shares for which stock tne plan will continue to exist for purposes of the existing options may be granted may not exceed 2 million and no outstanding options, single employee that is the chief executive officer-of the Under the provisions of the [999 Non-Emp!oyee company or any of the other four highest compensated Directors Stock Option Plan, tne number of stock options officers of the company and its subsidiaries can be granted granted under the plan may not exceed 100.000, and -he options for more than n50.000 shares during any calendar snares to be delivered will consist solely of treasury shares.

yeai. Stock options ame granted by the Compensation and Stock options are granmed at the discretion of the Board of Nominating Committee of the Board of Directors and may Directors. No options may be oranted under this elan after be granted at any time. No stock options will have a term December 3 , 2008. Ail options have a ten year life, but may longer than ten years. The exercise price of each stock optior not be exercised until one year after the date of grant. Options is equal to the fair market value of the stock on the date the granted under this plan are immediate.y vested, The exercise stock option was granted. Stock options were granted under price of each option is equal to -he fair market value of the the 1999 Stock Option Plan on February I .1999 (subject stock on the date the stod. options were granted. Options to snareholder approval of the 1999 Stock Option Plan that were granted on December 9, 1999 and February 10, 2000, was received on May 6, 1999, at which time the exercise with exercise prices of $25.4375 and $25.6875, respectively.

price was established for the initial grant), March 13, 2000, The number of shares subject to each stock option plan and December 14. 2000 having exercise prices of $ 2 9.875, and each outstanding stock option, and stock option exercise

$23. [875, and $34,75, respectively. Stock options were prices are subject -o adjustment in -he event of any stock split, granted under the 200l Omnibus Plan on Jaly 12, 2001 and stock dividend, or other transaction affecing our outstanding December 13, 200 having exercise prices of $34.38 and common stock.

$34,09. respectively. One-fourth of the stock options granted The fair value of each stock oDtion grant is estimated on will become vested and exerc sanle each year on the the date of g-ant using the Black Scho es stock option pricing anniversary date of the grant, No additional stock options model assum ng:

WPS Resources Corporation WPS Resources WPS Resources 1999 2001 Omnibus Incentive 1999 Non-Employee Directors Compensation Plan Stock Option Plan Stock Option Plan Annual dividend yield May 6, 1999 6.63%

December 31, 1999 7.94%

March 13, 2000 8.71%

December 14, 2000 5.93%

July 12, 2001 6.58%

December 13, 2001 6.60%

Expected volatility May 6, 1999 14.00%

December 31, 1999 14.90%

March 13, 2000 15.50%

December 14, 2000 20.40%

July 12, 2001 20.93%

December 13, 2001 20.19%

Risk-free interest rate May 6, 1999 5.52%

December 31, 1999 6.14%

March 13, 2000 6.36%

December 14, 2000 5.23%

July 12, 2001 5.54%

December 13, 2001 5.62%

Expected life (in years) I0 I0 It3 i0n1 in 0P *E'URE ***o*. .61\

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A summary of tie statjs o- the stocD< option plans as of December 31 2001 is presented below:

Weighted-Average Shares Exercise Price Stock Options Options outstanding at beginning of year Omnibus plan 722,416 30.9322 Employee plan 24,000 25.4688 Director plan Granted during 2001 327,927 34.1038 Omnibus plan Exercised during 200 1 16,500 34.7394 Employee plan 850 34.8400 Director plan Forfeited during 200 1 Outstanding at end of year 327,927 34.1038 Omnibus plan 705,916 30.9806 Employee plan 23,150 25.4699 Director plan Options exercisable at year-end 283,604 30.6072 Employee plan 23,150 25.4699 Director plan Weighted-average fair value of options granted during the year Omnibus plan $3.23 A sun'mai,, of t-.e s-atss of the stock oD Jon plans as of December 3 . 2000 is Dresented DeloN:

Weighted-Average Shares Exercise Price Stock Options Options outstanding at beginning of year 478,000 $29.8750 Employee plan 21,000 25.4375 Director plan Granted during 2000 244,416 32.9997 Employee plan 3,000 25.6875 Director plan Exercised during 2000 Forfeited during 2000 Outstanding at end of year 722,416 30.9322 Employee plan 24,000 25.4688 Director plan Options exercisable at year-end 119,500 29.8750 Employee plan 21,000 25.4375 Director plan Weighted-average fair va4ue of options granted during the year

$3.87 Employee plan

$1.08 Director plan

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A summary of the status of tVe stock option plans as of December 3 1a99 is presented Delo\v:

Weighted-Average Stock Options Shares Exercise Price Options outstanding at beginning of year $

Granted during 1999 Employee plan 478,000 29.8750 Director plan 21,000 25.4375 Exercised during 1999 Forfeited during 1999 Outstanding at end of year Employee plan 478,000 29.8750 Director plan 21,000 25.4375 Options exercisable at year-end Weighted -average fair value of options granted during the year Employee plan $2.04 Director plan S1.38 The stock options outstanding a7 December 3, 2001 under the 2001 Omrirus Plan -or an agregoate of 327,327 shares have exercise prices of $34.38 and $34.09 and are summarized be ow:

2001 Omnibus Plan Options Outstanding Exercise Options outstanding Weighted-average Weighted -average remaining prices at December 31, 2001 exercise price contractual life (in years)

$34.3800 15,572 S34.3800 10 34.0900 312,355 34,0900 10 None of the 2001 Omnibus Pan stock options are currently exercisable, The stock ontions outstarding at December 31, 2001 under the 1990 Stock Optior' Plan for an agreiate of 705,916 Shares have exercise prices between S23,1875 and $34.7500 and are surnmarnzed below:

1999 Stock Option Plan Options Outstanding Exercise Options outstanding Weighted-average Weighted-average remaining prices at December 31, 2001 exercise price contractual life (in years)

$23.1875 34,500 $23.1875 8 29.8750 464,000 29.8750 8 34.7500 207,416 34.7500 9 "avlrharr.*i 4c Ir-ie11,g C)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The stock options outstanding at December 31, 2001 The stock opt ons outstanding at December 31, 2001 under the 1999 Non-Emp oyee Director Stock Option Pan exercisable under the 1999 Stock Option Plan for an agoregate of 283,604 shares have exercise prices of for an aggregate of 23, 150 shares have exercise prices of

$25. 4 3 7 5 and $25.6875 and are summarized below:

$23.1875, $29.875C, and S34.7500 and remaining lives ot 8. 8, and 9 years.

1999 Non-Employee Director Stock Option Plan Options Outstanding Exercise Options outstanding at Weighted-average Weighted -average remaining prices December 31, 2001 exercise price contractual life (in years) 20,150 $24.4375 8

$25.4375 3,000 25.6875 8 25.6875 of 23. 150 shares are exercisable at year end at the above All ý-emaining stock options granted undee the 1999 refererced exercise prices Non Employee Stock Option Director Plan for- an aggregate NOTE 19-REGULATORY ENVIRONMENT Wisconsin Public Service filed for and received an interim -ate order is issued in this case which is expected early in the second quarter of 2002.

rate order in the Wisconsin jurisdicion effective January I. 2002.

Upper Peninsula Power's application for a $5.7 miliion The order autho.ized a S55,5 mli ion increase in electric revenues and an increase of $ 11.2 million in gas revenues on rate increase, which had been pending before the M chigan Puolic Service Commission since October 2000, was an annual bas s. The -everues are based on a 12. I% return dismissed in August 200 at Upper Peninsula Power's on utility common ecuity, wi-h equi-v constituting 55% of the request. Upper Peninsula Power requested a dismissal capital structure. These revenues are subece to refutd to the because the information filed in the case was outdated.

extent that they exceed 7he revenues authorized in the final Upper Peninsula Power expects to submit a new app icatior rate order. The inter rr rates vi!l be supersedec when a final

• or rate increases in 2002.

NOTE 20-SEGMENTS OF BUSINESS

\A/e marage oLr -eportable segments separately due -o WPS Energy Services is a diversified ee'-gy supply and services company, and WPS Power Development is an their dicnrernt operating and regulatory environments. Our electric generation asset development company, Nonutii ty principal business segments are the regulated electric utility operations and subsidiaries of WPS Resources not already operations of \/isconsin PuNbic Service and Upper Peninsula mentioned are included in the Other column. The tables on Power and the regul.ated gas utility operations o- Wisconsin the next page present information for the respective years Public Service. Our otter reportable segments include pertaining to our operations segmented by lines of business.

WPS Ererg, Services and WPS Power Development.

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SA P e \X/ E , F U L E Q U AT 1 0 N Segments of Business (Millions)

Nonutility and Nonregulated Regulated Utilities Operations Electric Gas Total WPS Energy WPS Power Reconciling WPS Resources 2001 Utility* Utility* Utility* Services Development Other Eliminations Consolidated Income Statement Total revenues $ 675.7 $321.6 $ 997.3 $1,575.1 $141.5 $ 1.3 $(39.7) $2,675.5 Depreciation and decommissioning 66.4 11.7 78.1 0.7 7.4 0.4 - 86.6 Other income (expense) 14.5 0.2 14.7 1.1 2.8 28.1 (9.2) 37.5 Interest expense 28.3 6.0 34.3 0.2 10.3 22.8 (8.3) 59.3 Provision for income taxes 31.6 5.9 37.5 4.0 (34.8) (1.8) (0.1) 4.8 Income available for common shareholders 58.8 8.9 67.7 6.4 2.3 1.3 (0.1) 77.6 Balance Sheet Total assets 1,356.8 375.2 1,732.0 720.1 323.1 167.7 (72.9) 2,870.0 Cash expenditures for long-lived assets 175.8 24.9 200.7 10.9 32.1 5.0 - 248.7 Includes only utility operations. Nonutility operations are included in the Other column.

Segments of Business (Millions)

Nonutility and Nonregulated Regulated Utilities Operations Electric Gas Total WPS Energy WPS Power Reconciling WPS Resources 2000 Utility Utility* Utility* Services Development Other Eliminations Consolidated Income Statement Total revenues $ 642.7 $264.5 $ 907.2 $955.6 $128.1 $ 1.2 $(43.1) $1,949.0 Depreciation and decommissioning 82.4 8.9 91.3 1.4 6.7 0.5 99.9 Other income (expense) 18.1 0.1 18.2 0.9 1.0 9.7 (9.6) 20.2 Interest expense 27.3 4.8 32.1 0.4 10.9 20.7 (9.8) 54.3 Provision for income taxes 33.6 7.6 41.2 0.9 (29.2) (6.9) 6.0 Income available for common shareholders 60.7 11.6 72.3 1.7 0.9 (7.9) 67.0 Balance Sheet Total assets 1,239.0 305.5 1,544.5 924.9 233.1 178.0 (64.4) 2,816.1 Cash expenditures for long-lived assets 138.0 21.5 159.5 0.3 39.0 0.3 199. 1 Includes only utility operations. Nonutility operations are included in the Other column.

Segments of Business (Millions)

Nonutility and Nonregulated Regulated Utilities Operations Electric Gas Total WPS Energy WPS Power Reconciling WPS Resources 1999 Utility* Utility" Utility* Services Development Other Eliminations Consolidated Income Statement Total revenues $ 590.4 $191.5 $ 781.9 $292.2 $ 35.4 $ 5.7 $(16.7) $1,098.5 Depreciation and decommissioning 70.9 8.2 79.1 1.0 3.3 0.3 83.7 Other income (expense) 7.2 0.1 7.3 (0.2) (0.3) 5.7 (3.6) 8.9 Interest expense 24.0 4.5 28.5 0.3 4.6 11.3 (8.5) 36.2 Provision for income taxes 32.0 7.4 39.4 (2.6) (4.7) (2.4) 29.7 Income available for common shareholders 56.1 11.2 67.3 (3.5) (3.8) (0.4) 59.6 Balance Sheet Total assets 1,247.9 267.4 1,515.3 64.8 190.2 184.3 (138.1) 1,816.5 Cash expenditures for long-lived assets 120.9 19.8 140.7 0.1 132.1 0.3 273.2 Includes only utility operations, Nonutility operations are included inthe Other column.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 21 QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

(Millions, except for per share amounts) Three Months Ended 2001 March June September December Total Operating revenues $997.4 $577.2 $517. I $583.8 $2,675.5 Net income $ 23.6 $ 11.7 $ 21.8 $ 20.5 $ 77.6 Average number of shares of common stock 26.5 28.6 28.7 29.2 28.2 Basic earnings per share * $0.89 $0.41 $0.76 $0.70 $2.75 Diluted earnings per share * $0.89 $0.41 $0.76 $0.70 $2.74 2000 March June September December Total Operating revenues $398.8 $374.2 $456.9 $719.1 $1,949.0 Net income $ 29.2 $ 11.4 $ 12.9 $ 13,5 $ 67.0 Average number of shares of common stock 26.6 26.4 26.4 26.4 26.5 Basic earnings per share $1.10 $0.43 $0.49 $0.51 $2.53 Diluted earnings per share $1.10 $0.43 $0.49 $0.51 $2.53 Because of various foctors, which affect the utility business, the quarterly results of operations ore not necessarily comparoble.

Earnings per share for the individual quarters of 2001 do not total the year ended 2001 earnings per share amount because of the significant changes to the average number of shares outstanding throughout the year.

NOTE 22-NEW ACCOUNTING STANDARDS Effective January 1, 2002. WPS Resources adopted retirement of a tangible long-lived asset -hat result f-om the Statement of Financial Accounting Standards No, 142_ acquisition, construction, or development and/or norma "Goodwill and Oher intangible Assets." Under Statement operation of a long-lived asset. An asset retirement obligation should be recognized wvnen it meets the definition of a liability No. 142, amo-tizatior of goodwill s no longer allowed.

Instead, an assessmert of fair value ,,ill be usec to test and be measured at fair value. We are still analyzing the impact this statement will have on WPS Resources and its for impairment of goodwill on an annual basis or when circumstances incicate a possible impa rment. subsidiaries. It will be effective for WPS Resources on january 1, 2003.

Nost of -he goodw:,v' at WPS Resources is related to Effective January I. 2002, we adopted Statement of the Wisconsin Fuel and Light acquisition. in accordance with Finarcal Accounting Standards No. 144, 'Accounting for the the requirements of toe statement, we prepared an evaluation of the fair market ,,Le of the gas utility business segment to Impairment or Disposal of Long-Lived Assets." The statement intends to unify the accounting for long-lived assets to be assess tie potential Mrairment of tne goodwill balance, Based on the estimated :a-i vaiue, an impairment charie was not disposed of, based on the framewoirk established by Financial required at January !, 2002 Accounting Standards No. 121. Accounting -or the mpairment In June 2001 . the Financial Accounting Standards Board of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The statement didn't have a sionificant finalized Statement of Financial Accountirg Standards No. 43, impact or WPS Resources.

'Accounting for Asset Retirement Obligations" This statemeni applies to all ertnie. wth legal obligations associated with the

A POWt RFUL EQUAT ON REPORT OF MANAGEMENT REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 0.

WPS Resources Corporation 1) q- .ANDERSEN The management of WPS Resources Corporation has To the Board of Directors of prepared and Is responsible for the consolidated financal WPS Resources Corporation:

statements and related financia. information encompassed in this Annual Report. Our consolidated fnancial statements We have audited the accompanying consolidated balance nave been prepared in conformity with generally accepted sheets of WPS Resources Corporation (a Wisconsin accounting principles, and financial information included corporation) and subsidiaries as of December 3 1, 2001 and elsewhere in this report is consistent with our consolidated 2000, and the related consolidated statements of income, financial statements. shareholders' equity, and cash flows for each of the three years in the period ended December 3 I, 200 . These We maintain a system of internal accounting control designed financial statements are nhe responsibility of the Company's to provide reasonable assurance that our assets are management, Our res onsibility is to express an opinion safeguarded and that transactions are executed and recorded on these firancial statements based on our audits.

in accordance with authorized procedures. Written policies and procedures have beer developed to support the internal We conducted our audits In accordance with auditing controls in place and are updated as necessary. standards generallv accepted in 7he United States. Those standards require that we plan and perform tne audit to We also maintain an internal auditing department that obtain reasonable assurance about whether the financial reviews and assesse the efectiveness of selected internal statements are fee of material misstatement. An audit controls, and reports to management as to their findings and incdudes examining, on a test basis, evidence supporting recommendations for improvement. the amounts and disclosures in the financial statements.

An audit also includes assessing the accounting principles Our Boarc of Direcors has established an Audit Committee, used and significant estimates made by management, comprised entirely of outside directors, which actively assists as well as evaluating the overall financial statement our Board in its role of overseeing our financial reporting presentation. We believe that our audits provide a process and system of internal control. reasonable basis for our opinion.

The accompanying consolidated financial statements have In our opinion, the consolidated financial statements been audited by Arthur Andersen LLP independent public referred to above present farly, in all material respects, accountants, whose report follows. the financial position of WPS Resources Corporation and subsidiaries as of December 31, 200 1 and 2000, and the results of their operations and Their cash flows for each of arry L Weyers the three years in tne period ended December 31. 200 !

Chairman, President, and Chief Executive Officer in conformity with accounting principles generally accepted in the United States.

Josp 10 OLeary Senior Vice President and Chief Financial Officer Arthur Andersen LLP Milwaukee, Wisconsin January 28, 2002 Diane L. Ford Vice President - Controller and Chief Accounting Officer RERE0PS C *OAPOR S

FINANCIAL STATISTICS Year Ended December 31 (Millions, except per share amounts and number of employees) 2001 2000 1999 1998 1997 Total operating revenues $2,675.5 $1,949.0 $1,098.5 $1,063.7 $ 935.8 Net income 77.6 67.0 59.6 46.6 55.8 Total assets 2,870.0 2,816.1 1,816.5 1,510.4 1,435.8 Preferred stock of subsidiaries 51.1 51.1 51.2 51.2 51.6 Long-term debt and capital lease obligation 727.8 660.0 584.5 343.0 347.0 Shares of common stock less treasury stock and shares in deferred compensation trust Outstanding at December 31 31.1 26.4 26.8 26.5 26.5 Average 28.2 26.5 26.6 26.5 26.5 Basic earnings per average share of common stock $2.75 $2.53 $2.24 $1.76 $2.10 Diluted earnings per average share of common stock 2.74 2.53 2.24 1.76 2.10 Dividend per share of common stock 2.08 2.04 2.00 1.96 1.92 Stock price $36.55 $36.8125 $25.125 $35.25 $33.8125 Book value per share $23.06 $20.75 $20.16 $19.61 $19.56 Return on average equity 12.8% 12.3% 11.3% 9.0% 10.8%

Number of common stock shareholders 23,478 24,029 25,020 26,319 27,369 Number of employees 2,856 3,030 2,900 2,673 2,902

A P0W E FU L E Q UA 0 NT IN LEADERSHIP STAFF BARBARA A. NICK Manager - Corporate Services Ace 43/Years of service 17

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WILLIAM L. BOURBONNAIS, JR. JERRY A. JOHNSON ROGER M. MC CAMBRIDGE MICHAEL I. RADTKE Manager - Rates anc Manager - information Services Regioral Custone "Ma1acer - Electric D stri'ation Ecoromic Evaluation Age 52/Years of sevice 29 Service Manager Erngceering Age 56/Years of service 33 Age a6/Years ol seaice 17 Age 47/Years of se-ce 23 RANDALL G. JOHNSON DONALD R. CARLSON Manager - Coiorate Transformation DALE N. MILLER JACK C. RASMUSSEN Manager Energy SLDpy Age c4/Years of service 31 Regional Customer Manage - - Purchasir'g and Store, and Control Service Manager Age 54/Yea s of serice 31 Age SIiYears of service 26 TIMOTHY J. KALLIES Age 56/Years of service 31 Manager - Customer Care PETER]JVAN BEEK CHARLES A. CLONINGER Age 42!ear s of service 18 EDWARD N. NEWMAN Regional Cstomerrr Reioral Customer Director- Environmental Services Serv ce Maiager Service Manager PAULJ. LIEGEOIS Age 59!Years o'service 27 Age 56.e"Years of service 33 Age 43/Years of serice 20 Utility Business Development Leader Age 5I/Years of service 28 DALE M. QUINN RALPH P ZAGRZEBSKI HOWARD R. GIESLER Manager - Substation Reg onal Customer Manage-- Pulliam Plant DENNIS J. MAKI ard Transmission Service Manager Age 3E/Years of serxvice 5 Maciager V/Vestor Part A4e S6/Years of se ice 30 Ace -7"'Years of service 35 Ace 53iYears of service 31 RICHARD J. BISSING CHRIS E. MATTHIESEN BRUCE A. RIZOR D rector of Sales - Wisconsin Director - Energy Supply Diector - Wholesale Age 41/Years ofse-xice I" Cost Management Pricing Structures Age 4S/Years of service 22 Age 40/Years of servce 2 JOHN T KEENAN Director roducer DEBRA L. MC DERMID Pricing Structures "Marager - Customer Serv ice Age 48/Years of service 2 and Business System Opeeation Age 45/Years oý service 22 ALAN M. BARGENDER JOHN K. MORTONSON RICHARD J. SUSLICK P!ant Manager - Sunbur, D rector - Asset Management Director - Power Developmert Age 3/Years of servxce 16 Age 44/Years of service 19 Ace S8/Years of service 10 MICHAEL W. CHARLES LEONARD J. RENTMEESTER Assistant to President General Manager - Engireeirng A~e S2/Years of service 24 Services Age 36/Years of service 8 GARY W. ERICKSON Regional Custome er-rve Vanager Age S9/Years o0 seovice 33 Titles, age, and years af service are as of December 31, 2001.

Years of service take into considerationservice with WPS Resources Corporation or a system company.

WIP 0tb-11t

• ***0*TI

BOARD OF DIRECTORS

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'A A. DEAN ARGANBRIGHT MICHAEL S. ARIENS RICHARD A. BEMIS (Age 7 I) (Age 70 c (Age 60)

Bdllion,VWisconýsin Sheboyean Falls, Wisconsir OshkosN. cViscarsir)

Recired Charran, P-e dert, c0airmar R-esiden and Cief Executive Officer Ah-ens Company Bemis "anufactur ng Company aId & ef IExeQCtve OIsce Wisconscn Naieoal L,`e cD'recto simce 974) (D ector since !983, Insuranie CorpErny (Directo- since 1972)

ROBERT C. GALLAGHER KATHRYN M. JAMES L. KEMERLING HASSELBLAD-PASCALE ,Age 62)

,Age 63)

Greer Bay,. V,,iscor'si:: "AgC53 VWasau. VNisconsin Presdelt and Cl" ef- xe ,,eo,tOfficer Green Bay 'e',scosin Preside't a Chefrd ExcL.ivea O. er Associatec Banc-Co, Ma ýlagir'g DtL Riiser Oil Com pany, anc

'Dir-ector since 1992'I 71asselb'ad MaYhine Coevai,', LLP (Dirctor since 1988)

(D r s 987

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JOHN C. MENG WILLIAM F. PROTZ, JR. LARRY L. WEYERS (Age 57) (Age 56¢a Gieen Bay. \AiSN CO s NoHtnfeid.! I Iois Green Bay, ",sconsin ChaiOrn ofehe oce' President and Cref Execut ve 0, cer Crairman. Presidert. aac Schreiber Foocs, nc. Santa's Best Cref Executve Ocer (Directo' sircce 2000" 'Director sirce 2,0I1) WtPS Resoerces Corporation (Director s ce 1996)

IA P 0 W E RF U L E Q U AT I O N OFFICERS WPS Resources Corporation Wisconsin Public Service Corporation LARRY L. WEYERS LARRY L. WEYERS PHILLIP M. MIKULSKY GERALD L. MROCZKOWSKI Chairman, Presicert, and Chairman and Chief Executive Officer Chie' Executive Ofice, "Cmiaý Executive Oficer Chief Executive Officer Age 56,iYea-s oa service 16 Age 5Fr,/ears of service 30 Age a6,Years of seavce 33 Age S6iYears of serCvce 6 MARK A. RADTKE PATRICK D. SCHRICKEL CHARLES A. SCHROCK PATRICK D. SCHRICKEL President ý'i-esicert Presicent and Chief Operatirg OFcea Execu ive Vice President Age S5Years of serice 35 Age 40/Years of sera cc Age 4S/Years of ser,'ce 22 Age 5T/Yearis of servire 35 RALPH G. BAETEN . DAN IEL J. VE RBANAC TERRY P JENSKY RALPH G. BAETEN

• Seaior Vice Presicert - Finance Serior Vice President Vice Pr esident - Oper tioas Seniar Vice President Finarce avd T-easurer Age 38/Years of servlce 17 Ace 48/Yea-s ol service 24 and Teasure, Age 58iYears of service 31 DARRELL W BRAGG BARTH J. WOLF Age 58c/Years of service 31 THOMAS P MEINZ Vice Fr"trernt Sec re tar" THOMAS P MEINZ Seioraicea Presdent - Public Affairs Age 42/Years of service 6 Age L4!Vears of sarvice 13 Senior Vice Presicert - Pblic Affairs Age 5S/Years of service 32 BETTY J. MERLINA RALPH G. BAETEN' Age 55iYears of serice 32 JOSEPH P O'LEARY Vice "residena T-easuar e

PHILLIP M. MIKULSKY Senior V ce President and Ag /Years of serice 6 Age 58/Years of aerice 31 Serior Vice Piesident - Deveop ment Chief Francial Officer RUQAIYAH Z. STANLEY-LOLLES GEORGE R. WIESNER Age 53/Years of service 30 Age 47/"Yeams of service I Vice Pres deit Coatoi er JOSEPH P O'LEARY LAWRENCE T BORGARD Age 47.Years oa seavice 3 Age 44/Yea's oasevice 7 Senioa Vice Presidet ard Vice Dresident - Distributior Chief Fina[cial Ocicec BARTH J. WOLF ad CustomrerSerice Se- eta, Age 47/Years o-service r Age 40iears of seavice a7 Age 44/Years o' service 13 BRADLEY W. ANDRESS DIANE L. FORD aPDrciert Marketing Vice RALPH G. BAETEN Vice President Coenroler anid Age "7iYea-s o'sevice 3 Tieasirer Caief Accunting Offtcer Age 581ears of sarvice 31 Age 48iYeaas of seace 26 DIANE L. FORD V/ice President - Coatrol eCra GREGORY C. LOWER BERNARD J. TREML aontroller PATRICK D. SCHRICKEL Chief Account ng Offiaer Vice Presidert- H-mar Resoarces Age 471Years of "eovice I C~airman Pr-esident, and Age 48iYears of service 26 Age 52/ ears of service 29 Ch efI Excuive t Oficer RICHARD E. JAMES DAVID W. HARPOLE Age 57,iyearýs of ser-vice 35 Vice President Corporate PlaCD ig Ass stoat Vice Presicent - 5re-gy SpCcly Age 48/Years ofse-vice 26 Age 4'/Years of service 24 BARTH J. WOLF Secre-ary NEAL A. SIIKARLA BARTH J. WOLF A'ce 44'Vea s o' s e rvice 13 Vice Presieent Secireta7 and Varager Legal Serices Age 541Years of service 3 Age 44/Years of searce 13 RALPH G. BAETEN A T-easurer BERNARD J. TREML JEROME J. MYERS Ag" b8iYears of s arvi"c

-)

Vice President - Human Resoirces /Asistant l-easuaer 5

Age 52/Years of sevice 29 Age 6,Yeaas of service 33 GLEN R. SCHWALBACH PAMELA R. CLAUSEN Assistant V ce Piresident Assistant Cantroaler Corporate Plariryg Age 5 /Years of service 14 Age 56/Years o' ses ce 33 BARTH J. WOLF Secr eta-y anc Manager- Legal Se,,aices Age +/Years of service 13 BRADLEY A. JOHNSON ' Retired February 28, 2002.

Assistart Treasirer Titles. age, and years of service are as of December 3 1, 2001.

A2e 77/Years of se-vice 22 Years ofservice take into considerationservice with WPS Resources Corporation or a system company.

SHAREHOLDER INFORMATION Shareholder Inquiries Anticipated record and payment dates for common stock Our Sharehclcer Services staff (bottom of next page) can dividends paid in 2002 are:

be reached via teleptone between tne hours of 7:30 a.m.

and 4:30 p.m- central time, Monday through Friday by calling Record Date Payment Date 920-433- :00 or 800-236-1551. February 28 March 20 Addresses and acdicional telephone numbers are listed May 31 June 20 August 30 September 20 on -he back cover o--his repor.

November 29 December 20 Common Stock As a record holder of our common stock. you may The New York Stock Exchange is the principal market for have your dividends electronically deposited in a checking or WPS Resources Corporation common stock which trades savings account at a financial Institution. If you are a record under the ticker symbol of WPS.

holder and your dividends are not electronically deposited, You may purchase or sell our common stock through our we will mail your dividend check directly to you.

Stock Investment Plan described below or through brokerage Ifyou are a record holder of our common stock and firms and banks whicl offer brokerage sevrces.

your dividend check is not received on the payment date, Common stock certificates issued before September I, wait approximately ten days to allow for delays in mail 1994 bear the name of Wisconsin Public Service Corporation delivery. After that time, call Shareholder Services to request and remain valid certificates.

a replacement check.

Effective December 16, 1996, each share of our common stock has a Rioht associated with it which would entitle the Stock Investment Plan owner to purchase additiona, shares of common stock under We maintain a Stock Investment Plan 'or the specified te~rs and conditions, The Rights are not presently purchase of common stock which allows persons exercisable. The Rghts would become exercisabie ten days after who are not already shareholders (and who are not a person or group (1) accuires 15% or more of WPS Resources employees of WPS Resources or its system companies)

Corporation's common stock or (2) announces a tender offer to become partic pants by making a minimum ininial to acquire at east a 3 of WPS Resources' common stock.

cash investment of S 100. Our Plan enables you to On Decemuer 31, 2001, we had 3 1.182,878 shares maintain registration witn us in your own rame of common stock outstanding which were owned Dy rather than with a broker in "street name.'

23.478 holders of record.

The Stock Investment Plan also provides you with options for reinvesting your divide-ids and making Common Stock Comparison (By Quarter) optional cash purchases of common stock directly through Dividends Price Range Per Share High Low Shareholder Services without paying brokerage commissions,

.2001 Ist quarter $ .515 $36.6250 $31.0000 fees, or service charges. Optional cash payments of not less 2nd quarter .515 35.2500 32.2000 than $25 per payment may be made subject to a maximum of 3rd quarter .525 35.4000 32.0000 $100,000 per calendar year. An automa-ic investment option 4th quarter .525 36.8000 33.2500 allows you to authorize the deduction of payments from your

$2.080 checking or savings account automatically once each month, 2000 Istq-a-ter S .505 $26.68-5 $22.6250 on the 3rd day of the month, by electronic means for 2nd cuar-.er .505 32. 2 500 25,2500 investment in the Plan as optional cash payments.

3rd cua.re- .515 33,2500 29.6250 4t- qu arte- .515 39.0000 30.0625 Cash for investment mist be received by the 3rd or 18th

$2.040 day of the month for investment which generally commences on o- about the 5th or 20th day of the month or as soon Dividends thereafter as practicable.

We have paid quarterly cash dividends on our common The shares you hold in our Stock Investment Plan may stock since 1953, and we expect to continue that trend. Future be sold by the agent for the Plan as you direct us, or you may dividends are dependent on regulatory [imitations, earnings, capital request a certificate for sale through a broker you select. We requirements, casn- flows, and other financial considerations. will accumulate sale requests from participants and,

1A POWERFUL EQUATION approximately every five business days, will submit a sale It is anticipated that 2002 quarterly earnings information request to the independent broker-dealer on behalf of will be released on April 23, July 23, and October 29 in 2002 those participants. and on January 30 in 2003.

Participation in the Stock Investment Plan is being offered You may obtain, without charge, a copy of our 2001 only by means of a Prospectus. If you would like a copy of Form 10-K, without exhibits, as filed with the Securities and the Stock Investment Plan Prospectus, you may call us at Exchange Commission, by contacting the Corporate Secretary, 800-236-1551, contact us via e-mail by using our e-mail at the Corporate Office mailing address listed on the back address of investor@wpsrcom, or order or download cover, or by using the Internet.

the Prospectus and enrollment forms using the Internet at http://www.wpsr.com under Financial Information. Internet Visit our award-winning web site at http://www,.wpsr.com Safekeeping Services to find a wealth of information on As a participant in the Stock Investment Plan you may our company and its subsidiaries, transfer shares of common stock registered in your name into The site will give you instant a Plan account for safekeeping. Contact Shareholder Services access to Annual Reports, SEC for further details. filings, proxy statements, financal news, presentations, news Preferred Stock of Subsidiary releases, career opportunities, The preferred stock of Wisconsin Public Service and much more. You may also Corporation trades on over-the-counter markets. Payment and download a copy of the ..

record dates for preferred stock dividends paid in 2002 are: Prospectus for the Stock Investment Plan and the associated forms for participation in the Plan.

Record Date Payment Date The site is updated regularly, so visit it often.

January 15 February I April 15 May I Annual Shareholders' Meeting July 15 August I Our Annual Shareholders' Meeting will be held on October 15 November I Thursday, May 9, 2002, at 10:00 a.m. at the Weidner Center, University of Wisconsin Green Bay, 2420 Nicolet Drive, Stock Transfer Agent and Registrar Green Bay, Wisconsin.

Questions about transferring common or preferred Proxy Statements for our May 9, 2002 Annual stock, lost certificates, or changing the name in which Shareholders' Meeting were mailed to shareholders of certificates are registered should be directed to our transfer record on March 28, 2002.

agent, U.S. Bank, N.A. at the address or telephone numbers listed on the back cover.

Annual Report Ifyou or another member of your household receives Address Changes more than one Annual Report because of differences in Ifyour address changes, call or write Shareholder Services.

the registration of your accounts, please call Shareholder Services so that account mailing instructions can be Availability of Information modified accordingly.

Company financial information is available on the Internet.

This Annual Report is prepared primarily for the The address is http://wvwv.wpsr.com.

information of our shareholders and is not given in connection with the sale of any security or offer to sell or buy any security.

WPS Resources Corporation CORPORATE OFFICE TRANSFER AGENT AND REGISTRAR 700 North Adams Street Investor Services Green Bay, WI 54301 U.S. Bank, N.A.

MAILING ADDRESS: P.0. Box 2077 WPS Resources Corporation Milwaukee, WI 53201-2077 P 0. Box 19001 TELEPHONE: 414-276-3737 or 800-637-7549 Green Bay, WI 54307-9001 TELEPHONE: 920-433-4901 FAX:920-433-1526 FINANCIAL INQUIRIES WEB SITE: http://www.wpsr.com Mr. Joseph P O'Leary Senior Vice President and SHAREHOLDER SERVICES Chief Financial Officer WPS Resources Corporation WPS Resources Corporation 700 North Adams Street PR0. Box 19001 Green Bay, WI 54301 Green Bay, WI 54307-9001 TELEPHONE: 920-433-1463 MAILING ADDRESS:

WPS Resources Corporation P. 0. Box 19001 STOCK EXCHANGE LISTING Green Bay, WI 54307-9001 New York Stock Exchange TELEPHONE: 920-433-1050 or TICKER SYMBOL: WPS 800-236-1551 LISTING ABBREVIATION: WPS Res E-MAIL: investor@wpsr.com WISCONSIN UTILITY INVESTORS,INC.

Wisconsin Utility investors, Inc. ("WUI")

isan independent, non-profit organization representing the collective voices of utility shareholders. It monitors and evaluates industry issues and trends and isa resource for its members, regulators, and the public.

WUI can be reached by calling 414-967-8791.

EQUAL EMPLOYMENT OPPORTUNITY WPS Resources Corporation is committed to equal employment opportunity for all qualified individuals without regard to race, creed, color, religion, sex, age, national origin, sexual orientation, disability, or veteran status.

To that end, we support and will cooperate fully with all applicable laws, regulations, and executive orders in all of our employment policies, practices, and decisions.

4 Printed on paper that contains between 10%and 30% post-consumer fiber V 2002 WPS Resources Corporation